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The Fraudsters

It is with a pious fraud as with a bad action. It begets a calamitous necessity of going on.

–Thomas Paine, The Age of Reason

A number of people have begun wondering what the difference is between Jon Corzine and Bernie Madoff.  The answer is that Mr. Madoff knew exactly where his clients’ missing billions of dollars went.   Mr. Corzine is still trying to figure that out.  Mr. Madoff had to keep track of more money that didn’t exist than did Mr. Corzine. Bernie’s clients lost at least $20 billion whereas the money belonging to clients that cannot be located at MF Global just yet is only $1.2 billion.

To use the word “lost” in connection with monies belonging to Mr. Madoff’s clients is not appropriate since it was only lost, in the technical sense of the word, unless you were one of his clients.  It found homes in yachts, houses and other indicia of great wealth that were the hallmark of Mr. Madoff’s life style until he exchanged it for the more modest confines of the United States Penitentiary in Atlanta and later the Federal Correction Complex in Butner, North Carolina.  Another difference between the two men is that Mr. Madoff would appear to be considerably more competent than Mr. Corzine.  Although he was neither U.S. Senator nor a governor of New Jersey, Mr. Madoff managed to keep his Ponzi scheme going for 16 years whereas Mr. Corzine brought MF Global to bankruptcy within 18 months after taking it over.  Mr. Madoff knew how to juggle books to keep his Ponzi scheme afloat; Mr. Corzine testified before the House Agricultural Committee that:  “I simply do not know where the money is, or why the accounts have not been reconciled to date.  I do not know which accounts are unreconciled or whether the unreconciled accounts were or were not subject to the segregation rules.”  Had those, or similar words come out of Mr. Madoff’s mouth, his Ponzi scheme would not have enjoyed success for 16 years.

Given Mr. Corzine’s background, his befuddlement at the absence of $1.2 billion from the company books comes as a bit of a surprise. He was hardly a newcomer to the world of finance when he joined MF Global.  He started his career as a bond trader at Goldman Sachs in 1976.  From December 1994 to June 1998 he was Co-Chairman and Senior Partner of the Goldman Sachs Group, L.P.    During his years at Goldman Sachs he reportedly earned close to $400 million, a smaller sum than the amount Bernie made, but nothing to be ashamed of and an amount that one would expect would have been paid to someone who was really good at what he did (although recent examples from the world of business show that that is rarer than the public would have believed before the financial crash.)

In testifying before the House Agricultural Committee about MF Gloabal’s problems Mr. Corzine said:  “I tried to exercise my best judgment on behalf of MF Global’s customers, employees and shareholders.”  Mr. Madoff could not have said that.

Since the loss of customers’ funds may be attributable to using customers’ funds to cover the firm’s own investments losses, Mr. Corzine was asked whether he authorized such transfers.  He said he was not one of the people who transferred funds.  He said that he “never intended to authorize anyone” to use customer funds.  If someone thought he had that was a misunderstanding.  I do not know . . .whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global.”

Mr. Corzine’s appearance before Congress and Mr. Madoff’s appearance before criminal investigators were quite different events.  When Mr. Corzine was testifying before the Agricultural Committee, Rep. Tim Johnson, (R-Il.) showed a bit of professional courtesy to someone who was a former colleague in the U.S. Congress, saying:  “I haven’t done a net-worth analysis of individuals who have testified before this committee but at least according to any [public] accounts, you’re a person of substantial wealth, and I congratulate you on your acquisitions.”  I doubt whether anyone congratulated Mr. Madoff on his acquisitions.

Some folks on Wall Street have reportedly begun floating a theory that Mr. Madoff and the firm over which Mr. Corzine presided may have more in common than was first thought.  According to a report on CNBC, an executive at one Wall Street firm says that some of the folks in his firm think that the missing funds had a Madoff-like quality-they never existed.  The theory is that the $1.2 billion that’s gone missing were simply phony trading profits that were realized from trades that never took place and were used to demonstrate to customers that their money was being ably managed.  The executive was quoted by CNBC as suggesting that “Maybe there’s a mini-Madoff inside of MF Global. A guy who just faked the trades.”  Time will tell whether that was idle speculation or perceptiveness. I hope they remember to let Mr. Corzine know when time has spoken.

Christopher Brauchli is an attorney living in Boulder, Colorado. He can be e-mailed at brauchli.56@post.harvard.edu.

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