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Community funds, post-Madoff

July 1, 2009 – 9:18 pm7 Comments

By The Hasid

Bernie Madoff has been sentenced, symbolically, to 150 years in prison for his fraudulent crimes. As someone who is not terribly financially literate (and who gets clammy-palmed telling even the whitest of lies), it continues to astound me that it was possible for one individual to single-handedly (well, perhaps) lose fifty billion dollars. And yet the extent of Madoff’s crimes are still unknown. Certainly, it’s impossible to measure the losses dealt to the numerous individuals, charities and non-profits who trusted Madoff with their money. But enough with the platitudes, there’s nothing new there. I have a question.

My question is not about Madoff’s Jewishness, and whether it is somehow made him more likely to do bad things with other people’s money. Don’t get all het-up, now. Any suggestion that Jews are more likely to screw you and your money around is just dangerous, old-fashioned anti-Semitism. (Although Madoff’s Jewishness did perhaps facilitate his access to various influential Jewish people and organisations.) Unfortunately, bad people of all religions and ethnic extractions do bad things to other people all the time.

My question is about the transparency of the communal organisations of that entrusted their funds and endowments to Madoff: quite simply, was there any?

What sort of responsibility did the Jewish Community Centre (JCC) of, say, a mid-size American city have to report their financial investments and policies to their community members, or an external auditing body?  I’m not suggesting any wrong-doing or complicity on the part of said communal organisations. Obviously, they are in no way to blame for Madoff’s transgressions. But how open were their financial policies to debate, even scrutiny?

And – this is a question that might be un-PC to ask, but anyway – to what extend did the JCCs et al of America trust Madoff because he was Jewish? Madoff’s reputation was stratospheric. It’s hard to argue – or indeed, even have doubts – when everyone else is telling you someone is trustworthy, one of the tribe, and apparently a worker of financial miracles. So did people just assume that because Madoff was Jewish, he was less likely to engage in any morally dubious activity? And, if so, isn’t that just as dangerous as assuming someone’s going to do something morally dubious because they’re Jewish?

Lastly, what do we in Australia have to learn from the experiences of our American counterparts? Could something similar happen here? Or are we, more (ahem), Sensible?

Lots of questions.

Answers?

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7 Comments »

  • frochel says:

    Hasid,

    You ask: “Could something similar happen here?” Our answer to this is that it already has, albeit not on such a grand scale. We know of several stories where many people in the community were taken in by similar ponzi-style scheme run by a Jewish fraudster, where the scheme was facilitated by word-of-mouth.

    We can also attest to being guilty of misplacing our trust in people of our own ethnicity, only to be manipulated by an ultimately untrustworthy party.

    We are sure this happens in other ethnic communities, although we do not know if it happens to the same degree.

    In general, trust is often won on partially irrational grounds. For example charisma, sympathy, and feelings of kinship can prematurely accelerate levels of trust. In Madoff’s case, it appears that social aspirations were also at play – that is, Madoff offered his victims social connections and gravitas in addition to the financial incentive.

    Of course, kinship and community has its advantages as well as disadvantages so if we mistrusted everyone equally we might also miss out on the warm feeling that comes from being part of a community.

    Nonetheless, it probably pays to try to make these types of financial decisions on more rational grounds. (For example, to learn about what your money is being invested in and to assess whether it makes sense that it would be profitable.)

  • The Hasid says:

    Thanks Frochel. I’m aware of the scheme to which you’re referring, though my memory of the details are vague. Your comments really make me wonder what can be done to prevent such schemes. It’s tricky. Obviously it would be completely inappropriate (and impossible) for communal organisations to investigate and/or intervene with the private business matters of private citizens. But much of the wheeling and dealing for this sort of stuff happens out of the office – playing golf, over dinner and of course at shul and communal functions. Madoff had the scheme down pat – it seems pretty much impenetrable to me. Maybe the monitoring and scrutiny has to be left to government and regulatory bodies…

    I wonder what sort of practices could be put in place – if any – to protect members of ‘ethnic’ (bad word, but it’ll do!) communities from fraudsters. I’m imagining some sort of totally impartial, transparent, financial bet din – but without the ability to pass law; rather simply make recommendations.

  • jewinthefat says:

    The reality is that Bernie Madoff made off (ha) with people’s money because they were willing to part with it. I would hate to think that a Jewish communal organisation, be it Australian or otherwise would see fit to use donated/accrued funds in such a dangerous, high-risk scheme.

    Let’s not kid ourselves – Bernie Madoff is a terrible person, but his actions need to be put into context. Two parties need to be involved in a scam – the scamer, and scamee, and if the scamee doesn’t have the presence of mind to inquire as to how EXACTLY the scamer is going to provide a TWO HUNDRED PER CENT return on their investment (when the going rate is closer to one tenth of that), or is too greedy to think about the potential consequences of handing over their trust fund/life savings … well, good luck to ‘em, and even better luck to people like Madoff, who is only guilty of opportunism (and a little fraud).

    Jewish or not, the real crime here is the stupidity and greed. Diabolical AND expensive.

  • mark says:

    I have a slightly controversial question to ask. Did Madoff steal any money? We know he lied about the returns the investors received. We know his disclosure requirements were less than adequate to say the least. We know he has received 150 years in jail hence he won’t be receiving the US equivalent of an AO in a hurry…but has it been proven that he actually stole any money from his investors over and above the declared commissions when people invested money with him.

    The other interesting angle is whether people who invested money and took it out before the whole thing collapsed should be able to keep their false returns which has left those who stayed on to the end penniless. There have been numerous articles written on this point. Not sure if a conclusion has been reached.

    As for non-profit organizations that invest charities money. You pose an interesting question. Closer to home people may recall some very bad investments by the board of Maccabi Victoria in the late 80s. Those investments involved purchasing land around the Alma Rd sports centre with the grand plan of extending it. The recession came, property prices collapsed, interest rates went up and Maccabi was forced to sell 97 Alma Rd. The community have never owned a sports centre since. The boards original intentions may have been honorable but the consequences were terrible for the community.

  • kugl says:

    Oy! My head hurts. How is Maddoff related to Jews in Australia? Are OUR leaders involved in ponzi schemes? I don’t think so. Hassid asks what practices can be put in place. They’re called LAWS. They forbid fraud and they already exist!

  • The Hasid says:

    Kugl, I’m not suggesting our leaders are involved in Ponzi schemes. Or course not. What I’m asking is how we, as a community, can protect ourselves from this sort of fraud – it tends to flourish in small religious/cultural/ethnic communities where a lot business is referred internally, on the basis of reputation alone. As Frochel mentioned, it has happened here before.

  • WA Veteran says:

    I share the concerns of the post.

    I recall hearing stories from several decades ago about a “Mr Mole” (spelling?), a well dressed and well presented ‘gentleman’ who cleaned out a whole bunch of Jewish doctors in Perth (mostly) whom he persuaded to invest money with him. Apparently he skipped the country with their money.

    I’m not sure if “Mr Mole” was Jewish or not (all the details of the story are a little hazy now), only that his victims primarily were. The point is that his scheme was facilitated by ‘internal community referral,’ in this case the community of Perth Jewish doctors – educated people who nonetheless had been taken in by a shyster.

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