The 60 Minutes story touched on two names that have been lately in the news:  Bernard Lawrence Madoff and Harry M. Markopolos.  Let me first provide some background on these individuals and provide facts on what they allegedly have done.

I will cover a very well known term that describes what Mr. Madoff allegedly did.  Finally I would like to reflect on what this means to Naive Americans like you and me and what could be done.

Bernard Lawrence “Bernie” Madoff (born April 29, 1938 in New York City) is a Jewish American businessman and former chairman of the NASDAQ stock exchange charged with perpetrating what may be the largest investor fraud ever committed by a single person. He founded the Wall Street Company Bernard L. Madoff Investment Securities LLC in 1960 and served as its chairman until his arrest on December 11, 2008.  Madoff said that his Company had liabilities of approximately $50 billion US Dollars.  Mr. Madoff was running the world’s largest unregistered hedge fund.  Banks from all over the world have announced that they have potentially lost billions in dollars as a result.  Madoff’s Company was one of the top market maker businesses on Wall Street.  Madoff was also a prominent philanthropist who served on the boards of nonprofit institutions, many of which entrusted his Company with their endowments.

Harry M. Markopolos (born October 22, 1956 in Erie, Pennsylvania) is a former securities industry executive turned independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise.  Mr. Markopolos tipped off the SEC repeatedly starting in 1999 (the US economic melt down occurred in late 2008), when he argued that it was not legally possible for Madoff to deliver the returns he was claiming (steady 12% year after year).

A term associated with the alleged crime committed by Bernie Madoff is:  ”Ponzi scheme”.  A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from profit.  The term “Ponzi scheme” is used primarily in the US; in other parts of the world it is called a pyramid scheme.  The Ponzi scheme usually offers abnormally high (in this case about 12%) short-term returns in order to entice new investors.  The perpetuation of the high returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors in order to keep the scheme going.  The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903.  Ponzi did not invent the scheme, but his operation took in so much money that it was the first to become known throughout the United States.

Now that we are acquainted with the players and the term, how should Naive Americans react to the alleged actions from Mr. Madoff?

Harry Markopolos figured out that Mr. Madoff was doing something illegal in about five minutes.  Mr. Markopolos then spent about four hours working on mathematical models to prove that the hedge fund ran by Mr. Madoff was a scam.  We Naive Americans need to think about this.  About 65 Billion US Dollars lost and a single individual in a few hours able to prove what was going on.  Why did the SEC, Wall Street executives and the US government did nothing?

The SEC (that is our government) according to Harry Markopolos is staffed with lawyers that know nothing about financing.  They could probably easily spot a form or document improperly composed or filled (similar to what a computer program could do at a much reduced cost), but apparently the SEC staff is not trained or is incapable to detect financial crimes.  Perhaps the SEC needs to revise their staffing needs.

So what about Wall Street executives?  The answer from Harry Markopolos was simple.  When you [Wall Street executives] live in a glass house, you do not throw stones.  Our financial system public and private is corrupt to the core.  Most (one should never generalize) people in financial positions making from hundreds of thousands of to Millions of Dollars a year are not going to upset the status quo.  If there are no police officers to enforce speed limits, we will speed on all and any types of roads, if we could retrieve money from our accounts over our current balance we would, if we would have the opportunity to cheat on our spouses and not get caught, we would, etc, etc, etc.  Suddenly what Bernard Madoff allegedly did to many Naive Americans does not seem so bad.

According to records the list of people and organizations that Mr. Madoff allegedly ripped covers about 162 full pages.  At about 66 names per page it adds up to about 10,000 people and / or organizations.  The greed and lack of morals and ethics of, at the time, very well respected and influential person, affected 10,000 people and organizations.  If you take the entirety of unscrupulous Wall Street executives and higher management, you can easily come to the conclusion that what is going on with the US economy is the result of such individuals.

Naive Americans should contact politicians and demand that legislation be enacted to protect us from Mr. Madoff and people like him.  Sounds like a good idea, but Mr. Markopolos went a step further and did it many years ago in front of the SEC and nothing happened.

Mr. Madoff was so sure of his scam, connections and power that he publicly told investors on several occasions (you can see one of them on-line by visiting the 60 Minutes web site) that it was impossible for a financial institution to violate SEC rules and go undetected.  The public (he meant Naive Americans) does not understand such a simple fact.  The aftermath is that nothing of that was or is true.  Bernard Madoff stole 65 billion US dollars with little consequence.

So what should Naive Americans do about Wall Street?  I would say nothing directly.  What we can do is put extreme pressure on politicians to pass new legislation to put check and balances in our financial system to avoid what some greedy people did and will do over and over again.  Stiffer penalties should be made mandatory for people convicted of financial crimes.  The fathers of our nation did not trust each other.  They wrote into our constitution checks and balances to avoid some family or group of people to rule the United States of America like a monarchy.  At the time, that was their main concern.  With time the main concern has shifted to greed.  Naive Americans in general want to make money but do not wish to work for it.  This is not a problem specific to Wall Street.  This is a problem spread through our entire society.

Please press your local and federal representatives to pass legislation to induce CHANGE and most important make sure we CHANGE our personal ways.