On Saturday, an auction in New York featured items once owned by Bernard Madoff. The auction raised over $900,000, beating expectations. Once combined with proceeds from another auction later this week, it’s likely that this money will go to investors who were burned by Madoff’s Ponzi scheme.
Here are some of the items that received winning bids this weekend:
- Two pairs of Ruth Madoff’s diamond earrings: $140,000
- Bernie’s Mets jacket: $14,500
- Three duck decoys: $11,500
- Madoff branded boogie boards: $1,000
- A life preserver: $7,500
Serving 150 years in prison could likely be, from an asset value standpoint, one of the best things to happen to Madoff. Of course, he won’t be able to enjoy the benefits of his celebrity status. The benefits of this auction and Tuesday’s auction of larger assets such as Madoff’s boats will go to his victims. One of these victims is allegedly Zsa Zsa Gabor. She owes $120,000 to the IRS and claims her inability to pay is due to Bernard Madoff who took $7 million of her money through the Ponzi scheme.
Zsa Zsa will assemble the money with the help of her ninth husband and will do what many people do when they owe the IRS money: They will set up a payment plan on pay the debt over time.
Watch eBay and other auction houses; perhaps some of these items will continue to fetch higher prices due to their association with the most popular investment scammer in recent history.
Madoff’s Mets jacket sells for … $14,500, Les Christie, CNN Money, November 15, 2009
Zsa Zsa Gabor says she was victim of Bernie Madoff, Jessica Hudson, Examiner.com, November 15, 2009
Consumerism Commentary was included as an Editor’s Choice in the 229th edition of the Carnival of Personal Finance earlier this month with Seven Zen Principles to Guide Your Money and Your Life.
Last year, hundreds of hedge funds, special mutual funds generally open to wealthy investors which specialize in alternative investments like derivatives, shut down due to the economic crisis. Three of the ten largest hedge funds to close were funds that invested exclusively or almost exclusively in Bernard Madoff’s Ponzi scheme, leaving investors with nothing. While I mention that hedge funds are investment vehicles for the rich and famous, it’s worthwhile to note that you don’t have to be rich to be affected by this. 971 employees in Connecticut, for example, are feeling the same pain wealthy clients like Steven Spielberg and Jeffrey Katzenberg feel because their pension funds were pooled together and invested, much like one wealthy client, in Madoff’s funds.
The lack of diversification played a roll for individual losses. But how much is the fault of the investors? Presumably, the firemen in Fairfield are not given any choices for their pension fund. Also, hedge funds promise or at least imply diversification; this is how investors “hedge” their bets. An investor in a hedge fund would then assume that although the money is held in one and managed by one individual, that individual is sufficiently providing the diversification they promised.
In the case of the feeder funds, the hedge funds invested almost exclusively with Bernie Madoff. This extra middle layer passed the responsibility of diversification on to Madoff, who was never sufficiently clear about his “investments.” Of course, we now know that there was no “investment” and thus no diversification.
How well are your investments diversified? Is it enough for a investors who has weighed risk against potential reward to diversify among stock investments, like large-cap, small-cap, international, etc.? Do you rely on one mutual fund, like an index fund or a target retirement date fund to handle your diversification? Are you diversified into precious metals, and are you satisfied with using exchange traded funds or do you own gold or silver in physical form?
Typical investors can at least trust that a mutual fund in their portfolio does not lie on the prospectus. But when you invest in a hedge fund that is supposedly diversified, how diversified is it?
Three of the largest hedge funds to fail last year, Fairfield Sentry (managed by Fairfield Greenwich Group), Rye Investment Management (managed by Tremont Group Holdings), and Kingate Global Fund (managed by Kingate Management), were Madoff feeder funds, designed to provide access for “smaller” wealthy investors to the exclusive Bernard Madoff. Investors trusted their financial advisers who suggested the invest in these hedge funds. Thse advisers trusted the hedge fund managers who in turn trusted Bernard Madoff, one person, to provide sufficient diversification within his secret “investment” scheme. Or perhaps “trust” isn’t an issue when reputation and the promise of sustainable, high returns is involved.
A Look at the Hedge Funds That Closed, New York Times, March 19, 2009
Bernard Madoff is on his way to jail, having plead guilty to defrauding investors in a massive Ponzi scheme. While his victims thought they were investing with a legitimate manager, Madoff simply deposited clients’ money in a Chase Manhattan bank account and paid “returns” to earlier investors from the contributions of newer investors. The bulk of investors directly damaged by the failure of the scheme were banks, foundations, endowments, and trusts. Other investors include Kevin Bacon and Zsa Zsa Gabor.
Most investors didn’t invest with Bernie Madoff directly; usually, funds were invested through at least an additional layer, such as a wealth manager or two. The further someone is separated from their money, the harder it is to understand the investments. For example, Jeffrey Katzenberg and Steven Spielberg relied upon a financial adviser named Gerald Breslauer, who invested his own money with Madoff in addition to his investors’.
Even though investors and their asset managers who decided to invest with Madoff are due some blame for investing without requiring concrete details of their investment, I do feel bad about their situation. Madoff was obviously a professional; he was able to convince otherwise smart people that he was running a legitimate operation. I’m confident that many of the middle-men who had access to Madoff and were investing on behalf of wealthy clients didn’t care about the existence of underlying investments as long as the quarterly statements showed growth, even if this growth was merely a work of fiction.
I feel bad for investors who found themselves as victims of this Ponzi scheme. In their position, I can understand putting faith in highly recommended money managers which reportedly search for the best investments balancing risk and reward for wealthy clients. Someone should have made sure there was an understanding of the underlying investments, but in theory, that is why wealthy clients pay asset managers.
Even early investors who managed to withdraw more than they invested, the only investors other than Bernard Madoff who made money in this Ponzi scheme, might deserve some pity if they weren’t complicit. But I do not believe any investor who withdrew more than they contributed should deserve any more restitution. The most judicial way to resolve the issue should be for every investor to receive back only their contribution, and to do so, anyone who withdrew more than they invested should be ordered to return their false profits back to others who were not able to withdraw as much as they invested.
This will reset the clock, providing no advantage for anyone. I would imagine that most of that money is gone, spent by Madoff, so I’m not sure how viable this plan would be.
What are your thoughts on Bernard Madoff’s Ponzi scheme?
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It may be true that everyone who invested with Bernard Madoff without knowing the extent of his scheme was a victim, but some investors have profited from Madoff’s plan. For example, assume an investor gave $1 million to be invested in Madoff’s fun in its earlier years. A few years later, but still early in the life of the pyramid scheme, the investor’s statement from Madoff might have valued the “investment” at $3 million. The investor decided he needed to cash out, collected the gain of $2 million, and left $1 million in the fund to earn more money.
A this point, there were enough new investors to pay for the occasional withdrawals of earlier investors. The gain of $2 million didn’t come from appreciation of an asset, simply deposits from new investors. Keep in mind I’m using fictional numbers here to illustrate the point. Let’s say that in March 2008, Madoff’s statement to this investor valued his portion of the fund at $5 million. This is still before investors discovered the fund was a pyramid scheme. Now, this $5 million is “lost.” The investor is considered a “victim” of Bernard Madoff, and victims are now filing with the Securities Investor Protection Corp. (SIPC) to get back the money they “lost” (up to $500,000).
Even though he didn’t know it scheme, this investor benefited from the pyramid scheme. He gave Madoff $1,000,000 and received $2,000,000 in return, without an underlying appreciation on an asset. This “victim” is actually came out ahead.
Lawyers are encouraging Madoff’s investors to do some math before filing a claim with SIPC.
“I had a call yesterday from a guy who said, ‘I’ve taken out more money then I originally put in, but I still had $1 million left with Madoff. Should I file a $1 million claim?’” said Steven Caruso, a New York attorney specializing in securities and investment fraud…
Jonathan Levitt, a New Jersey attorney who represents several former Madoff clients, said more than half of the victims who called his office looking for help have turned out to be people whose long-term profits exceeded their principal investment.
The courts can rule that investors who profited in the earlier days of the fund can be required to pay back these “profits.” But most, if not all, of these investors did nothing wrong other than not questioning the underlying investments of the fund and ignoring the secrecy shrouding Madoff’s investing techniques. These investors included public pension funds.
What would you do if you were an early investor who withdrew more than you invested and you believed you still had money invested in Bernard Madoff’s fund? Would you file a claim with the SIPC to receive as much $500,000 if your latest statement indicated you had more? Would you stay under the radar and not advertise to the SIPC that you profited from this mess?
Madoff ‘victims’ do math, realize they profited, David B. Caruso, Newsweek, January 8, 2009
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