SA can be proud of the stature of some of its white-collar crooks: the Guptas, Markus Jooste of Steinhoff, and the crooked cabals of BEE tenderpreneurs and dodgy politicians.
It would be hard, though, to match the achievements of the late and not much-lamented US financier Bernie Madoff, a man whose Ponzi practices netted the lofty sum of $68bn. Yes, that’s billions of dollars.
Author and financial journalist Richard Behar suggests that in today’s money the sum would be closer to $100bn. With that, you could buy Luxembourg. (Not that anyone in their right mind would want to.)
“Sixty-eight billion bucks, laid end to end in dollar bills, would encircle the Earth approximately 265 times,” Behar calculates.
“Now add another 104 circles to calculate the fraud’s value in today’s money: $100bn, give or take a billion. That’s nearly 2-million times what the average American worker earns in a year. With $100bn, you could own Luxembourg (GDP $91bn), one of the countries that Madoff ‘feeder funds’ used for funnelling money to Bernie, thanks to their strict banking secrecy.”
Former federal judge and FBI director Louis J Freeh is quoted in the book’s introduction as saying that he had “never seen such a sophisticated, elaborate infrastructure and operation for deceit and deception that served to protect an underlying fraud scheme of such mammoth proportions”.
Behar concurs: “Freeh was essentially right: Bernie had engineered the greatest known fraud in human history.”
How did he do it? The answer seems to have been human greed. No rational follower of the financial markets would believe that an investment could yield double-digit returns over decades, year in and year out.
Yet Madoff was able to provide such returns and paid out 15% and 20% “profits” to most of his customers each year. “Those he especially liked ‘earned’ as much as 50% on paper. Or more,” Behar notes. “Those kinds of consistent profits are just not possible on Wall Street.”
A Ponzi scheme can keep going, with spectacular returns, because you pay out the long-standing investors with the new funds you receive, as Behar explains: “The mechanics are simple, but irresistible to the gullible. A Ponzi’s architect uses the allure of fantastical returns to lure in the next wave of investors; each subsequent wave’s money is then used to pay off the previous wave — although many investors choose not to redeem their purported profits but instead let them continue to grow.
“So long as there is a sufficient supply of new money coming in at the bottom of the pyramid, the schemer can afford to pay other investors — especially those higher up — the promised returns.
“If, for whatever reason, the supply of new money dries up, and investors start requesting (or demanding) their money, that’s when the plunderer either gets busted or flees. It’s a story as old as the pyramids. Or at least pyramid schemes.”
Behar suggests in this thorough account of Madoff’s rise and fall that had anyone asked the right questions over the years — and had those who did have doubts then reported them to the authorities — it would not have been difficult to topple the pyramid.
“People spend more time researching a new TV purchase than they do a Ponzi’s can’t-lose proposition like Madoff’s,” Behar warns.
“The due diligence that so many banks, feeders, charities and even celebrity money managers failed to do on Madoff is made even more glaring by the fact that any number of corporate intelligence and risk management outfits could have done it for them.
“For as little as $5,000 to $10,000, any leading investigative firm with a global footprint — Kroll, Control Risks, Nardello & Co, FTI Consulting, among others — could have found enough in a basic background check (or, in Madoff’s case, not enough) to raise questions for their clients.”
However, a combination of luck and the careful strategy not to admit investors who really understood the financial markets enabled Madoff and his small team to keep the ball in the air — until the funds stopped flowing in, the cupboard was bare, and the house of cards came crashing down.
“The so-called smart money — professional investors; finance types in general — was, as a rule, excluded,” Behar explains.
“Madoff lured in his investors — and kept them in — by keeping his club selective. Not everyone could join, causing many to beg for admittance, like gaggles of nightclub patrons standing outside the velvet rope and hoping to get picked by the doorman.
“A man of few words, Bernie had an almost cult-leader allure. Those he did accept were expected to keep quiet about their relationships with him. And if you asked too many questions about Madoff’s delectable payouts, you could get shown the door — like Seinfeld’s Soup Nazi refusing to serve his spectacular concoctions to those who annoyed him.”
Behar’s Madoff. The Final Word not only looks at the arch-conman himself but also at his family and employees. One son committed suicide and there were other casualties.
However, the theme is that, in general, the penalties were light for all but Madoff himself, who died in jail in April 2021.
The bank account — known as the 703 account — at the heart of the Ponzi operation was held at JPMorgan Chase (JPMC), which was the US’s largest bank at the time the Ponzi scheme collapsed.
Behar suggests that had bank officials “paid attention to the ins and outs of the account, then the Ponzi scheme definitely couldn’t have been sustained for so long.
“No fewer than a dozen executives at JPMC ignored the red flags about the 703 account that landed in their laps — and there were many. The bank’s role in history’s greatest known fraud should be the subject of a course in the country’s top business schools, but not a single one offers it.”
Victims of Madoff included some of the very rich and famous. “Those financially harmed — destroyed, in many cases — by Bernie reads like a Who’s Screwed Who in the sports, business, entertainment, academic and philanthropic worlds: publisher and real estate baron Mort Zuckerman; Baseball Hall of Fame hurler Sandy Koufax; actor John Malkovich; film director and producer Steven Spielberg.”
Madoff also turned on his own Jewish community, taking in and losing funds from Jewish organisations and even from Holocaust survivor Elie Wiesel, whose foundation was wiped out.
Despite all the drama and the fascination with how this gigantic fraud was committed, I found the book quite hard going. There is a lot of tedious detail. Behar discusses who among the family and employees knew what and when, and it seems that a lot of convenient mistruths have been told by those who have struggled to avoid being dragged down along with Madoff.
The legal battles do continue, and 75% of the capital of those who were ripped off by Madoff has been returned. More is likely to be recovered.
When you are talking in tens of billions, that is a lot of money.
Out of the blue, in an awkward and uncomfortable section at the very end of the book, Behar makes a comparison between Donald Trump and the Ponzi king. The suggestion is that both are sociopaths, but the author’s expertise on Madoff, with whom he had extensive interaction, is not matched by his expertise on Trump, and I was disturbed by what I felt to be a clumsy and unconvincing political attack on Trump.
That said, this is a book that will provide much fascination and food for thought for those in the investment community, though it might be a bit too indigestible for the general reader.
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