Madoff Ponzi Scheme – Two Years Later
by Brett Newberry
I just finished reading The Wizard of Lies: Bernie Madoff and the Death of Trust by Diana B. Henriques. It was a very interesting book about Bernie Madoff and the details surrounding his multi-billion-dollar Ponzi scheme.
Madoff’s mug shot, March 2009
It has been over two years since the Madoff Ponzi scheme came to light. Are we closer to any answers? We know that a whistle-blower by the name of Harry Markopolos tried to get authorities for years to listen but was unsuccessful.
In March 2009, Bernie Madoff pleaded guilty to 11 felonies and admitted a decades-long, multi-billion-dollar Ponzi scheme. He was sentenced to 150 years in prison for the crimes. The Securities and Exchange Commission described the fraud as “vast” and designed to “deceive investors, the public and regulators.” Tens of billions of dollars were alleged to have been stolen; later, questions arose as to how much of the estimates represented “real money” and how much of it was made up of fictional, imagined funds Madoff “deposited” in his clients’ accounts as a key component of his scheme.
Lawsuits involving the Madoff case included Fred Wilpon, the well-known principal owner of the New York Mets professional baseball organization. Brought by Madoff trustee Irving Picard, the $1 billion suit charges that Wilpon and his business partner reaped fictitious profits from a scheme that they knew or should have known, based on warnings and red flags, was a fraud. The trustee has filed many lawsuits for multi-billion dollars against various investors based on the same charge. Wilpon and the other investors have denied these charges.
One of the big questions that has not been resolved is who knew about the Ponzi scheme. Madoff stated that he was the only one who knew about the Ponzi scheme. The authorities suspect that business associates and family members must have known due to the size and length of the scheme. Several people have committed suicide, including Bernie Madoff’s son, Mark Madoff. Whether or not Mark Madoff was aware of the Ponzi scheme, it appears that the scrutiny, infamy, and threats of legal action were apparently too much for him.
Madoff asserted from prison that banks and hedge fund managers displayed a “willful blindness” in the face of information that would have exposed his scheme for the fraud that it was. The Madoff trustee, Irving Picard, in civil lawsuits has asserted that executives at some banks expressed suspicions for years, yet continued to do business with Madoff and steer their clients’ money into Madoff’s hands.
So far, the trustee has recovered $10 billion for Madoff victims. The pending lawsuits are seeking over $100 billion in damages from investors who profited from the scam.
On August 24, 2010, Bernie Madoff granted his first on-the-record interview from prison. One question: when did the Ponzi scheme start? He continues to insist that his vast fraud did not start until 1992. Until then, he says, he was making legitimate investments. Prosecutors have said at every opportunity that the Ponzi scheme began at least by the 1980s.
Asked to explain his relationships with a long list of big investors and feeder fund managers, he stated, “People are greedy. I told everyone, don’t put more than half of your money with me – you don’t know, I could go crazy.”
Clearly, Madoff was running an enormous inescapable Ponzi scheme. If he didn’t plan to kill himself or go into hiding, how did he think it would end? Madoff stated, “It was almost like – it sounds horrible to say it now – but I just wanted the world to come to an end.”
All Ponzi schemes transfer wealth from victim to victim. But because of the nature of so many of Madoff’s victims – charities, endowments, major philanthropists, generous people on all levels of the economic ladder – this Ponzi scheme transferred wealth from victims and to the larger community, too. In effect, Madoff robbed Peter to pay Paul, and Paul gave the stolen money away to help the rest of us.
If the Madoff story proves nothing else, it proves that regulators are living in a dream world, one that is very different from the dream world populated by investors. Good regulators believe in skepticism, but most investors crave simplicity. If regulators run across someone claiming to have a safe, high-yield investment that always goes up even when everything else goes down, they want to take him to court. Investors want to take him to dinner.
Until next time,
The Business Doctor
