On Dec. 8, 2008, Bernie Madoff—then chair of Bernard L. Madoff Investment Securities LLC—was arrested after admitting that the hedge fund part of his business was an elaborate Ponzi scheme (a fraudulent operation in which early investors are paid with money from later investors).
While other fraudulent schemes made headlines that year, none were as big: Madoff allegedly made off with an estimated $50 billion of investors’ money. For John O’Connell, then a portfolio manager at RBC Dominion Securities, “this was just another example of the depravity illustrated [in] the whole financial community.”
The Madoff scheme dealt a massive blow to the confidence of both retail and institutional investors, says O’Connell. “Investing is difficult enough as it is. But now [investors] are also worrying about whether their money’s safely held.”
Making matters worse was the fact that suspicions had been raised against Madoff years earlier. Harry Markopolos, a former equity derivatives portfolio manager and author of No One Would Listen: A True Financial Thriller, wrote to the U.S. Securities and Exchange Commission’s Boston office in 1999, alleging that Madoff was running a Ponzi scheme.
“People tend to want to close their eyes to the truth,” O’Connell explains. “If it looks too good to be true, it probably is. Yet people didn’t want to know.”
The Madoff case also led investors to question the “safety in size” mantra.
“Bernie Madoff was a large portfolio manager; he had a good reputation. [The scandal] really highlights that sophisticated investors are as vulnerable as unsophisticated investors because, for the most part, they rely on others to do their homework.”
When O’Connell left RBC and bought Davis Rea in 2010, he made it clear to the firm’s employees that their jobs depend on doing the right thing for their clients. “That’s the golden rule. The equity I have in this business is our customers,” he explains. “Your equity is your integrity—and if you do anything to destroy that, you’re out of business. It should destroy people who [show] any signs of impropriety.”
And the business did destroy Madoff. Inmate No. 61727-054 will be spending the rest of his life in prison (he’s now 73). Has his experience taught others a lesson? O’Connell says there may be less fraud in the investment industry, but the effects may be only temporary.
“There will always be the two fundamental factors: fear and greed. Greed will compel people to steal, and to put money with criminals who they think will make them more money.”
Brooke Smith is managing editor of Benefits Canada. brooke.smith@rci.rogers.com
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