Madoff Puzzle: How His Reputation Survived

Chidem Kurdas

Hedge funds lose their clients and tend to shut down when they are investigated by government agencies or face civil lawsuits. Raj Rajaratnam’s Galleon Group and Arthur Samberg’s Pequot Capital, accused of abusing inside information, come to mind. Both long-time managers closed shop.

For public companies, reputation damage is cumulative and significant, according to research by professor Ingo Walter from the NYU Stern School of Business and others. They found that companies facing reputational issues lost on average 7% of their market cap.

How did Bernard Madoff manage to shake off several published news stories suggesting he might be engaged in some trickery? He seems to have been almost unique in emerging unscathed from what should have been highly damaging criticism.

Consider the timeline. Harry Markopolos, asked to replicate Madoff’s supposed trading strategy, realized that Madoff was faking. In 2000 he submitted the  first of a series of reports to the Securities and Exchange Commission, explaining why Madoff could not be making those returns. In 2001, Michael Ocrant wrote a detailed expose for MAR/Hedge. Ocrant is a co-author of Markopolos’ revealing new book, No One Would Listen, that I’ve been reading.

There were two other articles in 2001 and 2002, one in Barron’s about Madoff’s extreme secrecy and other in The Toronto Globe and Mail about his employment of family members in key positions that are supposed to provide independent checks on the business.

The SEC repeatedly examined Madoff. Rumors went around the industry. But the end did not come until December 2008, when he turned himself in because he could no longer get new money to pay redeeming clients. How did he survive so long after the attacks on his reputation?

One explanation fits the facts and is plausible. The SEC found nothing but minor infractions at the Madoff firm and this almost-clean bill of health from the regulator  reassured many investors and advisers.

But there is a second explanation that goes with the Madoff estate trustee’s claw-back of the phantom profits from the investors that redeemed. Namely, some investors and advisers did not really believe Madoff was making the returns he claimed. They simply wanted a piece of the racket and figured they’d withdraw their money – with the supposed profits – in good time. In other words, they did not care about Madoff’s reputation, only about the money.

This second theory is less plausible for the simple reason that in past schemes, redeemers who took out bogus profits were forced to return the money afterwards. If you knew anything about the history of such scandals, you would know that you won’t be able to keep the gain. If someone realized the returns are phony, no point in their staying around to get more of the faux profit.

So my impression is that regulators in effect saved Madoff’s reputation.


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