Madoff and His Ponzi Scheme
I guess it isn’t surprising that the greedy and gullible still fall for this scheme, but this one is rather amazing in its sheer size.
Investors around the world are counting the spiralling cost of the biggest fraud in history, a $50bn scam that has ensnared billionaire businessmen and tiny charities alike and whose tentacles have stretched further and deeper than anyone imagined.
The fallout from the arrest of the Wall Street grandee Bernard Madoff was continuing to grow last night, as institution after institution detailed the extent of their possible losses, and the victims in the UK were headlined by HSBC and the Royal Bank of Scotland, which is majority-owned by the British Government.
But the biggest confessions were coming from Wall Street, from the City of London and from the headquarters of European banks and from banks around the world. They have poured billions of dollars into Mr Madoff’s too-good-to-be-true investment fund, which appeared to post double-digit annual returns come rain or shine.
Mr Madoff confessed last week that his business was “all one great big lie”. The investment returns were fake, and he had been paying old clients with money from new ones. In its conception, the scam is a classic. In its size, it is breathtaking, eclipsing anything seen before. He personally estimated the losses at $50bn, according to the FBI, and as investors owned up to their exposure yesterday that did not seem impossible. For 48 years, until Thursday morning, Mr Madoff was one of Wall Street’s best-respected investment managers, able to harvest money from a vast network of contacts and to trade on his name as a former chairman of the Nasdaq stock exchange.
Funny how even supposedly the very rich and smart can get caught by too-good-to-be-true opportunities.
Nicola Horlick, the British fund manager known as Superwoman for juggling her high-flying City career with bringing up five children, turned her fire on US regulators. Her Bramdean Alternatives investment fund had put 9 per cent — about £10m — with Mr Madoff.
Yes it is so much more comforting to blame regulators than it is to blame oneself for one’s own stupidity. Funny how “Superwoman” now has to be told, “Remember, if it sounds too good to be true…it probably is.” Oh and can we stop calling her Superwoman now?
Update: Lovely a judge is going to partially protect investors from their own stupidity.
Meanwhile, a federal judge on Monday threw a lifesaver to investors who may have been duped, saying they need the protection of a special government reserve fund set up to help investors at failed brokerage firms.
U.S. District Judge Louis L. Stanton ordered that clients of Madoff’s private investment business seek relief under a federal statute created to rescue cheated investors. Stanton also ordered that business be liquidated under the jurisdiction of a bankruptcy court and named attorney Irvin H. Picard as trustee to oversee that process.
Stanton signed the order after the Securities Investor Protection Corporation asked that steps be taken to protect investors in the scheme, which has ensnared several major banks and prominent figures as victims and could result in as much as $50 billion in losses.
Congress created the SIPC in 1970 to protect investors when a brokerage firm fails and cash and securities are missing from accounts. Funds can be used to satisfy the remaining claims of each customer up to a maximum of $500,000. The figure includes a maximum of up to $100,000 on claims for cash.
Oh and tax payers who didn’t get to ride the gravy train will get to pay for it…even better. Keep in mind that many of these people who will get at least some restitution are extremely wealthy and they are in the position they are in now due to their own greed and foolishness. Protecting people in this case strikes me as precisely the wrong thing to do.
Update II: Commenter cfpete points out some good news, that the SIPC is funded via member brokers fees so that the tax payers will not have to take a hit. Still, I don’t think such funds should be used in cases like this as it could have the perverse effect of reducing people’s responsibility to make sure that the firms that they give their money to are reliable and not running a scam.