Robert Trigaux: Most evil part of Madoff's scheme were feeder funds

"Madoff was indeed a record holder. He had stolen more money, over a longer period of time, from more thousands of people all over the world than any thief in history."

From the 2009 book Too Good to Be True: The Rise and Fall of Bernie Madoff, by Erin Arvedlund

If there's one absolute I can offer after 30 years of financial reporting in New York, London, Washington and Florida, it is the consistency of masterful and often personally charming scumbags to take other people's money.

We've seen it time and again during the S&L collapse and the Ivan Boesky/Michael Milken flimflams on Wall Street in the 1980s, the BCCI scam of the '90s, the $11 billion accounting scam at WorldCom, and Enron's house of cards in the early part of this decade. More recent and more local, we covered it in Orlando boy-band promoter Lou Pearlman and his Ponzi scheme, international flight, capture in 2007 at a resort in Bali and current incarceration.

In sheer thievery, none come close, in size or severity of personal damage, to the $50 billion-plus Ponzi scheme perpetrated (and discovered last December) by Bernie Madoff. But most of you know all this.

What looms most sinister in this epic swindle is not that investors met Bernie Madoff, looked him in the eye and decided to give him their money to invest.

Rather it was that very few of Madoff's investors ever encountered or even spoke to the man. That investors were convinced by others — Madoff's well-compensated minions who fed investor money to Madoff through numerous "feeder funds" — strikes me as the most evil device, and the most difficult to protect against. (Pearlman's Ponzi scam in Orlando worked in a similar way, siphoning Tampa Bay investors through local feeder funds.)

In many ways, it was Madoff's exclusivity, like the public lined up behind velvet ropes hoping to get into some upscale club, that helped perpetuate his scheme for so long.

When Madoff confessed to lawmakers of his fraud late last year, he had 14,000-plus investor clients.

One of every six was from Florida.

Many folks scammed of their investments had never heard of Madoff even when the scheme collapsed. Their investing relationship was with separate money advisers with names like Michael Bienes, Frank Avellino, Jeff Tucker, Ezra Merkin, Cohmad Securities, Sonja Kohn, Walter Noel and Andres Piedrahita. They all were Madoff feeder funds.

Other people knew full well that they were "lucky" enough to win Madoff's blessing and become investors. And they seemed delighted to receive heady, steady returns — no matter the market reality — and ask no questions because they were in on a good thing.

Madoff's now in prison and will stay there. Where it gets dicey is looking at the responsibility of Madoff's front men and women who fueled the feeder funds and refilled Madoff with cash.

Many of these feeder fund salespeople got rich. Some offered investors a handsome return but one smaller than what Madoff promised them. As they passed investor money to Madoff, the salespeople kept the difference in what Madoff paid back.

Other feeder fund providers were paid astonishing fees — tens of millions of dollars in many cases — to keep pumping fresh dough through the system.

It is, by definition, how Ponzi schemes work. Madoff's elite aura allowed him to pay off earlier clients with the funds of newer arrivals. Madoff was very good at this — far superior, for example, than Pearlman's fumbling Ponzi gig in Orlando.

In 2001, a Barron's reporter named Erin Arvedlund was tipped by Wall Streeters skeptical that Madoff could produce steady investment returns every year. She interviewed Madoff, but Arvedlund says he "responded with double-talk." That story and subsequent investigations led to her new book on Madoff, Too Good to Be True.

But back in 2001, Madoff was still considered a Wall Street innovator in computer technology for trading securities. He advised Wall Street's federal regulator, the clueless Securities and Exchange Commission, which asked Madoff to tell its young and green staff how Wall Street really works. He was even chairman of the NASDAQ stock market.

And he was a scumbag, stealing billions and living an extraordinary lifestyle. He ripped off or ruined more than 2,000 Floridians, including more than 40 right here in the Tampa Bay area.

Most victims are clustered in Palm Beach, where Madoff and wife Ruth kept a home (now for sale for $8.7 million), one of several they owned. It's also where locals convinced a third of the entire Palm Beach Country Club membership, mostly Jewish, to invest close to $1 billion. Madoff worked his religious ties to draw enormous sums from fellow Jews and Jewish charities.

If this were a movie plot, it would be dismissed as too outlandish.

In her Madoff book, Arvedlund quotes Herb Blank of the independent ratings agency Rapid Ratings: The Madoff family, he said, was "like the Sopranos, with Bernie at the center and the fund-raisers his consiglieres." If the market had not crashed in the fall of 2008, Blank adds, Madoff may never have been revealed.

The more I look at the Madoff scandal, the more frightening it becomes. The SEC is laughably outclassed and years away, even under ideal circumstances, from catching up with an enormous, sophisticated and increasingly global market it's supposed to police.

Madoff was pathological, but he was no genius. Who else is out there with like ambitions?

Robert Trigaux can be reached at trigaux@sptimes.com.