The current economic crisis in the world has increased the risks of greed, corruption and fraud. The latest, and currently the largest, involves Madoff Securities. The epic size of the fraud scheme should sound warning bells and alarms to more than just those that lost investments. Are you at risk? How secure are your operations, investments and business relationships? The warning signs existed – the classic red flags were evident. Decades after Charles Ponzi duped thousands with his get rich quick scheme to buy and sell international mail coupons, Madoff enticed his investors with promises of double digit returns in a highly volatile market. In 1921, Ponzi raised $1 million in one three hour period. In 2008, Madoff was released from custody in exchange for $10 million bail and an ankle bracelet.
Victims are now looking for the deep-pocket sources to obtain some compensation for their losses. The court appointed trustee will be tasked with unwinding the financial linkages of the feeder funds that served as the pyramid upon which the fraud was built. Investors have lost fortunes – many of whom used this investment as their money market fund. The myriad of complex layering that existed will be unwound and the classic outcome of winners and losers will be developed. The theories of equitable distribution and recovery among all involved will be argued in the court system for many years. It’s not just the investors that are at risk - investment advisors, accountants, lawyers, and others are likely to face significant exposure.
As forensic accountants, we have reconstructed financial and other records and assisted clients in documenting such schemes. Those who have lost millions may have to disgorge the investment returns previously received. The IRS may take an aggressive position with the tax treatment of the sham transaction that was perpetrated, and in turn, may have to deal with significant tax deductions taken by those who suffered. Moreover, the extent of “insurance or protection” offered to investors is not clear cut given the size of the scheme.
Like Mr. Ponzi’s scheme, this one likely will result in winners becoming losers and the losers recovering pennies on the dollar.
