In our introduction, we spoke about the old saw that you can’t con an honest man. James Walsh even has a recent book out, an exploration of the Ponzi scheme and its practitioners, whose titles begins with “You Can’t Cheat an Honest Man.”
But are we being too hard on the “marks,” are we blaming the victim here? Perhaps yes, and also no. Let’s discuss.
Naturally, we all ache for the charities that took a hit. Nobel Prize winner Elie Wiesel’s foundation, and it’s losses to Madoff, makes for a heart-rending photo op. We don’t know the inside story of who from Wiesel’s group placed the money with Bernie, who was supposed to have checked it all out.
And we have a soft spot for busy, hard-working people who might not know the reasonable limits of investing success, that is, know when the returns are simply too good to be true.
Actors Kevin Bacon and wife Kyra Sedgwick presumably have a plate piled high, busy careers and travel schedules, a long-lasting Hollywood marriage and kids to raise. If they didn’t look the gift horse of Madoff’s returns too closely in the mouth, we cut them some slack. We figure it’s not lack of intelligence or integrity, it’s lack of time due to lives focused elsewhere.
Who’s to say who had the time to perform due diligence? But that phrase, originally from the legal world, cuts to the heart of the matter. Due diligence assumes you find the time, take the time, or consult the expertise to make good decisions in your sphere of responsibility. If you don’t care about your discretionary couple of million parked in a fund somewhere (and, of course, everyone does care) then go ahead and flip a coin over your decision.
If you do consider your money a matter of high stakes, then do you really have an excuse? And let’s be clear, Bernie’s clients, either directly or through feeder funds, were generally the wealthy. This was not the poor neighborhood Credit Union, where folks might proudly have a few thousand dollars in their savings account.
These folks had placed millions, and thus the question: How can you be savvy enough to amass a good-sized pile of money, and so naive as to have never heard the phrase “too good to be true”? That’s Finance 101, really Life 101, and everyone’s been exposed to the warning, if they care to pay attention.
This guy’s fund makes steady money, whether the market’s up, or it’s down. Can he fly without wings as well, walk on water? In other words, just how the heck does he do that? For a guy with his long history, and elite connections to the Street, we wouldn’t have imagined a Ponzi structure either.
We’d have imagined some species of “insider trading” –making money on inside information you shouldn’t have, at least shouldn’t play the market with. The other explanation: Bernie and his traders have come up with a secret trading code, have developed a new analytical tool that enables them to make money, in all market conditions, when no one else has.
That’s possible, Einstein’s breakthroughs, obviously, were possible.
But with tens of thousands of the best, brightest analytical minds working on just that challenge, for a century now, just how likely is it that Bernie’s cooked up a legitimate secret sauce?
How plausible is that explanation, compared to say, insider trading based on his lifetime of contacts?
Anyone doing true due diligence on the matter would have asked themselves that hard question.
It shouldn’t have taken Harry Markopolis, and his high level skills at financial analysis, to see through Madoff.
His sons worked on a different floor, a different division, away from the scam entirely. The story is they knew nothing, were stunned when the father came clean to them, and went to authorities straight away. But Sherlock still has questions.
The sons were brought up on Wall Street wisdom. Did they never ask, Dad what’s this secret formula that no one else has, and if so, what was the answer? And many assume Ruth Madoff knew, although she and Bernie swear, no she didn’t.
In she end, she lost as much as any “victim.” Her two sons are dead, one from suicide induced by the scandal, the other from cancer two years later. Her husband may as well be dead, and so is her reputation or dignity anywhere in society. She’s lives on in quiet anonymity, as best she can.
The stories of victims could fill volumes, themselves.
Let’s look at a couple of remarkable cases. From an article from the UK, right after this all broke:
A 95-year-old Boston clothing tycoon, Carl Shapiro, looks set to be the biggest single victim of Bernard Madoff’s fund management scam by losing up to $545m (£357m) at the hands of the Wall Street fraudster.
A respected philanthropist, Shapiro entrusted much of his wealth to Madoff and had $400m of his own money in the disgraced financier’s firm, plus $145m from his family’s charitable foundation.
HSBC, Royal Bank of Scotland, Banco Santander, scores of hedge funds and many Jewish charities are nursing a big exposure to what has become known as the world’s largest Ponzi scheme.
But Shapiro’s loss is the greatest disclosed by a private individual so far. The elderly entrepreneur made his fortune by founding a womenswear label, Kay Windsor, which is still known in fashion circles for its vintage floral dresses despite being defunct since the early 1980s. He sold the business to Vanity Fair in 1971.
According to the Boston Globe newspaper, Shapiro’s family are friends and neighbours of Madoff in the exclusive Florida enclave of Palm Beach. Shapiro said he was “stunned and saddened” to learn of the allegations surrounding Madoff.
The Guardian, Dec. 16, 2008
A neighbor, a friend of Madoff’s for half a century, baldly burned. That’s a long time to know someone, time for trust to settle in. But shouldn’t a ninety-five year old have also learned life’s basic lessons? Seven, eight decades of business experience, and Mr. Shapiro can’t look at financial reports and wonder if something’s up? We feel for the elderly gentleman, but he should have been long past the age of financial innocence.
Then there’s the complex matter of New York Mets owner Fred Wilpon. His relationship with Madoff was long-term, involving serious dollars, serious implications.
Sandy Alderson recently commented that when he took the job as Mets general manager, he did not know just how badly the team’s finances had been ruined by their involvement with Bernie Madoff. This primer briefly explains some of what Alderson was referencing.
Why were the Mets so heavily invested with Bernie Madoff?
The Mets and their owners were so addicted to the Madoff gravy train that they had nearly 500 accounts with him. The basic reason is that Madoff gave the Mets three things all investors want:
1) High returns—The Wilpons were getting (fictitious) annual returns of 12-18% from their investments with Madoff.
2) Consistent returns—Madoff never failed to produce double-digit returns, even for a single year of their multiple-decade relationship. These consistently high returns are a big part of the reason the Mets made deferred-compensation agreements with Bobby Bonilla and others; they figured that instead of paying the players while they were playing, the Mets would give that money to Madoff. Then, by the time the deferred compensation was due, the investment would have grown enough to easily pay off the promised compensation with money to spare.
3) Liquidity—The nature of the Wilpons’ relationship with Madoff allowed them to invest their money, profit from it, and then turn around and reinvest both the principal and the profit to really accelerate their gains. They felt comfortable operating like this because they knew that whenever they needed a little extra cash, they could withdraw it from their Madoff accounts with no problem.
amazinavenue.com, March 30, 2015
This excerpt from a “primer” on the issue goes on a while, complicated enough to make brain cells ache. But we’ll boil down the gist for you:
Yes, Wilpon was another “victim” of Madoff, left with some empty accounts when Madoff went belly up.
But, over the years, the Mets owner had also cashed in a lot of Madoff “earnings,” now considered bogus earnings by the government. In that sense, he’s an unwitting partner in fraud.
He’s someone who got his hands on money newly committed by other suckers, that is, investors, but paid out to Wilpon upon request to sustain that fiction that your accounts have grown, and you can cash them in any time.
Think about it, it’s an interesting brain-teaser for regulators. What do you do with someone who cashed out his account or accounts with Madoff, but ended up with money not earned in legitimate market conduct. The money instead came from other poor souls, that’s what a Ponzi scheme is. Do you use legal tools to pry that money, minus the original principal, loose from investors who think they “earned it,” to redistribute back to victims left high and dry?
The money might have tripled, quadrupled, over a couple of decades of its fictional growth. Do you leave it with the client who was lucky or prescient (or suspicious) enough to get out, or send it back to others?
Wilpon’s relationship to Madoff, so many accounts over so many years, took a herd of CPA’s to untangle, but at the end of the day: He gets some consideration for the money he lost with Bernie, but it’s offset by the money he gained by Bernie’s fraud. At the time the article was written, the Mets were slated to owe about $29 million back to the compensation fund, out of well over $150 million said to have been cashed in over the years.
The unlikely relationship of Madoff and a Major League baseball team has a thousand more wrinkles–it could be a book in itself.
But beyond the complex moral and financial math, the question leaps out again. Here’s a guy who’s in a rarefied height of the business world–there’s such a limited number of top professional sports franchises. Owning one has replaced polo as the sport of billionaires.
What’s a businessman of that caliber, that experience, doing in accounts that always pay back over 12% per year? Should we have any sympathy for him, biting on the rusty old hook of “too good to be true?”
It really makes you wonder if he’s so innocent at all. Might he have been along for the ride with Bernie, explicitly or subconsciously, and just been caught by surprise, standing in the musical chairs game, when the end came so suddenly?
He’ll never be jailed. But, should he be?