Madoff, Nadel polish Florida's scam-friendly imageReuters
Madoff, Nadel polish Florida's scam-friendly image
Reuters, Wednesday January 28 2009
By Jennifer Ablan
NEW YORK, Jan 28 (Reuters) - Warren Buffett's quip that "it's only when the tide goes out that you learn who's been swimming naked" holds special meaning in beach-fringed Florida, where the waters seem to be receding faster by the day.
Palm Beach, the upscale resort dominated by affluent elderly residents, was a favorite hunting ground for Bernie Madoff, the Wall Street fund manager who authorities say confessed in December to committing a $50 billion fraud.
Many investors based in the easternmost town in the state, where Madoff had a home and was a familiar figure on the social circuit, say they have probably lost millions of dollars in Madoff's funds.
Then, the week before last, hedge-fund manager Arthur Nadel disappeared from his home in Sarasota, on Florida's other coast, and has since been charged with defrauding investors at six Florida-based hedge funds, and allegedly overstating the value of the investments by about $300 million.
Nadel was arrested by FBI agents in Tampa on Tuesday.
This comes on top of Florida's role in the current housing boom and bust as one of the states where house prices rose most and have crashed furthest, burning many speculators and homeowners along the way.
To historians, or anyone with a long memory, the Florida link to today's investor scandals is hardly a surprise.
The state has always had its own infamous role in many of the great scams of the past 100 years.
In the 1920s, the great Florida real estate boom was like a preview to the 1929 stock market crash. Speculators poured money into real estate in the expectation that northerners chasing the sun would flock south.
The hot market involved trading "binders," or documents that reserved for 30 days a piece of property for a small deposit and were easily resold.
Negative publicity about Florida investments coupled with deadly hurricanes in 1926 and 1928 contributed to the end of the land boom. Basically land prices got completely out of sync with what was reasonable or affordable.
John Kenneth Galbraith, in his classic "The Great Crash, 1929," wrote that it was assumed that the flight of people to the sunny south "would be as regular and impressive as the migrations of the Canada Goose."
"On that indispensable element of fact men and women had proceeded to build a world of speculative make-believe ...
"So great would be the crush that beaches, bogs, swamps and common scrubland would all have value."
Almost inevitably, Charles Ponzi, whose name gave birth to the term "Ponzi scheme" for scams in which investors who withdraw money are paid with money put in by later investors, was a Florida hand at one stage of his life.
Ponzi sold tiny tracts of land -- some of it under water -- on the promise of large and fast returns.
In the late 1980s and early 1990s, the state was the center of a string of penny stock frauds -- so many that Boca Raton was once dubbed by state investigators "The Maggot Mile."
Referring to the confidence tricksters that frequented the Boca area, Richard Breeden, a former U.S. Securities and Exchange Commission (SEC) chairman and now an activist hedge fund manager, put it best when he said that Florida, specifically Boca, had "more sharks on land than in the water."
COUNTRY CLUB ENVIRONMENT
So what's still attracting sharks to Florida?
"There's tons of northeast money, a lot made on Wall Street, that ends up in Florida," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.
"These scam artists prey on the retirement community and you have a lot of retirees with a lot of money there. There are more victims to be had in Florida."
Florida's lower cost of living, absence of state income taxes and, of course, climate and beautiful beaches, all contribute to its draw.
Florida's population grew 17 percent in the first seven years of the decade, the third-most of any state.
And it's not just the retirees who get conned.
In the Madoff and Nadel cases, charities, society circles and wealthy families in Palm Beach on Florida's east coast and in Sarasota on Florida's west coast have been hit hard.
"Florida is a country club environment," said Tom Sowanick, the chief investment officer for $22 billion in assets at Clearbrook Financial LLC, in Princeton, New Jersey.
"Florida is about trusting your neighbor, and if your neighbor says, 'This is a good investment,' then it must be a good investment," Sowanick said.
There is a recognition that regulatory watchdogs need to beef up operations outside of Washington, D.C. and New York.
Legislation being introduced in Washington would authorize $80 million for 500 new FBI agents, $20 million for 100 enforcers at the SEC and $10 million for 50 new assistant U.S. attorneys.
"There was a lot of wealth generated in Florida during the housing and credit boom," Sowanick said.
"Now that we are in a bear market, all of these scams and con artists are unraveling and showing up -- yes, in Florida. There will be more SEC cops, I am sure, in the state." (Additional reporting by Rachelle Younglai; Editing by Brian Moss)