Alleged Madoff Scam Wasn’t a Classic Ponzi Scheme, Posner Says on Blog
Bernard Madoff’s alleged scam defrauding investors of $50 billion doesn’t fit within the classic description of a Ponzi scheme, according to one prominent blogger.
Madoff has been accused of paying consistently high returns to sophisticated investors such as hedge funds with investor principal. He was arrested earlier this month after his sons told federal officials their father had confessed to the scheme and said he could not pay a requested $7 billion in redemptions.
Judge Richard Posner of the 7th U.S. Circuit Court of Appeals notes in his post at the Becker-Posner Blog that perpetrators of Ponzi schemes typically scam “greedy dopes.” That wasn’t the case here, if media reports are correct, Posner writes.
“The strategy that has been attributed to Madoff is the opposite of that of the typical Ponzi schemer: It is to obtain investments from well-off people far more financially sophisticated than the average Ponzi victim, including genuine financial experts such as hedge fund managers and bank officials,” Posner writes.
“And therefore it requires different tactics from that of the ordinary Ponzi scheme, such as offering returns only moderately above average, satisfying redemption requests promptly, turning down some would-be investors (it would be interesting to know whether there was a tendency to turn down investors who might prove nosy or suspicious), and trading on a reputation earned in a legitimate business (Madoff’s business of market making).”
Posner says the most interesting question raised by the case is why the Securities and Exchange Commission never detected any wrongdoing, despite repeated requests for a probe by money manager Harry Markopolos. Posner suggests two reasons. The first is that “regulation is hopelessly inefficient.” The other is that the SEC has been “has been too trusting of the securities industry.” The final result, he said, is a likely reorganization of the financial regulatory system and the possible abolition of the SEC.
Hat tip to Legal Blog Watch.
