Recent investor pressure to liquidate investments has exposed fraud of massive proportions. On Thursday, federal investigators arrested trader and hedge fund manager Bernard L. Madoff, a former chairman of the Nasdaq Stock Market, for allegedly defrauding investors of $50 billion. According to the accompanying civil complaint filed by the SEC in federal district court, Madoff ran Bernard Madoff Investment Securities (BMIS), a broker dealer and investment firm, where he also maintained a lucrative investment adviser business. Madoff apparently kept that business on a separate floor of the firm under “lock and key” from BMIS employees. There, Madoff managed money for hight net-worth individuals, hedge funds, and other institutions, a business whose steady returns had long provoked skepticism from traders. Early this month, investors sought $7 billion in redemptions from the business. Unable to pay these returns, Madoff allegedly confessed to two senior employees (his sons, according to the Wall Street Journal’s sources) that his investment advisory business was a fraud. Madoff allegedly admitted: “it’s all just one big lie,” a “giant Ponzi scheme” that for years had paid returns to investors out of the principal received from other investors and had nothing left. Madoff apparently told those employees that the business had been insolvent for years and the fraud was worth billions.
This recalls 1987, the “Den of Thieves” period of insider trading, risky takeover stocks, and manipulations of the junk-bond market. As Time reported that year, maintaining integrity was a “difficult challenge in the deregulated, hurly-burly Wall Street of the 1980s, where traders have been tempted to use insider tips to maintain their competitive edge.” Now, as then, fraud has blossomed in the face of loose regulatory controls and oversight as well as a lack of transparency in a complex financial market. One might suppose that our current task is to figure out how to strike the balance between tougher regulation and a productive and unencumbered market. But there are no doubt other important questions, and hopefully our insightful corporate/law and economics gurus Dave, Frank, Lawrence, and Nate will help us explore them.