He was once the President of NASDAQ. The list of his clients is an ultra-world class cross section of truly impressive charities, banks, entertainment and other celebrities, university endowments and more (See the NYT website). The SEC even examined his books not long ago and gave him a financial clean bill of health.
How then did 70-year old Bernard L. Madoff, Pillar of Wall Street respectability, make off with $50 Billion? What does this mean for the already pitifully low level of public confidence in our thoroughly beaten-up financial system? And, for God’s sake, why on earth did he do it?
Bernard L. Madoff Investment Securities slipped passed the event horizon and disappeared into a financial Black Hole last week when the FBI turned up to arrest Madoff and seize everything that wasn’t nailed down. Madoff apparently kept several sets of books and various phoney documents and had a long history of lying to regulators about what he was doing.
SEC Chairman Cox said his investigators “relied on information voluntarily produced by Mr. Madoff and his firm,” and the media has lately seized upon possible family connections between those from the SEC who were supposed to be keeping an eye on Madoff’s operation and those within Madoff’s operation who were supposed to be working with the SEC watchdogs and supplying them with information to review.
But, we are talking about $50 Billion here, not hundreds of thousands or even hundreds of millions – and, apparently, this Ponzi Scheme went on for a very long time, perhaps a decade or more – how could it happen right under the very noses of the SEC to the Best & Brightest who entrusted enormous amounts of their money to Madoff?
Not surprisingly, the name Ponzi Scheme derives from a frisky gentleman, active in the early part of the 20th Century, named Charles Ponzi, who emigrated from Italy to the US in 1903. But, Ponzi was far from the first; for but one example, in 1899 William “520 Percent” Miller opened for business as the “Franklin Syndicate” in Brooklyn, New York promising an astounding 10% a week interest, defrauding buyers out of $1 million and ultimately serving a 10-year prison sentence. But, it was Ponzi who left his name branded on any con scheme which involves paying, often abnormally high (but not always, as we shall see) investment returns to investors, not from the profit from any real business, but rather, instead, from newer investors’ money flowing in to the venture.
Madoff’s evil genius, and how he was able to get away with this embarrassingly large theft for so long, lies perhaps in the fact that he did not offer abnormally high investment returns – Madoff’s Ponzi Scheme just paid regular, decent returns, like 1% per month, month after month after month, so maybe it did not draw the same amount of attention as a scheme promising 100% per month returns or some such fabulous amounts. And, Madoff was there year after year, steadily running it and lending his huge prestige and seemingly unassailable reputation, and his clients swept their funds into their accounts to maximize their returns, apparently using it as you would a Money Market Fund Account.
What we will see now will be a Litigation Feeding Frenzy to end all feeding frenzies. Litigators all over the world will be busy over the year-end holidays dreaming up lawsuits to point the fickle finger of blame at whomever they can hold responsible for these staggering losses of money, including bankers, accountants, business managers, lawyers, brokers, and other professionals who ‘should have known’ what was going on. Likely, not much will be realized directly from Madoff’s companies as they probably used the new money and returns to pay old investors and don’t now have much to show for it.
But, when the SEC and the IRS and the Bankruptcy Trustees, and the Litigators get hold of this, they will go back a number of years and seek recoveries of monies paid out from Madoff’s Ponzi Scheme – maybe seven or more years past – adding insult to injury for those who have lost fortunes, by requesting Judges to order the victims of this earth-shattering fraud now to pay back their supposed returns received from Madoff’s companies going back to 2001 or earlier.
In an Oedipal twist, it was apparently Madoff’s sons who brought this scheme to the authorities, finally – Madoff will have lots of time in the federal penitentiary to think this over – likely for the rest of his life. They are hocking Ferraris in the pawnshops of Palm Beach. Vast populations of the formerly wealthy, in toney areas of Los Angeles, Connecticut and the Hamptons, among many others, are wearing black mourning clothes, grieving for their lost Billions, during a time of economic turmoil seemingly worse by the day already, even before this punch in the financial solar plexus.