The Madoff Principle
Maxwell Smith of Fair Haven, New Jersey, operated a financial scam for more than 15 years. He operated the scam at the several brokerage firm he worked for over a 35 year career as a stockbroker. He promised guaranteed returns of between seven and a half and nine percent per year. He raised more than $10 million over that time and spent $8 million on himself and his wife. Smith and his wife used investor money to travel overseas, rent a villa in France, dine in the finest restaurants, buy antiques, and gamble.
This case illustrates what I call the “Madoff Principle,” which states that the lower the promised return, the longer the scam operates. Madoff did not promise or purport to deliver outrageous returns, only a consistent 10 to 15 percent per year. While even that promise was outrageously unreasonable to those of us who do this for a living, it did not strike ordinary investors as unbelievable. Smith promised between seven and a half and nine percent, which is low enough that most investors would not immediately think it unattainable. That allowed him to keep the scam going for 17 years.
Scam artists, though stupid enough to break the law, are savvy enough to learn what works and what does not. Madoff taught scam artists that promising an arguably “reasonable” return can allow them to operate their scams for decades.
Never think that a believable return is an indication of a legitimate investment. The only way to get some comfort about that is to hire an investor protection company to do an investigation. Only someone who has seen hundreds of scams can hope to recognize the subtle clues that indicate a professionally-designed fraud.
