At the end of a boom, there is always a story that epitomises the greed, corruption and stupidity of the decade.
While there are many contenders in 2008 – and there may be more to come – the title has to go to Bernard Madoff, 70, and his Manhattan-based brokerage firm and investment advisory business, who is behind an alleged $76 billion fraud. Hedge funds, banks and investors are reeling after it appears the business may have been insolvent for years and there was only $US300 million left. The scam was exposed when investors recently wanted to redeem US$7 billion.
Madoff, a native New Yorker, was arrested last Thursday, after he confessed to his two sons, who immediately alerted authorities. While authorities have already begun liquidating the 48-year-old brokerage firm, a massive blame game has already begun with many reflecting on how they were conned.
Institutions stung include HSBC, which has revealed an exposure of $US1 billion, Japan’s Nomura, France’s Natixis and Spain’s Santander. Individuals also caught up by the scam include Fred Wilpon, an owner of the New York Mets baseball team, and Nicola Horlick, the UK’s “superwoman” investor and mum who has attacked US financial regulators after becoming a victim of the scam.
Here is the scammer’s guide to ripping off investors – and how Madoff built his firm and attracted some of the smartest people in the world to invest.
1. Be exclusive: Madoff created an air of exclusivity around his firm. He personally courted clients from exclusive clubs including the Palm Beach Country Club and rejected many, cultivating a sort of Midas Club. His A-list of investors then acted as a tool to attract others.
2. Be likable and well connected: Madoff and his wife Ruth were described as likeable and understated. They were keen golfers and popular on the social circuit. Madoff liked to entertain investors on a 55 foot fishing boat called Bull and at one of his three homes.
3. Have a scheme: Madoff instituted a Ponzi scheme whereby early investors are paid with money raised from subsequent investors.
4. Get a network to recruit on your behalf: Madoff had “friends” who recruited on his behalf, helping him access the wealthy in other states.
5. Be a great salesman: Madoff always advised people not to sink in a lot of money at the start, believing that if they started off small, they would increase their investments later. Of course this contributed to his “credibility”.
6. Be seen to follow rules: Madoff sent out monthly detailed reports to investors showing their trading activity and investments.
7. Avoid big name accounting and audit firms with reputations to protect: Madoff used an unknown auditing firm, made up of several people.
8. Be close to regulators: Although many people raised concerns at the steady 10% return he gave to investors even in bear markets, apparently the investment advisory business was not closely inspected by regulators. Madoff has actually admitted he was “close to regulators”. How close and to whom is yet to be confirmed.
9. Establish credibility: Madoff advised the regulators. He was a former Nasdaq chairman and an adviser to the Securities and Exchange Commission on how to regulate the market
10. Buy influence: Madoff was a generous political donor and philanthropist, and a prominent member of the Jewish community, setting up a charitable foundation.
