Madoff investors: Not so innocent after all


It was always something of a mystery how Bernie Madoff was earning the strong returns he reported to investors. One of the most common theories was that Madoff was, in his capacity as a hedge fund manager, market maker and brokerage operator, front-running the orders of brokerage clients. A piece in Barron's had even suggested that possibility.

Bloomberg reports that Madoff Enablers Winked at Suspected Front-Running. The notion that Madoff was making his money by frontrunning clients' orders did not seem to bother people -- as long as he wasn't ripping off them.


But here's what I don't understand: If people believed that Madoff was taking advantage of his brokerage clients, how can they muster up such righteous indignation on learning that he was ripping them off? DId they think that they were special and somehow immune to his perfidy?

What these investors who thought he was frontrunning client orders should have understood was this: Integrity and character are generally not compartmentalized, and if someone you trust is ripping off other people, you probably shouldn't trust them.

This is one of the reasons that I would never invest in a company with a reputation for exploiting its consumers: If a company's management is evil enough to market a product that causes cancer, why would you put something relatively benign like securities fraud past them?

Trusting your hard-earned money with someone who doesn't behave ethically is like leaving your wife to marry your secretary -- a woman who messes around with married men. Don't be shocked if your ex ends up with the last laugh.

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