Madoff was never caught by the SEC despite a damning report by independent financial fraud investigator Harry Markopolos, despite 8 separate investigations over 16 years, despite a French bank spotting the risks. Instead the shady business came to an end when Madoff confessed to his two sons who then turned him in to authorities.
Portfolio.com has all the details on how Madoff plotted the fraud. The account statements he sent to investors were "elaborate works of fiction," and it appears that no securities were ever even purchased for his customers.
It's an understatement to say Bernard Madoff is a despised man. At Thursday's court hearing, before he was handcuffed and led away with applause, the courtroom spectators laughed when Madoff's defense lawyer described the conditions of his client's house arrest and how Madoff had, "at his wife's own expense," paid for private security at their Manhattan home. His wife will have a hard time proving any of her money is untainted.
In fact, the whole idea that Madoff could possibly be the "single bullet" responsible for the complex crime is ridiculous. But Madoff turned down the chance for a plea deal when he wouldn’t agree to plead guilty to conspiracy. He's not cooperating, and so the investigation has only just begun.
"It is only when the tide goes out, that you know who was swimming naked." — Warren Buffett
Last year as we lurched from one financial crisis to the next, we learned painful lessons about what happens when regulators destroy regulations. So I hardly blinked last December when some guy named Bernie Madoff was charged with perpetrating what may be the largest investor fraud ever committed by a single person.
But how messy could it be? How did it go on? Was some regulator asleep at his desk maybe? Nobody answered the phone at the SEC? Here are a few crazy articles that summarize the mess:
Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the SEC and other regulators. Regulators failed to uncovering the alleged $50 billion Ponzi scheme that may have begun in the 1970s.
In 2003, a team from France's Société Générale’s investment bank spotted the risks and put Madoff's firm on their internal blacklist. The bank kept the discovery to itself though.
In 2005, Harry Markopolos, an independent financial fraud investigator, submitted a report to the SEC which listed 29 red flags and stated it was highly likely that "Madoff Securities is the world's largest Ponzi Scheme."
Madoff's "official" three-person based auditing firm, Friehling & Horowitz, had only one active accountant. An employee from a nearby business claims the only man using the Friehling & Horowitz's building stays "for 10-to-15 minute periods, and wears tight pants and tie-dyed shirts."
Finally in 2008, Madoff confessed to his two sons that his investment advisory business was indeed “a giant Ponzi scheme.” The sons, Andrew and Mark, turned Madoff in to U.S. authorities on the night of Dec. 10.
So this week, the House Financial Services Subcommittee is holding hearings on the investment scheme. You can watch Markopolos's testimony on the CSPAN web site, but here is a rather interesting bit (if video doesn't show, click here):
The scary part is in the last minute. Could it be true that WSJ reporters feared Madoff so much that they would not get on a plane to interview Markopolos regarding the fraud? And Markopolos also feared for his own safety. Wow.
But I admit that I'm viewing this investigation from such a remote position. Putting aside six degrees from Kevin Bacon jokes, I don't know anybody on Madoff's investors list. Many of those clients are charities. Banks have been hit hard too. But I can't feel sorry for those who invested because they knew Madoff was cheating.
Certainly there is no shame in being rich. But what if you get rich by cheating the poor and the elderly? Or by running sweatshops, waging wars, selling poison or any of a million other evils. Why is there no shame in that? Of course somebody profited from this mess, and I predict those people will go on to sell books and give expensive lectures regarding ethical and legal quandaries. A small group gets rich, while the whole country bails them out.
In other news, Bill Gates released a jar of mosquitoes at the Technology, Entertainment, Design (TED) conference in Long Beach, Calif. If the room had been full of bloodless Wall Street investors, those poor mosquitoes would have starved to death.
Bernard Madoff is going to jail for life. Today he pleaded guilty to 11 counts of fraud, money laundering, perjury and theft.