Successful Madoff Investors Worry About Lawsuits
While many people lost money with disgraced investor Bernard Madoff, some actually made money. Will they have to give any of it back, as defrauded investors line up to sue?
LINDA WERTHEIMER, Host:
Bernard Madoff's alleged Ponzi scheme was not good for the Jews. So many of the victims of his $50 billion swindle were wealthy co-religionists and Jewish philanthropies. The Madoff case may be the most spectacularly successful example of an age-old phenomenon known as affinity fraud. Ronald Cass, dean emeritus of the Boston University School of Law, wrote about this recently in the Wall Street Journal. Dean Cass joins me now.
DEAN RONALD CASS: Delight to be here.
WORHTHEIMER: Now, you write that the Securities and Exchange Commission warned about affinity fraud two years ago. What sorts of things where they talking about?
RONALD CASS: Well, the Securities Exchange Commission identified about a half dozen examples of fraud against people who were similar in the basis of faith or ethnicity. They talked about examples, for instance, in the Armenian-American community in California.
The same happened with Korean-Americans who were target by another Korean-American in Southern California, who got $36 million from them in a similar sort of Ponzi scheme. The numbers that were being thrown around by the SEC, were large for anyone looking for this prior to the summer of 2008.
WERTHEIMER: Is this affinity fraud, what has happened here with Madoff?
RONALD CASS: I think this is affinity fraud. He was clearly targeting people who were Jews because he's Jewish. This is the circle he moves in, it's the circle that is going to be most trusting of him. I think it's not any accident that Mr. Madoff went out and sought out as clients many, many prominent Jews.
WERTHEIMER: You suggested in the Wall Street Journal, that Jews are particularly vulnerable. Why is that?
RONALD CASS: Jews have for centuries been brought up to believe that there are people out there who don't like us, who may be doing things that are targeting us, so we turn to one another. We have generations of people who say we have to trust each other, we have to help each other.
When my wife, who's a lawyer, and I were going to try to pick somebody to do health insurance for, we asked the rabbi in our congregation, do you know anybody who does this? And he recommended another member of the congregation. We didn't go out and do due diligence, we didn't have to. The rabbi said this one's OK. And I think a lot of that is the sort of thing that was happening with the Madoff investments.
WERTHEIMER: With some of the other groups you mentioned, you might have imagined that perhaps they don't speak English fluently, or they're marginalized economically. But some of the people and institutions who say they were duped by Madoff were very sophisticated folks like Steven Spielberg, or university endowments, which have very fancy people sitting on their boards watching out for their investments. Why would they be gullible?
RONALD CASS: Well, in some ways, it's easier to fool people who are very successful. If you're talking to somebody who is used to being successful, used to knowing what they're doing, they don't want to appear foolish.
But if they have someone vouching for them, someone they know to be very successful - Bernie Madoff was the chairman of NASDAQ, an advisor to the SEC, he was someone who had within his circle of clients enormously successful people. It was like he came pre-certified. You had every reason to trust the guy. He looked like and sounded like you and your friends. It is, in some ways, exactly that sort of set-up that makes sophisticated and successful people easy targets.
WORHTHEIMER: When the SEC turned its attention to Madoff, I guess you'd have to say the investigators seemed to feel some kind of affinity with him.
RONALD CASS: When they get a complaint against somebody who is as prominent, as successful as Mr. Madoff, they tend to look at it like this is unlikely to be a real, meaningful complaint. If you have a complaint against somebody who seems to be in a fly-by-night operation, you look at it differently. And I'm sure when people at the SEC saw a complaint against the former chairman of NASDAQ, somebody who was an advisor to the SEC, they start out giving him the benefit of the doubt. And you read things differently when that happens.
WERTHEIMER: Dean Cass, thank you very much.
RONALD CASS: My pleasure.
WERTHEIMER: Ronald Cass is president of Cass and Associates, which is a legal consulting firm.
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Madoff Fallout Grows as 'Feeder Firms' Scrutinized
The scandal surrounding Bernard Madoff and his alleged $50 billion Ponzi scheme grew deeper Tuesday when Rene-Thierry Magon de la Villehuchet, the head of an investment firm tied to Madoff, was found dead in his office, an apparent suicide.
Magon de la Villehuchet founded Access International Advisors, which had reportedly invested more than $1 billion with Madoff. Access was one of numerous "feeder funds," which took money from investors and funneled it to Madoff's firm.
Many of these feeder funds now face big legal problems.
A Retirement Fund Wiped Out
Until a few weeks ago, Bob Chew had no inkling his retirement fund was in any jeopardy. He had put about $650,000 into an investment fund run by California money manager Stanley Chais, who had been investing for Chew's wife's family for decades. Chew says Chais was secretive about what he did with his clients' money.
"He wouldn't offer, and when we did try to ask specifics, we weren't given the answers," Chew says.
But the fund made steady returns, so Chew learned not to ask questions. Then, on Dec. 11, Madoff was arrested by FBI agents in New York and everything began to unravel.
"The person who was handling our family fund called and said we're wiped out," Chew says. "And I said, 'Well what do you mean?' And he said, 'There's this fellow Madoff who's been arrested and all our money went to him.' "
" 'Who's Madoff? Who's this guy Bernard Madoff?' " Chew responded. "We had never heard the name before."
Feeder Funds Face Lawsuits
As it turned out, Chew's money had been placed in one of the feeder funds that delivered investors to Madoff's firm.
For years, Madoff was known as a spectacularly successful money manager. Ordinary investors were barred from putting their money in his funds. However, they could go to one of the feeder funds, which for a fee would send their money on to him.
Dan Strachman, author of The Long and Short of Hedge Funds, says these funds have become increasingly popular with investors.
"They want a bite of the forbidden fruit, and organizations like Fairfield Greenwich and others in some cases provide that access," Strachman says. "Someone like Madoff seems to have been able to take advantage of that by using these people."
Fairfield Greenwich is a hedge fund company that operated what is believed to be the largest feeder fund — and it is reported to have lost $7.5 billion in the Madoff debacle.
Many other funds have now lost all or part of their investors' money, and they're expected to spend years fighting lawsuits.
Attorney Jeff Zwerling, who represents some of Madoff's alleged victims, says some of these funds are virtually bankrupt. It will be difficult for these investors to recover any money from them, but Zwerling says there are exceptions.
"If the feeder fund did not invest all its assets in there but lost, say, 50 percent of its investment and is still an ongoing entity, then I think the investors have a much better shot of recovering at least some significant portion of their investment," Zwerling says.
He points out that some of the feeder funds were tied to bigger companies with deep pockets.
Massachusetts Mutual Life Insurance Co., for example, was sued this week because one of its subsidiaries was tied to a company that invested with Madoff.
On Preventing Future Disasters
Chew says regulators need to demand that feeder funds be more transparent. He says the fund operated by his money manager wasn't registered with the government because it was so small and therefore was able to escape scrutiny.
"Had we been able to see what was going on, been able to pull the curtain to the side and see the black box and what it was doing, we would have been able to make a better investment decision," Chew says. "And maybe, in fact, we would have kept going — but at least we would have known."
Chew says he is speaking out on the issue because he wants to prevent future financial disasters. But for him, it's probably too late to recover much of the money he lost.
For now, he is left to sort out the damage caused by a man he hadn't heard of before this month.