Madoff: A Fraud in Plain View
In 1997, Naples hedge fund adviser James R. Hedges IV had a rare opportunity to meet Bernard Madoff.
He didn’t like what he saw or heard as he got an up-close view of the convicted swindler’s sleek offices in Manhattan’s Lipstick Building, so named because of its oval shape.
After sitting down with Madoff for two hours, the red flags flew, said Hedges during a public talk Thursday hosted by Bank of Florida Trust Co. for local residents.
At the time of the meeting, Hedges was putting together a fund of funds and was encouraged by his clients to look at including Madoff in the mix.
Hedges was struck by Madoff’s big investment returns, and the consistency of those returns. He was eager to hear about his strategy and played the “young naive card,” to try to get as much information as he could about the “magical” organization that he’d heard so much about.
Madoff explained his strategy three times. “The fact of the matter is it didn’t make sense,” Hedges said.
That was a big red flag. Then came more red flags.
Hedges asked if he could meet the traders. He said Madoff told him that was “not possible.”
Hedges asked if he could meet with Madoff’s chief financial officer to discuss “tax reporting issues,” hoping to get a foot in the door to pump another executive for more information. Again, he got the same answer: “No.
Hedges said he needed to see annual audits. Madoff’s answer was “nope,” he said.
Hedges wanted to know where all the money was kept. He didn’t get a good answer.
“I was shot down with red flags at every single turn,” said Hedges, the founder, president and chief investment officer of LJH Global Investments LLC, an alternative investment advisory firm headquartered in Naples.
He wasn’t impressed with the “star” money manager and he steered away from doing business with him.
He smelled something fishy. But he didn’t know enough to realize that Madoff was orchestrating a Ponzi scheme — and what may be one of the biggest frauds in history.
In a Ponzi scheme, early investors are paid off with money taken from new investors. Prosecutors have said Madoff’s scheme involved as much as $65 billion over 20 years.
The amount of assets Madoff had under management was always “veiled in secrecy,” Hedges said.
He explained that Madoff had two types of investors: investors who knew him directly and investors who invested through other money managers.
He said one lesson to learn from the scandal is to diversify investments. Some lost their life savings with Madoff.
“Nobody should have all their money invested anywhere — anywhere. Under no circumstances,” said Hedges, a chairman of LJH Financial Marketing Strategies in Florida and founding partner of LJH Linley Capital in New York.
In some ways, he said, some victims were also accomplices, helping to feed the myth of Madoff. He said too many people “bought into the fantasy,” without doing any research.
“There are thousands and thousands of people who chose not to invest in Madoff. I’m not alone in that,” said Hedges, who has been interviewed about the Madoff scandal by CNN, ABC’s 20/20, Fox Business News, Forbes and Fortune.
He recalls the day Madoff was arrested and the story broke about his scheme. He said his Blackberry turned into a “Mexican jumping bean.” He was struck by the coverage by press, which he said turned a blind eye to Madoff when he and others raised concerns.
He described the scandal as a “train wreck that happened in broad daylight.”
He said if an investment seems too good to be true, it probably is and that investors need to ask more questions and not just go with the crowd.
Hedges, one of the most often quoted experts on alternative investing in the world, discovered that one business reporter he often dealt with, who was soft on her coverage of Madoff, was an investor herself.
“It’s deep,” he said. “It’s convoluted. It’s entangled.”
He said there are many more people to blame for the scandal. He described the scheme as a “pathological system,” saying that the forest is being missed for the trees.
“This is a story that will keep on giving,” he said.
About 40 people attended the talk at the bank’s corporate headquarters off Immokalee Road near Collier’s Reserve. They had questions about who all is to blame for the scandal, the role of the U.S. Securities and Exchange Commission and the fate of victims.
Herman H. Tarnow, a Naples divorce attorney with his own firm, told Hedges it wasn’t fair for him to put so much blame on victims for their investments with Madoff.
“A crook is a crook,” he said. “And a good crook is a good crook. Obviously, Madoff was a very good crook.”
He said it’s hard for him to tell the difference between a good adviser and a bad one.
“You trust your adviser,” he said.
He was impressed by Hedges and called his presentation “excellent.”
“I thought it was thought-provoking,” Tarnow said. “It gave people an opportunity to ask questions. What more can you want?” Scott Kellett, president of Bank of Florida Trust Co., said the lessons that should be learned are buyer beware, don’t put your eggs all in one basket, and look for highly regulated investment companies.
“Most importantly, do your due diligence,” he said.