Commentary The victim of fraud is Trust

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The Victim of Fraud: Trust
Financial crimes spawn a strong sense of betrayal
Money manager Arthur Nadel may not be in the same league as Bernard Madoff, but it appears he may have been in the same business.

The FBI and local police have been looking for 76-year-old Nadel since last week, when he left his Sarasota, Fla., home for his office and disappeared — leaving investigators with questions about what happened to some $350 million in investments he had been managing and advising for wealthy investors. The suspicion is that Nadel’s investment fund, like Madoff’s, was a fraud. U.S. regulators have filed fraud charges against Nadel in a Tampa, Fla., federal court.

Madoff, of course, is the New York-based money manager who is by now famous for allegedly operating a $50 billion Ponzi scheme, one that was years in the making and which may be the largest fraud in history. The list of Madoff victims includes sophisticated hedge fund managers, wealthy and not-so-wealthy individuals and a long list of nonprofit organizations, including a large number of Jewish philanthropies. The financial and human toll is dramatic.

So, too, is the impact on financial institutions and investment companies, for whom trust is a fundamental of day-to-day business. Indeed, in October 2007, while speaking on a panel in New York about the future of the stock market — which was recorded on video — Madoff himself discussed the built-in safeguards meant to reassure investors.

“In today’s regulatory environment, it’s virtually impossible to violate rules, and this is something the public really doesn’t understand. If you read things in the newspaper, and you see somebody violated a rule, you say, ‘Well, they’re always doing this.’ It’s impossible for a violation to go undetected, certainly not for a considerable period of time.”

While financial fraud is nothing new on Wall Street (or Main Street), the Madoff case engenders a particularly strong sense of betrayal. That’s because Madoff’s stock-in-trade was not only promised financial results — steady returns of about 1% a month — but powerful personal relationships.

“If a tragedy occurred in a family, he’d go to the funeral. If somebody caught a cold and he knew about it, a phone call would come,” Norman Braman, a Miami businessman and billionaire who invested a “considerable amount” of money with Madoff, told CBS News. Braman said that he’s not concerned about himself but about others who invested with Madoff not out of greed but because they were “interested in preserving capital and earning a minimal return on their investments.”

But exactly how, and when, did it start? That’s what investigators and people who trusted Madoff would like to know. As writer and editor Tina Brown put it in her Daily Beast blog: “One crucial psychosociological question still unanswered is this: When did Madoff decide to become a crook? Or had he always been one? Was this low-key, softly smiling gonif who inhabited the private comfort zone of the super-rich a lifelong charlatan who escaped detection until late in his career? Or (my theory) did the accelerating madness of the last decade or two entice him slowly but surely into an entirely new playing field where every moral boundary fell when it was pushed?”

The irony is that so many of Madoff’s contemporaries on Wall Street have earned fabulous sums of money even as their firms and hedge funds often returned substandard results, or sometimes failed. But these market geniuses managed to make their fortunes without any obvious or apparent violation of the law. Indeed, one of the more shocking revelations in recent days has been how many large financial institutions or funds simply gave their money to Madoff to invest while they pocketed a hefty fee (in some cases, 1.5% of assets) for their “due diligence” in ascertaining his integrity.

And then there is the creeping recognition that Madoff’s alleged scheme will not be the only sizeable fraud to be revealed by a falling market. Florida money manager Nadel is but one example. Obscured by the headlines surrounding the Madoff revelations has been the bizarre case of prominent New York lawyer Marc Dreier, who was recently jailed and accused of cheating hedge funds out of about $380 million. Dreier, who was called “a Houdini of impersonation and false documents” by prosecutors at a hearing, allegedly impersonated executives of some of his own clients in a plot to sell phony bonds. Dreier’s 250-attorney law firm recently filed for bankruptcy protection.

On a larger scale, the most obvious victim of such fraud is trust, a virtue already damaged by the global economic crisis and plummeting stock markets. In fact, the Securities and Exchange Commission now acknowledges that it had warnings about Madoff nine years ago but failed to act. In the coming months, Congressional investigators will doubtlessly be examining the SEC’s performance and the appropriate role of regulation in the future.

But the outcome of those inquiries is likely to be too little, and far too late, for victims like Roger and Diane Peskin, of Bethlehem, Pa., who gave Madoff their entire nest egg — $3 million, from the sale of a magazine business built up over almost 30 years. “We entrusted him with everything we had - our future and the future of our children - and now it’s all gone,” Roger Peskin told The Morning Call publication. ”Where can you put your money these days? Who can you trust? There’s no one left to trust.”