Detecting fraud is one of the most important roles for government. But our friends in power tend to be incompetent at it.
This becomes clear in light of that most costly Ponzi scheme, Bernie Madoff’s.
Before he was caught, Madoff — who now paints signs in prison — perpetrated one of the longest-running scams in investment history. It wasn’t an investment scheme that lost its way. No, it was a fraud through and through. It cost his marks billions.
Joseph Cotchett, a lawyer for some of Madoff’s victims, interviewed the fraudster at length. Cotchett calls Madoff “charming” and “no dummy.” But he noted that his fraud was not a great work of sophistication: “It is amazing how simple it was.”
Still, the regulators responsible for finding this kind of fraud didn’t see it. Early in the millennium, Madoff thought he might get caught. In 2005, the SEC sat down with him, and he thought the gig was up. Regulators, insists Cotchett, did not dig “to the next level, and the next level was not deep by his own admission.”
Lots of folks clamor, these days, for more regulation. Here’s my advice: Improve the most basic form of regulation — protection against fraud — and build on success. Leave complicated micromanagement stuff alone until governments get competent at the very basics.
If you cannot detect an unsophisticated fraud, how can you run a very sophisticated economy?
This is Common Sense. I’m Paul Jacob.
6 replies on “The Moral of the Madoff Story”
Dear Citizen,
How is this for the most basic form of regulation? Remove
attorneys from office.
It is not the regulation that is the problem. It is who is doing the regulating that is the problem. End same-hands governance.
Harsha Sankar
Virginia
In my opinion, the peopel who were the “victims”- to a large extent, DESERVED IT.
1. Many ( this was in an issue of, I beleive The Wall Street Journal- but I don’t have it now)thought that Madoff was “front running” orders (buying or selling knowing that a large block of the stock will be bought-or sold- shortly-so trying to gauin the 1/2 point or so)
and 2. Anyone who put MILLIONS with him, and his suppsoed buying and selling options-with any knowledge could look at a financial paper and see the option volume and open interest and see that there was no way that he could eb doing this. So, the answer is- they were greedy.
To me, there should eb a point where- how much is enough?
Seeing that someone lost $400 million with Madoff, or $75 million-or other telephone number dollar amounts- my question-why so much- with one firm? The principal would last a lifetime. Why so greedy for the 10 – 12% or so that Madoff was promising?
Recall-rate of return is a function/the oppsoite of risk- the greater the risk, higher the return. And, a tree cnanot grow to the sky
My 5 cents .
What about the greed of the investors.Madoff blind them with fantastic returns?They all thought they were going to make more money than they should off of a normal investment.
But what is meant by “the most basic form of regulation — protection against fraud”? Who defines fraud? The majority of new businesses go under and it’s not necessarily the result of fraud. How about simply “buyer beware”? If something sounds too good to be true, it probably is. If you as an investor don’t exercise due diligence then YOU are out of luck.
It’s amazing what Paul Jacob and his unquestioning followers will say to coddle criminals.
Now it’s not the fault of Madoff, the mega-rich criminal perpetrator of fraud. No, it’s the fault of the victim, and the fault of government.
Nothing could more perfectly shine a spotlight on conservative hypocrisy. Say you believe in personal freedom and responsibility, but when responsibility actually hurts, pass it off on someone else. Pathetic.
Hey, that post lavees me feeling foolish. Kudos to you!