Emperor Madoff's Suit of Fine Clothing

We all know the old folk tale, “The Emperor Has No Clothes,” by Hans Christian Andersen. In the story two weavers convince the emperor to buy cloth so incredible only the wisest in the kingdom could see it. The emperor leads a parade in this supposed fine apparel, until a young child yells: “But the emperor has no clothes!”

Bernard Madoff, who may turn out to be one of the greatest villains of all time, has no clothes. So many around him, even in the face of clear evidence of wrongdoing, could not believe it possible that a man of such distinction and stature could engage in such blatant thievery.

For those who have been behind a rock, Madoff, who ran an investment advisory and brokerage business, is accused of bilking investors large and small of as much as $50 billion. A still relatively quiet part of the story is that a significant portion of this money was given to him by leaders of the Jewish community, in particular in South Florida. Madoff’s background included serving as non-executive Chairman of the Nasdaq.

He kept total control of what apparently were two sets of books, had this huge firm’s accounting done by a tiny two-person firm in upstate New York, and it seems even his brother and children, in senior positions in the firm, knew nothing.

In his alleged hedging strategies, he bought stock options for clients, but in looking at the paperwork, it would have been impossible for him to buy options for all his clients or it would have constituted many times the total option trading for the particular days reviewed.

The SEC even investigated him at one point, but relied totally on information Madoff chose to provide him, never thinking to subpoena information or to enter his offices to review files. He got the benefit of the doubt despite multiple red flags. Then it looks even worse that Madoff’s niece, a senior person in the firm, married an SEC functionary who had worked tangentially on the investigation. Not that there’s any evidence of wrongdoing at the SEC, but it just makes them look bad.

I am willing to bet that there will not be any criminal behavior to be found at the Securities and Exchange Commission on this. It just shows that often regulators take on a view about a person or firm and that view then pervades the agency. Madoff was considered a “good guy,” and so the presumption was with him absent any smoking gun, which apparently they only just found.

A client called me last week and explained that his retired, elderly parents had given their $2 million life savings to Madoff. It’s now all gone.

Time to find a new weaver, Bernie. You’ll need one where you’re going.

Comments

Leave a comment