Fructivore Investments

Well, it’s official. Bernie Madoff is to be locked up for 150 years. Although it’s not exactly investing related, the largest fraud in history cannot pass without comment.

Madoff’s attorney must have been dreaming when he offered 12 years; Madoff’s fraud lasted longer than that, and it makes no sense to me that he should be punished for less time than he was a criminal. It should be recalled that at any time during his fraud, Madoff could have said “Enough” and turned himself in, but in fact it seems that he was raising money to shore up his scheme right up until the end. And, even if he can’t live out his sentence he can’t pay off all of his investors either and that didn’t stop them from seizing his assets.

So, what else is there to say, apart from some old advice involving eggs and baskets? (It’s hard for a crooked hedge fund manager to steal all your life savings if you don’t give them all to him.) The sad fact is that investors are generally powerless against fraud. Investing is hard enough without worrying about data quality, and so any remedy for fraud has to come from outside the investment world. That is why we have auditors and that is why Enron took Arthur Andersen with it. Madoff had an auditor (who has also been charged with securities fraud), but apparently his auditor avoided the peer review process among accountants by publicly denying to the AICPA that his firm does any audits. Again, this might have been a red flag, but a typical investor has enough demands on his time, and fraud on a scale big enough to be worth guarding against is so rare, that it would be more productive to invest in a straightforward manner and leave the fraud prevention to the existing system of accountants and regulators. Trouble is, sometimes that system has a Madoff-sized hole in it.

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law by grocca