The Affinity Ponzi Scheme.(International Edition; GLOBAL INVESTOR)(Bernard Madoff)

Byline: Barton Biggs; Biggs is a managing partner of Traxis Partners hedge fund in New York.

It's incredible that Madoff could have sucked so many rich and very sophisticated people into his Ponzi scheme.

The Madoff Ponzi scheme has changed the rules of trust that governed the money game. Many great names in the business will never be the same. And even though Bernie Madoff did not run a hedge fund--he was just a broker who got paid through commissions, not fees and a cut of the profits--his massive scam will help deal a heavy blow to many hedge funds and fund of funds, as well as to other professionals who steered powerful clients into Madoff's hands. But there may be worse to come. In Geneva recently, this writer heard that some private banks, European feeder funds, and American fund of funds were extensively using Madoff in their funds and in client portfolios; and were apparently secretly being paid placement fees by Madoff. If so, this creates a scandalous conflict of interest because the advisers were acting as fiduciaries and charging clients an advance fee. This could be a serious black mark for all involved in wealth management.

Madoff's scam was immense ($50 billion) and classic, but Ponzi schemes are as old as gullibility. It's incredible that he could have sucked in so many rich, sophisticated people. No verification of the accounting was ever made, and no one questioned the investment strategy and resources of the Madoff firm. Somehow worldly businesspeople swallowed the story that this single guy could generate returns of 12 to 13 percent a year trading the stock market, come rain or shine, without a single down quarter. One of the oldest adages of the investment world is that "if it sounds too good to be true, it probably is too good to be true."

Ponzi schemes through the ages have stolen the money of naive, ordinary people. This one scammed the supposedly highly analytical funds of hedge funds and the very wealthy, smart Jewish community that Madoff hung out with. It was an affinity Ponzi. Now Palm Beach, the watering hole of the East Coast upper class, is reeling with mansions for sale, the luxury stores on Worth Avenue empty, the magnificent charity balls canceled, and members resigning from golf clubs. The same plague is already affecting Greenwich, Connecticut, and next summer it will hit the Hamptons. This man Madoff was the most sophisticated and charming huckster of all time to have been mingling socially with his fellow members and their guests at the very exclusive Palm Beach Country Club even as he was taking their money.

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