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Posner on Madoff

Did Bernie Madoff have the perfect Ponzi scheme? Perhaps not, because in the end, Madoff was caught.  But for a while he had a good thing going. That's  because Ponzi scheme (where returns are paid to investors out of money paid by subsequent investors, rather than profits) are notoriously difficult to detect, as Miami lawyer Edward Davis, of Astigarraga Davis, explains in this extensive interview with The Am Law Daily.

However, one prominent blogger -- 7th Circuit Judge Richard Posner -- disagrees with the conventional theory that Madoff was running a Ponzi scheme primarily because Madoff didn't con "greedy dopes" who are classic Ponzi targets, but instead, lured sophisticated investors. In this fascinating blog post, Judge Posner writes:

The strategy that has been attributed to Madoff is the opposite of that of the typical Ponzi schemer: it is to obtain investments from well-off people far more financially sophisticated than the average Ponzi victim, including genuine financial experts such as hedge fund managers and bank officials. And therefore it requires different tactics from that of the ordinary Ponzi scheme, such as offering returns only moderately above average, satisfying redemption requests promptly, turning down some would-be investors (it would be interesting to know whether there was a tendency to turn down investors who might prove nosy or suspicious), and trading on a reputation earned in a legitimate business (Madoff's business of market making). Madoff is alleged to have preyed primarily on his fellow Jews; such "affinity" frauds are common, because people are likely to be more trusting of members of their own ethnic or religious group than of outsiders and because a con man may be abler to identify and exploit the weaknesses of members of his own group than of others.

In addition to this interesting take on the Madoff scandal, Posner criticizes Christopher Cox of the SEC for blaming his subordinates for failing to apprehend Madoff earlier rather than taking responsibility himself. Ultimately, Posner also predicts that the recent failures of the financial regulatory system (beginning with Enron and Worldcom, and continuing through the banking/mortgage crisis) may lead to wholesale reorganization, with the possible abolition of the SEC. [Update - The New York Times' Dealbook also critiques Cox for lack of leadership and considers whether Obama's nominee, Mary L. Schapiro, is the right person to head the SEC].

Who would have thought that a conservative judge would have some of the most unconventional views in the blogosphere on the Madoff incident? 

Posted by Carolyn Elefant on December 22, 2008 at 11:14 AM | Permalink | Comments (2)


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