Madoff question

[DTS]

I was listening to a discussion on the radio tonight about Madoff's scheme and had a thought that I hoped someone here would know.

I am assuming, maybe incorrectly, that Madoff reported all the investors' earnings to the government, such as interest, dividends, etc and the investors reported all this on their returns.

Are all the reportings from him and the investors considered proper or do they have an avenue to make a little bit of this tragic mess right for them since all this was bogus. Could they amend their returns or something else along these lines?

D

[David1980]

There was a revenue ruling/revenue procedure on that.

http://www.irs.gov/pub/irs-drop/rr-09-09.pdf

http://www.irs.gov/pub/irs-drop/rp-09-20.pdf

Basically treated as a theft loss for the amount invested + amounts reported as income in prior years in the year discovered. There's a safe harbor procedure in the RP.

[OtisMozzetti]

It seems pitiful...

To me this seems pitiful. Some of the investors may or may not have been naive investors who put up their money and found say 15-18% return coming to them, out of what to them maybe have been a mysterious black box of "proprietary trading", during a year when maybe the S&P 500 went up by maybe 22%. Now they have to worry that the legal machinery is going to require them to give back the 15-18% even after they long ago should have paid federal and state taxes on their then-apparent investment earnings.

Those individuals are in many if not most instances also victims, and there is every reason that the Treasury Dept. should not compound their woes.

[Zee]

My guess is most of Madoff's clients were wealthy individuals that should have known better. I doubt if many blue collars were clients.

[JohnH]

I agree with Zee.

I'm sure that a certain number of them were innocent victims who didn't know what they were getting into. But the vast majority were wealthy people who don't normally become wealthy by making dumb mistakes or not having a good grasp of financial fundamentals. Virtually anyone who earns their wealth certainly understands you don't put all your eggs on one basket.

And anyone with even a rudimentary understanding of financial matters HAD to know that his consistently high results didn't make sense. I've wondered to myself if many of them suspected he was engaging in insider trading or other more nefarious illegal activites, but they didn't care & didn't want to know too much as long as the returns were good. It's called greed.

This isn't to imply that they deserved being cheated or that what happened to them was right. But in many cases, they may have helped reinforce the old humorous WC Fields line that "You can't cheat an honest man."

[Roberts]

Several of the major investors supposedly negotiated with Madoff to get their investment returns increased so they could use their inflated investment portfolios as collateral for loans. Many of the people involved knew exactly what was happening but we'll see if the government is interested in taking this further. They are supposedly deciding whether they want to investigate further before considering filing charges. I'm guessing it'll drift away as too politically hot for some of these guys.

[taxxcpa]

Madoff

A lot of large charitable organizations, especially some Jewish charities lost large amounts investing with Madoff and had to discontinue funding the causes they supported

[DTS]

...But in many cases, they may have helped reinforce the old humorous WC Fields line that "You can't cheat an honest man."

John,

I'm wondering if you and I listened to the same radio segment last night. This same quote from WC was used. However, I don't think the majority of these people were not honest, greedy and too trusting, maybe.

D

[Roberts]

John,

I'm wondering if you and I listened to the same radio segment last night. This same quote from WC was used. However, I don't think the majority of these people were not honest, greedy and too trusting, maybe.

D

Most of the people were just investing based upon the recommendation of perceived professionals. It was the professionals that were the likely crooks. We'll see if it is investigated. Some of it could very easily be checked if payouts were higher to some than others.

[JohnH]

John,

I'm wondering if you and I listened to the same radio segment last night. This same quote from WC was used. However, I don't think the majority of these people were not honest, greedy and too trusting, maybe.

D

Dennis: No, I didn't hear anything about it last night on the airwaves. But it's one I've invoked on numerous occasions to help understand when some people get swindled. Not always, but oftentimes greed overwhelmes people's common sense when the right vulture moves in.

I keep hearing two competing stories about how he hooked up with his marks. One explanation is that he hoodwinked a lot of professional money managers. The other line is that he personally recruited people at charitable events and country club settings. People would hear about his results and would beg him to take over managing their money because of the aura around him.

I'm sure that there's some of both, and maybe over time the actual numbers will come out. But it seems to me that any professional who threw in with him had to be incompetent, crooked, or unobservant. On the other hand, maybe it's an eloquent statement about what often passes for competence even at the highest levels of the financial advice industry.

[Burke]

On the other hand, maybe it's an eloquent statement about what often passes for competence even at the highest levels of the financial advice industry.

I think that's it. I know and work with a number of financial advisors, and none of them are crooks or incompetent, or dealt with Madoff. Yet, none of them saw this coming, and none of them have made more money for their clients by moving them in and out of funds than their clients could have done for themselves by purchasing funds and just letting them alone. I bailed out of the market in 2004 -- okay, it was too early -- but never felt good enough about what was happening to get back in.

[AuditorTurnedGood]

It makes you wonder about the general moral fiber in this country over the last few decades. I recently saw the Charlie Sheen movie "Wall Street" again, and it made me wonder if much has really changed. The idea of something for nothing has been pounded into my generation (Generation Y, if you're wondering) to the point that we all came out of college expecting to be CEO of a corporation by 30. Making money in the market has been so easy, I expect the people investing with him just figured it was par for the course. I also agree they likely didn't care how the returns were being made, just that wealth grew. "greed is good".