Thursday, December 18, 2008

The long hand of the Ponzi scheme

Bayou was a fund that blew up and was revealed in 2005 to be a fraud with some $450 million in investor losses. Bayou is memorable for two reasons. One is founder Samuel Israel III's staged suicide. (He eventually rose from the dead and turned himself in after prosecutors went after the girlfriend who helped him disappear.) The other is a legal precedent set in the Bayou case that should scare the heck out of anyone who once invested with Madoff but who managed to get out safely in the last few years: Any investors who managed to take out profits from a fund like Bayou before the fraud was revealed had to give the money back. ...

There's no time limit on the gains they'd have to give back, so any fund that outed Madoff could be on the hook for any profits it had gained from its Madoff investments for years back. So, as my fund-manager friend puts it, “The question people have to ask is not, 'Do I have money in a fund that has exposure to Madoff now?' but, 'Do I have money in a fund that that has ever invested with Madoff?' ” ...

The Bayou precedent means that the discovery of a huge fraud leads to a whole chain of liabilities that stretches back for years and may hit investors who hadn't dealt with Madoff in a decade. ...

The consequence of this is that any longtime Madoff investors who'd gotten suspicious could very well have seen that publicizing their suspicions and outing Madoff's scam would not have saved their money but actually exposed them to greater losses. As the law stands, post-Bayou, a major fund company that finds itself entangled in a scam like Madoff's has every incentive not to out the fraud but, rather, to keep its fingers crossed and maybe hope that the whole thing can be written off as just another multibillion-dollar stock market blowup.
--Mark Gimein, Big Money, on "just when I thought I was out... they pull me back in"

1 comment:

bchoi said...

Not even a statute of limitations? Generally, the only crimes not subject to a statute of limitations are murder and possibly rape.