Madoff to Plead Guilty: Is This Justice?

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The AP reported yesterday that Bernie Madoff will plead guilty to 11 criminal counts including money laundering, perjury and securities, mail and wire fraud and will do so without a plea deal, knowing it carries a potential prison term of 150 years. I find it kind of odd that Madoff would choose not to try and get a plea deal. But just another thing in an odd set of circumstances.

Adding to the weirdness is Madoff's lawyer, Ira Sorkin, and his family were investors with Madoff and lost nearly $1,000,000. Is Sorkin the best to represent Madoff? I know most out there don't really care about this potential conflict in interest. But I will always be a believer that everyone (even accussed money launderers) should be properly represented in court.

I have no idea if this is justice. Madoff seems to have stolen people's trust as much as he's stolen their money (now a reported $20 billion instead of the $50 billion first thought). More and more investors are going the do-it-yourself route because their trust has eroded. The tragedy is most investors going this route will fail. The most comprehensive study on the subject of individual investor performance was conducted by Professors Brad Barber and Terrence Odean. They found:

Of 66,465 households with accounts at a large discount broker during 1991 to 1996... After accounting for the fact that the average household tilts its common stock investments toward small value stocks with high market risk… …the underperformance of average individual investor household is 3.7 percent annually.

The average household turns over approximately 75 percent of its common stock portfolio annually. The poor performance of the average household can be traced to the costs associated with this high level of trading.... Our most dramatic empirical evidence is provided by the 20 percent of households that trade the most often [with a turnover of 115%]… …the underperformance of hyper trading households averages 7.6 percent annually.

While prosecutors have recovered about $1 billion for investors so far, how can they recover the trust that was lost? Not an easy question to answer. For our part, we will, over the next couple of days, get back to going through the10 red flags for spotting financial crooks. In the meantime check out parts one and two.

Disclosure: none

Comments

[Aristophanes:]

From all the commentary—we'll know more when the Court docs are revealed—it appears the Madoff scheme was run in Madoff's head. The true extent of his dealings and the crucial timeframe may only be known by him co-operating. This is particularly true if there are clawbacks of some recent redemptions. The perjury charge is interesting. There may be some blowback there on the SEC.

His plea may be genuine contrition; if not opening the door to compensation, at least for complete disclosure. He's not young. We need a clear, uncontested view of the mechanisms he used to better document the case and prevent future swindles.

Demonize Madoff if you will, but the sheer, mass gullibility of his investors is an issue for all to consider. Sad to say, but many of his investors were caught up in the conspiracy of greed with a wink-wink, nudge-nudge acceptance, showing a sad lack of common sense. They wanted a guy who could "beat the market". They refused to believe it was "too good to be true". They suspended their disbelief. The whole "insider track" and "invitation only investor's club" marketing will be studied for decades.

Of course, waiting for the other shoe(s) to drop on the Stanford thing, too.

Mar 11 08:17 AM

[momomiester:]

Do we really believe this guy who was out on the road meeting people daily was able to do all this himself? Really? I have problems balancing my check book when I am traveling let alone being able to run a 50billion dollar ponzi scheme.
We might see more people indicted and who knows what will hit the fan.

Mar 11 12:04 PM

[jackooo:]

Your comment regarding investors investing on their own or getting financial gurus to invest for them does not sit well with me.
Watching the "Nightly Business Report" showing what the gurus had picked 6 months before for winners was terrible. They average 98% to 45% losses. Now you can twist this anyway you want to. I would rather lose my own money because these people know as little as I but the difference when I invest is I am not paying THEM a commission year after year.

Mar 11 12:42 PM

[paulseglund:]

The only true justice for this type of abuse if they are found guilty is public stoning. If you lost money by investing with him, you would be granted a stone to do with what you wish as he stands there in a public square just like days of yore. Some people may think this is harsh but how many lives were ruined by this man? I know of at least 2 suicides resulting from his actions. This is not a new idea either-I felt this way after Bernie Ebbers and the WorldCon scam too.

Mar 11 01:27 PM

[LJR:]

People are saying they "lost everything" through his actions and to me it would be stupid to put all one's eggs in one basket like that. My feeling is that he is now deeply humbled and trying to limit the damage done to others around him.

In your analysis of independent investors, the short termed nature of their attempts says a lot. I was a little like that at first, learning to look to the long term.

It will all come out, I would assume.

Mar 11 01:53 PM

[henarl:]

The author wrote:

"More and more investors are going the do-it-yourself route because their trust has eroded. The tragedy is most investors going this route will fail"

How could the do-it-yourself route possible turn out worse than investing with Madoff types?

Mar 11 03:21 PM

[henarl:]

We can't know if this will be "justice" until we hear the sentence. If he is sentenced to life in prison, that will be justice for him, if not for his victims, but bear in mind that he will be sentenced by the same judge who has allowed him to remain in his luxury penthouse so far.

Mar 11 03:24 PM

[samwise:]

Good article. If you believe that this was "all in his head" as "Aristophones" does then your as gullible as a Madoff investor! "Trust" can never be replaced and insofar as Madoff is concerned what makes Bernie such an interesting guy. He never made that claim. Instead, he claimed (with real reason) to called "good." Look at all his charity work, right? Bottom line--Bernie will be the first to say this road to hell was paved with good intentions and is very instructive with what's going on in DC right now. Having said that trust will come by not listening to people like Aristophanes and the "lone gunman theory" and get to the bottom of this truly massive scheme. I have read that all the taxes that were paid on these investments might be refunded--which is strikingly generous for Uncle Sam. Hopefully the charities get first dibs. I will be looking for as much exposure by Uncle Sam to restore my trust--in other words if there is even the appearance of the government trying to hide anything here then I really will believe, especially as a New York resident, that I cannot get a fair shake with the justice system as an investor in this state or even this country. That would cause me to keep staying in cash and demand an even higher return since all the government is saying is that sthey will bag the Bernie's of this world but not go after the institution of the kleptocracy root and branch.

Mar 11 04:41 PM

[mediapro:]

I agree, Jackooo.

If one reads the seminal guide to dollar cost averaging and broad spectrum INVESTING, not trading, Burton Malkiel's "A Random Walk Down Wall Street", he makes an indisputable case for how index balanced index investing has beat actively managed mutual fund investment.

Malkiel notes that IN ANY GIVEN YEAR 85% of the actively managed stock mutual funds fail to match the S&P.

His historical analysis, dating well back into the 1800's, factors in investor psychology, market conditions, access to information, etc. Though impossible to summarize his analysis in a post, basically he proves conclusively:

1. Technical analysis, reading tea leaves, hoping that the past movement in stock patterns predicts the future is simply wrong. For every guru (whether its the current doom machines like Rubini or the tech gurus of the late 1990's) with a system or explanation, there are always unforeseen counter forces moving patterns back to the mean.

2. We have always experienced market bubbles and we always will. These don't point to inefficiencies in markets, simply a demonstration of the greater fool who tries to guess or time the market.

3. Any historical analysis of asset classes and ROI comes up with roughly the same conclusion: stocks = ~8-11%; bonds = ~4-6%, etc. His recommendation about diversification clearly extends beyond investments in the stock or bond markets.

4. As boring as the approach seems, the only logical way to invest is broad diversification, dollar cost averaging when this is feasible, and stock investment predominantly in broad indexes that track the various market caps. In fact he suggests that the Wilshire 5000 is the best predictor of long term return of stocks.

I know. The counter to EMT is that in the long term we'll all be dead. Though I'm one of the current suffering along with most everyone else, I'm willing to admit that I'm not smart enough, unable to collect and absorb information that result in enough correct guesses to win the lottery, and unwilling to risk losing all my investment when a formerly "safe" company goes belly up.

I've ridden that rollercoaster since before 1987, and the worst that I can say is that I've lost no more money than the "active investor".


On Mar 11 12:42 PM jackooo wrote:

> Your comment regarding investors investing on their own or getting
> financial gurus to invest for them does not sit well with me.
> Watching the "Nightly Business Report" showing what the gurus had
> picked 6 months before for winners was terrible. They average 98%
> to 45% losses. Now you can twist this anyway you want to. I would
> rather lose my own money because these people know as little as I
> but the difference when I invest is I am not paying THEM a commission
> year after year.

Mar 11 07:43 PM