Just when you thought that we had heard it all, and that there were no real surprises left, along comes Bernard Madoff and his nifty little alleged Ponzi scheme.
If you haven't been following the news, Madoff (pronounced made off) was robbing Peter to pay Paul to lure unwitting investors into his unregistered and unregulated money management business.
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Madoff's secret business was run along side his firm's other regulated investment advisory subsidiaries.
According to press accounts, Madoff's "legitimate" business operated on the 18th and 19th floors of a downtown Manhattan office tower, while his side business occupied the 17th floor. No one could gain access to Madoff's private 17th floor clubhouse unless he or she knew the secret handshake.
A Classy Crowd
Madoff, the former chief executive of Nasdaq, was ratted-out to the feds by his two sons. Apparently it had gotten so bad the Madoff boys believed that their dad's financial shenanigans would jeopardize their otherwise gilded future.
Here's the real kicker; Madoff didn't swindle old ladies and pensioners.
Some of his biggest victims were well-known giants of the financial world, including Mets owner Fred Wilpon and major hedge funds like Fairfield Sentry. His “A” list also included Tokyo's Nomura Securities, and financial institutions like BNP Paribas in Paris, Spain's Santander Bank and Europe's largest bank, HSBC.
You would think that their first clue would have been his name.
If love makes you blind, then greed must make you stupid. Despite his claims of high returns, court documents seem to show that none of these sophisticated investors ever conducted an independent audit either before or after they entrusted their monies to Madoff.
How It Worked
Madoff may have been clever, but it looks as if he ran nothing more than a run-of-mill pyramid scheme. It was simple; use the funds of new investors to pay returns to earlier participants. No muss, no fuss.
The plan is foolproof unless the flow of new money stops.
The end of the road came for Madoff when the stock market went south, causing new investors to withhold money from his fund.
Madoff got away with this scam because this sector of the investment world is largely unregulated. In this world of dark finance, Madoff was able to not only keep his lists of investors secret, but was not obligated to subject his books to any form of independent public scrutiny.
Did the Commission Know How?
Even if the SEC suspected Madoff of wrongdoing, they had no authority to monitor his activities, and probably did not have the sophistication to pierce his deception.
As this case continues to unfold, it is likely that we will learn of other, and possibly larger, schemes of a similar nature.
The only mystery is why we are continuing to bail out banks and other financial institutions that were either too stupid or too lazy to do homework before they got ensnared by the oldest trick in the book.
John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com
