Pyramids and Networks
The collapse of Bernard (Bernie to his friends) Madoff’s Ponzi scheme is exposing some interesting networks in the world of investment and philanthropy. Not only did the scam spread through word of mouth and country club contacts, but apparently a large part of the appeal of the scheme was in its apparent exclusivity. “Dealing with him was all about getting behind the velvet rope to get into a downmarket bar… His entire fund was structured around a cult of access,” in the words of Fabio Salvoldelli, global strategist of Optimal Fund Management (article here).
The extension of the fraud in Spain, where the financial elite has been hit hard, provides an interesting illustration of the personal networks through which ‘investment decisions’ and ‘trust’ flow. Especially, and this might well be a Spanish idyosincrasy, of the pivotal role of the son-in-law. Madoff’s funds were marketed to wealthy Spaniards by M&B Capital Advisers, which is run by Javier Botin-Sanz and Guillermo Morenes (respectively son and son-in-law of Banco Santander’s Chairman Emilio Botin). Another key agent of contagion in the spreading of the pyramidal scheme was Andres Piedrahita, fund manager at Santander’s Banif and a fixture of Spanish high society, who also happens to be the son-in-law of Fairfield Greenwhich owner Walter Noel. As a result of these ‘connections’, Santander has reported the largest exposure to Madoff’s plot so far: €2.33 billion, mostly invested by its clients.
Back in New York, Madoff seems to have been at the epicenter of the city’s network of Jewish charities, many of which are now on the brink of collapse due to their involvement (or the involvement of their benefactors) in Madoff’s funds. Dr Gary Tobin, President of the Institute for Jewish & Community Research offers some insight in an interview in today’s Wall Street Journal:
“Specifically, Jewish philanthropy is built on social and personal networks. High-end solicitations are person to person and built in the social culture of philanthropy. It’s like finding out your brother is a murderer, it’s really bad for the family, it’s bad for the family of Jewish philanthropy.” (‘Madoff: The Atomic Bomb for Jewish Charities’, Wall Street Journal. See also this Bloomberg article, this one in Haaretz, and this one in the New York Times)
This philantrophic angle might prevent Madoff from adopting the ‘Jerome Kerviel Defense’: namely, to claim he was only robbing the richest of the rich and become in the process a popular hero. ‘Free Bernie’ t-shirts on sale in Times Square? Unlikely, given that the institutions suffering the brunt of the scheme include the likes of the Gift of Life Bone Marrow Foundation, or the Philoctetes Center for the Multidisciplinary Study of the Imagination.
Test Society 
December 16, 2008 at 4:04 pm
All banks and funds should start hiring their own in-house kinship anthropologist.
December 19, 2008 at 1:34 pm
One fascinating aspect of Ponzi schemes is that if you are good at detecting them, and happen to detect them early on, you can actually take advantage of the fraud by being one of the first people to invest in it, and then exit before the pyramid collapses.
From the legal standpoint, this means that in the humongous lawsuit(s) that will follow Madoff’s scam, early investors can also be sued by those who lost money – the money they made was simply ‘stolen’ from later entrants, lawyers will argue. But the legal aspects of this case are and will be controversial: see this article in the NYT for more details: