The Ethical (And Mathematical) Dilemma Of Madoff Investors Who Took Some Money Out

from the what-to-do? dept

With respect to the Bernard Madoff scam, I’d been hearing plenty of people ask “where did the money go?” since there’s none left. The answer has always been pretty straightforward: as a Ponzi scheme, much of the money went back out to the earlier investors who took some money out. The rest was probably invested in various investments whose value has gone down to almost nothing in the last few months. However, this is apparently creating something of a quandary for some of those early investors who took money out — but still had some money (theoretically) still with Madoff. Should they apply for aid from the Securities Investor Protection Corp?

SIPC acts like an FDIC for these types of investments, helping to protect investors in cases of fraud. But some are realizing that if they took money out from Madoff over the years (and some did so profitably), if they go ask for money from the SIPC, it could alert regulators to the fact that they profited from Madoff’s scam — and they could suddenly owe the “profits” they had taken out in the past. The Feds can demand that those who profited from Madoff’s scam return the money — but that will involve actually being able to track them down. For some “victims,” it may be better to just keep what they have, keep quiet, and forget what they thought they still had invested with Madoff. But there are concerns for others who have already admitted to cashing out (sometimes a long time ago), are they suddenly going to be forced to return the money they took out of their accounts?

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Comments on “The Ethical (And Mathematical) Dilemma Of Madoff Investors Who Took Some Money Out”

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Dave says:

Having looked into the background of the Madoff “scam”, it seems it only became a scam once the market started going south a couple of years ago.

For many years, it operated successfully, but started to fail and then used the ponzi method to keep going “until the market recovered” Not smart, but that’s what happened.

Of course, the market got worse and people pulled money out faster than they could get it in as investors pulled out of the market in general.

So, for many over the years, the profits are legitimate. For some, they invested in good faith and it doesn’t seem like a good idea that they should pay back what isn’t actually stolen.

On the flip side, it makes you wonder how many of these investment firms may be doing the same thing…

PixelPusher220 says:

Re: Re:


A scam is not only a scam when it’s losing money. A Ponzi scheme is a scam because it can never ultimately turn a profit. It runs out of new investors since you need an ever increasing number of investors to meet your claims of growth. The collapse of the market in general sped this to a close, but it was guaranteed to happen eventually.

My question on the profits is that if they didn’t know it was a ‘scam’ how are they responsible for returning profits that were by all appearances were legit. I thought the Feds had looked at Madoff (albeit fleetingly) and incorrectly determined there wasn’t a problem. If the cops say it’s legal, isn’t it legal? You don’t get a fine for driving through a red light when an officer directs you to do you?

Even if you need to return your ‘profits’ it would only be what you happen to have left rather than punitively asking for everything back if they didn’t know it was illegal?

Anonymous Coward says:

My understanding based on some other articles is the Feds can only go back six years to seize profits. In addition, if you can demonstrate you cashed out for reasons other than you suspected Madoff was playing fancy with the numbers, you are probably not liable for the illicit gains. For example, if you cashed out to buy a house then you could argue you didn’t profit from the fraud because you took the money out for purposes other than a suspicion the investment wasn’t kosher.

Anonymous Coward says:

given that the entire stock market is by definition a ponzi scheme (i.e., no more money can go out than come in and all “growth” is based on future suckers (errr investors) AND there is skimming on every single transaction by the brokers), why all the whining? Madoff is just a small stock market. Now, are there still fools out there dumping money into the “never lose” stock market? Where does your 401k $ go? Mine certainly does not end up in the market – it never has and never will.

Anonymous Coward says:


What I never understood was why the stock market had stocks that would be around forever. It would make more sense for the stock market to be much more like risky bonds. That would make the gambling that is inherent in the system more clear. You would buy from a given batch of end payout securities, which would be based on a percentage of corporate profits over a given timeframe.

Say a corporation wanted to start out with a 10 year scheme. Their total yearly profits would be 100%. If they loose too much they go bankrupt and your left with worthless paper. If they make a profit then that 10% is split proportionally among the batch they sold for that year and similarly among the other batches. Every 10 years a given batch would expire and they would sell new issues.

The valuation of a given batch would be determined by how much profit potential investors expected it to make.

If the company wanted to sell longer duration batches they would have to reduce the percentage of profits they have leased shares in so they could support a longer duration. Alternatively they would have to use more complex dilution methods.

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