The Mighty Fraud: The fall of Bernard Madoff

It’s being touted as the biggest fraud in history. This is quite something, given the competition U.S. financial trader Bernard Madoff is up against in this year’s financial rogue sweepstakes. Madoff, founder of Bernard L. Madoff Investment Securities LLC, is one of those characters who was seen as a good sort of fellow, giver to both the political and philanthropic machines of the United States.

Madoff was a presence on Wall Street for decades and used the infamous ‘Ponzi scheme’ (named after Charles Ponzi), which may well hail as one of the biggest deceptions on the public in history. Its format is typified by abnormally high yields where later investors buy off earlier ones in what most outside the U.S. would term a pyramid scheme.

The defrauded were also the sort you might consider good chaps. Country club members, New York Mets owner Fred Wilpon, GMAC Chairman J. Ezra Merkin. The Elie Wiesel foundation and an assortment of other of charities were also fleeced. The Robert I. Lappin Foundation in Salem, Mass., announced a day after Madoff’s arrest that it would be shutting down operations after losing all its assets – $8 million in all. The Chais Family Foundation duly followed on December 14. Entire life-savings have vanished.

Madoff’s lines of influence were also considerable, going straight to Washington. In that wonderful collusion between politics and capital that is so typical of this country, his family had contributed almost $400,000 to committees and candidates. According to Politico, red-faced lobbyists have been scrambling to sever ties. They, like other customers of the Madoff empire, were duped.

The hedge fund industry was already in deep trouble before Madoff was arrested on December 11. This revelation will sink them further. Madoff’s firm had a difficult structure, and proved opaque to outsiders and regulators. Not that anyone was interested in looking. Again, the lack of regulation through such bodies as the Securities and Exchange Commission, which had received various tip offs about the nature of Madoff’s returns, assisted the unsustainable endeavour to thrive.

Perhaps this aspect is not surprising, given that former assistant director in the SEC’s Office of Compliance Inspections and Examinations’ market oversight unit in Washington, Eric Swanson, is married to Madoff’s niece, Shana Madoff Swanson.

What of the defrauded? Assets from Bernard L. Madoff Investment Securities LLC will be carved out in due course by the receivers, Richard Kibbe and Orbe LLP. Few will be surprised if these fail to cover the losses inflicted on Madoff’s incredulous customers.

External help may well be in the offing as well. The SIPC reserve fund could ease the pain to a certain extent, though this is not automatic. Busy lawyers will also seek to target brokerage firms who robed Madoff’s enterprise with glowing references to encourage investments from the gullible. As ever, the lack of oversight form firms that should have known better, helped.

Figures like Madoff have been sprouting like fungi on bracken in the last eighteen months. Given the mania against regulation and supervision, their emergence is hardly surprising. The only difference is one of scale. If you are going to defraud people and entities, do it in spectacular style. Madoff now towers over other financial calamities that have characterized this period of economic woe. And the most he will get in return is a possible $5 million penalty with short prison sentence.

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, University of Cambridge. Email: bkampmark@gmail.com

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