When the first news of Bernard Madoff’s arrest hit me, I experienced a cacophony of emotions. For sure, I was not gloating. Anyone who has been in the brokerage industry for a long time has been preyed upon by one or more con artists. They are always the most charming guy in the room and seem to pounce on you at the exact moment that your guard is down. My main sentiment was relief that I had dodged this bullet.
I met Uncle Bernie in Palm Beach over 10 years ago. We both scoured Palm Beach for business. Bernie’s “office” was the Palm Beach Country Club which he drove to in his late model Mercedes. My workplace was more down market, the lunch counter at Green’s drugstore or the Breaker’s Hotel’s swimming pool, where I arrived on my bike.
I wish that I could say that I am totally brilliant and knew instantly that Bernie Madoff was a fraud. Being young and arrogant at the time, I can only claim that he rubbed me the wrong way. When we got together to discuss business, he told me that I was lucky he was considering letting me and my clients invest with him. The alarms bells immediately went off in my head.
Pocketbooks, perfume, and cars are sold on the whiff of exclusivity - not stocks. There was not any legitimate reason that Bernie needed to limit his portfolio size because he was trading large capitalization stocks by computer. While I tried to steer the discussion to stocks, Bernie, the former chairman of NASDAQ, went mute. He only grudgingly disclosed that he used a split conversion strategy that employed options.
Like everyone else, I was suspicious of the consistency of returns of Madoff’s fund and the structure of the investment, but they were not the ultimate deal breaker for me. Since my office was previously in the same building as the Philadelphia Options Exchange, I called some of the biggest option market makers and employees of the exchange. I asked them about Bernie. All of them knew Bernie, but none of them were handling his trades. That seemed strange to me so I passed on the investment after 45 minutes of detective work.
It was with great regret that I did not invest with Bernie. I knew that I could have made bucket-loads of money with him. The product that he “designed” was perfect for his clients. Those groups do not care about superior returns. They just do not want to lose money. I also would have had an easy time in my job. There is nothing worse than having to call clients and tell them that you lost money.
That was not the end of Bernie in my life. In prospecting for new clients, I often ran across Madoff clients. Though I urged diversification, all of them insisted on increasing their stake with Madoff. Trying to lure clients from Madoff was difficult and frustrating. I could not promise the same things.
Finally, in 2001, both Barron's and MAR/Hedge wrote articles sounding the alarm and trashing Madoff’s track record and operation. Barron's and Mar/Hedge are not tabloids reporting on Jennifer Aniston’s pregnancy, but examples of responsible financial journalism at its best. It piqued my curiosity that 2 publications raised questions about Bernie at the same time. These articles should have raised the suspicions of everyone but the illiterate.
The title of the MAR/Hedge article did not pull any punches “Madoff tops the charts; Skeptics ask how". Barron's was even more hard hitting. “The recent MAR Hedge report, for example, cited more than a dozen hedge fund professionals, including current and former Madoff traders, who questioned why no one had been able to duplicate Madoff's returns using this strategy. Likewise, three option strategists at major investment banks told Barron's they couldn't understand how Madoff churns out such numbers. Adds a former Madoff investor: "Anybody who's a seasoned hedge- fund investor knows the split-strike conversion is not the whole story. To take it at face value is a bit naïve."
Now I had a reason to contact Madoff’s clients to alert them and possibly convert them into my own. I did not expect them to leave Madoff entirely; just diversify. Once again, I would like to say that I was prescient, but the truth is that I was just practicing good marketing. Each year, I send out hundreds of relevant articles to my clients and prospects.
Instead of being thanked for sending the articles, I was attacked. People complained to me, “How dare you go after Bernie".
Some of those that received my mailing asked me questions. Even though I had planted the seeds of suspicion, they decided to continue investing with Bernie. They told me that they did not want to give up a good thing. Apparently, they did not believe that the music would stop and they would be left without a chair.
Interestingly, more women asked me questions about Madoff than men. I guess a low golf score stifles questioning by men.
I have heard from many of the people that received my articles about Madoff over the years. Although it remains to be seen if they recover any money, many of these people are now more open to listening to my investment ideas.
Published by Globes [online], Israel business news - www.globes-online.com - on December 24, 2008
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