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‘Trust, but verify’ — don’t invest illegally
Bernard Madoff is in prison. He was sentenced to 150 years for his Ponzi scheme, which, depending on what article you read, amounted to a theft of $24 billion or $64 billion — no one seems sure about the exact figure. How does all this affect you? If you have any investments, and are usually nervous about them, then don’t read this column, because it delivers some disturbing news.
The Securities and Exchange Commission oversees the investment industry — from the brokers to the stock markets. By all accounts, it is staffed with well-trained, if overworked, accountants, lawyers and securities experts. Their task is not easy. They are our watchdog against crooks like Madoff who want to steal our investments. Usually the SEC does a credible job, but it really messed up in Madoff’s case.
Probably no one reading this column invested with Madoff, so why be concerned? Madoff, whose name, by the way, is pronounced “made-off,” performed on the big stage. Literally dozens of Ponzi schemes abound.
About 20 years ago, on Indianapolis’s south side, a former minister went door-to-door selling “mortgage-backed securities.” Over a period of 18 months, he sold about $3 million of these securities by promising a return of at least 15 percent annually. Maybe a few investors got some money back — at the expense of later investors, which is the essence of the scheme. Most received about one-half cent for each dollar invested after all the court proceedings were over.
An interesting variant of Ponzi was also popular about 20 years ago. Known as the “Circle of Gold,” the scheme required so-called investors to pay $100 to participate. Each such investor would then seek out others who would give the initial investor $100 with the prospect that each of them could then entice other investors into this evolving scheme. For example, I would invest $100 with Al Able so that I could participate. Then I would get several of my friends to invest $100 each with me so that they could get their friends to invest with them. One of my university teaching colleagues assured me that all this must be legal because a lot of people were involved. Indeed, there were even Tupperware-like parties to promote this illegal scheme.
President Reagan said that when dealing with the Russians, “Trust, but verify.” That is good investment advice, too.
So much for one aspect of stock fraud. Let’s turn to insider trading. This criminal misconduct strikes at the heart of market integrity by allowing a privileged few to manipulate the stock market to their gain.
The New York Times reported that for more than a decade one or more employees at Intel and other large technology companies were tipping off hedge-fund executives and others about new developments at these companies. This information could have had a substantial impact on their stock prices if it had been publicly disclosed. For example, if you, as an employee, found out that Intel had just developed a vastly superior computer chip, and no one outside the company knew about it, then a quick call to your broker could earn a tidy profit when the stock price rose. You would be violating the Securities Exchange Act of 1934 and could land in prison.
Is there much you can do about insider trading? Not really. Just hope that the SEC is vigilant.
Theft is theft, and the sooner we cart these thieves off to prison, the better for our investments.
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