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Lessons from the Bernie Madoff Scandal

Lessons from the Bernie Madoff Scandal

| November 13, 2018
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I recently heard from Diana Henriques, she is a New York Times best-selling author and wrote The Wizard of Lies: Bernie Madoff and the Death of Trust.  This was turned into the Bernie Madoff HBO movie, and she had the opportunity to play herself (after auditioning) in the film. 

She said Ponzi schemes must be viewed as the most vicious financial crimes, punishing people for trusting others, tearing apart a precious aspect of being human.  Trust is the only weapon a con man needs to destroy our financial lives.

 

In the late 1990s, during the stock market NASDAQ price-fixing scandal, Bernie's firm, which sometimes did 10% of the daily volumes, didn't have any shenanigans.  So the SEC was always coming in looking for front-running trades or other common scams, so they ended up getting a great reputation for honesty.  This was because they weren't going to lie on top of the Ponzi scheme!  LESSON: Don’t look for the same old thing again and again.  Be open to new things, and listen to varied opinions and ideas.  Don’t hold people up as infallible, and try to avoid groupthink.      

After careful study, Diana thinks that the humiliations of Bernie's father going bankrupt multiple times with business failures launched in him a pathological inability to admit failure.  To illustrate this surprising point she asked him, "When did you first realize your scheme was going to fail?" 

He said, "It didn't fail.  I just tired.  I decided to quit." 

He always converts himself being a liar, never as a failure.

 

Harry Markopolos is absolutely brilliant in my opinion, and thought that they were front-running the stocks.  But that was the one thing that the regulators were always looking for, and they never did it, so they never got into any trouble.  He couldn't get anyone to listen to him.

She said the SEC had a massive failure of imagination.  They could not believe that such a successful man could be running such a large Ponzi scheme.  It’s not usually a promise of great riches that gets people into these scams.  They usually offer reasonable returns to avoid attention.  The real compelling “hook” is avoiding finical losses and the fear that accompanies it.    

Unfortunately, because it was ridiculously easy to determine and evaluate it, they simply counted assets. 

Thanks for taking a look!

 

Tom Gartner, MSAPM, CFP®

 

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

 

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