Madoff's Accomplices: His Victims (Nocera)

by Chris Sturr | March 17, 2009

Finally, somebody in a mainstream publication says something close to what I have been thinking about the Madoff victims. In a column last Friday entitled Madoff Had Accomplices: His Victims, Joe Nocera argues that the investors whom Madoff cheated were irresponsible. As I will argue below, I think they were showed not just personal irresponsibility, but possibly also ethical and political irresponsibility. But here’s Nocera:

[J]ust about anybody who actually took the time to kick the tires of Mr. Madoff’s operation tended to run in the other direction. James R. Hedges IV, who runs an advisory firm called LJH Global Investments, says that in 1997 he spent two hours asking Mr. Madoff basic questions about his operation. “The explanation of his strategy, the consistency of his returns, the way he withheld information—it was a very clear set of warning signs,” said Mr. Hedges. When you look at the list of Madoff victims, it contains a lot of high-profile names—but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply.

I suppose you could argue that most of Mr. Madoff’s direct investors lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered. Isn’t the first lesson of personal finance that you should never put all your money with one person or one fund? Even if you think your money manager is “God”? Diversification has many virtues; one of them is that you won’t lose everything if one of your money managers turns out to be a crook.

“These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.”

And that’s the point. People did abdicate responsibility—and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.

I spoke, for instance, to Phyllis Molchatsky, who lost $1.7 million with Mr. Madoff—and is now suing the S.E.C. to recoup her losses, on the grounds the agency was so negligent it should be forced to pony up. Her story is sure to rouse sympathy—Mr. Madoff was recommended to her by her broker as a safe place to put her money, and she felt virtuous making 9 or 10 percent a year when others were reaching for the stars. The failure of the S.E.C., she told me, “is a double slap in the face.” And she felt the government owed her. Her lawyer, who represents several dozen Madoff victims, told me he “wouldn’t be averse” to a victims’ fund.

Even Mr. Wiesel thought the government should help the victims—or at least the charitable institutions among them. “The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’ ” he said at the Portfolio event.

But why? What happened to the victims of Bernard Madoff is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole. Half a dozen Ponzi schemes have been discovered since Mr. Madoff was arrested in December. People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.

I like Nocero’s line of thinking, but I wish he’d gone beyond personal investment advice. There is an argument to be made that Madoff’s victims—or some of them, at least—and (it should be added) plenty of other big-money investors, are guilty not only of failing in their duties to themselves to invest their money wisely, but also failing ethically to invest their money in ways that don’t harm other people. And if this is true of the Madoff investors, then it’s true of a lot of other investors in Wall Street’s latest high-flying phase.

Take Elie Wiesel, for example. Here are some excerpts from the NY Times article about Wiesel’s comments at the Portfolio forum Nocera mentions:

Elie Wiesel Levels Scorn at Madoff

By STEPHANIE STROM
Published: February 26, 2009

What does Elie Wiesel, the Nobel Peace Prize laureate and Holocaust survivor who has dedicated his life to fighting hatred and intolerance, think about Bernard L. Madoff?

“‘Psychopath’—it’s too nice a word for him,” Mr. Wiesel said in his first public comments on Mr. Madoff and the Ponzi scheme he is accused of perpetrating on thousands of individuals and charities, including the Elie Wiesel Foundation for Humanity.

“‘Sociopath,’ ‘psychopath,’ it means there is a sickness, a pathology. This man knew what he was doing. I would simply call him thief, scoundrel, criminal.”

And this:

Asked what punishment he would like to see for Mr. Madoff, Mr. Wiesel said: “I would like him to be in a solitary cell with only a screen, and on that screen for at least five years of his life, every day and every night, there should be pictures of his victims, one after the other after the other, all the time a voice saying, ‘Look what you have done to this old lady, look what you have done to that child, look what you have done,’ nothing else.”

Now, the punishment Wiesel describes sounds a lot like torture to me—solidary confinement alone is torture—so I was a little taken aback that Wiesel called for it. But what about a humanitarian and professor of ethics like Wiesel failing to look into the source of his and his foundation’s investment profits? In the case of Madoff, the source was theft—Madoff and his accomplices used new investors’ money to pay interest to older investors (this is what a Ponzi scheme is). But what if Madoff had just been a “good” (i.e., effective) money-manager (albeit with less consistently, and suspiciously, reliable returns), and had been paying Wiesel and his foundation interest that came from, say, companies that outsourced jobs to sweatshops; leveraged buyouts of companies that were then gutted and resold; companies that pollute; companies engaged in predatory lending; etc. etc.—that is to say, the usual sources of Wall Street megaprofits? Madoff was stealing from people, but many a money-manager who hasn’t been branded “the most hated man in New York” (as one of the tabloids, I believe, put it), or called a “monster” on the cover of New York magazine has been complicit in plenty of human misery. Would Wiesel have known?

4 comments

Comments (4)

  1. Of all the commentary blaming Madoff’s victims, this is the most disturbing. What Madoff’s fraud has exposed is the much bigger fraud of the financial industry and financial adviser collusion. No one should ever seek financial advise from a so called professional adviser who is really just a commissioned sales person whose real job is to have you sign over your money and incurs no fiduciary obligation. It’s time to boycott market scams and scammers. Look out for yourself and make financial “advisers” go get real jobs.

  2. “Ethical lapses” by the investors? Are you on drugs? What a crock of …

  3. Hi Bruce,Yes, that’s the claim. I realize that it sounds pretty outlandish. But if you think about it, it is no more outlandish than the very common arguments that the right-wing has been making for months now that subprime borrowers who got caught up in the housing bubble–itself a kind of Ponzi scheme–are to blame not only for their own foreclosures (because they allegedly bought “too much house”), but even for the financial crisis as a whole. Here’s the argument: Suppose you have a million dollars or so to invest. You hand it over to someone who gives you a 10% return. You ask no questions about how that person is able to provide you with that return. He might be a loan shark, or investing in companies that engage in activities that, though legal, still harm lots of people. Isn’t it clear that you are partly responsible for the harm that came to the people who were victims of the loan shark, or the harm that came to the people who were victims of the company’s legal but unethical activities? This kind of argument is at the basis of the socially responsible investment movement. While I think it’s a hard argument to digest in the case of small investors who are trying to make sure they have some money to retirement money (doesn’t the main burden fall on the people who run their pensions?), for big money investors, I think this line of thinking is pretty clear. Even for big investors, it’s hard to digest the argument in cases like the Madoff victims, because they truly are victims, and what has happened to them has had bad consequences for them. Nevertheless, if they themselves had some role in the harm that came to them (and, it’s important to note, the other Madoff victims–remember that the whole scheme depends on Madoff being able to recruit new investors, and the older investors profited, for a while at least, by getting money from the new investors), then they bear some of the blame.Anyhow, that’s the claim and the argument as far as I’ve been able to make it. I agree, by the way, with the earlier commenter that the argument can be extended to the financial “services” industry as a whole (with the possible exception of socially responsible investment firms).

  4. A follow-up on this: I asserted that Elie Weisel’s preferred punishment for Madoff–solitary confinement–counted as torture. Here’s < HREF="http://www.newyorker.com/reporting/2009/03/30/090330fa_fact_gawande" REL="nofollow">a recent New Yorker article<> that backs up that claim (hat-tip to Lois A.).

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