He "Madoff" with So Many People's Money

Leighton Strader - Virginia Ventures, LLC

A modern day Willie Sutton, Billy the Kid, John Dillinger, Clyde Parker and Butch Cassidy has recently emerged in the form of ...Bernie Madoff. Not a very sexy appellation for the thief of all thieves. Unlike so many of his predecessors, Bernie took money without showing his face behind a mask or while brandishing six shooters or a Thompson sub machine gun. He did it while serving you cocktails at one of his 3 palatial homes or on one of his yachts. He did so through one of his many "feeders" that insisted they had conducted extensive due diligence on Madoff's firm, and were confident that the former Executive Chair of NASDAQ, and servant to so many philanthropic endeavors was truly an investment genius.

But storm flags had flown over Madoff's operations for years. They came in the form of detailed letters written by true experts in his strategy (split-strike conversion), asking how it could be that he had assets approaching $50BN, yet there was no evidence of his trading in a sufficient amount of necessary options to underpin his strategy. They came in the form of some of the most basic issues used to exculpate managers - independent custodial, accounting, and trading. They came in the form of far too great an opaqueness relative to his strategy. ("I would decline to get into the details of our strategy, as it is proprietary").

There was no way for experts to evaluate Bernie Madoff's skill set, but with all of that and more weighing against his firm, so many "experts" not only placed monies with him, many placed inordinate amounts with him. Some entrusted 100% of their entire fortunes to his investment prowess. How could it be that people (hedge fund experts, consultants, family offices, and sophisticated institutions) with presumed good judgment be so taken and smitten by this scheme?

It says two things about our society. First, we are eternal optimists. We want to believe the best. We have distaste for confrontation and negative attack. That's what keeps us going...a positive outlook about life. Second, it says, "good pitching (marketing) will always beat good hitting (investing)."

The first precept is something embedded in our souls, thank goodness. It permeates our fiber and is the fabric of our Nation. Let it last forever. The second precept is a condition to which we've all fallen victim. It can be repaired.

This scandal (scheme, contrivance) will live in the Halls of the Harvard Business Review as a classic example of people not asking the tough questions. Further it will be a beacon over rock-strewn waters to light the way to safely diversify ones investments. It will rein forevermore as a warning label that says, "Always examine potential conflicts of Interest; always understand the underlying investment thesis and its executable strategy; always look for pedigree in vendor relationships; always insist on audited results; always approach 'distinctive' schemes with skepticism - there is very little that is new under the investing sun." Whenever a manager (advisor, broker) claims "uniqueness" ...run!!!

In 1999, trader Harry Markopoulos wrote a detailed letter to the SEC*, and delivered it to the Boston Section Office of that Agency. It said (among other charges), "Madoff Securities is the world's largest Ponzi Scheme." The SEC, in its wisdom, did what so many others did. They ignored well articulated warnings and used their $900MM budget to go after small-time brokers, insurance fraud and privacy violators.

Be a skeptic, ask the tough questions, and if you have an unsettled feeling walk away. Investment schemes, legitimate and otherwise are like taxis in the big City...there's another one right around your corner.

*Harry Markopoulos' letter is available at the SEC website, and through most financial journal.