Skip to main content

Madoff, the "little guy", and the SEC

Bernard Madoff has been sentenced to 150 years in prison for defrauding investors of at least $13 billion.

We all pretty much know the details of his crime by now, given the months-long media coverage devoted to Madoff's decades-long ponzi scheme (which many refer to as the biggest ponzi scheme in history). We won't rehash all the details here. Instead, let's focus on how this giant fraud against investors was uncovered.

Madoff confessed to his crime back in December when adverse market conditions led to a wave of redemption requests from investors. In spite of one whistleblower's attempts to shed light on Madoff's fraudulent scheme (essentially handing the agency an investigative case file), and repeated examinations into Madoff's business by the SEC and other regulatory agencies, the fraud was never revealed. That is, until Madoff was forced to reveal it.

So what does the SEC concern itself with if it's not actively pursuing cases against the largest, most sophisticated investment firms? According to Joe Nocera at the New York Times, it's usually building a case against smaller investors and brokers, including those who have done nothing illegal or unethical:

"Three months ago, in a courtroom in Bridgeport, Conn., a 72-year-old former
Morgan Stanley broker named Richard A. Kwak was cleared of any involvement in a small-time stock manipulation scheme.

The Boston office of the Securities and Exchange Commission began the investigation around 2001. Three years later, formal charges were brought against Mr. Kwak and seven others. By the time the case went to trial, in 2007, only three defendants were left; the others had settled with the S.E.C.


In that 2007 trial, Mr. Kwak and another defendant, Stephen J. Wilson, were cleared of one charge, with a hung jury on the remaining charges. (The third defendant, who foolishly acted as his own lawyer, was found liable and fined $10,000.)

The S.E.C. retried Mr. Wilson in 2008. He was cleared. Finally, in March 2009, the S.E.C. retried Mr. Kwak, with the same result. The jury took less than four hours to exonerate him.

Mr. Kwak’s life is now in tatters. He is around $1 million in debt and suffers from emotional problems. He has struggled to stay out of bankruptcy. Although he is still a broker — he certainly can’t afford to retire — he long ago lost his job with Morgan Stanley, where he had spent several decades without so much as a hint of impropriety. Needless to say, his business is a small fraction of what it once was.

“It pretty well wiped me out,” he said a few days ago. He is extremely bitter. The same is true of Mr. Wilson, who is also deeply in debt and struggling to reclaim his life."

An isolated incident, you say? Have a look at this post from Tim Knight's blog (Hat tip: Howard Lindzon) along with this story from one similarly affected investor in the comments section (Hat tip: Bear Mountain Bull).

I suppose this is what they mean when they say that Wall Street's regulators are "looking out for the little guy"?

Related articles and posts:

1. Chasing small fry, SEC let Madoff get away - NY Times.

2. The Outrageous SEC - Slope of Hope.

3. The SEC makes Wall Street more fraudulent - Mises.org.

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$BCORpic.twitter.com/xjsMk433H7
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at Financetrendsletter.com

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  



Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.

Moneyball: How the Red Sox Win Championships

Welcome, readers. To get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter.

The Boston Red Sox won their fourth World Series titleof the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,John W. Henry(with his partners)bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.

This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job off…