Big Ponzi Scheme, Big Sentence — But Big Questions Remain

Bernard Madoff’s Ponzi scheme of the ages resulted in a sentence for the ages. Yesterday, after Mr. Madoff faced some of his victims for the first time, the court imposed the statutory maximum 150 year sentence. That sentence far exceeds the 12 years Mr. Madoff sought and even the 50 year recommendation of the federal probation department. It also far exceeds those handed down in other recent white collar cases, such as Jeffery Skilling of Enron and Bernie Ebbers of Worldcom, each of whom is serving 25 years.

The preliminary forfeiture order issued on Friday also dwarfs those in other actions. Under that order, Mr. Madoff will forfeit over $170 billion. His wife will be left with about $2.5 million, which could not be “sufficiently linked” to the fraud, according the U.S. Attorney’s Office. There is no assurance that the SEC or others may not try to attach the assets left with Mrs. Madoff, however.

The jail term and the forfeiture order confirm that Mr. Madoff will never leave prison and will not profit from his crimes beyond the lavish life style he enjoyed until caught. At the same time, the huge jail term and forfeiture order do not resolve the two key questions about the Madoff Ponzi scheme: 1) how did the SEC fail to uncover the massive fraud despite multiple opportunities? (2) who else was involved?

How the SEC failed to uncover the Madoff fraud is virtually impossible to understand. With multiple opportunities beginning as early as 1992, and a virtual road map to Madoff and his scheme as discussed here, the fraud should have been detected and the carnage stopped much earlier. To be sure, no law enforcement agency can halt fraud from the start. And, Ponzi schemes can be difficult to detect, although it is hard to make that argument given the number of these cases brought in recent weeks. In the case of Mr. Madoff however, the size and scope of the scheme coupled with the repeated opportunities and road map should have been more than sufficient.

The answer to this question is more than academic. It is fundamental to reforming and rejuvenating SEC enforcement. Perhaps the answer to this question will be in the forthcoming report of the SEC Inspector General who reportedly has interviewed Mr. Madoff.

Equally important is the question of who else was involved. The answer to this question is important to law enforcement and the victims. Law enforcement needs to unravel this issue not just to bring the appropriate actions, but as part of the self-evaluative process of how the scheme was missed earlier. The victims need to identify the other beneficiaries of the scheme to try and salvage some of their investment. It is clear that the Madoff Trustee will not recover anything close to the amount the investors lost. The number in the DOJ forfeiture order, while headline grabbing, has no relation to the amount of money available for investors who are faced with recovering cents on the dollar.

Mr. Madoff has steadfastly insisted that he acted alone. The size and scope of the fraud belie this claim. The cases brought to date against the auditors by DOJ and the SEC (discussed here) and two feeder funds by the SEC (discussed here) offer some insight into the Madoff scheme. The auditors were apparently paid for producing audit reports while doing virtually no auditing. The feeder funds were paid for soliciting investor cash and turning the money over to Mr. Madoff while doing no real investing or fund management. The formula is straight forward: assist Madoff, do little and get paid very well. It can be easy to turn a blind eye to what is really happening when there is so much money involved.

Just how many others prospered from Mr. Madoff’s fraud under this formula will be the subject of intense investigation in the coming weeks and months. The huge sentence yesterday closed one chapter of the Madoff saga. Key questions which must be answered for the benefit of everyone remain, however.