One bank analyst pointed out that Madoff’s investment fund was a likely Ponzi scheme as early as 1999. Madoff’s returns were essentially the equivalent of magic, and he had billions of well connected, sophisticated dollars rushing into his magical well? Why? Because his returns were amazingly consistent. They literally defied rational belief, and yet you had investors up to the size of multi-billion dollars hedge funds putting money into a dark hole with minimal oversight because they were almost guaranteed a consistent, usually above market return.
In the end the investors were in his fund because of magical thinking and greed. How sorry would you be for me if I used my life saving to buy magical beans and then cried that I was abused when the giant beanstalk did not appear? Red flags in Bernard Madoff’s alleged giant Ponzi scam
Yah - the SEC looked at him in 1992, and again (I believe) in 2002, finding only minor technical problems in Madoff’s record-keeping. There were firms that smelled something fishy, but this wasn’t nearly one of those situations where only greedy, gullible people could be suckered in. In fact, one of the clever things about Madoff’s scheme was that the returns were modest, for a Ponzi scheme - only 10%, on average. Ponzi schemes more commonly promise outrageous, get-rich-quick returns. Further, Madoff made a point of returning investors’ money on request - Ponzi schemers rarely do that.
This guy was very, very smooth. The most careful people avoided getting ripped off, but there are plenty of honest small investors who got screwed. Why not feel sorry for them?
No, I don’t feel sorry for them. The fact that these investors had billions to invest, and choose a hedge fund as their vehicle, tells me they’re woefully ignorant to have had that kind of money in the first place. They should have stuck with low cost mutual funds with Vanguard or Fidelity. Being “rich” like that… well, lets just say that wealthy people seem to think that investing in a hedge fund is somehow better for them. Something “elite” or something. The fact is, is that hedge fund investing is for wealthy suckers.
The guy not only traded falsely on his reputation (as former chairman of Nasdaq), but on his heritage. He targeted older Jewish people with roots in the NYC/Long Island areas, because they would instinctively trust him as “one of them.” He would then solicit referrals to their relatives and friends for the same reasons.
He was what they call a social engineer. He knew that the less likely people are to want to check up on you, the easier your game becomes. For that reason, I do feel sorry for the older folks - those accustomed to trusting people who are of their group, because back in the day you often couldn’t trust anyone else.
First of all, he did not run a hedge fund. Second, many of his investors were not billionaires. Some were not even millionaires. A lot of honest, hard-working people trusted him and got screwed.
I feel sorry for the people interviewed in this article. It sounds like a lot of charities got hit too. At least one had to close down completely.
“Thirty-six years of loyalty, through two generations, and this is what we get,” he said.
“It seems like a huge over-allocation, I know,” Mr. Englebardt said. “But remember, they had started out small and invested over 5 years, 15 years, 30 years — and every year they got a great return, and they could always take money out without ever having a problem.”
These quotes probably get to me the most. That could easily have been me and no I’m not some kind of millionaire. I started with a small investment in one Vanguard fund and slowly contributed money every month for many many years. I could be giving my savings to a ponzi scheme right now for all I know. This guy had been in business for 30+ years and given the ok by the SEC too. I try not to get worried when I read of Wall St. scams and I usually don’t. However when I hear a fund that’s been around for more then 30 years turns out to be a scam I start wondering if anything is safe.
It’s one thing to paint a picture of a greedy billionaire who invested directly with Madoff with the expectation that they’d earn even more billions. But I don’t think that’s an accurate portrayal of all of his investors. Weren’t there people who invested with bond or mutual funds which were then invested in Madoff funds? I think there are plenty of people who only lost thousands or tens of thousands, but for whom those losses will be devastating.
A lesson to take away from this is to diversify your holdings, not just by asset class, but by manager. It costs a bit more in time and transaction fees to hold several functionally equivalent funds, but it does mean that one crooked manager can’t wipe you out.
Yes, I feel sorry for the victims (much more than I do for the victims of more obvious scams).