While we are on the topic of Bernard Madoff...Getting scammed: The Rae Cowan story

Frauds tend to be revealed during the bursting of bubbles; no one asks questions when everyone is intoxicated with money when times were good. The Bernard Madoff case will go down in history as the worst scam in modern American history. Fortunately, most of the losses are accruing to the wealthy, who can afford to take losses, and to "sophisticated" institutional and hedge fund investors. I'm not trying to unsympathetic to the victims but the damage won't be as heartbreaking as cases such as Enron, where working class and middle class lost nearly their whole life savings. There will be indirect impact on everyone but it should be largely contained to those who blindly gave their capital to Madoff and his associates.

It should also be noted that some speculate that some of Madoff's investors thought he was doing something illegal but didn't realize that allying with the devil doesn't guarantee your success. These investors are thought to have assumed that Madoff was profitting from insider trading or front-running and wanted in on the scheme. Cassandra of Cassandra Does Tokyo and John Mauldin of Thoughts From The Frontline have mentioned this thinking among some (Mike Shedlock of Mish's Global Economic Trend Analysis also has some info.)

So far no word on his associates and others who were part of the scheme but details will surely come out once the police and the SEC start digging. One thing about American officials is that, they may not prevent all crimes from happening (who can?) but they are very tough on white collar crime. In developing countries, the wealthy and the well-connected can get off easily, even for murder. Even countries like Canada have generally been accused of being a safe haven for white collar criminals. You can't say the same about US authorities. (However, my opinion is that US law enforcement is weak in other crimes such as their habit of granting asylum or easy passage for war criminals, tyrants, drug dealers, politicial allies who committed crimes against humanity, and so forth. USA is a popular destination for serious criminals of all sorts.)

Anyway, I would like to refer you to the scam involving of Rae Cowan, an investment advisor/portfolio manager. The Globe & Mail does an excellent job detailing this case from last year. This is a very small Canadian case with limited losses but it does give you an inside perspective on what can happen. I suspect the Madoff case is similar but on a very large scale. None of this has anything to do with improving your investing skills but if you want some light reading, check out the article. Here is an excerpt:

THE PRESSURE WAS BUILDING. For weeks he'd been fending off questions from anxious clients who were worried about their investments and the whereabouts of the cheques he used to send so regularly.

And these weren't ordinary clients. They were his father, mother, aunt, friends from high school, college buddies. Many of them had been counting on him for years to manage their life savings. They included people like Altaf Hussain, who was relying on Cowan to help put his daughter, Aisha, through university. And Cowan's 62-year-old aunt, Charlotte Munro, who had entrusted her nephew with $200,000 and depended on him to keep sending $750 a month to supplement her $1,200 monthly pension. And Judie Benyei, who needed Cowan to ensure there was enough money to pay the bills at her octogenerian aunt's nursing home.

How could he tell them he'd made some bad bets on the currency markets and that most of the money was gone? How could he explain that he was down to his last $700 and that the Lamborghini, the Porsche and the pricey condo in a trendy Toronto neighbourhood were all for show?

He couldn't.

So he took the elevator down from his ninth-floor condominium to the parking garage. He ran a hose from the exhaust pipe of his Lamborghini and placed it through the window. Then he got in and turned on the engine.

It was Monday, Nov. 26, 2007. Rae Cowan was 36 years old.