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On Bernard Madoff's day of reckoning, he apologized to those he
hurt. But he has yet to cooperate with federal authorities or to tell his
victims where the billions he stole went.
Throughout
history, scandals have been commonplace. This one is estimated to be at
least $13 billion and has entrapped individual investors, banks and
charities, all of whom placed their trust in a man with "impeccable
credentials." Madoff's penalty, 150 years in
a federal penitentiary, is meant to be a warning to future hucksters to
back off. The sad reality, though, is that such a Ponzi
scheme will invariably occur again and again and that investors must do
more of the due diligence up front to avoid getting burned.
"Here
the message must be sent that Mr. Madoff's crimes
were extraordinarily evil and that this kind of manipulation of the system
is not just a bloodless crime that takes place on paper, but one instead
that takes a staggering toll," says Judge Denny Chin, who earlier
ordered the fraud to forfeit $171 billion in various assets. Still, he was
compassionate and left Madoff's wife with $2.5
million.
Because Madoff has not cooperated with federal authorities,
they have been left to try to put together the pieces of the puzzle. Their
general feeling is that the scam originated in the 1980s and ended in
December 2008. In the intervening years, his firm sent bogus statements to
its clients that all was well -- too well in fact -- and that his funds
were always outperforming the market.
The reality
is that Madoff was paying off older investors
with new money coming in the door. The government estimates that 1,341
entities have been affected by this scandal.
In March, Madoff, the one-time head of NASDAQ, pleaded guilty to
11 criminal counts that include fraud, perjury, money
laundering and lying to federal regulators. Investors, who continue to make
their claims against Madoff, have said that if
the U.S. Securities and Exchange Commission had investigated assertions
made against Madoff's firm, then this whole mess
would have been minimized.
Indeed, as
early as 1999, the agency had been warned that Madoff's
operations could be delusional. But it generally dismissed the allegations,
noting that they came from one of Madoff's
competitors. Besides Madoff, his accounting firm
is alleged to have been complicit in the scandal while the feds are said to
looking closely at seven others.
"We
implore you to give the maximum sentence at a maximum prison for this
deplorable low life," said one of the victims who spoke at the
sentencing hearing. "This is a violent crime without a tangible
weapon."
Just
Desserts
A core
issue surrounding the scam is whether the victims should have been
suspicious that the returns they had been getting were exaggerated. It's
not just a question of due diligence. It's also a legal matter.
Investigators are now looking at those investors who cashed out during the
last six years and hence avoided the bloodbath. But authorities want to
retrieve some of those winnings so as to compensate others who have endured
irreparable harm.
Madoff ran a
hedge fund, which is an unregulated private investment fund. Hedge funds
are comprised of sophisticated financiers that range from wealthy
individuals to institutional investors such as pension funds. Investment
banks oft-times finance them. Unlike mutual funds that undergo lots of
public scrutiny, such accounts lack that relative transparency. The
rationale is that the investors know what they are doing and that they are
willing to assume the added risks in exchange for potentially higher
returns.
The
thinking then continues that the lucrative profits that Madoff
had provided his clients were too good to be true. In other words, they had
been making as much as 10 percent on their investments at a time when
others were losing money. They were then given opaque explanations as to
how the results were achieved, which few seemed to scrutinize.
"Investors
have to do their own due diligence," says Gregory Hays, managing
principal of Atlanta-based Hays Financial Consulting, in a BusinessWeek story. "They need to make sure
what they're investing in is accurate."
But Madoff banked on his stature within the financial
community and was thereby able to deceive authorities. If his operations
had been good enough for the SEC, well, it's good enough for those who put
their blind faith in the guy. Most people want to believe in and to trust
others -- especially the former head of the NASDAQ.
Without a
doubt, the overwhelming majority of those who manage wealth have the best
of intentions. They play by and live by the rules -- and encourage the
national regulators to maintain order in the marketplace. Nevertheless,
investors must also do their homework before entrusting others.
Bernie Madoff is an aberration. But the con was caught and now
his reputation lives in ruins. Along the way, he has destroyed some faith
in the American way. While he will get his just desserts, his innocent
victims will also suffer an uncertain fate.
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