In my younger and more vulnerable years, I worked for a Fortune 50 communications company. I once asked my boss, who was a big guy in the company’s Manhattan bunker if he traded options in the company. He looked at me in disbelief. “Trade in puts and calls in our stock?” he said. “That’s go to jail time, baby.”
Well, with today’s sentencing, it’s go to jail time, baby, for crooked financier Bernie Madoff. Thanks in large part to a sleepwalking Securities and Exchange Commission, Madoff systematically ripped off individuals and foundations for billions of dollars based on a promise, wholly incredible, of a steady, rock-solid 12% annual return to his investors’ money.
Madoff was running a kind of double Ponzi scheme. The first pyramid was the classic kind: paying early investors with the principal of new investors. Madoff’s second pyramid was based on social aspiration: convincing new investors to join up based on the reputation of those who had already invested with him.
The damage Madoff did, and it was considerable, was to the people who entrusted him, however unwisely, with their money. But Madoff also did damage to the business and regulatory environment. To make up for past sins of omission, Congress and the SEC are now talking tough on rulemaking and enforcement, not unlike the post-Enron atmosphere which led to the stifling Sarbanes-Oxley legislation.
The truth is that no amount of new regulation can prevent someone from cheating. In our system, doing business, like paying taxes, is essentially a self-regulating affair that begins with the realization that certain activities mean it’s go to jail time, baby. Perhaps Madoff’s sentence will be useful in reminding businesspeople of that fact.