Madoff Destroys Himself and Others

Bernard Madoff enjoyed one of the most trusted names on Wall Street. "Enjoyed" is definitely past tense. Madoff has sat on a committee of academics, regulators and executives formed in 2000 by former Securities and Exchange Commission Chairman Arthur Levitt to assist the agency on new stock-market rules in response to the growth of electronic trading. Madoff has led the trading committee at the Securities Industry Association, Wall Street’s biggest trade group, and has served as chairman of the Nasdaq Stock Market. Madoff was the quintessential insider, which is how he was able to go so deep into a far reaching "Ponzi scheme" (to use his own words). Everyone who was someone on both sides of Wall Street -- regulators and investors alike -- knew the 70 year old Madoff as an authority with enormous personal credibility.

Now, Bloomberg reports that Madoff is "alleged to be (a central part of) a Ponzi scheme that cost investors $50 billion, after he subjected it to oversight two years ago, people familiar with the case said." Did the regulators dismiss the normal level of due diligence that they would require for such investments because of Madoff's reputation? That, I'm sure is one of many questions that will be asked.

Bloomberg also reports that Madoff is "operating what he told his sons was a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions. His ability to avoid detection may fuel debate about the SEC’s effectiveness and the adequacy of its resources for policing money managers. "

Ironically, Madoff was accused of illegal activities in the early 1990s but was found to had been operating legally in the raising of over $400 million in an unregistered securities deal. I wonder if they will want to look at that deal again, considering how far reaching this current scam is and its financial impact. $50 billion is no small amount (yes, you keep seeing BILLION).

Madoff got clean with his sons first and they, in turn, turned him in to authorities. They are completely distancing themselves from him and are declaring their innocence.

Madoff has invested huge amounts of money into the politicians who appoint the regulators. Furthermore, he has been in a regulatory role over the years. On the surface, he appeared to be the kind of person that would require anything but extensive scrutiny. Maybe, in order to protect those who would easily trust such individuals, such financial managers should be under additional scrutiny. I'm sure that will be part of future debates as well. In the mean time...buyer beware!

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Hedge Fund Changes

The US Securities and Exchange Commission is considering raising the financial requirements to participate in certain high risk investments (such as hedge funds). Currently to be an accredited investor, one must have $1 million in net worth to participate in such investments. If many in the SEC have their way, this amount will rise to $2.5 million.

Such actions happen in an effort to protect individuals from losing a disproportional amount of money. Such funds are largely unregulated and uninsured. So there is a belief that it makes sense to limit access to the fund, if they are not going to put limits on the fund itself.

Unfortunately, often the best funds available are those that require being an accredited investor. Robert Kiyosaki has pointed out that the vast majority of investments available to smaller investors (he calls them "retail investments") may be safer, but they have the smallest returns. Thus, the changes being proposed to raise the requirements for hedge funds are only making it more difficult for people to reach serious wealth.

People are smart, they will get part ownership of some lucrative investments for sweat equity when they don't qualify as investors, but it seems to me there needs to be a better way for individuals to have access to the best opportunities.

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