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Bernard Madoff has pleaded guilty to the mother of all Ponzi schemes. He'll go directly to jail pending sentencing, instead of to the cushy $7 million townhouse where he hung out while under house arrest. We hope he'll learn his lesson -- or at least, that he'll spend the rest of his life in prison -- but honestly, there are things in this case for all of us to learn.
Truth and consequences
Madoff pleaded guilty to 11 charges; he'll be sentenced on June 16, with the possibility of a prison sentence as long as 150 years. What was originally reported to be a $50 billion fraud has now risen in estimation to $65 billion; Madoff's firm said 4,800 investor accounts held that total amount in November. So far, only $1 billion in assets has been recovered.
Among the amazing elements of this case: Madoff's firm made no real trades for at least 13 years! The Wall Street Journal reported earlier this week that employees had allegedly created fake trading tickets to help support the illusion that trades were taking place for Madoff's clients.
The WSJ also said that today in court, Madoff admitted starting the scheme in the early 1990s, and that he had believed he would be able to exit quickly. This idea bears a striking resemblance to another recent fraud, Satyam (NYSE: SAY ) CEO Ramalinga Raju's anecdote about his own behavior, which he said "was like riding a tiger, not knowing how to get off without getting eaten."
Like Raju, Madoff took the opportunity to apologize, but many of the victims who have been ruined probably don't feel too forgiving.
The Bernie Madoff saga yields a lot of food for thought as the era of unbridled greed unwinds. First, a good resume is no guarantee of ethical conduct. Among his impressive-sounding credentials, Madoff was once the chairman of the Nasdaq Stock Market, now owned and operated by Nasdaq OMX (Nasdaq: NDAQ ) .
Second, a ritzy client list is also no protection against getting scammed. A peek at Madoff's victim list runs the gamut of clients, from charities and fairly regular people, to luminaries and celebrities like Eli Wiesel, Steven Spielberg, Kevin Bacon and Kyra Sedgwick, and DreamWorks Animation's (NYSE: DWA ) CEO Jeffrey Katzenberg. Even financial companies like HSBC (NYSE: HBC ) and Royal Bank of Scotland (NYSE: RBS ) , were on the list, as well as many other banks, hedge funds, and investment management firms. If all these respected clients trusted Madoff, surely he must have been beyond reproach, right? That sort of assumption helped Madoff keep bilking people for far too long.
Third, regulators don't always get it right. It's pretty clear the Securities & Exchange Commission dropped the ball on this one big-time, and for a long time, too.
Fourth, we come to an oldie but goodie: "If it sounds too good to be true, it probably is." Madoff's firm promised solid, regular returns through good times and bad. Apparently, hardly anyone chose to doubt whether that was logically possible through good times and bad. Any of us can fall victim to such a setup, but hopefully, Madoff's example will teach us all to be a bit more skeptical about things that sound just slightly too good to be true.
Last but not least, downright greed has deadly consequences. I guess it can be tempting for some people to break all the rules in the name of money, rationalizing that it'll be "just this once" or "just for a little while, and then I'll stop." But the next thing you know, you're riding that tiger, and it's going to devour you the moment you stop. (And make no mistake -- eventually, it will eat you alive.)
Unfortunately, people like Madoff also hurt countless innocent victims while living large off their ill-gotten gains. That's the biggest crime -- and the biggest tragedy -- of all.
Payback's a … well, you know
I recently complained bitterly about Bernie Madoff's penthouse arrest in an article about how the Madoffs had made off with more, so it's nice to know he's going straight to jail. Unfortunately, the damage has been done, even though justice is being served.
I'm sure we'll hear of more instances where greed, groupthink, and irrationality helped other opportunistic criminals get away with fraud. But hopefully, the Madoff mess gives us all fresh resolve to embrace common sense, healthy skepticism, and the Golden Rule, all of which arguably became scarce commodities during the bubbly go-go years.
That said, jail time for the guilty is a pretty darn good outcome, too.