aka What’s Worse: Insider Trading or Ponzi Schemes?
This morning I was reading The New York Times article about Stanley Chais. He’s the billionaire who operated the longest running of the Madoff feeder funds. And while most victims “earned” 12 percent returns, Chais’ family accounts averaged 40 percent for more than thirty years.
First things first. All you need is $58,000 in seed capital to accumulate $1 billion. That’s the power of compounding at 40 percent over thirty years. Or start with $5.8 million if your goal is $100 billion and you can’t hold the world hostage like Dr. Evil.
Sorry, shoppers, that’s Christmas of 2039. But if you planned ahead like a Madoff feeder fund and started back in the 1970s, you’re done on a billion. Here’s what The Wall Street Journal wrote about Chais earlier this year:
Accounts of Mr. Chais and his family averaged annual returns of 40% with Mr. Madoff, and as much as 300%, Mr. Picard alleged. Mr. Chais also requested fictitious losses from Mr. Madoff’s firm, apparently to offset gains he made through other investments in order to avoid taxes, Mr. Picard alleged. Mr. Chais’s foundation, wiped out in the scandal, had $178 million in assets as of 2007.
“Earning” 40 percent in family accounts—while clients make less—is fishy. Particularly, if you are the money manager in question. Bottom line: Stanley Chais is knee deep in bad kimchi as you will see from today’s NYT article:
Figure in Madoff Case Now Faces Criminal Inquiry
Alright, I’m meandering here. That happens on Saturdays before the coffee kicks in. But the NYT article reminds me that Raj Rajaratnam, the founder of Galleon, also made $1 billion—the “winner” of an alleged insider-trading scam.
There’s no doubt Madoff and the feeder funds hurt more people. Madoff ran a $65 billion fraud, which far eclipsed Galleon’s operation in size and scope. Moreover, Madoff left his investors with cents on the dollar. Next to nothing. Devastating for many decent people.
Galleon cheated—according to the allegations—but made money for clients. Don’t get me wrong. I’m not saying the hedge fund’s methods are acceptable. Just pointing out the different impact on investors. This comparison implies that Galleon’s crimes are less severe than Madoff’s. What do we care if a trader named Octopussy bites sim cards in half? Nobody gets hurt, right?
Not so fast.
Why would anybody invest in a system where king-sized returns accrue primarily to cheaters? Isn’t fair play core to the capital markets? What happens if money stops flowing to business? Tell Acrimoney what you think:
The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.