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.
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?
Here is how a Ponzi scheme works. The individual running the scheme promises abnormally high returns over a short period of time to the initial investors. These investors provide the start-up capital, and the schemer will do whatever he likes with that money, either invest it, spend it, or let it sit in a bank. Subsequent investors brought into the scheme will provide money, some of which will go to the initial investors in the form of “returns.” Subsequent investors directly fund the returns of the previous investors.
This is surprisingly sustainable for a long period of time, despite an increasing amount of required new investment. If investors are persuaded to reinvest their “returns,” very little money is handed to the investors.
Bernard Madoff, in the news lately, allegedly operated a Ponzi scheme like this. Despite years of warnings provided to the SEC, he wasn’t arrested until recently. Many smart investors fell for the scheme and lost millions of dollars. More than half of the $14 billion (as of November 1, 2008) managed by one investment advisory, the Fairfield Greenwich Group, was invested in Madoff’s securities, and they stand to lose the entire investment.
According to FGG, the company performs due diligence on their investments, including evaluation of portfolio, investment performance, and financial risks. That’s the first category of due diligence listed on their website. Madoff’s investments did not include details on the holdings, so that should have been a sign to look elsewhere.
FGG might not be a victim, however. The New York Times describes how Fairfield executives benefited greatly from the relationship with Madoff and were not shy about their newly found wealth.
As an individual investor, the chances of getting caught up in a Ponzi scheme are low, particularly if you stick with well-known mutual funds, stocks, and bonds. If you are interested in private investment opportunities, know exactly what you are buying before you hand over any money.
Email this article
Print this article
