February 22, 2020

The one question Madoff’s victims forgot to ask

(3/29/12 – CBS Marketwatch) Bernie Madoff: “From my first interview to the media I have said that ‘the banks must have known,’ and were complicit and contributing to my crime.”

He’s back.  In a pathetic effort to reduce his 150 year sentence while also offering his unsolicited assistance in reforming the financial services regulatory regime, Madoff is making sure we all know that JP Morgan, Citibank, and other large global banks knew that they were participating in his $50 billion Ponzi scheme that shattered lives as well as investor confidence.

The real lesson from Madoff isn’t that crooks will think twice before screwing investors and therefore the world will be safe for investors.  History simply isn’t on our side.  It will happen again, but we need to know the right questions to ask. 

So the next time you are presented with a “too-good-to-be-true” investment opportunity, Question Number One should be, “where will my money be held?”  That’s it.  End of story. 

The vast majority of registered investment advisors and hedge fund managers are decent, trustworthy fiduciaries who won’t steal your money.  Think of investment advisors like commercial airplanes.  You only hear about the crashes, not the safe landings. 

Most advisors keep clients’ money in custody with a third party brokerage firm like Charles Schwab or Fidelity.  These firms have extensive fraud and investor protection systems. Not Bernie.  He held clients’ dough at Bernard L. Madoff Securities; a brokerage firm owned by, well, you get the picture.

A now-famous (and completely unconfirmed) story:  Three well-known partners of movie company met Madoff a number of years ago.  LIke most of his victims, they were impressed by his modest, but extremely consistent long-term performance.  Two of the partners signed up on the spot, but the third simply asked “where do propose keeping our money?”  When Madoff answered, Partner #3 said “thanks, and goodbye.”

Madoff’s genius was his appeal to a different type of greed.  It wasn’t that investors were promised or expected 20% returns.  Rather, they were promised something that doesn’t exist in this universe: long-term consistent returns, year-in and year-out. The frustrating thing about the Madoff affair is that investors could have avoided their catastrophic losses by simply asking the only question that matters.