It is a bit unusual to see federal appellate court judges blogging about the scandal of the day, but Seventh Circuit Judge Richard Posner has weighed in on the Madoff case with an interesting post on his Becker-Posner Blog.
In a post on Dec. 21, Judge Posner writes that in his view, Madoff’s scheme is not a classic Ponzi scheme offering “ludicrous pitches that only the least sophisticated, or those most blinded by greed” would fall for. Rather, Posner writes,
The strategy that has been attributed to Madoff is the opposite of that of the typical Ponzi schemer: it is to obtain investments from well-off people far more financially sophisticated than the average Ponzi victim, including genuine financial experts such as hedge fund managers and bank officials. And therefore it requires different tactics from that of the ordinary Ponzi scheme, such as offering returns only moderately above average, satisfying redemption requests promptly, turning down some would-be investors (it would be interesting to know whether there was a tendency to turn down investors who might prove nosy or suspicious), and trading on a reputation earned in a legitimate business (Madoff’s business of market making)….
Posner adds that to him, the most interesting question raised by the scandal is why it was never detected by the SEC, despite numerous letters and accusations sent to the SEC from people like Harry Markopolos. Posner believes that “the fact that Madoff did not sue Markopolos for libel should have been another warning sign.”
Finally, Posner writes that “it is beginning to seem likely that there will be an ambitious reorganization of the financial regulatory system. In the course of that reorganization, the SEC may be abolished. If so, Bernard Madoff and Christopher Cox can share the credit.”