Weekly Puzzle #3: Danger and Opportunity
Set up: There are dozens of stories that can be told about the sad fate that awaits investors, when they forget that danger goes with opportunity. Rather than pick one of the big stories (Ponzi, Madoff), I have chosen a smaller one, since it allows us to focus on how these schemes are born, what makes them grow and how a successful scam needs two parties: a scammer who may not always start off with the intent of committing fraud and and scammee (I don't think there is such a word) who really wants to be scammed.
In this story, a former professor and associate dean at the Sloan School of Management at MIT and his son were arrested for committing securities fraud. Start with the news story on their arrest:
If you want a drier version, take a look at the FBI press release on the arrest:
Details are scarce, but it looks like the pair started with a mathematical algorithm that they thought would beat the market or at least sold as such. They promised investors 13-15% returns, with minimal or no risk. It is not clear when they realized that things were not working out the way they claimed they would but the Madoff scandal indirectly led to the indictment of this pair.