OPINION:
Charles Ponzi, who a hundred years ago invented the eponymous scheme of paying abnormally high returns to investors out of money paid in by subsequent investors, rather than from actual profits, would be proud of Bernard Madoff. Last week, Madoff revealed his Ponzi scheme and reportedly told authorities that his investors could lose $50 billion - that’s with a “b,” constituting possibly the greatest financial fraud in history.
Apparently the scheme had been going on for at least one decade, possibly two, with nary a peep from individual investors (many of them wealthy and supposedly financially sophisticated), institutional investors, industry groups, auditors, examiners and regulatory agencies. Those agencies included the Securities and Exchange Commission, whose chairman, Christopher Cox, acknowledged Tuesday “apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.” All of which cries out for explanation and, for the sleeping watchdogs, investigation and discipline.
The collapse of the scheme - which was inevitable when the market plummeted - has left (former) millionaires and even billionaires virtually destitute, it is reported. A couple of well-known sports owners, the foundation of a U.S. senator, the chairman of GMAC Financial Services, and a number of foreign banks and “funds of funds” such as hedge funds were heavily affected. More touching, the enormous fraud has wiped out or heavily impacted various charities, foundations and dependent elderly clients that had placed most or all of their funds into Madoff’s investment pool.
The debacle is a cautionary tale. Madoff, 70, was highly respected; he was a former chairman of the Nasdaq Stock Market, a leader in financial organizations, a generous philanthropist, and modest in demeanor. He frequently declined to allow begging would-be investors to join his secretive private-wealth management fund, which only added to his allure.
The too-good-to-be-true steady returns his firm reported, in good months and bad, should have raised some eyebrows, along with his refusal to explain how his investing worked. Instead, word-of-mouth raves from investors satisfied with their investment statements created a private-club atmosphere where those invited in felt privileged and blessed. As Jason Zweig in the Wall Street Journal put it, “When you are in an exclusive private club, you do not go rummaging around in the kitchen to make sure the health code is being followed.” Well, someone should have.
It is astounding that one person (if it turns out to be only one, as Madoff claims) could have pulled off such a monumental fraud involving many entities, monthly statements, bank transfers, annual tax statements, trade confirmations, etc. (Madoff was reported to authorities by his two sons, who were senior officers of his firm.) It is astounding that the SEC acknowledged it had credible allegations about the scheme at least nine years ago but did nothing.
The allegations were made repeatedly over the past nine years to the SEC by Harry Markopolos, an industry executive and our candidate - sight unseen, no further questions or qualifications necessary - to be the next commissioner of the SEC. Mr. Markopolos in 1999 contacted the SEC with his suspicions, according to the Wall Street Journal, after researching the Madoff strategy and concluding the results likely weren’t real. “Madoff Securities is the world’s largest Ponzi scheme,” he wrote the SEC as part of his nine-year “j’accuse” of Madoff sent to both the New York and Boston bureaus of the SEC. The SEC was clueless, deaf and blind by Mr. Cox’s own acknowledgement until Madoff himself revealed his fraud. Clearly, the SEC needs close investigation of its own procedures and policies.
Until the SEC and other regulatory agencies are reformed as necessary - and, indeed, at all times anyway - it is always wise to realize that if something seems too good to be true, it is. Some are destroyed by greed, others by their innocence or naiveté, and all by their misplaced trust. The rain falls on the just and the unjust, and another $50 billion of wealth may be washed away.
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