Navigating Through Madoff-Land

"Bernard Madoff has been arrested," my husband said, and I knew we were in serious trouble. Only months before we'd moved the last of our disappearing non-Madoff investments over to him, having been investors for 21 years. What I couldn't have imagined in the fog of my shock is how lucky we would turn out to be. Luck, I've learned, is relative.

Lest you think you could never be as foolish, let me suggest that 20/20 hindsight is invaluable in making wise decisions. During the bull market, our nine-percent return seemed conservative. Our detailed monthly statements, insured by SIPC, showed we owned excellent stocks, including US Treasuries.

We became investors without even knowing it through two accountants, Avelino and Bienes. In 1992, the SEC ruled that they were acting as brokers without being licensed and closed them down. We were hugely relieved then to discover our money was with Madoff, whom the SEC had also investigated and found sound.

Over the years, the more we learned about Madoff, the more we considered ourselves blessed. Besides the SEC's virtual endorsement, he had been Chairman of Nasdaq and was often mentioned with respect. People clamored to "get in," and we, hardly big players, had gained access by accident.

My husband, Gene, now 80, is a retired theatrical producer on and off Broadway. I'm 63 and had been in advertising and the cosmetics industry. I then had my own company, Eat Healthy, aka, the Bloomingdale's Diet, because so many of their executives were successful on my program. The Bloomingdale's Eat Healthy Diet became a bestseller. I'd been happily writing fiction before this upheaval. We live in Montauk, a quarter-mile from Madoff's weekend house. He's oceanfront; we're ocean view. In most of the country, we'd have been considered well off. By Hampton's standards, we were comfortable.

I remember sitting at our dining table with Gene that first night, two white-knuckled troopers, trying to take in the implications. I knew I had to go back to paying work, but doing what? Would we sell our house? In this market?

A plan came to me in the middle of that night: I'd start up Eat Healthy again. There were lots of reasonable diets our there but none dealt effectively with keeping weight off. In my numbed shock, I saw that as an opportunity. I imagined starting a small group like last time. Everyone's results had made it mushroom. It would happen again.

What blissful naivete! The difficulty of keeping weight off is the dirty little secret of dieting. And Eat Healthy had mushroomed all right, so quickly we never could catch up with it. It took almost ten years to get it on firm ground. That thought has kept me up plenty of nights since then.

Besides starting the business, we had to plow through Madoff country with its language of legal terms and acronyms. SIPC: Securities Investors Protection Corp, an oxymoron for far too many people. Net Equity: the difference between what you invested and withdrew. And the truly nightmarish clawback (or the verb, to claw back): monies withdrawn within six years that must be returned under certain conditions.

Listen up. While Madoff and his ilk may not have cheated you, the implications affect all investors. Before his arrest, his reputation appeared unassailable. Yet many pillars of the financial industry seem to have suspected the fraud. What threatens all of us is they had no incentive to act. SIPC, which is industry backed insurance, is woefully underfunded. The $500,000 maximum payment, set in 1978, hasn't been adjusted since. Today, by Department of Labor statistics, that would be $1,600,000. If the industry had to pony up, I'd wager they'd police themselves.

The bankruptcy trustee set his own definition of "net equity," contrary to existing case law. The precedent had been your "right of expectation" based on the last statement. Under that definition, many more would be entitled to SIPC coverage.

It was through luck, not design, that Gene and I had positive net equity. We're entitled to a SIPC payment and not threatened with clawbacks. Also, fraud victims were allowed to go back five years instead of the standard three to claim the loss on our taxes. (This is after 21 years of paying taxes on phony income.)

But none of that replaces close to what we lost. What gives us a shot is that I had entrepreneurial experience and perceived a need I feel passionate about. Eat Healthy Your Way, has actually been thriving for three months now. I'm loving it, though building a business at my age, in this economy, with no start up money is daunting.

Many others are not so fortunate. In spite of paying their taxes, they are penalized for using what they thought was their money and denied SIPC coverage. Or they invested through feeder funds, a nightmare on every front. Innocent victims may still be clawed back. Many are retired and don't have ability to start up again, let alone find a job.

I'm close enough to know their dire straits could be mine. If you feel safe, I implore you: pay attention. No one's watching the store.

Comments

[quindy]

The speculative character of the stock market, the inability of regular investor to get IPOs, the insider tradings and so on, all make me dislike it. I prefer to have a simple savings account. In the good old days I was getting 5%. Low was 4%. I paid what little taxes were due and that was it. If you were invested in the stock market you got dividends. These days you get neither decent interest on your savings nor dividends, since most companies stopped paying them.

Few years ago I went on some pharmaceutical companies web page and saw returns of over 1000%!!! I really thought I was the stupidest person on this planet for not investing with them. I can see how people got lured into Madoff's scheme. One has to know awful lot to be savvy investor and not end up broke.

[RenoSage]

And the moral is, as we all have heard before: IF IT SEEMS TO GOOD TO BE TRUE, IT PROBABLY IS!

[Ruth Schwartz]

Laura - I love that you saw that you could do something given this situation you and your husband found yourself in, and I would love to know more about your book. I went looking on the Internet for it, and on Amazon and couldn't find anything on the new book. Please post some info.

Thanks!
Ruth
Independent Isagenix Consultant
http://cleansingyourbody.blogspot.com/

[fregan]

good points

[LetMeUnderstandThis]

The difference between Madoff and a common thug, Madoff didn't use a gun and stole more money.

[Bobzmcishl]

I don't feel sorry for many of the victims who had an entitlement mentality to high returns year after year. As someone who has had dealing with financial advisors over the years, the honest ones will tell you that there is no such thing as a guaranteed double digit return year after year. Many of these victims knew that Maddoff was a scam artist but chose to ignore it since they were getting these 12% returns. The SEC should have gone after Maddoff a long time ago when his ridiculous returns were brought to light. Personally I have very little trust in anybody associated with Wall Street. You are better off doing your own home work and avoiding any schemes that promise guaranteed returns with minimum risk.

[sadie11]

Let's be clear. The Madoff clients thought they were lucky to be in his portfolio- not the other way around. When the stock market was tanking, I'm sure many were smug in the smaller but still positive returns they were still getting. It appeared that they were not losing 30 to 40 % of their nest egg. Many of the current victims were no doubt congradulating themselves that they were smarter than everyone else losing money because they had this great inside connection with the exclusive Bernie Madoff.

That being said..and who among us has not quietly gloated over getting a better deal than a friend... the failure of the entire financial system is truly tragic. My heart goes out to these people.

I know how hard many worked for that money and I cannot imagine being 70 and losing everything. It is a sad commentary on the financial markets that this happened to a lot of good people.

This is why I am out of the stock market forever. I'll stick with a 2 to 3% return if necessary but at least I'll know how much money I really have.

I believe a lot of other Baby Boomers will do the same. The stock market is going to have a very hard time going back to 14,000 with no Boomer money. The Wall St boys literally killed their own golden goose with their own greedy hands. Great businessmen!

[TryToBeFlexible]

The stock market remained flat for a decade or so after the Great Depression, because once burned, no one would invest in the stock market again. I totally agree, you are right.

[plebeianswillrevolt]

"Before his arrest, his reputation appeared unassailable" This is a lie.

You got what you deserved, and now you want more than you deserve. Eat that.

[usna73]

Plebe. You are indeed. I suspect that you may not allow for thoughtfulness, lest compassion.

Ms. Stein was cheated. It is simple. It was criminal. End of story.

I have been a public markets participant since 1984. Starting with a modest sum, I have never had a down year since then. Yes, I was even up in 2008. I do not sell advice.

Even with my track record, I have not "outperformed the broad market" in the 25 year span. I have merely kept pace in a sort of conservatism over time. I knew when to sell.

So, the Madoff scheme was not simply implausible.

Nobody should demonize the victims here. Ms. Stein is one of them.