Real estate fraud has become a common occurrence in our distressed economy. Last April, the FBI uncovered the largest mortgage fraud case ever prosecuted in Southern California. It involved an elaborate con which defrauded over 70 lenders for millions of dollars. Recently, we've seen the "foreclosure rescue" scams, "short sale facilitation" scams, and "loan modification" scams.
By far one of the coldest, most calculating deceptions, extending over 20 years and $67 billion was the Ponzi scheme orchestrated by Bernard Madoff. He showed no discrimination when selecting targets; his victims ranged from celebrities, wealthy financiers, to retirees and small investors. There was no sense of remorse on Madoff's part, as he stripped many of their life savings, leaving a trail of betrayal and shattered lives.
Many of these victims sat in court, anxiously awaiting the outcome of his much publicized trial. Everyone was shocked when the judge pronounced the maximum sentence of 150 years. The judge may have considered a lesser ruling, but no one came forward with letters of reference in support of Madoff's character or any good deeds he had done.
Now the victims have closure, and it appears the judge was setting an example to others by imposing such a harsh ruling. This case, however, is far from over. There are a number of unanswered questions that may spark investigations for years to come, as well as the moral questions raised by this crime.
Bernard's fraud was based on a Ponzi or pyramid scheme where investors are promised larger than average payouts. The money is never invested, but payouts are made from the the deposits from new members. Layers of investors provide profits for the lower level members. This worked nicely attracting all levels of investors until the bottom started falling out of the market and large investment firms were going bankrupt. Nervous investors began withdrawing their funds at alarming rates. Madoff, realizing his scheme would be uncovered, confessed to his family that the business was all a sham, and turned himself into the authorities.
Apparently, no one knew of his deceit, and Madoff accepted total responsibility for 20 years of fraudulent investing practices.
Question Number One. How could anyone pull off this type of complex crime for so long, with no one's help? Apparently, there was an accountant that has been charged, and an investment firm was also implicated, but other than those, Bernard Madoff, swears he was the lone gunman. In the next few months, watch for the name "Frank DiPascali" to appear in the news. he was Madoff's Chief Deputy whose actual job description in the company was somewhat of a mystery. Rumor has it, he is under investigation and is willing to "sing like a canary" with regard to the entire operation, in exchange for reduced sentencing.
Question Number Two: Just how innocent are some of these victims anyway? For years, Madoff's operation operated in a profit margin, securing double digit investment returns even during the recession when other companies were folding. Were the recipients of these positive returns concerned about where the money was coming from? Apparently, during questioning, DiPascali claimed that he modified investment statements for some clients to reflect losses to reduced their tax blow.
Question Number Three: So, now that it's all said and done, where is the money? Bernard's wife and kids are still living luxurious lifestyles, is it such as stretch to assume they are reaping the spoils?
Finally, Question Number Four: What's up with the SEC? The Securities and Exchange Commission investigated Madoff's business dealings on a few occasions, but always came up empty handed. Apparently he was a clever man, who covered his tracks well, but to completely outwit an SEC investigation – what's up with that? We also understand that Bernard's niece Shana Madoff, who was active on the Executive Committee of SIFMA's Compliance & Legal Division, married an SEC compliance official not long after the investigation was concluded. Might as well keep it all in the family.
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