From the Penthouse to the Jailhouse

Have you been following the Bernie Madoff story? In case you haven't let me briefly summarize: 

Bernie Madoff was chairman of Bernard L. Madoff Investment Securities, which he founded in 1960. In December Madoff admitted that the asset management arm of his firm was a giant Ponzi (pyramid) scheme—as he put it, "one big lie." In fact, Madoff had been perpetuating the largest investor fraud ever committed by a single person, pleading guilty to federal charges that he had defrauded his investors of almost $65 billion. 

His clients? From regular rich guys and global banks to celebrities like Steven Spielberg and Kevin Bacon to schools and charities (yes, this greedy bastard defrauded schools and charities). For his full client list, click here. 

Yesterday, he plead guilty and was immediately jailed:

"I realized that my arrest and this day would inevitably come," Madoff said in a courtroom crammed with many of the investors he cheated out of billions of dollars.

The 70-year-old financier could get up to 150 years in prison at sentencing June 16 on 11 counts, including securities fraud and perjury. He could also be fined and ordered to pay restitution to his victims and forfeit any ill-gotten gains.

"I am actually grateful for this opportunity to publicly comment about my crimes, for which I am deeply sorry and ashamed." 

While it's terrible that so many people lost their money (like this poor old guy), equally scandalous was the failure of our regulatory agencies. Unbelievably, Harry Markopolos, a money manager and investment investigator, smelled a rat almost a decade ago:

His role in the Madoff saga began in 2000, when the hedge fund he was working at asked him to figure out how to match the fantastically consistent returns produced by Madoff in options trading. Markopolos studied the markets and deduced it couldn’t be done: Madoff had to be cheating — either by front-running, which would’ve involved trading on advance information about customer orders from his market-making firm, or by the good ol' doomed-to-fail Ponzi method. Before long, the world-weary numbers cruncher settled on the latter and wrote a series of whistleblowing memos to the Securities and Exchange Commission. Memos that they, as we're now painfully aware, dismissed.

And it wasn't the only one! A number of ponzi schemes have been uncovered in the last few months (see here, here, here and here). This is what happens when markets are not properly regulated and regulatory agencies are not adequately funded. The head of the SEC and the senior people involved should all be tendering their resignations for their gross incompetency. But of course, we all know that won't happen.