John Scott - Revisiting Madoff

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Last month we discussed how regulation, specifically on our country's banks, can cripple an economy. This month let's talk about how regulation, if well crafted and used for the right reasons, might actually do some good...maybe.

This time last year we welcomed in a new presidency and congress who promised to find scapegoats for the financial crisis in the fall of 2008. The media jumped on board and made their "poster child" Bernie Madoff. Rightfully so, since he deceived the SEC regulators for over 20 years and artfully embezzled billions of dollars. Even more shocking was his deception of over stated returns and his lofty client list! Poor Bernie, everybody hates him.

Let's look at what really happened and what we can intellectually learn from this story. What can be garnered from the investors perspective that lost millions. What can we learn going forward?

First and foremost there was greed. I'm not talking about Madoff's greed, but his investors. How could some of this country's most wealthy investors have a major portion of their assets with him? It just does not make sense.

Amazing and shocking. Only one word can explain this and that is greed. Greed overshadows all reason when it comes to money.

Let's think about how this happened. These prominent families relied on each other to network to top advisors since they are busy living a wealthy life. Bernie was the talk of the town with his remarkable, albeit fraudulent, returns during the past decade. So fueled by greed, they all jumped on board expecting better rates of return than the average person.  The result, a 10 year average on their investment portfolio that was less than that of a bank savings account and in some cases even worse! Greed lost them a major portion of their nest egg...Greed made them blind.

So what can we learn before Bernie becomes a faded memory? Be prepared, history will repeat itself . Greed is not going away anytime soon. Where does that leave us today?

Cedrus clients avoided the pitfalls of Madoff and others by employing methods and processes that do not allow greed to overcome their portfolio as it did for so many of Americas most prominent families.  This is the very reason we have put our trust in our esteemed portfolio management outsourcing partner SEI for the past 13 Years.

The most important value in this lesson is TRANSPARENCY.

SEI last year announced that all their client's portfolios had no exposure to Madoff. This was terrific and welcomed news but let's look at WHY there was no exposure. The simple truth is that in utilizing SEI you have made the prudent decision to pay for a gatekeeper to your portfolios asset allocation and the managers chosen to fulfill that promise... SEI of course was reported Madoff's returns and considered his firm for an appropriate portion of these assets. But their rigorous due diligence found that they simply could not hire Madoff since he would not be transparent and disclose how and where he invested the funds. Pretty simple concept, SEI could not provide oversight if they could not see how the funds being managed were being deployed. In fact SEI had clients who did not agree with their findings chose to ignore transparency, and we can only imagine the consequences.

This past financial crisis was the worst I have seen in my 25 years in this business due to the loss of credibility of some of Wall Street biggest names. It is my opinion, that it does not matter if it was over leveraging, credit default swaps, overvalued real estate prices, mortgage defaults, or whatever. All the misgivings can be traced back to financial selfishness and the lack of transparency to keep greed in check. I for one welcome any new regulation that forces transparency, not only on Wall Street, but in the corporate world as well as in our government. We remain proud of our association with SEI to be a leader in fighting this cancer in the business world. You should too. Often when markets start to accelerate upward, SEI takes flack for moderate returns. SEI more than makes up for it when the truth prevails and all the greed and deception come unwound.

Cedrus knows the importance of transparency. If you have not already checked out our new website, please do so at, click on the Transparency of Advisors and read more about where we stand on this issue. It is one of the primary keys to your contentment. That is exactly why we founded Cedrus and what makes us different. We also expect transparency in working with other advisors in your family such as lawyers, accountants, estate planners, etc. all to the benefit of your family for the reasons we have outlined in this article. Know that this will always remain foundational to us and we hope you feel the same. Cedrus is working hard to protect your families wealth. Good lessons learned indeed.