Wednesday, July 08, 2009

The Madoff Affair on PBS

By Vahan Janjigian - Last night I took time to watch The Madoff Affair, a video production by Frontline that aired on PBS not too long ago. The entire investment industry has been following events related to the world's largest stock fraud ever since news of it first broke in December 2008.

The Frontline production does an excellent job of covering Bernie Madoff's career from the time he graduated from Hofstra University in 1960 to his conviction. His fraud began soon after he married his high school sweetheart and took an office in her father's accounting firm. Madoff first started a market-making operation, which he grew by paying for order flow.

However, he also started an investment advisory business without registering with the SEC. He did what he knew how to do very well: He paid for investments. In fact, he paid big bucks to so-called feeder funds to send him their clients' money. Amazingly, these feeders did virtually no due diligence on Madoff.

As all Ponzi schemes are prone to do, Madoff's fraud blew up when the long bull run in equities ended and stocks started falling fast. His clients started asking for their money back; not because they were unhappy with his performance, but because they needed their money to cover loses in their other investments. Of course, what they didn't realize at the time was that their money was gone and Madoff's outstanding performance was nothing but fiction.

One of the most tragic events of the Madoff fraud was the suicide of Thierry Magon de la Villehuchet. He was a money manager from France who had invested everything with Madoff. He killed himself shortly after Madoff's fraud became public. Frontline interviews Villehuchet's brother who calls the suicide honorable.

I urge you to watch the video if you would like a more complete understanding of how Madoff earned the trust of investors and got away with his fraud for so long.