In January of 2009, I was attending a conference in the elegant old Boca Raton Resort & Club. During a quiet breakfast alone, a small elderly couple sat down at the next table. As his hearing was poor, their conversation was loud enough to hear. Although trying not to listen, I learned they had been victims of Bernie Madoff’s massive Ponzi scheme, which was discovered the previous month. By that point, they realized the financial ruin they faced, but they were trying to understand how it impacted their family members. No more expensive gifts. No more 529 contributions for grandkids. No more flying extended family to Florida for family occasions. They discussed how to explain everything to their family. How? They felt stupid and embarrassed in front of their family.
As an investment advisor, I had naturally focused on the numbers and the mechanics of Madoff’s Ponzi scheme. It was neither original nor unique. There is probably a small Ponzi scheme exposed every quarter of every year. Madoff’s Ponzi scheme was just big. Huge, in fact! I felt anger toward Madoff as a fellow-investment-advisor for being so stupid. He was stupid because ALL Ponzi schemes are destined to fail, due to the every-increasing cost of servicing the early investors.
The only good thing about the whole tragedy was that it illustrated the importance of always having a custodian to hold the assets, not the investment adviser. Sadly, the continuing flow of revelations about new Ponzi schemes proves that lesson was not learned by enough people.
However, what I learned that morning in Boca Raton was that the tragedy of Bernie Madoff was not the dollars stolen. It was the lives forever changed, of lives turned upside down, even kids and grandkids. I was moved to even write a novel about it, called Paybacks.
