July
18, 2012
It
Appears That The Madoff Scam
Was
Not, Repeat Not, A Ponzi Scheme.
From the time Bernie
Madoff's fraud was uncovered in December 2008 until today, a period of over 3 -
years, his scam has been regarded as a Ponzi scheme. I know of only one person, a brilliant lawyer
named David Bernfeld, who did not concede it was a Ponzi scheme, but nobody
accepted his view. Victims, (very
importantly) the media, and courts all thought and said Madoff was a Ponzi
scheme. Of enormous importance the Trustee
in the Madoff case, Irving Picard, and his chief lawyer, David Sheehan,
regularly insisted it was a Ponzi scheme because, they said, there were no
securities transactions, and accordingly there were no securities, and no
earnings (and could not have been any
earnings). Crucial legal and factual
consequences, some of which are mentioned below, flowed from the fact that the
scam was regarded as a Ponzi scheme.
But now it is beginning
to look as if Madoff was not a Ponzi
scheme. It was a huge fraud to be sure, but
not the species of fraud called a Ponzi scheme, with the consequences attendant
upon that species of fraud.
As I have always
understood matters (I think and hope correctly), in a Ponzi scheme the crook
tells people that he will be investing their money in particular stocks or
particular goods or what have you, and then fails to do so. Instead he blows the money, uses it for other
purposes, etc. The key point, the
central point, is that he does not purchase or acquire the investments that he
told victims he would acquire in order to induce them to give him their
money. Along this line, in the Madoff
case the Trustee has always insisted -- in court filings, in remarks, whenever
and wherever -- that none of the securities that were shown in victims' monthly
account statements -- none of the securities that Madoff inducingly told
victims he would buy and sell for them -- were ever bought or sold. There were, the Trustee and his lawyer have
told victims, the courts and the world, no
transactions in these securities.
Ergo, a Ponzi scheme.
But apparently there were purchases and sales of these
securities -- untold and currently unknown billions of dollars of these
purchases and sales. On his books,
however, Bernie Madoff did not, as he should have, credit the investor-victims
with ownership of the billions of dollars in securities he was buying (and
selling). Instead, on his books he unlawfully kept ownership for himself. There was a fraud alright, but the fraud was not the Ponzi fraud of failing to buy the
very items the crook said he would buy.
The fraud, rather, was in failing to credit his investors with the
ownership of the securities on Madoff's books, as should have been done, and instead keeping the securities for
Madoff himself. The securities, that is
to say, were bought and sold for what was called the proprietary trading arm of
Bernie Madoff's company, the arm which bought and sold securities, and
attempted to thereby make a profit, for Bernie's company. They may also have been bought for the market
making arm of his business. The monies
given to Madoff by his investor victims was used not to purchase the promised
securities for them, but instead to
purchase those securities for Madoff himself -- for his own account, as it is
said, and, when necessary, to support another arm of his business, the market
making arm. (The monies were also used
to fund the Madoff family's extravagant life style.) The account statements received every month
by victims, and showing that they
owned the securities, were a lie, a fraud.
It would be fair for
the reader to ask at this point, "How do you know all this? Can you be sure of it?" Let me answer this way: For reasons discussed below, and for other
reasons too, we already know enough to be virtually positive that the foregoing
is what occurred. But we do not know enough to know certain of the
details, e.g., what was the total value at any given time of the securities
that Madoff purchased for his own account, and how closely did the value of these
securities match up with the amounts of monies victims invested with him; how
much of the money invested with him was used to support the market making arm
of Madoff's business or the family's life style instead of being used to buy
the securities for Madoff's own account
that he fraudulently told victims were being bought for them; what amounts of profit or loss did Madoff make or suffer on
the purchases and sales of securities for his own account.
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