Spectacular investing frauds like the single in kind allegedly created by dint of. means of the New York financier typically come for the time of investing bubbles—and only get exposed once they pop

By Ben Levisohn

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The popping of an asset bubble has a way of bringing investment fraud out of the shadows and into the light. It looks to be no different with the case of Bernard Madoff— respected financier, in-demand money manager, framer NASDAQ chairman, and circulating poster boy in favor of investing. trickery. Madoff stands accused of operating an elaborate Ponzi scheme, using cash from new investors to pay off older ones, to the tune of $50 billion. The alleged offenses only came to light inasmuch as he could no longer levy the circulating medium to stand by his plan going, according to the U.S. Securities & Exchange Commission.

Sadly however, Madoff’s alleged scam is not single.

Need proof? There’s Richard Whitney—respected financier, in-demand money conductor, and former head of the New York Stock Exchange (sound affable?)— whose own investment company, circa 1938, turned out to be as empty as Madoff’sitting 70 years later. Just as in the 2008 version, investors were wiped out by Whitney’sitting devise, which began while he started borrowing standard of value to cover investment losses in penny stocks. His victims included the New York Yacht Club, the New York Stock Exchange, and his father-in-law.

Learning from History

To experts, one thing is clear: "It happens each vacant time there’s an asset bubble," says Robert Wright, a fiscal historian at New York University.

Bubbles provide the cover the crooked neediness to perpetrate their scams. When the mart’sitting heading up, any investing. seems possible. Go back to 1720 and England’s South Sea Bubble. Shares became so trivial, investors snatched up stock in a company whose business was so secret it could not be revealed in a prospectus.

Banking stocks were the investment of choice in 1792, when William Duer, a respected investor close to Secretary of the Treasury Alexander Hamilton, rapidly drove up shares of the Bank of New York, only to be unable to meet his obligations. "The greediness of a bubble is a breeding ground for bad actors," says Jeff Marwil, a partner with law firm Winston & Strawn’s Restructuring and Insolvency Group.

What was Madoff’s Motivation?

Complacent investors may enable the fraud. When the market’s going up, they usurp everyone else is making money and want to also. They have the election of investigating who they invest by, but many get seduced by the combination of stable returns and a stellar reputation. After the fact, many claim they simply trusted their advisers.

But trust is a funny something when it comes to standard of value. "The financial connected view is not based on trust," NYU’s Wright says. "Banks don’t trust you—that’s why they take collateral. You don’t confide in the bank—that’s why we have the FDIC."

Still, no person knows what may have caused Madoff to turn his happy trading firm into an ripen scam, as he is accused of doing. Here was a person who had money and veneration and it being so that is charged with bilking investors, from hedge funds to individuals to banks, of billions of dollars.

"The Easy Way Out"

Madoff has company. Recent frauds take in the $3 billion Ponzi scheme allegedly perpetrated by Tom Petters in Minneapolis—he is accused of using the money to fund a jet-setting lifestyle—or Samuel Israel’s Bayou Hedge Fund Group, which created a dummy accounting firm to cover up trading losses.

But while bubbles furnish opportunity, it’s ultimately the financial wizards themselves that constitute and perpetrate these schemes. "Sometimes the people at the wheel have recourse to the easy way out," says Gregory Hold, chief executive of brokerage concern Hold Brothers.

Others are less forgiving. Says Marwil, who has worked on recovery at Bayou: "I don’t think you be able to reach a conclusion other than they are bad guys." The investors—ranging from charities, universities, and individuals salting away money in 401(k) funds—who are left through massive losses as these schemes stroke up might agree, albeit in harsher language.

Original text: http://www.businessweek.com/investor/content/dec2008/pi20081215_232943.htm?campaign_id=rss_null