Bernie Madoff found it quite easy to fool investors. First, he insisted on being the custodian for all stocks. Stocks can be held two ways. The stock certificate can be physically held by the investor. This is a pain since the certificate can be lost. Then, if the stock is sold, it must be sent to the brokerage house within three days. The second way is to let the broker keep the certificate in “street name.” That means that the broker holds the stock in his name but gives the investor a receipt for the stock to prove ownership. In other words, the broker is the custodian.
Madoff was both the trader and the custodian; that is, the stock was not only sold through his brokerage house, but the stock was held in his name. The investor only had a receipt, generated by Madoff, to show that he actually owned the stock. Hence, every quarter an investor would receive a piece of paper that said what the investor owned and how much he”d made. The piece of paper was also generated by Madoff. There was simply no way the investor could penetrate Madoff”s web of secrecy since neither the trade nor the stock certificates could be verified except through Madoff. Oh, another point, he never released any audits of the funds.
Investors thought they were beating the market year in and year out. Their greed allowed Madoff to defraud them for 18 years.
Charles Moton
Lucerne
