Weekly international investment round up to 30th June 2009
• Fraudster Bernard Madoff sentenced to 150 years.
• Serious failing by financial regulators highlighted.
Former ‘Emperor of Wall Street’, Bernard Madoff, was sentenced to 150 years in jail this week after engineering the worst financial fraud in history. The 71 year old swindler was found guilty of defrauding thousands of clients including the rich and famous and many respected institutions out of some $65 billion dollars in a heart-braking tail which should serve as a lesson to us all.
Over the last three decades Madoff had cultivated a reputation as a brilliant but ‘exclusive’ investment market performer who could deliver returns for his elite cliental of way-over 10 per cent per year come bull or bear market when in reality his strategy was simply to use the money raised from new investors to pay-off the old ones. This method is commonly referred to as a ‘Ponzi Scheme’ named after Charles Ponzi who in the 1920’s promoted his scheme of making returns of 50 per cent within the space of only a few months, after attracting millions of dollars he too was caught and sentenced to jail for fraud.
Not only is this a cautionary tale for individual investors not to blindly follow the heard or to be one of the crowd who saw the Emperor’s clothes when in fact he was standing before them naked but it also casts some dark shadows upon the state of today’s investment markets which will surely have long lasting implications.
Whilst the credit crunch may have initially highlighted many Banks dodgy lending practices together with those financial institutions who had developed extremely complicated investment products secured upon a property market built on sand, the whole Madoff case has asked some serious questions of the financial systems regulators, in short “where were they?”
To perform effectively investment markets need rules and regulations and it is the responsibility of the regulators to referee these effectively. In this case, America’s Securities and Exchange Commission (SEC), whose mantra is ‘to protect investors’ has been shown to have some serious failings. In the investigation into their role concerning the whole Maddoff case it was found that they had actually been tipped-off some years earlier by a rival of his, Harry Markopolas, who had alerted the SEC to the fact that such consistently high returns with apparent low risk such as that offered could not be real. The Congressional investigation found that Markopolas’s warning was largely ignored and separate SEC investigations into Madoff’s operations uncovered no serious irregularities leading Congressman Gary Ackerman to tell the heads of the SEC that “you couldn’t find your backside with two hands if the lights were on!”
It may take years for the whole story to unravel itself but such a case in today’s uncertain times will surely only add to the general lack of confidence thus extending the roller-coaster ride that little bit longer but strangely, if it wasn’t for the credit crunch which led many of Madoff’s clients having to exit his schemes earlier than expected, resulting in his whole house of cards come tumbling down, the con which had already ran for years would probably have continued for many more to come.