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What’s up rebels, I’ve got a little different article for you today. More of a story that all fund managers should know and learn from. So try not to get too down as you go through this thing.
In the 1920s a man by the name of Charles Ponzi was busy perfecting the art of theievery.
So legendary were his crimes, and so masterful and elaborate were his schemes, that the name “Ponzi” now is used to define an entire system of theft.
The FBI defines “Ponzi” schemes, as schemes…
That promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays “dividends” to initial investors using the funds of subsequent investors.
But Charles Ponzi couldn’t hold a candle to the heist that would be pulled off decades later by one of Wall Street’s giants, Bernie Madoff.
Madoff is arguably the greatest con artist of all time, and with his recent passing in April of this year, I thought it would be appropriate to highlight just how important integrity is in the fund business.
Let’s get into it.
Madoff’s Story
The one part of this story that is unquestionable is the sheer brilliance of Bernie.
Madoff was raised in Queens from humble beginnings, growing up in a very modest middle class family.
He quickly ascended the ladder with the rising tide of the stock market.
He established himself as one of the most consistent and sturdy players on Wall Street.
Never too high, never too low.
In the 90s the Stock Market was commonly returning over 20% on investments, but Bernie’s firm promised returns of 12-15%.
It was considered conservative and safe, and that’s how he built his reputation… And what allowed him to deceive so many.
Bernie ran his hedge fund from the famous “Lip Stick” building in New York City and by all accounts the business seemed believable.
Three floors of people worked away day in and day out.
It’s widely believed that market making operation (brokers used to buy and sell stocks) of Bernard L. Madoff Investment Securities were legitimate.
But Bernie personally ran another section of his business, the Investment Advisory Operation.
This was supposedly where he would take capital from private clients and invest the money for them.
But this never happened.
And thus the biggest Ponzi scheme of all time was born.
For at least 15 years Bernie never invested any of the money with which he was entrusted, but directly deposited everything into a private account with JP Morgan Chase.
He was careful to never overpromise his prospective and current investors. His returns were never too good to be true, yet good enough to desire and trust.
Madoff would always send out reports that supposedly outlined just how his clients investments were performing, but it was all a sharade.
The reports were falsified from past stock performances that he selected to meet his promised return criteria and thus appease and reassure his investors.
Whenever money was requested by his clients – for whatever reason – he was always quick to oblige them and used other peoples funds to pay them out.
His act was so convincing that he avoided suspicion for years and even rose to be the Chairman of the NASDAQ.
Truly, unbelievable and unlike anything we’ve seen before or since.
However, the strategy that Bernie depended on to continue functioning and avoid investigation required a constant infusion of new capital from new investors in order to pay dividends to original clients.
Which is possible when the stock market is thriving, but impossible to sustain in a crash.
And that’s precisely what took place in 2008.
The Stock Market had the floor pulled out from under them, and the entire globe was thrown into financial crisis.
Madoff Investment Securities members began requesting withdrawals for all their invested capital, which Bernie no longer had.
After mounting pressure and a realization of the inevitable future that lay ahead of him, Bernie confessed his lie to his wife, Ruth, and two sons, Andrew and Mark.
The devastation that ravaged the family can only be imagined.
The two sons felt morally and legally obligated to turn their father in the same day he informed them of his actions, December 10, 2008.
That was the beginning of the end for Bernie, who would go through a brief legal battle, before pleading guilty to 11 felonies, having defrauded an estimated $65 billion dollars from his private investors.
Consequences
Let this be a lesson to anyone who is an aspiring fund manager.
The importance of trust, integrity, and transparency in this game cannot be understated.
Paul Hutchinson, one of my father’s early partners, said he agreed to come on with him largely due to the fact that he had more integrity than anyone he knew in the space.
Bernie Madoff was sentenced to 150 years in prison, and died alone in jail.
People across the globe were financially ruined and had their lives shaken thanks to his deception and mismanagement of their hard earned money.
His wife Ruth lives a solitary mournful life, widely disliked and mistrusted by those closest to her and society at large.
Bernie and Ruth’s eldest son, Mark, 46, died by suicide in 2010, when he was found hanging from a dog leash in his family room. Mark died on the anniversary of his father’s arrest two years prior.
His younger brother, Andrew, died from lymphoma in 2014. He was only 48.
I am a big believer that if you do good things, good things are gonna happen to you and vice versa.
There is no better illustration of this than the depressing dismantling of the lives of the Madoff family
Take this for what you will.
Do things the right way.
Best,
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
