Friday, January 9, 2009

The Massive Bernard Madoff Fraud Case

As most people who read newspapers know by now, Bernard Madoff, the 70 year old New York based money manager, was arrested on December 11th of running a giant illegal so-called Ponzi scheme under which old investors are provided above average manipulated returns funded by moneys from unwary new investors, rather than from actual returns from their investments. He has confessed to fraudulently losing over a long period of time, possibly since he started his business in 1960, up to an incredible $50 billion of money entrusted to him by family members, close friends, major banks, and other substantial financial market players. As I understand it, he is currently free on a $10 million personal recognizance bond, but is under 24 hour house arrest in his New York penthouse.

There is increasing pressure from several well-known investors, including major Hollywood celebrities, like Jeffrey Katzenberg, CEO of Dreamworks Animation, to put him in jail, especially after word got out that federal prosecutors actually found $173 million in checks signed by Madoff when they searched his office on the day he was arrested. The checks, about to be mailed out, were apparently made out to family members and close friends who had invested with him in an effort to keep those funds away from the prosecutors and other creditors. Madoff's attorneys apparently have argued that their client didn't violate any of his bail terms and didn't know the asset freeze imposed applied to the $173 million. Incredible!

What a crook! He definitely belongs in jail, though he no doubt has some negotiating leverage with the prosecutors because he reportedly is the only one who knows exactly what happened to all the money entrusted to him, what's left and where it is deposited or invested. It is likely his attorneys won't hesitate to employ that leverage in talking to the U. S. Attorneys examining and prosecuting the highly publicized and unusual case in New York.

Allegedly his two adult sons, who served as senior executives in other parts of Madoff's business and worked on a different floor in his building, knew nothing at all about their father's activities with this fraudulent scheme. It's rather hard to believe that was actually the case, but I suppose it's possible.

This case definitely will put another big dent in the reputation and credibility of U. S. financial markets and our significantly damaged financial services industry. It is unclear whether more government regulation, such as that now being considered, could have prevented this scandal. However, it ought to lead to much more due diligence and care, and exercise of more common sense, by investors seeking investment advice and asset managers for their investment funds. Madoff's clients should have known that steady, double digit investment returns in good and bad markets was not realistic, especially if the planned investments would not involve above average risk. They should also have known that it wasn't prudent to invest all, or a substantial percentage, of their investable funds with one money manager or in one category of investments. These are very basic, quasi no-brainer investment principles. Live and learn.

No comments: