It's striking that Mrs. Picower has voluntarily returned $7.2 Billion to the Madoff Trustee Recovery Fund. (This settlement is worth about 40 cents on the dollar to the other victims.)

I believe that she did the "right" thing, as the costs and pace of litigation would have ensured a much smaller eventual recovery.

Yet, should one salute her and hold her out as an example of morality and generosity? (How many of us would voluntarily write such a large check?)

Or should one be cynical? Did she know about the fraud– given her husband's string of dodgy business deals… And believe that this check was the cost of quickly healing her reputation and getting back on the dinner guest lists from her peers?

One notes that there is still a long list of other obvious beneficiaries that are hiding behind their lawyers…

What would Mr. Scrooge have done had he discovered that he had been a unwitting beneficiary of a fraud?

Scott Brooks comments:

Rocky presents a conundrum for which there are applications everywhere in the market.

What about the investors who rode Enron, Worldcom, Global Crossing, etc. up and sold out at the top? Does the same hold true for the bubble? What about the real estate bubble?

What about the biggest ponzi scheme of all time…Social Security and those that take/have taken social security benefits….when SS blows up will they pay back their ill gotten gains?

If a person cashes out or smells a rat (like many did with Enron), do they owe something to those that didn't get out?

Would I personally give any back? I'd have to look at the situation on a case by case basis. But my initial reaction is, "no, I would not".

OTOH, if I was the one left standing without a chair when the music stopped, I would not expect those that had chairs to give me their chair. If they were complicit in the fraud, that's a different story….but if they were innocent (as I would be), I would not expect them to be penalized for their wise move…..or said another way, I would not expect them to be punished because I failed to do my due diligence.

Kim Zussman writes:

Scott raises a great question, which can be generalized: what is the difference between a share of stock and a share of Madoff investments?

Both were claims on earnings streams of the future
Both had value because many knowledgeable people believed so
Both were verified by various financial authorities
Both were presented and sold by educated, sophisticated professionals
with impressive credentials and licenses
Both were proven sources of wealth for prior investors
Both were understood to entail risk, including the possibility of 100% loss
Both capitalize on "greater fools": why buy a stock unless you believe
the seller is foolish?

It is hard to think of the differences.

Rocky Humbert comments:

Kim's analogy is cute but it is like me saying: "What's the difference between my wife and a sugar maple tree?

Both have limbs.
Both like sunlight.
Both need food and water.
Both are inspected by health professionals.
Both are proven sources of sugar…
etc etc.

One must not confuse the VALUATION of an enterprise with the ACTIVITIES of an enterprise, and similary one must not confuse the ultimate SUCCESS of an enterprise with the INTENT of the executives.

Criminal and civil fraud require three elements: (1) An action/statement with an intent to deceive (scienter); (2) a victim's reliance on the action/statement; (3) damages.

Kim's argument usually fails at #1– and it's why prospectuses are long, and CEO's taciturn.

Stefan Jovanovich writes:

Scott's characterization of Social Security is wonderfully dramatic (as always), and it is an accurate description of the facts of our current pay-go system.

But, the Social Security Act of 1935, as conceived, was anything but a Ponzi scheme. The original act presumed that Social Security would follow the same model as private life insurance and annuities; benefits would be paid from the earnings of a reserve. The initial Social Security "crisis", in 1939, came because the government was collecting too much money and setting it aside as an actual reserve for payment of future benefits. (Keynesians argued - then as now - that the reserves needed to be spent.) Those arguments - and the Democrats' stunning losses in the 1938 Congressional elections, led to the first acceleration of benefits; eligibility was adjusted so that the first checks went out in 1940 instead of 1942. The amendments of 1939 also changed the system to pay-as-you go by allowing the Trusteee to invest in non-marketable securities. (That is what has led to the infamous lock-box, which is a file drawer in West Virginia that has "special issue" U.S. Treasury bonds that are - like the President's birth certificate - computer-generated facsimiles of presumed originals.)

Social Security taxes have remained unchanged from the 1935 Act. It hardly seems fair, therefore, to accuse current recipients of Social Security Old Age and Survivors benefits of being greedy. They have paid into the system their entire working lives; and, even with the increase in life expectancy, the payouts they will receive represent a ZERO rate of return on their contributions when those are adjusted for inflation. They might even have the right to ask why the trustee chose to invest only in non-marketable securities. If, as of the end of November, the U.S. had reverted to the original Act and the Treasury were required to exchange the special issue bonds for ones equivalent to those owned by the Federal Reserve, the Trust Fund would have assets of $2.93 Trillion. I will leave it to Rocky and Big Al and others who are qualified to estimate what that would portfolio would earn, but I do have confidence that their investments would accrue more than the $160M that Treasury accrued on behalf of the special issue bonds for the first 11 months of 2010. Let's be optimistic and assume that, without quantitative easing and other central bank manipulations, the portfolio would have earned 4% for those 11 months ($117.3B). According to the Treasury, the payouts for that same period were $97.5B.


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