Ponzi flourished when there were few regulations
governing investments, brokers or banks. The Securities and Exchange
Commission (the SEC) wasn’t established until 1934. The big question today
is how did Madoff’s gigantic scheme go unnoticed for so many years by the
guardians of our investments. The SEC was warned no less than eight times
that Madoff appeared to be running a scam, that he couldn’t possibly be
generating those happy results legitimately, but the SEC never found
anything wrong. No new regulations have been imposed. Investment advisors,
such as Madoff, are still permitted to act as custodians of their investors'
securities. That’s not true for mutual funds. Mutual funds are required
“place and maintain its securities and similar investments in the custody
of” a bank or a dealer admitted to a national securities exchange, “subject
to such rules and regulations as the Commission may from time to time
prescribe for the protection of investors.” And no mutual fund has
ever been found to be a Ponzi scheme. Professor John C. Coffee, Jr. of
Columbia University, testifying before the US Senate, said that having a
bank act as custodian, “largely removes the ability of an investment adviser
to pay the proceeds invested by new investors to old investors. The
custodian will take the instructions to buy or sell securities, but not to
remit the proceeds of sales to the adviser or to others (except in return
for share redemptions by investors). At a stroke, this requirement
eliminates the ability of the manager to ‘recycle’ funds from new to old
investors.” For the complete testimony, see the Hedge Fund Law Blog at
http://www.hedgefundlawblog.com/professor-coffee-testimony-at-senate-madoff-hearing.html