Ah, hedge funds, so sexy with their “rich people only” requirements and secretive investments. I have been catching up on a bunch of news articles about Bernard Madoff, who was recently arrested after admitting that his hedge fund was “all just one big lie” and a “giant Ponzi scheme”, estimated that his investors will lose about $50 billion. If true, this represents the one of the largest cases of investor fraud and definitely largest Ponzi schemes in history. The SEC said it appeared that virtually all of the assets of his hedge fund business were missing. Oops.
According to this NY Times article, lucky investors included J. Ezra Merkin, the chairman of GMAC; Fred Wilpon, the principal owner of the New York Mets; and Norman Braman, who owned the Philadelphia Eagles. Unfortunately, there was also substantial money from several charities and endowments. Finally, throw in a few other hedge funds which did zero original thinking and instead simply invested their money in Madoff’s hedge fund as well.
Mr. Merkin, a prominent philanthropist and the founder of several hedge funds, including one called Ascot Partners, jolted his clients on Thursday with a letter announcing that “substantially all” of that fund’s $1.8 billion in assets were invested with Mr. Madoff.
“These investors were never aware that all of their money was invested with Madoff,” Mr. Susman said. “They are obviously shocked.”
Surprise! I also love the marketing techniques:
Mr. Madoff emphasized secrecy, lending his investment accounts a mysterious allure and sense of exclusivity. The initial marketing often was in the hands of what one source described as “a macher” (the Yiddish term for a big shot). At the country club or another exclusive rendezvous, the macher would brag, “I’ve got my money invested with Madoff and he’s doing really well.” When his listener expressed interest, the macher would reply, “You can’t get in unless you’re invited…but I can probably get you in.” [WSJ]
Sometimes it seems that human nature just dooms us to want to believe in impossibly easy money. If you aren’t familiar, check out this previous post on 12DailyPro (another Ponzi which suckered in a much less wealthy crowd) and a book about life of the original 1920s Charles Ponzi.
By Jonathan Ping | Investing | 12/13/08, 6:57am