Wednesday, March 11, 2009

Beast of the Month - February 2009

Beast of the Month - February 2009
Bernie Madoff
Ponzi Scheme Con Artist

"I yam an anti-Christ..."
John Lydon (aka Johnny Rotten) of The Sex Pistols, "Anarchy in the UK"

Let's hand it to the good ol' USA, even now with the economic crisis, we're still number one in one major economic category: business fraud. (Sorry, Nigeria.) Yes, because America is the center of the economic universe, it still leads Planet Earth in swindles. And in America, the most famous form of fraud is the good old-fashion Ponzi scheme.

Like many great American traditions, the Ponzi scheme wasn't actually invented in the US: indeed, in the 1844 Charles Dickens novel Martin Chuzzlewitt, one is perfectly described. In fact, the man who the Ponzi scheme is named after, Charles Ponzi, was, like many great American trailblazers, an immigrant to this country. But in Chuck Ponzi, the swindle was perfected and popularized, so it is rightfully named in his deserved honor, and thus the Ponzi is as American as General Tso's chicken or nachos.

At the age of 21, Ponzi came to America in 1903 with only $2.50 in his pocket. Like another Italian-born American folk legend who immigrated to the East Coast two years later, Angelo Siciliano AKA Charles Atlas, he was a man short of money but strong of will and dreams to make it in the New Atlantis. But unlike Atlas - who made his fortune on marketing bodybuilding, thus paving the way for future American immigrant folk legend Governor Arnold - Ponzi earned his wealth in Boston on an investment scheme in 1920.

Ponzi's plan was a simple one as presented: exchanging international reply coupons bought in Italy for postage stamps in the US, he could make enormous profits. He formed a business, the Securities Exchange Company, to use foreign agents to make such mass transactions. Investors were offered a 50 percent return after 45 days, or double the investment in ninety. Incredibly, he was able to make the payouts, and quickly amassed $15 million dollars in investments. It appeared almost too good to be true.

It WAS too good to be true. The whole coupon exchange plan was a hoax, something the Boston Post had pretty much uncovered by late July. The real way Ponzi was able to meet his enormous payouts was by rapidly increasing his investor base by both reinvestment of "returns" and finding more suckers. He was arrested by the Feds in August, charged with mail fraud in using postcards to his "investors" in the scam (his only apparent actual business with the postal service.) He became the first business villain of the roaring twenties, and even with his quick rise and fall, the influence of Ponzi on the public's confidence in business investments is vast: no doubt in 1934, when FDR formed the Securities and Exchange Commission as part of the New Deal, the name and initials were used to replace the bad name to security trades given thanks to Chucky P.

Today, $15 million is chump's change when it comes to investments. Still, no Ponzi con since Ponzi has managed to match him in infamy. At least not until last year, when the curious case of Bernie Madoff, The Konformist Beast of the Month, came to light.

The aptly named Madoff ran a brazen Ponzi scheme which was unique in two ways. One was in how respectable the mastermind of the fraud was. The other was in its sheer amount: at $50 billion, it's the largest Ponzi scheme in history, even if you include MLM pyramid schemes like Amway.

Unlike the scrappy and streetwise Ponzi, Madoff was as inside the Wall Street establishment as you could get, having been a former chairman of the NASDAQ stock exchange. Indeed, it is arguable that the NASDAQ wouldn't exist without him, as the technology behind it was developed by his firm. This is what makes his story so strange: the reason respectable folks like Madoff don't form Ponzi schemes is because they don't have to.

Not having to didn't stop Madoff. And he managed to long avoid some of the key pratfalls of most Ponzis, which he is believed to have started in the 1970s. To begin with, he targeted charities, which are unlikely to make sudden withdrawals of their cash, actions that usually lead to Ponzi black holes being unmasked. He further promised modest but consistent returns of around 10 percent annually, enough to keep charities afloat, but not too high to arouse suspicion. The ten percent number also allowed him 10 years of time for every dollar taken before any investment became completely worthless, thus also making it unnecessary to desperately seek more and more capital. Meanwhile, by being an insider schmoozer who hung with the rich and famous in Long Island and Palm Beach, he managed to obtain large amounts of investment painlessly from well-to-do who had little reason to suspect he was a con artist. Indeed, though it became the world's largest hedge fund, he would turn down would-be-investors who sometimes literally begged to become his clients, which only added to his fund's appeal.

But a con artist he was, with a rather famous list of victims: Jeffrey Katzenberg, John Malkovich, Sandy Koufax, Zsa Zsa Gabor, Yeshiva University, the Elie Wiesel Foundation, and charities set up by the publisher Mortimer Zuckerman and Hollywood film director Steven Spielberg. (For those playing Six Degrees of Kevin Bacon at home, the actor and his wife Kyra Sedgwick were indeed investors as well.) The list of Jewish investors bilked by fellow Jew Madoff left some anti-Semites on the Internet confused about the whole enterprise: didn't Madoff read the Protocols and realize he was supposed to screw the goy?

Though the SEC investigated Madoff at least eight times since 1992, they apparently did a sloth-filled job, as no evidence of a scam was ever uncovered. This despite being warned this was so by financial analyst Harry Markopolos, who in 2005 would send the SEC a report with the subtle title The World's Largest Hedge Fund is a Fraud. The Markopolos report itemized 29 red flags that the Madoff fund was a Ponzi con. Markopolos also sent the information to the Wall Street Journal the same year, who decided not to pursue the story. A 2001 article in MARHedge magazine shined suspicion of his track record of 72 straight months without a loss, a streak it deemed practically implausible. Charles Gradante, co-founder of the hedge-fund research firm Hennessee Group, agreed with this assessment, telling the L.A. Times in 2008: "You cannot go 10 or 15 years with only three or four down months. It's just impossible." After the hoax was uncovered, financial software company RiskData analyzed Madoff fund returns and discovered it was similar to those in previously uncovered fraudulent funds, something that should have raised warning signs in its own right.

Even with all these suspicious facts, there was apparently little interest among authorities to do detective work on such an esteemed Wall Street investor. Indeed, the only person in power who seemed to have any real interest in investigating Madoff was Eliot Spitzer, who did so in 2006 as New York's Attorney General. Spitzer, who also had investments in the Madoff fund, would become Governor the following year before being destroyed in a conveniently timed sex scandal expose early last year.

How he got away with it for so long may be the least of the remaining mysteries surrounding the Madoff scam. Two claims are repeatedly made in the mainstream press about the fraud: that Madoff did the whole thing by his lone gunman self, and that nearly all of the $50 billion is gone for good. Considering the main source for both these claims is Madoff himself, perhaps they shouldn't be taken on faith. Is it possible Madoff is just a fall guy for a larger money looting operation, and the money is now hidden in some offshore bank accounts?

Whether there is a larger conspiracy or not, in some ways, Madoff is a rather convenient scapegoat for the recent crime spree by Wall Street. After all, $50 billion is nothing compared to the money lost so far in the economic crisis. Meanwhile, the $700 billion bailout, widely opposed by the public from the start, has been pretty much been unmasked as the fraud and dollar black hole The Konformist warned it was last October. With unemployment at the end of January at 7.6 percent (with over 3.5 million jobs lost since December 2007) the masses need a face to attach their rage to, before they focus their rage against the system. Then again, considering Madoff was a swindler who targeted charities to the tune of billions, he is probably a more deserving scapegoat for the crimes of humanity than Britney Spears.

And perhaps the Madoff con is just the tip of the iceberg. Already, the SEC has busted two more Ponzi schemes in the post-Madoff era, worth $50 and $17 million each. Another hedge-fund scam, which may have bilked investors of up to $350 million in Florida, was discovered last month when the manager suddenly disappeared. None match the scope of the Madoff enterprise yet, but anything is possible at this point. In any case, if enough of these Ponzis posing as respectable funds start popping up, perhaps Madoff, like Ponzi before him, will enter the lexicon as an adjective in its own right.

In any case, we salute Bernie Madoff as Beast of the Month. Congratulations, and keep up the great work, Bernie!!!

1 comment:

Anonymous said...

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