A $50 Billion Fraud Adds to Market Concerns

Bernie Madoff owned a trading firm that made money year in and year out for investors. Yesterday he was arrested as it looks like his $50 billion empire was a Ponzi scheme that crashed like a house of cards. About 15 or 20 years ago we were asked by someone who had an opportunity to invest with Mr. Madoff whether he should do it. At the time, we had never heard of this firm but it seemed odd that this individual who had an insignificant amount of money was given this opportunity to invest in this firm as a special favor to a friend of his. After a quick review, it appeared to us that Bernie was not really investing clients' money but using investor's money as capital to build his trading firm. In our opinion, we said this operation was too risky. Of course, our investor friend couldn't resist the consistent high returns Bernie produced every year and invested anyway. For years we were proved wrong as Mr. Madoff yielded very consistent returns for his clients.

If it seems too good to be true, it usually is. We don't know the details of how Mr. Madoff's firm came crashing down but the global credit crisis and volatile stock market has claimed another victim. Investors most likely started to withdraw their capital and this leveraged entity could not manage the dwindling liquidity. Game over.