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Letter from America | 7
The Financial
Scandals in
Perspective
by Charles Lewis Sizemore, CFA
which money taken in from new investors is
Chief Investment Officer,
used to pay existing investors. Of course,
none of the participants realise this at the
Sizemore Capital Management LLC
time. They believe their funds are being
legitimately allocated, generally in
www.sizemorecapital.com
investments with high returns not available
elsewhere. The scheme can only be sustained
by attracting ever-larger crowds of new
investors. If not detected sooner the project
will collapse under its own weight when,
inevitably, the new money fails to meet
W
ould you consider Law’s Mississippi Land Scheme. Banque existing commitments. (The name “Ponzi”
putting your investable Generale Privee managed to bankrupt France comes from the American purveyor of such a
assets in “a company for and her nobility and sowed the seeds of the scheme in the early 1900s, Charles Ponzi. Mr.
carrying on an French Revolution, which would break out a Ponzi’s was not the first recorded case of the
undertaking of great generation later. scheme that bears his name, but his was the
advantage, but no one is But in many ways, our small-time scandal first of its size and notoriety).
to know what it is”? A prudent investor might above is the most instructive of how normally Mr. Madoff did more than ruin his victims
require a little more due diligence and prudent and rational people can be caught up financially. Perhaps even more significantly he
demand a little more information about this in the euphoria of a bubble and allow shook investor confidence in the entire
company of “great advantage” before buying themselves to be duped by unscrupulous financial services industry and in the
shares. But during the British South Sea fraudsters. regulators charged with safeguarding it. The
investment mania of the 1720s, £2000 in U.S. SEC and FINRA somehow failed to
investment capital was raised by the founder Madoff’s mendacity detect his wrongdoing for more than a
of said company – which would be between Perhaps no one better fits the description of decade, as did many of the world’s biggest
£270,000 and £3 million at today’s prices, unscrupulous fraudster than the infamous banks and financial advisors, including UBS,
depending on how you account for inflation, Bernard Madoff, the runner of the largest Bank of America, Banco Santander and Citi.
according to research site Ponzi scheme in history – estimated at $65 Investors with accounts at Madoff’s
measuringworth.com. Not too surprisingly, billion – who was recently sentenced to 150 brokerage firm will be partially compensated
the founder of this venture quietly years in U.S. federal prison. Barring a with Securities Investor Protection Corp
disappeared to the Continent and was never presidential pardon, which is highly unlikely (SIPC) insurance, which for the purposes of
heard from again. “Of great advantage” given the lives and reputations Mr. Madoff this article can be thought of as US
indeed, at least for the promoter. has destroyed, it is almost certain that Mr. government FDIC insurance for brokerage
This was certainly not the first financial Madoff will die as a ward of the state. We houses. But SIPC only covers $500,000 in
scandal in history, nor was it even particularly doubt that there will be many present at his securities per investor, and it does not cover
significant in comparison to larger funeral. persons or institutions who invested via one
contemporaneous scandals in both Britain For those unfamiliar with the term, a Ponzi of the numerous feeder funds and sub-feeder
and France. For example, there was John scheme is a fraudulent financial operation in funds. Hedge fund investors and their
www.investmentinternational.com July/August 2009 Investment International
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