Procerity

When stock markets are booming, it is easier to hide malfeasance than when investors are liquidating their portfolios. Bernard L. Madoff was arrested for allegedly running a $50 billion Ponzi scheme. A Ponzi scheme is a fraudulent investment operation that pays out unrealistically high “profits” to early investors from the money put into the organization by later investors, rather than from any real business returns. The illegal investment vehicle is named after Carlo Ponzi, who, although not the first to invent such a scheme, is also obviously not the last. Until the recent market meltdown, Madoff appeared to be doing well - in retrospect, too well.

What is very interesting about the Madoff affair is the stature of the victims involved (estimated losses in brackets). Santander of ($3.1 billion), HSBC Holdings Plc ($1 to 1.5 billion), Royal Bank of Scotland ($600 million), Natixis ($600 million), BNP Paribas ($480 million), Nomura Holdings Inc ($300 million) are just some of the largest financial institutions that have been duped. Perhaps the halo effect of surrounding the former chairman of the NASDAQ blinded the banks to the underlying “business” of Bernard L. Madoff Investment Securities LLC.

Procerity’s Prognosis: Expect more skeletons to come out of the closet in the new market environment.