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Bernie Madoff should not walk the plank alone – Part 1 Freddy Kabini

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23rd Dec 2008
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Was Mr Madoff really running a firm selling freshly baked ponzi pies as he claims or is this just a pipe dream? Freddy Kabini investigates

Warren Buffett, the American billionaire, once said: You learn who’s been swimming naked when the tide goes out! Since the credit crunch hit, we have seen the fulfilment of those famous words in many ways but the exposure of Bernard L Madoff two weeks ago has taken everyone by surprise. How many Bernie Madoffs are still out there waiting to be exposed or to expose themselves. Can we expect one in the UK anytime soon? Oh, we have had Nick Leeson already?

The key question is: Was Bernie L Madoff really running a firm selling freshly baked ponzi pies as he claims or is this just a pipe dream? Is there any evidence to support this?

According to the SEC press release, the reason Bernie Madoff has been charged is that he has by his own admission confessed to his two sons, Mark and Andrew that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that he was running "basically, a giant Ponzi scheme,". He said the “P” word and that is what lead to his arrest. If he had said nothing and continued with his life as normal, investors would still be clamouring to give him funds to invest and the regulators would be none the wiser.

Admittedly, if he is found guilty, the only fitting punishment is a long jail sentence; but should he be the only person to fry? I strongly believe that there are several individuals out there who need to be brought to justice and be punished for their actions or non-action. Negligence comes to mind. We need to start seeing a few people being arrested now. But who?

I am very sympathetic to those investors including charities, banks, hedge fund managers who have lost their investments or those of their clients but at the same time I don’t think we should overlook the greed surrounding their decision to invest with someone who has now been exposed (or exposed himself) as the world’s top class fraudster. They probably didn’t care as long as the promised guaranteed returns were coming in. They knew they were taking a big risk by expecting such high returns, unfortunately the risk has come to pass. If you live by the sword you die by the sword. If you go bungee jumping, expect your legs to be broken when you fall!

In my next blog, I will explain what a Ponzi scheme is and how to set one up.

Freddy Kabini

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David Winch
By David Winch
23rd Dec 2008 12:03

Negligence

Freddy

I don't see anyone being arrested for mere negligence in a financial matter.

Negligently driving your car with your eyes closed and running over a few people would be an offence.

Negligently picking investments with your eyes closed and advising others to buy them is not!

David

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By kabini
25th Dec 2008 01:01

Thank you for your intervention John
.
I have had to employ two secuity guards since Dave Paveley and Ayesha Bham posted their menacing comments.

I have let my security guards (a pit bull terrier and a rottweiler) go as I think my life is safe now! I gave them two bones in full settlement of their wages for services rendered but they didn't seem to mind that their pay was below the national minimum wage. It's very risky posting under your real name on this site.

Finally I wish to say thank you to David Winch, Tom Egerton and Patrick for their useful comments.

Merry Xmas!

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By Dave Paveley
23rd Dec 2008 14:05

And your question is?

I'm not sure that the 'Any Answers' section of this website is the appropriate place to start blogging your articles.

There is a blogs section here. Perhaps you would be kind enough to relocate.

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By User deleted
23rd Dec 2008 13:58

Not so Tom
As I underfstand it those investors who were paid out will not be laughing for very long because under US law they money that they were paid out was probably the proceeds of crime and the liquidators will be looking to recover it from them.

Not only that but those investors will probably have paid tax on the income and gains that they thought the investments produced and they may now have to see if they can get it back.

Being a liquidator would seem to be better source of untold wealth than investing with Madoff.

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By thomas34
23rd Dec 2008 13:26

Demise of the Accountancy Profession?
I wouldn't like to be the auditor that signed off Bernie's accounts over all those years. The Ponzi scheme is in some ways a red herring in this saga inasmuch as Bernie's downfall was due to insolvency - in accountancy terms, liabilities exceeding assets with no hope of a recovery.

As I understand it the Ponzi scheme uses recent investors' money to pay earlier investors' interest payments and return of capital. As a cash flow tool this is not uncommon. I suspect many insurance companies pay claims out of current premiums received. This is perfectly legal provided total assets exceed total liabilities.

Every time Bernie paid interest or dividends in excess of the actual rate of return on his investments he was creating a loss. Those investors that benefitted from these high returns and managed to recoup their capital are laughing all the way to the bank at the expense of the greedy bankers and hedge fund managers who were left holding the parcel at the end.

I have no sympathy with bankers or hedge fund managers whose bonuses were based upon what in hindsight were overstated profits. Now that large losses will accrue, I doubt that any of these bonuses will be repaid.

As far as the law relating to negligence is concerned, I agree with David that it is not a criminal offence in general unless it results in something that is, for example manslaughter due to gross negligence.

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By Ayesha Bham
23rd Dec 2008 23:08

any answers
your comments/"articles" are done by yourself through any answers because they do not appear in the blogs or features part of the website. can you not post via the blogs section???

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
24th Dec 2008 15:59

I hope this makes it better
Sorry for confounding members and introducing a tangent to Freddy's argument. We'll get our tech team on to the category-jumping glitch when they get back from Christmas.

In the mean time, I've ducked behind the curtain to reinstate the blog to its rightful place.

John Stokdyk
Technology editor
AccountingWEB.co.uk

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By kabini
23rd Dec 2008 14:39

Problem with the site
.
There is a problem with the site.

This article was originally published in the Blogs & Diaries section but due to a bug in this section of the site, it moved automatically to the Any Answers section when the“Edit the blog” button was pressed to edit it. The “Edit the blog” button is a new feature that was added to the Blogs & Diaries section last week (14/12/08). The site does not have the functionality to allow users to move articles between sections

Sift has been informed of this problem.

Please bear with us while the fault is being investigated. There is no need to post any further comments on this matter.

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