Madoff Had Accomplices: His Victims

By JOE NOCERA

Brendan McDermid/Reuters

Outside of court, Sharon Lissauer said she had lost everything to Bernard Madoff.

Standing in the security line Thursday morning, waiting to get into the federal courthouse in Manhattan, I started chatting with the man behind me. He looked to be in his early 60s, and though he was well dressed, he looked a little haggard. I asked him if he was a victim of Bernard L. Madoff, who would soon be pleading guilty to masterminding the greatest Ponzi scheme in history. He said he was.

Did he want to talk about it? He wasn’t sure, he said. I asked his name. “I’m not going to give my name unless there is some benefit for me,” he said dourly. “I haven’t had too many benefits lately.”

How much had he lost? I asked. He grimaced. “I don’t really want to say,” he replied, but conceded that it was a lot.

What was he hoping for today? He shrugged.

As we passed through security, I asked him what role he thought the government should be playing. It was as if I had flipped a switch. Suddenly, his reticence fell away.

“The S.E.C.,” he said, referring to the Securities and Exchange Commission, which muffed multiple opportunities to catch Mr. Madoff, “they played a big role in this. They have a lot to answer for.” He said that the tax code should be changed so that Madoff victims can recoup taxes they paid on profits that turned out to be illusory — no matter how far in the past those taxes were paid. He thought the Securities Investor Protection Corporation, which tries to put at least a little money in the hands of investors whose firms have gone under, should give victims more than the current $500,000 maximum.

“I think there should be some legislation,” he said finally. What kind of legislation? What he was hoping for, he said, was that the government would set up a fund for Madoff victims — maybe give them 60 percent of their losses, he suggested.

We turned a corner, and saw a long line of people waiting for a spot in the courtroom — far more people, it was obvious, than could ever fit in the chambers. (There was a large overflow room, where I watched the proceedings.) Most of them were holding notebooks; this was clearly the media line. “Is there a line for the victims?” the man asked the marshal.

“Are you a victim?” said the marshal. As the man nodded yes, the marshal said, “Come with me.” He took the man to the elevator and whisked him upstairs and directly into the courtroom.

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I can’t deny that there was something gratifying about watching Bernard Madoff handcuffed and carted off to jail Thursday morning. He was — is — the worst of the worst. By his own admission, his Ponzi scheme ran for nearly two decades; by contrast, the original Ponzi scheme, dreamed up by an Italian immigrant named Charles Ponzi in 1919, was exposed within eight months. Many of Madoff’s investors have been left with nothing, having foolishly entrusted their life savings to a man they thought “was God,” as Elie Wiesel put it not long ago. Mr. Wiesel’s foundation lost more than $15 million in the Madoff fraud, and he and his wife, Marion, lost their personal fortune as well.

Still, the proceedings were a bit of a letdown. After all the anticipation — some reporters had begun lining up outside the courthouse at 5:30 in the morning — it was a perfunctory affair, completed in an hour. Much of it was legal boilerplate. Mr. Madoff was expressionless throughout; when he read a statement recounting his crimes and expressing “remorse,” he sounded like a man reading a speech he hadn’t bothered to rehearse.

Judge Denny Chin had made clear that he was not going to allow the Madoff guilty plea to turn into a Wailing Wall for the victims, so most of them stayed away. Though Judge Chin allowed them to speak, he insisted they stick to the issue before the court: whether he should accept Mr. Madoff’s guilty plea. One woman argued that the judge should not and force a trial instead, for the “opportunity to find out where the money is.” But of course there is no money — certainly nothing close to the supposed $60 billion plus he was “investing.” That is the whole point of a Ponzi scheme: the fraudster uses money coming in from new investors to pay old investors, pretending that that is their gain.

Afterward, the TV cameras surrounded a woman named Sharon Lissauer. She had not been wealthy, she said, but she’s lost everything. She didn’t know what she was going to do. She was weeping. It was hard not to feel sad for her — indeed, for all the victims of Mr. Madoff’s evil-doing. But one also has to wonder: what were they thinking?

At a panel a month ago, put together by Portfolio magazine, Mr. Wiesel expressed, better than I’ve ever heard it, why people gave Mr. Madoff their money. “I remember that it was a myth that he created around him,” Mr. Wiesel said, “that everything was so special, so unique, that it had to be secret. It was like a mystical mythology that nobody could understand.” Mr. Wiesel added: “He gave the impression that maybe 100 people belonged to the club. Now we know thousands of them were cheated by him.”

And yet, just about anybody who actually took the time to kick the tires of Mr. Madoff’s operation tended to run in the other direction. James R. Hedges IV, who runs an advisory firm called LJH Global Investments, says that in 1997 he spent two hours asking Mr. Madoff basic questions about his operation. “The explanation of his strategy, the consistency of his returns, the way he withheld information — it was a very clear set of warning signs,” said Mr. Hedges. When you look at the list of Madoff victims, it contains a lot of high-profile names — but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply.

I suppose you could argue that most of Mr. Madoff’s direct investors lacked the ability or the financial sophistication of someone like Mr. Hedges. But it shouldn’t have mattered. Isn’t the first lesson of personal finance that you should never put all your money with one person or one fund? Even if you think your money manager is “God”? Diversification has many virtues; one of them is that you won’t lose everything if one of your money managers turns out to be a crook.

“These were people with a fair amount of money, and most of them sought no professional advice,” said Bruce C. Greenwald, who teaches value investing at the Graduate School of Business at Columbia University. “It’s like trying to do your own dentistry.” Mr. Hedges said, “It is a real lesson that people cannot abdicate personal responsibility when it comes to their personal finances.”

And that’s the point. People did abdicate responsibility — and now, rather than face that fact, many of them are blaming the government for not, in effect, saving them from themselves. Indeed, what you discover when you talk to victims is that they harbor an anger toward the S.E.C. that is as deep or deeper than the anger they feel toward Mr. Madoff. There is a powerful sense that because the agency was asleep at the switch, they have been doubly victimized. And they want the government to do something about it.

I spoke, for instance, to Phyllis Molchatsky, who lost $1.7 million with Mr. Madoff — and is now suing the S.E.C. to recoup her losses, on the grounds the agency was so negligent it should be forced to pony up. Her story is sure to rouse sympathy — Mr. Madoff was recommended to her by her broker as a safe place to put her money, and she felt virtuous making 9 or 10 percent a year when others were reaching for the stars. The failure of the S.E.C., she told me, “is a double slap in the face.” And she felt the government owed her. Her lawyer, who represents several dozen Madoff victims, told me he “wouldn’t be averse” to a victims’ fund.

Even Mr. Wiesel thought the government should help the victims — or at least the charitable institutions among them. “The government should come and say, ‘We bailed out so many others, we can bail you out, and when you will do better, you can give us back the money,’ ” he said at the Portfolio event.

But why? What happened to the victims of Bernard Madoff is terrible. But every day in this country, people lose money due to financial fraud or negligence. Innocent investors who bought stock in Enron lost millions when that company turned out to be a fraud; nobody made them whole. Half a dozen Ponzi schemes have been discovered since Mr. Madoff was arrested in December. People lose it all because they start a company that turns out to be misguided, or because they do something that is risky, hoping to hit the jackpot. Taxpayers don’t bail them out, and they shouldn’t start now. Did the S.E.C. foul up? You bet. But that doesn’t mean the investors themselves are off the hook. Investors blaming the S.E.C. for their decision to give every last penny to Bernie Madoff is like a child blaming his mother for letting him start a fight while she wasn’t looking.

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Late Thursday afternoon, I called Richard C. Breeden, the former chairman of the S.E.C. who had recently served as a trustee to get money back for investors who had been involved in a billion-dollar Ponzi scheme that was uncovered more than a decade ago. He had miraculously been able to pay investors close to 60 cents on the dollar, partly by increasing the value of the assets that the scheme was built on. That’s far more than any Madoff victim is going to get. (So far, the Madoff trustee has identified only $1 billion in assets.) Tragically, Mr. Breeden said, some people who had invested in the Ponzi scheme that he helped clean up turned around and gave their money to Mr. Madoff.

“I guess some people never learn,” Mr. Breeden said.

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