Half of Madoff "Victims" Didn't Actually Lose Money
Most investors who put money into Bernard Madoff's funds over the decades he was in business came up losers when the house of cards collapsed. Some, however, lost more than others. According to a new court filing, about half of the investors who had accounts in Madoff's Ponzi scheme at the time it was shut down didn't actually lose any of the original principal they put into the funds.
Turns out that, at the time the government shut Bernie down, half his investors had already taken their money out of his funds, and either broke even or made a profit. Of course, that doesn't mean the investors got a good deal. According to the New York Daily News:
When Madoff was arrested on Dec. 11, 2008, nearly 50% of his active customers did not lose money because they withdrew more from their Madoff accounts than they contributed, the feds found in their review of Madoff documents. ... But this analysis does not capture the money Madoff investors thought they had made, and never did - money they could have made if they had invested their hard-earned money in a legitimate firm.
Still, those investors are bound to be happier than some of Madoff's other victims, who really did lose it all. Some of them, though, may want to stash that cash in a new hiding spot, now that it's been revealed that a laptop with names, social security numbers, and some account information for over 2,000 Madoff clients went missing in July. See, every silver lining really does have a cloud!
Prosecutors say half of Bernie Madoff's investors lost nothing in ... [NY Daily News]
Madoff investors' security may have been breached [Newsday]
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Comments:
They might not have "lost money", but given inflation they sure as hell probably lost a lot of value.
If half didn't lose money, does that mean a scam is a better investment than the stock market?
@ilves: What if you had that couple grand and a little more, which is what they found had happened?
...because they withdrew more from their Madoff accounts than they contributed...
This is an inevitable consequence of how these schemes work, right? The people higher up the chain make money as the people down below lose it.
@Trencher93: Not really. In fact it's not even as good an investment as leaving your money in the bank and forgetting it exists. It's an even tie with putting it in a jar and burying it in the yard.
That doesn't make it any righter.
@ilves: You can't really lose money you never had in the first place. Too many people think of their investments as real money. If you break even then you never lost anything, you only have the illusion of losing.
If someone told me that burying $2000 in a hole in my backyard would one day yield $5000 when I eventually dug it up, but when I did dig the money up it was still $2000, I still have exactly what I gave. I only lost the illusion that it was worth more.
I thought that some of the people were to be on the hook for the money which they made over their initial investments i.e.: "they withdrew more from their Madoff accounts than they contributed"
Anyone know about that?
Just an idea here, and I'm not actually advocating it, but since it wasn't a real investment, shouldn't the people who made money have to give it to the people who lost it?
Maybe "have to" is too strong. Should they feel morally obligated? I mean, your brother-in-law owes you 5K, so he robs a bank and pays you off. When he gets caught, don't you have to give back the 5K?
I think clawbacks can only go back a specific number of years - I'm not sure how many, but if you invested in the '60s you probably are still going to come out ahead.
Ah, the peril of relying on prosecution figures (and a sensation-seeking media). Is the fraud the total amount that investors gave Madoff? These deposits plus whatever interest would have accrued had they been invested in T-Bills? In the S&P 500? The total amount that his fictitious monthly statements asserted he invested?
(The $6 Billion figure is the latter, btw).
The same thing happens with drug busts. Some cartel lord's enterprise is often valued at what all their output would be, if priced at the street level, which neglects the many, many levels of distribution and product dilutions that the drug lord can never see, to say nothing of the markup that goes into different people's pockets, none of whom are captured by those at the top.
Not to absolve cartel leaders or Madoff, of course. But it'd be nice if there were more sober numbers used when reporting or prosecuting these things.
@mrsultana: There may be a (somewhat thin) case for people being guilty of "receiving stolen goods" - as in the money that was given to them belonged to somebody else...
Same case as if when you buy a car it ends up being stolen- you don't get to keep it.
This is why there's been a lot of back-and-forth about how big the Ponzi scheme was. Was it the amount of principal that was stolen? Was it the amount that was promised that never existed? (In that case, they could have doubled the size of the Ponzi scheme just by writing bigger numbers on every statement!) Was it the difference between (the amount withdrawn + the amount clawed back from Madoff assets) and (the amount deposited + the amount the investor would have made by investing in T bills)?
@ilves: True, but the figures cited by prosecutors (and a compliant media) reflect the amounts Madoff's statements told clients they earned.
It'd be fair to count deposits, or deposits plus T-Bill (or more generously S&P 500 gains), I agree. Minus, as GetEmSteve says, withdrawals.
> all of this with the proviso that most investors thought something screwy was going on, but were happy when they thought laws were being broken/bent when it was done by Madoff on their behalf.
@Belabras ate my dingo!: Yet as the article says, half did withdraw at least their original principle, so it's close to what they'd have been if they were early Pyramid Scheme investors.
(Nonetheless: still evil! EVIL!!)
@mrsultana: There are provisions for a "clawback" -- taking from those who withdrew money to equalize across all investors -- under consideration.
The correct benchmark is whether you lost money compared to an S&P 500 index fund.
@Trai_Dep: Think of the situation like it was a corporation -- Tyco, for example. The enterprise presents figures establishing net worth on which investors relied. If those figures ultimately turn out to be erroneous or contribed, lawyers don't prosecute with a starting point of a market index -- they calculate stated net income against true net income. I don't see how this is sensationalism. Many wealthly individuals contributed millions to charity under the assumption that their audited investment returns and calculated worth were accurate. They have a right to be angry
@wagenejm: inflation will eat that value quickly.
The real value of money factors in inflation. Purchasing power is the real value of money.
For instance, a quarter in the 1950's could buy a gallon of gas. Today, a quarter gets you a half a cup of gas.
Congratulations, Consumerist, you've learned how a Ponzi scheme operates.
Not really-- lots of perfectly honest investment advisors under-perform the S&P 500 Index.
"Still, those investors are bound to be happier than some of Madoff's other victims..."
Want to bet? These are the very same people who will be complaining about how the government should give them the full value of what they thought the portfolio was worth and fighting against any action seeking return of their ill-gotten profits.
They are blinded by greed, or they would have realized long ago that the deal they had was too go to be true (or legal).
@mrsultana: In TX another "small" Madoff guy killed himself when it was discovered. His life insurance proceeds and estate went to the investors.
Now his wife is suing the investors that got made money for the proceeds back. Personally I think that it should be the government requesting it, not someone who benefitted from the scheme in some fashion - even if she "knew nothing" (wink wink)
@dilbert69: At this point, if you had a pile of cash and set fire to some of it, you still wouldn't lose money compared to the S&P 500.
@econobiker: easy to say from the sidelines. he was offering 10%, which was only 2% higher than the market average, and actually lower than you could get on a CD 20 years ago. that's what made this ponzi scheme unique. usually its someone offering 40% returns, but Madoff's pitch was consistancy. there were plenty of years that he underperformed the stock market
I've been asking this question ever since the story broke. Everyone is quick to demonize Bernie, and rightly so, but what about all the investors who made money and then withdrew it? Do they just get to keep it?
Surely SOME people besides Mr. and Mrs. Madoff vastly benefitted from this whole scheme, even if they didn't realize how/why. Do they get off scott free?
@jonmason1977: The problem is not that simple to resolve. I remember listening to a story about a project that formed a partnership to build something (for the sake of the discussion lets say it was a park) the partnership invested in the fund used the profits and the principal to build the park. Project is complete the partnership is dissolved. Hundreds of thousands of dollars were 'profits' from their investment in the fund... who do you go back to now to get that money back?
@treimel:
Clawback is likely to depend on who you are, and how much you could reasonably have expected to know. If you were one of the feeders, knew Madoff well, and were financially sophisticated, there's a much better chance that the trustee is going to come after you, since the argument can be made that you _should_ have known something was up. If you're a little old lady? Much less chance.
Yea, that's how a Ponzi scheme works.
How can "most" be losers if "half" got their money back, therefore losing nothing (some earning more than they put in!). I mean, most should be more than half - and the way this is written, only half lost money...
@ilves: Actually there was a point this year when if you invested (in lump sum minimal cost index funds) 15 years ago you would have come out dead even.
Even now I am still not back to my contribution level, and that is just the plain old stock market. So, basically half of Madoff investors did better than 401ks.
Yes, half of the investors in a Ponzi scheme will have a return of investment. It is a PONZI scheme. Duh. Those at the top are always going to get paid off by those at the bottom. Most importantly, how can you recruit new victims if the early investors are not bragging about their returns on investment?
Not so. He could be just paying a few people and the vast majority are paying in. 50/50 has nothing to do with a Ponzi scheme.
This is a good reminder that the whole thing about this being a "$50 billion" Ponzi scheme just might be fictitious. Of course, $50 billion sounds good to the media, so they ran with it.
The quiz question to take from story is that if you
1) give me $5 to put in an account, and I
2) increase your balance by 8% for 20 years, so that I
3) tell you you now have $23.30 on account, and
4) in the end reveal that your $5 was sitting in my pocket the whole time,
how big of a scam did I pull? A $23 scam? A $5 one?
Does this mean his Madoff will not spend 150 years in prison. Will it be 75 years instead?
@yasth: That is a great point.I have had my 401 k invested in a very conservative manner and with all the ups and downs over the last 15 years I have done just about as well as many of my coworkers with a much riskier strategy.
@wagenejm: But that $2000 you may have buried 20 years ago is not worth the same amount.
With inflation, it may only be worth $1500 in that years dollars.
um, if I put a couple grand in my 401K right now, let it grow every year by whatever %, then find out in 20 years that my 401k committed fraud and all I have left is my couple grand I started with, I have definitely LOST MONEY. Granted, these people were probably richer, but that doesn't mean they weren't relying on the money for retirement or other needs. If that happened to me I'd be completely screwed. There's something to be said for the time-value of money, they could've put it in a bank CD for all that time and made more, which is a real loss.