Madoff: Go Directly to Jail, Do Not Pass Go

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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.

Difficult lessons
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.

Nasdaq OMX Group is a Motley Fool Inside Value selection. The Fool owns shares of Nasdaq OMX Group. DreamWorks Animation SKG is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (18) | Recommend This Article (28)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2009, at 4:58 PM, McCrikey wrote:

    So 418,972,837,109,623,789,023,489,7324 bazillion hours of community service wasn't an option?

    Poor guy.

  • Report this Comment On March 12, 2009, at 5:16 PM, SorosZilla wrote:

    Ok, y'all are missing the point. Ponzi schemes are NOT bad. Social Security is a Ponzi scheme. Medicare is a Ponzi scheme. The bailout is a Ponzi scheme that we all are foistering upon our Great Grand Children.

    Why the H)&*( should Madoff go to jail when Bush, Hussein, Peolsi, Reid and the rest of the miscreants in D.C. dont go to jail for the Ponzi scheme?

  • Report this Comment On March 12, 2009, at 5:17 PM, BruceHBi wrote:

    They should send Madoff to Guantanamo. And waterboard him several hours a day. He is as much a terrorist to our economic way of life as bin Ladin and his crazies. Ironic, isn't it, that Madoff probably did more damage to our way of life and the fabric of our society than bin Laden?

  • Report this Comment On March 12, 2009, at 5:26 PM, 7thDaughter wrote:

    I feel sorry for "The Ponz's" fellow inmates; he is going to have all of their spending money in no time.

  • Report this Comment On March 12, 2009, at 5:52 PM, Seano67 wrote:

    I've got to give it to old Bernie though, as he did not try to evade responsibility for his actions or make any excuses for them. I have a lot of respect for that, at least. He's a bad man who did really bad things and made some absolutely horrific choices, but at least he's not *totally* without redeeming features. So he will spend the remainder of his life in prison, separated till the end from his wife of 50+ years and his children (and I thought it was kind of sad and strange that none of them were in the courtroom there with him). I cannot even begin to imagine how difficult that must be- but again, he didn't cry about it, he didn't try to claim any form of innocence whatsoever, and in fact each 'guilty' plea was another nail in his coffin- but he did it. He accepted full responsibility for what he'd done, even while knowing that he will go away forever.

    It sounds to me like his scheme started out as so many ponzi schemes do, as not an intentional effort to create fraud or a criminal enterprise, but rather as a terrible decision that just snowballs until it becomes impossible to extricate yourself from it. Many of these schemes people enter into with the intention that it's just going to be a temporary short-term thing, just to cover monetary shortfalls or losses with the thinking being "Well, I'll take some of this new money here in order to cover these losses there and be able to pay my other clients their money", but once that starts, it becomes nearly impossible to end it because you can never really catch up, and so it almost HAS to continue, and then it just grows and grows and grows. A ponzi scheme is never a temporary thing, as it just feeds upon itself and expands beyond any form of control. That's the whole devilish nature of the ponzi scheme. Whether your initial intentions are criminal or not, the end result is always disaster.

    It's remarkable his scheme lasted as long as it did, but it's thankfully over now. I think probably even he must feel a sense of relief, to not be living a complete lie like that any longer. I would imagine the stress of that had to have been agonizing and about eaten him up inside.

    Madoff will go down in the history of most notorious and destructive criminal frauds. He destroyed lives, and at this point really all you can do is hope his victims are able to receive at least some sort of restitution.

  • Report this Comment On March 12, 2009, at 7:03 PM, done4nau wrote:

    What is the government doing to liquidate all of Madoff's real estate? Have his children and friends had to give back the jewelery and cashiers checks he sent out??

    Madeoff is only one person who has ripped off honest investors. Is the government going to let all those with failing banks and zillions in bonuses keep them?

    maybe they should be put out on the street with their families and $20 after being stripped of their wealth so they learn first hand about the poverty they have caused.

  • Report this Comment On March 12, 2009, at 7:52 PM, steveherb wrote:

    Madoff can't be the only one to be tarred and feathered. Only one billion recovered? Hmm? Take part in drug trafficing and D.E.A. will take down you and everyone right down to the source. Take part in fake trading tickets and only one person has to go down. And there's still 64 billion left to spend. Hmm? Now I know why drugs are bad.

  • Report this Comment On March 12, 2009, at 9:39 PM, Seano67 wrote:

    Oh yeah, and for those worried about Bernie ending up being incarcerated at some cushy 'Club Fed' type prison, apparently that is not a possibility should he be sentenced to more than 25 years, which he's about 100% certain to be.

    If/when he goes up for more than 25 years, he will be doing hard time in a maximum security prison, most likely a Federal Penitentiary.

    Talk about a fall, wow.

  • Report this Comment On March 12, 2009, at 10:18 PM, soulmate13 wrote:

    All Madoff victims are as greedy as Madoff himself, they all wanted to get richer by ignoring simple investment rule: do not place all eggs in one basket, and another one if this is too good to be true, it probably is.

    So please, do not be so sorry about his victims, they were not forced to invest with him. He is a bad person, who did horrible things, he lied, he is a fraud, but all people who invested with him are not white angels either!

  • Report this Comment On March 12, 2009, at 11:17 PM, jbromet wrote:

    As far as I'm concerned, the fellas at the SEC should join Bernie in Federal prison. Anyone who watched 60 Minutes, which aired the Madoff whistleblower describe his repeated attempts to alert the SEC over a 10 year period about Madoff's scheme failed in their duty to protect the public. Undoubtedly, their close friendship with Madoff over the years allowed them to keep a blind eye to the truth. Apparently, everyone except CEO's, Executive Boards, and government hacks are exempt from prosecution for bankrupting the nation. The message: if you commit a crime, do it big like the big boys do!

  • Report this Comment On March 13, 2009, at 1:07 AM, dgmennie wrote:

    It would seem to me impossible that some 65 billion dollars could be collected from investors around the world over a 20-30 year period by fraudulent means and only ONE person be responsible. Yet this is what we are now suppose to believe regarding Bernie Madoff.

    Compounding this we are also being told (by implication) that the Madoff investors were mostly a bunch of greedy fools who willingly shipped off their fortunes to Investment Neverland without an ounce of due dilligance. Most unlikely.

    With Madoff tucked away in prision, what are the odds of uncovering the full story and making some reasonable restitution to those whose life savings are gone? The real tragedy here is that the victims will be left blowing in the wind while the politicos, courts, law enforcement, and press are all patting themselves on the back for a job well done.

    Nonsense! The "job," as it were, has yet to begin!

  • Report this Comment On March 13, 2009, at 3:22 AM, Tiingall wrote:

    I, agree, the "job" of tracking down more of these criminals dodes not appear to have begun. And it's also clear as Steveherb sugests that these bankers and financiers have put themselves into the same group as drug dealers, and along with them, the other dealers in death and human suffering, the illegal arms traders, war criminals and those into crimes against humanity. All of these despotic parasites have created vastly more death and suffering that those involved in the 9/ll attacks.

    But the bankers and financiers were overwhelmingly effective because they masqueraded in the trappings of legitimacy, honesty and professionalism; while all the time deliberately ripping off millions of peoples' savings. They deserve to rot in a rat infested cell in some South American dictatorship; where they'll be amongst their ilk. Any prison in the USA will be far too good for them; where they'll continue to live off the taxpayers they exploited.

    Think about this:

    1. Last year the OECD released findings that showed the gap between rich and poor in DEVELOPED countries was getting bigger. These bank and finance scumbags appear to have played an important role in this. And they appear to be getting away with it. They might be thrown in prison, but where is our money they stole?

    2. A few weeks back were news reports of a father who shot his wife and seven children and then himself; following the loss of his job. He faxed a local radio station with the details before starting to shoot. Consider for a moment how desperate and devoid of any hope for the future a father must be to chase his family around the house, killing them, one after the other. Apparently he thought this was a far better future then what he could now offer them; given the consequences of the bankers' and financier's greed. How many more thousands of families in the USA are yet to end this way in the next two years?

    3. A recent newspaper article reported the result of a French study indicating that an additional 200K to 400K children will die in developing nations in the next twelve months because donors have less money to give aid agencies; thanks to the bankers' and financier's greed.

    4. An interview with the Chairman of HSBC (that bank that is presently writing off US$51million per day of depositor funds due to their losses on the sub-prime loan scam, which recently fired over 6000 staff in the USA and is looking for US$18billion to shore up their operations), was quoted to say something like "yes we have a few things to learn" in response to questions about those massive losses. The problem is he's learning with our money; taking a hefty slice for himself and his mates in the form of a multi-million $ salaries, plus bonuses, perks etc, and gambling the rest on predictably stupid investments. I wish I could get a few trillion of HSBC depositor funds, skim off a few billion for myself, dissolve the rest in incompetent investments, and then not pay it back on the grounds that "I've learnt a lot". When will we see the HSBC Chairman - and all the other parasites like him - selling off their homes, property, boats etc and emptying their bank accounts to pay back our money they stole and gambled; the same as they'd demand from any other person who took a loan of HSBC depositor funds?

    I agree, the "job" of the investigatory bodies has not yet begun to uncover who has our money and where they have it stashed. The DEA can find all the drug dealers' money and get it back. So let's see it happening to our money the bankers and financiers have taken.

    And when they have finished with these scum, they should be passed to the International Court in The Hague, where they can be dealt with for Crimes Against Humanity for their decisions and actions that have lead to the family executions (past and yet to happen over the next two years) and the hundreds of thousands of child deaths - and the adults too - in developing countries who will die of hunger, dehydration and simple diseases. All this death and suffereing created by some peoples' greed.

    These people are worse than the drug dealers, illegal arms dealers and war criminals because they deliberately went out of their way to decieve, mislead and hide behind facades of legitimacy, education and professionalism.

    It's way past time for them to be brought to justice, to be publically humiliated, to be abandonded in disgust by their families, and to be locked up forever. We need to be protected from these deceitful merchants of death and destruction. The education system and financial industry self-management that should have sieved them out, has not worked. Now we need to rely on the police, FBI and courts. And of course, help from the people who worked with them and who can report on their behaviour.

    Only when these scum are weeded out will confidence return to spending and investing. At present, it appears these same people who deliberately perpetrated these crimes are still in the driving seat.

  • Report this Comment On March 13, 2009, at 4:34 AM, MissionToast wrote:

    You know China just sentenced some guy to death fro embeselling 14 million.

  • Report this Comment On March 13, 2009, at 8:49 AM, byzantic wrote:

    What nobody has tried to explain is where the loot has gone.

    1. Is the $50b is a nominal amount, partly built by fictitious profits? If so, how much "fresh" money has been paid in to Madoff over the years?

    Say $x, unlikely to be less than say $20b.

    2. Madoff has clearly lived high on many hogs, no doubt salted a lot away for his family, but there is no way he could have dissipated $20+b invisibly.

    3. So there must be some very particular beneficiaries of his generosity, from whom it can surely be recovered.

    4. The fact that nobody has apparently tackled this angle or even discussed it in the press as far as I know suggests the recipients have very considerable clout.

    So who are they? Politicians and bankers and financial intermediaries he bribed? But that does not seem on the right scale, although it needs to be looked at.

    Or some even grander purpose - special purpose charities, for instance could he have acted as a conduit for funds into Israel, with which he clearly has always had close links?

    It is rather uncanny. Who is going to look into it? Maybe he has pleaded guilty simply to protect them from further inquiries. Or will some federal agency still pursue the question?

  • Report this Comment On March 13, 2009, at 11:12 AM, justaroadfool wrote:

    plead guilty, no trial, no other defendants? He did it all alone? he gathered and disappeared 50 billion all on his own? Why aren't prosecutors upset instead of gloating? How much did he actually pay out in earnings and did Bernie work for someone he is protecting and gov wants to avoid exposing? Washington's programs are all ponzi schemes that push the debt on future generations.

  • Report this Comment On March 14, 2009, at 11:33 PM, RatherDashing wrote:

    What was he thinking?

    "It'll be worth it even though I'll probably get caught"

    or did he actually have an exit plan?

  • Report this Comment On March 24, 2009, at 10:35 AM, biglittleone wrote:

    I am amazed that he didn't jump out of his mansion in the sky.

    Somewhere there is a treasure trove worth a lot of money. Unless he gives out the password, etc. someone will be holding a big bundle without a claim for its return.

  • Report this Comment On April 08, 2009, at 4:40 PM, marshalspooky wrote:

    Send Madoff to Guantanamo until the end of his life, put him into an orange overall, and make him print USD notes 12 hours per day. And have all this managed by at least 6 bootcamp guards who are 24/24 hours on site.

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