American Consequences - May 2021

structure,” Erin told me. “He could have had that as his legacy. But at the same time, he was building a huge fraud.” Thanks to his ahead-of-its-time work on Wall Street, Madoff was on Securities Exchange Commission (SEC, the market regulator) regulatory committees. Madoff “kept his enemies close,” Erin said. In a public forum in 2007, Madoff said (there’s an actual video of this): “In today’s regulatory environment, it’s virtually impossible to violate the rules. It’s impossible for a violation to go undetected, certainly not

The level of non-transparency – that is, stonewalling investors, fund distributors, regulators, journalists, and anyone else who asked questions – in Madoff’s scheme was one of its biggest red flags. The level of non- transparency – that is, stonewalling investors, fund distributors, regulators, journalists, and

anyone else who asked questions – in Madoff’s scheme was one of its biggest red flags.

for a considerable period of time.” Only he knew how wrong he was.

MOSCOWAND MADOFF Erin developed a unique skill set for plumbing the murky depths of Bernie Madoff by covering markets and companies in Russia in the 1990s... In Russia back then... lots of companies kept multiple sets of books, depending on who they were showing them to. They’d understate income for tax purposes – and overstate them for borrowing purposes. At that time, in the former Soviet Union, there was little data available and almost no transparency, from the government or from companies. (Needless to say, this was also a big challenge for me as a stock analyst.) So Erin had a lot of practice in finding information a different way. “Instead of getting through the front door, a lot of times I had to go in the side door,” she told me.

ARE PONZI SCHEMES STILL HAPPENING? To butcher the opening line of Leo Tolstoy’s Anna Karenina : Good investments are all alike, but every fraudulent investment commits thievery in its own way. As a Madoff scholar, Erin knows something about pyramid schemes and what they look like. “These kinds of Ponzi schemes will continue to happen,” she told me. “They won’t be on the same scale, though. And no two frauds are ever the same, either.” One of the ways Madoff was able to get away with his fraud was that at the time, funds could hold custody of shares themselves... There was no requirement for a third party to hold actual ownership of shares. Partly in response to the Madoff fraud, that was changed.

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