Steering Clear of the Next Bernie Madoff — Diana Henriques

Posted by Linda Corman, guest contributor on Apr 23, 2019 11:29:01 AM

“Everybody thinks they can easily spot a Ponzi schemer. They’re the aggressive loudmouths who promise extraordinary riches if you just hand over your money to them, right away.

But, these assumptions are wrong and are more likely to make you the victim of the next Ponzi scheme than protect you from it,” said Diana Henriques, a financial journalist and author of “The Wizard of Lies: Bernie Madoff and the Death of Trust.” Henriques was a principal speaker at Investments & Wealth Institute’s recent Investment Advisor Forum.

“Examining the Madoff case – the largest Ponzi scheme in history, having erased $65 billion in paper wealth of victims ranging from schoolteachers to celebrities in 120 countries – can be instructive about how to protect oneself from such schemers,” Henriques said.

Madoff, for one, was soft spoken, did not promise extraordinary wealth, and was as apt to turn away eager investors as to rush them into investing with him, she said.

“The stereotype [of a Ponzi schemer] is a bon vivant type… He was the opposite,” said Henriques. “Wealthy investors would have been suspicious of a pushy, Ponzi personality. Madoff utterly disarmed them. Regulators too thought they knew what a Ponzi schemer looked like.”

But, as she put it, “If you’re thinking you’ll recognize a Ponzi scheme by their outlandish promises, you’re living in the wrong century.”

“Just as Madoff defied the stereotypes, the next Ponzi schemer is likely to do so as well,” said Henriques. And there will be more. A new Ponzi scheme – in which the schemer gets money from new investors to pay off older investors and named after the early 20th century schemer Charles Ponzi – is initiated an average of every five days, Henriques said, citing data from

While Ponzi schemers take on many guises, one common characteristic is that they manage to gain people’s trust.

“A Ponzi schemer is a trusted liar with a bank account,” said Henriques. “That’s all you need. Find people who trust you completely, bankers who allow you to open a bank account. Every schemer has a banker who (almost) never catches him.”

Ponzi schemers frequently start out as trusted, admired people in their communities. Madoff, for example, deserves some credit for the creation of NASDAQ in 1971, Henriques said. His firm had a “spotless” regulatory record and, notably, he was not implicated in a major price-fixing scandal on NASDAQ in 1997 when all the big banks paid large fines as settlements, she said.

Similarly, the Petters Group, between 1995 and 2008, ran its Ponzi scheme, the third-largest in history, within a legitimate business.

Madoff learned that, “Being trusted and valued means being allowed to cut corners,” Henriques said. Once he had people’s trust, he didn’t have to break any laws. Ponzi schemers’ victims in a sense break the laws for the schemers by making exceptions to their own rules, Henriques said. This too is characteristic of how Ponzi schemes operate.

“We, the victims, give them (the schemers) the keys to the [safe]. They have our trust, no questions asked,” Henriques said.

This is the problem of the trusted criminal. In big corporations, for example, the big stars are allowed to ignore the rules and being able to break the rules becomes a sign of having special privileges.

“That’s catnip to people like Madoff,” said Henriques.

The instinct we all have to trust, combined with a desire for money, fuels the schemes, she said. In theory, banks would be the first line of defense against Ponzi schemes. And, in Madoff’s case, there were warning signs. But, people in the banks wanted to keep the business, so they turned off the warnings, she said.

Regulators too were disarmed by trust. They assumed that local regulators would have checked out any suspicious activity, but that hadn’t been the case, Henriques said.

Organizations and individuals can protect themselves from Ponzi schemers and other con men by instituting simple but practical rules about all transactions, using third-party custodians, and never making exceptions for anyone.

“No one is above the rules,” she advised. “The CEO fills out expense reports just like everyone else.”

Investment advisors hoping to gain the confidence of their clients should explain to their clients how best to protect themselves against them and others. They should explain that giving them discretion over all their accounts could get them in trouble.

“Walk them through the steps they should take to protect themselves from their wonderful trust,” she said.

While there are precautions advisors and investors can take to guard against being victims, allocating more funds to strengthen regulators is also crucial, Henriques said.

“We get the regulation we pay for,” she said. “The person at the SEC in charge of the Madoff investigation was 19 months out of law school. Regulators’ budgets are constantly under pressure.”

Regulators should have caught Madoff and they would have if they’d had enough resources, she said.

“That’s on us,” she said.

Topics: investments

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