There are swindlers. And then, of course, there’s Bernie Madoff, who “made off” with $65 billion in investors’ funds. The biggest Wall Street crook in history will be sentenced June 29 for his crimes.
It will be hard for anyone to top such an epic criminal enterprise. You might not be able to save GM with that kind of money. But you could bail out California.
I’m truly puzzled about how this happened and how Madoff wasn’t discovered sooner, especially considering that his Ponzi scheme apparently began in the early 1990s.
I may never really understand, but a recent Frontline special on PBS offered some interesting details about the criminal setup.
For instance, Madoff’s insistence on snail mail over electronic financial statements was a clear sign that something was fishy.
Madoff would send out statements by mail to investors, but he refused to offer quicker electronic statements common at other firms, which would have allowed clients to keep more current tabs on their investments.
“… The fact that Madoff sent trading confirmations in the mail two to five days after a trade was reportedly made allowed him the benefit of hindsight, like betting on a horse race after it had begun,” the Frontline report stated.
So if you bothered to look at the statement, it would look like Madoff had made some great decisions with your money, because he sat back and created the statements after the trading for the day was actually over.
Of course, Madoff wasn’t investing the money given to him, but depositing investors’ money into his business account at Chase Manhattan Bank, then funneling out some of that cash whenever investors wanted a withdrawal, while mailing out bogus information about fictitious investments. This worked as long as too many people didn’t request returns on their investments at once.
Investors, who received kickbacks for convincing others to give their money to Madoff, apparently paid little attention to the details. They were more interested in the bottom line, in the appearance of easy earnings. The investor who did ask for more details was quickly put on the defensive.
“I remember one phone call I made,” said investor Joan Sinkin. “He said, ‘If you don’t like what I do, we’ll send your money back.’ It was very intimidating because, first of all, I didn’t want the money back. And I didn’t know what was so terrible about the question I was asking.”
Madoff also insisted on secrecy. For instance, an investment advisor who services more than 15 clients is required to register with the Securities and Exchange Commission, but Madoff serviced over 3,200 clients without registering.
“… Madoff had one condition he had to impose on everyone,” according to the Frontline report. “Funds were forbidden from listing him as an investment advisor in any marketing material.”
According to the Frontline report, the SEC knew that Madoff was unregistered and servicing over 3,200 clients, and yet they still avoided investigating him.
Meanwhile, accounting for his massive firm was handled by “a one-man operation in this strip mall an hour’s drive north of New York.” He told people who questioned his secretive accounting practices that he didn’t want to expose his trading techniques to competitors – which was, of course, hogwash.
In 2000, a man named Harry Markopolos contacted the SEC about Madoff’s Ponzi scheme. Markopolos examined the numbers and Madoff’s amazing “ability” to get a good return even in a down market.
“I gave them (the SEC) a road map and a flashlight to find the fraud, and they didn’t go where I told them to go,” said Markopolos.
In January 2006, the SEC lawyers did question Madoff, but, amazingly, two years later they cleared him.
Without the stock market crash, when so many investors grabbed for their money at once, Madoff may never have been exposed. When the market collased, he admitted the scam to his sons, who turned him in. The government surely wasn’t up to the task of uncovering his dirt. They were led to the mess and still didn’t do anything.
For years, many people looked at Madoff and believed that he worked some sort of magic.
“How do you split an atom?” one person close to Madoff asked. “I know that you can split them, I don’t know how you do it. How does an airplane fly? I don’t ask.”
That comment offers some insight on why the scheme worked — and why scams, in general, are appealing. If you’re enjoying a boat ride, you don’t want to think about the structure of the vessel and whether it will actually stay afloat. You leave such details to the skipper.
And if you’re getting money for nothing in the turbulent stock market, it’s easy to send your fortune with the captain of the steady ship. Sadly, in this case, there was no boat.
Zach Mitcham is editor of The Madison County Journal.