A $50 Billion Con Job Rocks Wall Street

Every era has its bad guy, its high-profile criminal who flames into public view through media circuses and tabloid headlines. In the 1930s, there was Al Capone brought down by the taxman. In the '40s, Willie Sutton was a big bad guy who once said he robs banks because "that's where the money is."  In the 1950s, the Mafia seized our attention, while here in New York, we had George Metetsky, the mad bomber. In the '60s -- well, you know the saying: If you can remember that era, you weren't there ...


Many of these larger-than-life gangsters were anti-social outlaws robbing banks and the like. Now the banks are robbing us. Until he is outdone, we now have a new poster boy for Wall Street excess and larceny: the bland personage of Bernard Madoff, the consummate Wall Street insider, philanthropist and pillar of the financial community. He has now been credited in this credit crisis for the biggest theft in history.

Madoff seems to have won the gold medal for absconding with the most gold -- to a tune of $50 billion and counting. It was all, he admitted, a Ponzi scheme. He was a perverted Robin Hood: he took from the rich and enriched himself in a lifestyle festooned with many houses, boats and stays at $5,000-a-night hotels.

The Notice

Go to the Madoff.com Web site today and there is this notice that thousands of investors are reading while holding back tears and outrage:

On Dec. 15, 2008, the Honorable Louis L. Stanton, a federal judge in the United States District Court for the Southern District of New York, appointed Irving Picard as trustee for the liquidation of Bernard L. Madoff Investments Securities LLC (BMIS) pursuant to the Securities Investor Protection Act as set forth in the attached order.
Mr. Picard supersedes Lee S. Richards, the previously appointed receiver for BMIS, and all claims by customers of BMIS will be processed by Mr. Picard as SIPA trustee. Customers and claimants should refer to the Web site of the Securities Investor Protection Corporation for information about the processing of claims: sipc.org.
Mr. Richards continues to serve as receiver for Madoff Securities International Ltd. pursuant to the attached order. The trustee Irving Picard has engaged Lazard Frères & Co. LLC to assist in the sale of the trading operations of Bernard L. Madoff Investment Securities LLC.
Should you have further questions, please contact the trustee at the following number: (888) 727-8695.

In short: Good Luck at Getting Any of Your Money Back.

Whistle-Blower Rebuffed

Of course, this dry legalistic language doesn't tell the whole story -- the story of the failure of the regulators to act, or about the submission to the SEC on Nov. 7, 2005, of a 19-page, detailed document charging that "The World's Largest Hedge Fund Is a Fraud."

It was written by financial expert Harry Markopolos and sent to the Securities and Exchange Commission with a request for deep confidentiality. He exposed the man now being called "Made-off." The title of his report: "The World's Biggest Hedge Fund Is a Fraud." It projected scenarios including this one:

(Very Likely) in bold, "Madoff Securities is the World's Largest Ponzi Scheme." He believed that "this would be another black eye for the brokerage industry."

Bingo!

Victims We Can Relate To

That black-eye punch was never thrown. Instead, it was three years before Madoff went down. He continued to operate his con game, defrauding customers worldwide. At the same time, the investors he ripped off later became "sympathetic victims" in our media -- like Steven Spielberg -- as opposed to subprime home borrowers, who were often demonized as schemers and told they were naïve and should have known better. A CNBC "documentary" showcased a parade of wealthy Madoff victims.

Madoff was a high-flyer, a part of a clubby and incestuous elite world of golf clubs, resorts and philanthropy with tax benefits. He was a leader of the Wall Street world, at one point the chairman of NASDAQ. Universities invited him to lecture on how markets work. He was admired, considered a role model, a genius. His firm handled l0 percent of all stock exchange trades.

His niece married an SEC regulator. Mary Schapiro, Barack Obama's pick to lead the Securities and Exchange Commission, previously appointed one of his sons to a regulatory body that oversees American securities firms. Madoff himself said he had often visited the SEC, where he complained of over-regulation.

Madoff was in until he was out!

Soon he was wearing an electronic bracelet and under house arrest, a further sign of privileged treatment by the way. Imagine what secrets he could spill. Already the New York Times is reporting that this theft problem went much deeper, with all the Wall Street firms posting phony profit reports and then giving themselves juicy bonuses. A financial blogger wrote that the Times was still obscuring the story because the practice constitutes nothing less than looting, a word they never use.

Unfortunately, Madoff was not unique, not alone and shrewder than the people who trusted him to earn a good return. One financial analyst said that some of his investors assumed he was doing something illegal -- perhaps insider trading -- which is why they wanted him to manage their money. They thought they would make more money that way without taking normal risks.

Funds of Funds

Subprime speculators targeted low- and middle-income people. Madoff marketed to the wealthy. Editor Steven Pearlstein of the Washington Post explained that he specialized in "funds of funds" hedge funds:

These are hedge funds that raise money from pension funds, university endowments and wealthy individuals, and, for a fee of 1.5 percent a year, invest it in other hedge funds, which charge even higher fees. In return for paying double fees, these middlemen claim to offer investors access to the best hedge funds, which can be choosy about whose money they accept. They also offer the peace of mind that goes with knowing that the funds have been thoroughly checked out.
Now it turns out that some of these funds of funds had parked billions of dollars of their clients' money with Madoff without asking how he could so consistently produce returns in up market or down, or demanding to know why his books were audited by a three-person firm that nobody ever heard of operating out of a broom closet on Long Island.
It doesn't take a Ph.D. in finance to see the pattern here: Accounting firms and rating agencies are too easily compromised by the fact that they are chosen and paid by the management of the companies whose books they are auditing and securities they are rating. There are simply too many built-in conflicts of interest.

And Madoff took advantage of them. As a result, he had a license to steal, and steal he did.

"Disintermediated" Investors

James Hedges IV of LJH Global Investments, says those that went with Madoff chose faith over evidence.

"You've got people who were disintermediated [i.e., didn't have a professional representative], or unsophisticated, or went in through a personal relationship. That's what a con man is -- a confidence man is somebody that engenders a relationship and then subsequently lures somebody into doing something that they shouldn't do."

In the aftermath, the small gesture speaks volumes. A friend was staking out Madoff's former offices for a major news organization. No one would talk to her, including investors who could be seen through the window on their cell phones moaning about losses. They looked grim. Some were wiped out. When they left the building, some hid their faces, perhaps in shame, like criminals photographed on "perp walks."  A philanthropy expert said the consequences will be "catastrophic." An Israeli newspaper said many Jewish organizations will be hurt, some irreparably.

The anthropologist Lionel Tiger writes in Forbes about how incidents like this undermine all respect for the business world: "The invisible hand lurches between clenched fist and begging palm, and the new Greenwich Mean Time is in Connecticut. Suddenly, the only thing taken for granted is a government grant."

You could never make this up, even though Wall Street history is replete with earlier versions of this Sultan of Sleaze. Around the world, it is not just the supercrook Bernie Madoff who is seen as the guilty party, but the whole American system of free-market finance. There will be a reckoning.

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