Madoff Madness
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Madoff Madness
Even investors who think they're safe are wrong.
By Mark Gimein
Posted Tuesday, December 16, 2008 - 6:52pm
Let's say, just for the sake of argument, that you invested your life savings in a fund run by a Wall Street legend named Mr. Made Up. For 15 years, your investment in the Made Up Fund has risen a nice 10 percent a year, and now the $1 million you put in is worth about $4 million. Then you get a tip from a friend out on the golf course that the Made Up Fund is ... well, just what its name suggests.
Do you:
a) Take your money out the next morning, then go to the police
b) Take your money out the next morning and say nothing
c) Do nothing with your money and go to the cops the next morning
d) Do nothing, say nothing, and hope that no one else notices
The ordinary human impulse on finding out that you've given your money to someone who's unlikely to return it is to ask for it back immediately. The ordinary moral impulse is to let other people know. And the one choice that you'd think any reasonable person would avoid is (d). That seems completely obvious, right?
Unless, that is, you have any familiarity with the terrifying labyrinth of the law on investment frauds. Once you do, you'll see why even the investors who got suspicious of what Bernard Madoff was up to might have been very, very wary of going public—and why the Madoff implosion will probably lead to an even longer, uglier unraveling than the sheer numbers suggest.
Comments
Class action against SEC and FSA?
It seems to me that there is significant blame in the last 6 months(years) against the SEC and FSA for
a) weakening regulation
b) failing to enforce existing regulation
c) failing to properly audit suspect trading
It doesn't surprise me in the slightest that the financial markets took advantage of this. To some extent that's what they are paid to do.
So does this mean that there is potential for a class action suit against the SEC and FSA for failing to do their job? Oh. Wait. Those are government supported organisations. Of course you can't sue them.
Bayou precedent
The relevant Bayou Bankruptcy Court decision is here: http://tinyurl.com/4nlr6e . It holds that payments to investors after the start of the fraud were fraudulent transfers. Depending on the state law (Uniform Fraudulent Transfer Act or the older laws) statute of limitations (historically this has varied between 3 and 7 years) fix the limit in which the bankruptcy trustee or receiver can recover funds from an investor. Bankruptcy law itself provides for a two-year period of stronger recovery powers, and within 90 days preferential creditor rules apply. There's a lot of general material on the subject of asset protection and fraudulent transfers at http://www.assetprotectionbook.com and a wealth of material on the Bayou bankruptcy at http://www.bayoubankruptcy.com .
Wasn't all of Wall St. basically a Ponzi?
Great article, thank you.
The more I read about this whole preventable and disgusting financial crisis, the more it seems like the whole system was a huge Ponzi scheme. As I understand it, these Wall St. guys passed off bad mortgages as AAA bonds and generated billions of dollars of profits for their companies. But even though the bonds were bogus, the bonuses they got (as pointed out by the NY Times today) were very real. In effect, these individuals pocketed tens of millions of dollars (Merrill Lynch paid out $5 billion in bonuses 2006, according to the times) each year.
So if these bonuses were based on profits that didn't actually exist, shouldn't the Bayou precedent apply? Shouldn't these white-collar thugs have to give back their money as well?
BreX
This multi billion $ stock fraud that made many people I know quite wealthy was like a Ponzi scheme. Nobody had to pay back the victims.