If it looks too good to be true, it probably is
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February 9, 2023
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March 17, 2023Film recommendations aren’t the core business of our Centre. However, we’re making an exception for the 2023 Netflix four-part documentary “Madoff: The Monster of Wall Street”.
This excellent four-part documentary describes how white collar criminal Bernie Madoff (1938-2021), managed to steal no less than $US 65 billion from his victims during his long and respected (almost God-like) career on Wall Street, the home of the American stock market.
Madoff operated what’s often called a Ponzi scheme. This is a relatively simple form of financial fraud made infamous by Italian businessman Charles Ponzi in the 1920s. Ponzi schemes rely on the greed and naivety of their customers who are sucked in by promises of high and consistent returns with little or no risk. They also rely on constant inflows of funds that are used to pay promised returns to earlier investors. Throughout that time, the fraudsters typically divert substantial amounts for their personal use, leaving minimal funds for investors.
When it becomes hard to attract new investors and/or existing investors seek to withdraw their funds, the scheme collapses. That’s precisely what happened to Madoff when the Global Financial Crisis (GFC) hit in 2008. If it wasn’t for the cashflow crisis caused by the GFC, Madoff’s Ponzi scheme might still be operating.
One of the most disturbing features of Madoff’s fraud was the lack of early action by the US Securities and Exchange Commission (SEC). It seems the SEC couldn’t believe that someone of Madoff’s impeccable reputation, power and influence in the American financial system, would engage in fraud. The film goes into this issue in some depth, reminding us that even the most qualified and experienced regulators and investors can be susceptible to smooth sales talk and a big reputation.
Here are the major so-called “red flags” that characterise many Ponzi schemes and other fraudulent practices:
- Consistently high returns (almost impossible to achieve, especially with investments promising minimal risk);
- Unlicensed and unknown promoters (who are friendly and plausible, yet often pushy, aggressive and sometimes based overseas);
- Private or Unregistered investments, especially those using vague and impressive language, such as “offshore”, “high yield” and “hedge futures” (usually meaning that investors have minimal protection and receive limited or false information about the people behind the so-called “investments”);
- Strategies which are complex, “strictly confidential” and difficult to understand (raising the question of whether you should ever invest in something you don’t understand);
and - Erroneous account statements and poor administration, especially where the processing of withdrawals is slow and accompanied by offers of even better returns if you don’t withdraw.
Regulators around the world, including the Australian Competition and Consumer Commission, spend much time and money publicising these fraudsters and their techniques, for example through the Australian Government’s Scamwatch website. Nevertheless, tens of thousands of people continue to fall for their false promises and increasingly sophisticated practices.
Sadly, fraud is a multi-billion dollar business. That’s why we’re recommending “Madoff: The Monster of Wall Street” for our readers to gain an entertaining and detailed insight into the secretive world of white collar crime. As a taste of what to expect, we offer these wise words from an investigator who is quoted in the film:
“People want to believe in good returns without downside risk. Everybody wants that in their portfolio, but they’re chasing the Holy Grail. The Holy Grail doesn’t exist in real life, nor does it exist in finance”.
That says it all.
