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Madoff, fraud and Wall Street

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On December 10 2008, Bernard Madoff broke down and confessed to his wife, Ruth, and his two sons Mark and Andrew that his investment business was a complete fraud. The next day two FBI agents showed up at Madoff’s front door and placed him under arrest for numerous federal crimes. “In addition to the charges, the government sought at least $170 billion in forfeited assets from Mr. Madoff, a remarkable figure that apparently counts all the money that moved through Madoff bank accounts during the years of the fraud as the proceeds of illegal activities.”[1] To date, some two billion dollars has been paid back to large investors by way of negotiation, litigation, and the chartered Securities Investor Protection Corporation. Irving Picard, the attorney who has filed more than 1,000 lawsuits, including those against large banks such as JP Morgan Chase & Co and HSBC Holdings Pic, to recover about $100 billion, has thus far recovered $7.6 billion, or 44 percent of the $17.3 billion that former Madoff customers have claimed to have lost, but most of these monies are still tied up in cross-filed litigation.[2] 

Madoff who had been a market maker—the middleman between buyers and sellers of stocks—intentionally engaged in the deprivation of people’s property and rights, including the stealing of some 18 billion dollars from tens of thousands of investors, most of whom unknowingly became victims, and more than a few others who knowingly became benefactors of Madoff’s slight of the invisible hand--the largest Ponzi scheme in the history of modern capitalism. His financial con of cons that had taken a lucrative wealth management business and had grown it over the course of at least two decades, into a $50 billion Ponzi scheme had finally collapsed when too many investors in the fall of 2008 wanted to pull out their funds during the worst economic crisis since the Great Depression.

At the time of Madoff’s public exposure and his criminal demise, one question often asked, but not all that important in the scheme of things was: why did one of the most successful broker-dealers in the financial industry, a legendary Wall Street figure who had been a co-founder and former chairman of the NASDAQ, and a loving husband, father, and brother as well as an admired and beloved philanthropist operate what became the biggest, unregistered, and fraudulent “hedge fund” (e.g., a mutual fund for millionaires and other institutional investors that did not actually exist as Madoff never invested a penny of this money) the world has thus far known? Unless Madoff, now confined for 150 years in the Butner Federal Correctional Institution, decides to write his memoirs or a “tell all” best selling book, inquiring minds will have to rely on a senior financial writer for The New York Times, Diana Henriques. Granted on-the-record interviews with Madoff after his arrest, she concludes in The Wizard of Lies: Bernie Madoff and the Death of Trust (2011) that after losing money in the early 1990s and unable to face his clients with the truth, he fudged the numbers, hoping to recoup the losses later, only finding himself digging into an ever deepening hole as it were.

A more significant question has to do with, not why did he do it, but rather why or how was it that so many “savvy” investors including, about half of the Palm Beach Country Club in Florida, the demimonde of Monaco, and the Russian mafia, were all taken for so much money? Quoting Madoff on February 17th of this year, CBS News reported that major banks were “complicit” with his Ponzi scheme and that these institutions had engaged in “willful blindness.” Thus, a book explaining how a fraudster like Madoff and a team of five could have established a global network of investors from more than 40 countries, 339 funds of funds (e.g., mutual funds that invest in other mutual funds), and 59 asset management companies, had “gotten away” with it for so long, when everybody in the know either knew or should have known that some kind of pecuniary swindle was occurring, would hopefully be more interesting than a book on The Wizard of Lies.

One such book, No One Would Listen (2010)[3] by Harry Markopolos, has already exposed how the widespread cultural and social acceptance of “free market” economies and the consequences of deregulation buttressed by the inactivity of the United States’ financial regulatory agencies in charge of such matters, allowed this Ponzi scheme to survive for so long.The simplest reason that the Securities and Exchange Commission (SEC) had failed for at least eight years to move on Madoff despite the detailed evidence of his fraud provided by independent investigators and outside informers was that neither his investors nor his regulators wanted to believe that Madoff could actually be running a multi-billion dollar financial scam. However, criminological research brings forth the knowledge that Madoff could get away with not being found out or busted for some 20 years or longer because he was not only a “trusted criminal” by his clients and SEC regulators, but his fraudulent enterprise was also run as a “secret society” consisting of a handful of well paid individuals that allegedly escaped the purview of his closest family members. In addition, as criminological research informs us, there are a host of psychological factors as well as organizational interests at work “not to know.”

In the face of either knowing for some of Madoff’s investing clients or in terms of the negative consequences of disclosing
the truth for some of his regulators, concerted ignorance was the result.[4] Much the same can also be argued about those too large to fail mega financial institutions like AIG, Countrywide Financial, and Wall Street investment banks. A principle difference, of course, is that even when these institutional fraudsters were caught breaking the rules red handed and looting the American people dry, not one of these institutions has been criminally prosecuted for securities fraud nor ever civilly fined proportionate to the wealth taken or to the social harm created and rarely, if ever, do they have to admit publicly or otherwise to any intentional misdeeds or wrongdoing.

Specifically, in terms of the defectively engineered derivatives attached to subprime mortgages and the trillions of dollars lost, the high-rolling bankers, mortgagers, and insurers were bailed out by the U.S. Troubled Asset Relief Program or rewarded for their incredibly risky, neglectful, and casino-like fantasy behavior to the tune of three quarters of a trillion dollars. Had the U.S. government not purchased assets and equity from those Wall Street and other global financial institutions to pay-off or cover the losses wrapped up in their toxic investments, they would have all had to declare bankruptcy as in “too big to fail.”

Meanwhile, as for all of those pensioners and homeowners who were or were not separated from their life savings and/or homes by the actions of those “too big too fail” institutions of Wall Street, nobody has “bailed out” the tens, if not, hundreds of millions of victims worldwide who have suffered collective losses equivalent to some $10-14 trillion.

Notes

1 Bernard L. Madoff, Updated May 25, 2010. The New York Times. Retrieved on 8/12/10 from http://topics.nytimes.com/top/reference/timestopics/people/m/bernard_l_madoff/index.html.

2 Stempel, Jonathan. 2011. “Madoff Trustee in $1 billion pact with Fairfield Funds.
Reuters, May 9. Retrieved May 15, 2011 from
http://news.yahoo.com/s/nm/20110509/bs_nm/us_madoff_fairfield_settlement_3.

3 Markopolos, Harry. 2010. No One Would Listen: A True Financial Thriller. Hoboken,
NJ: Wiley.

4 Van de Bunt, Henk. 2010. “Walls of Secrecy and Silence: The Madoff Case and Cartels
in the Construction Industry. “ Criminology & Public Policy 9 (3): 591-612.

Gregg Barak, Professor of Criminology and Criminal Justice at Eastern Michigan University

 

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