The Man who Stole $65 billion by Erin Arvedlund; Penguin Books; Price: Rs.399; 281 pp
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One of the tragic paradoxes of life and living in the over-hyped emerging superpower that is post-independence India, is the country’s abysmal record in convicting white collar criminals. During the past six decades, barely a dozen of the thousands of crooks and thieves who have looted public exchequers at the Centre and in the states, have been convicted by courts of law.
However while it’s true that in the developing countries of the third world it’s easier for white collar criminals to escape the day of judgement, this moral hazard is by no means a peculiarly third world phenomenon. As the recent bursting of the sub-prime mortgage bubble — the handiwork of greedy American bankers chasing million dollar bonuses — which has plunged the global economy into a catastrophic recession has proved, Wall Street and the City (London) is as infested with sharpies and crooks ready to ignore and bend ethics and rules for personal profit. Except that there is a much greater chance of them facing the day of reckoning. On March 12, Bernard Madoff, one of the greatest swindlers of the 20th century, pleaded guilty to the charge of running a ‘ponzi scheme’ (i.e paying off investors/depositors with each others’ money) estimated at $65 billion (Rs.299,000 crore). On June 29, 2009, Judge Dennis Chin sentenced him to 150 years in prison.
Writes Erin Arvedlund, a business journalist who as early as 2001 had authored a story in Barrons — an American business magazine — expressing skepticism about Madoff’s reportedly wondrous money investment strategy, in this timely biography of an ostensibly genius investor, philanthropist and pillar of New York’s financial community, who turned out to have feet of ordinary clay: “Madoff was indeed a record holder: he had stolen more money, over a longer period of time, from more thousands of people all over the world than any thief in history. And his punishment would be stiffer. According to Judge Chin, Madoff displayed ‘extraordinary evil’ which set him apart from generations of criminals before him.”
Born into a family of Russian Jews who migrated to the US in the early 20th century, Madoff graduated from New York’s Hofstra College with a Series 7 licensing test which allowed him to work in securities, and a degree in political science in 1960. He married his high school sweetheart Ruth in 1959 and with a generous loan of $50,000 from his father-in-law started his own firm, Bernard L. Madoff Investment Securities (BLMIS) in November 1960. A decade later his brother Peter, a graduate of Queens College, New York and the Fordham Law School, joined the firm. “The only time I was in debt was when I borrowed $50,000 from my wife’s parents to start my own firm, and I paid that back,” Madoff would often boast.
Aggressive entrepreneurial drive apart, the Madoff brothers undoubtedly had business and technology savvy and BLMIS started well. The firm was one of the pioneers of electronic computer-based trading which enabled it to undercut competition in the stockbrokers’ community. By offering clients quick buy-sell orders execution with smaller spreads, the firm was able to build up large volumes of business.
Yet even as BLMIS’ reputation as a broker-dealer firm grew, thanks to his father-in-law Sol Alpern’s recommendation and word-of-mouth publicity, Madoff began to acquire a reputation as a shrewd investor who could guarantee high 15-20 percent returns in a society in which banks’ pay barely 2-3 percent interest on savings. Indeed the secret of Bernie Madoff’s ephemeral success which came to a bad end, was the great American virtue of ‘networking’.
A member of several country clubs and high flying owner of a private jet and yacht, Madoff’s modus operandi was to project himself as a canny and knowledgeable investor who guaranteed bumper returns on savings entrusted to him. Therefore although not registered investment advisors as required by law, the brothers Madoff and BLMIS not only attracted investment from individuals but also from other hedge fund managers. “Bernie Madoff’s pyramid scheme spanned the globe — reaching from New York to Hollywood to London and Paris and beyond,” writes Arvedlund. Among his unsuspecting victims: Lord Jacobs of Belgravia, Lady Victoria de Rothschild, movie stars John Malkovich and Kevin Bacon, Hollywood producers Steven Spielberg and David Giffen and thousands of others.
Although many of Madoff’s victims had access to the best legal and investment advice, in their greed for high returns, they were bowled over by his projected gloss, glitter and apparent success. This despite many early warnings of lack of transparency about the steady 12-20 percent returns BLMIS was paying out to investors. For one, neither Madoff nor his company was officially registered as an investment advisor, and secondly BLMIS’ auditor was a small three-man firm with only one client. Moreover despite the American stock market suffering a massive crash in 1987 and volatile equity prices through the 1990s, Madoff kept paying high returns to investors. But actually Madoff was servicing his constantly growing clientele by paying existing clients from the investment inflows of newer clients, and newer clients were being serviced out of the capital of older clients.
In the end following the sub-prime mortgage crisis in the US, the stock markets tanked and banks began foreclosing luxury homes. This prompted investors to demand back their principal amounts invested with BLMIS and the whole pyramid scam crumbled, with Bernard Madoff exposed as the greatest fraudster in history. Yet by pleading guilty on all counts and fully accepting blame, Madoff has been able to protect his family members who were deeply involved with BLMIS and his fraudulent operations. At the time of his sentencing, losses likely to be recovered totaled a mere $13 billion (Rs.59,800 crore) including $1.27 billion of Bernie and Ruth Madoff’s private assets such as their jet, yacht, homes and loans to family members. The rest is likely to be irrecoverable.
Are there Bernie Madoff clones on the prowl in India? You can bet on it. But unlike Madoff who was outed and made to confess his sins by his own sons, the chances of indigenous ponzi scamsters being convicted are remote. There’s no shortage of investment trusts/companies (such as Sahara and Peerless) which run suspiciously ponzi-like schemes across the country. Therefore universally, the golden rules of investment are: don’t over-rely on experts, and better safe than sorry. That’s the moral of the story aptly conveyed in the decline and fall of Bernard Madoff.
Dilip Thakore