Powers On… Why Bernie Madoff should be a powerful lesson to stock and crypto memecoin investors

Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an Adjunct Professor at Florida International University School of Law, where he teaches a course on ‘Blockchain, Crypto and Regulatory Considerations.’

I was downstairs at a bar on the Upper East Side of Manhattan that Thursday evening, December 11, 2008, playing a friendly game of Texas Hold ‘em when the calls began. 

One after the other they came, and they continued at the office the next day. The theme was consistent. I was being asked to represent various victims of a fraud by this guy, Bernie Madoff.

At this point I had never heard of him, but in a matter of days, the whole world would come to learn of this evil misanthrope and his fictitious transactions, which would become the world’s largest individual financial fraud and Ponzi scheme. Some calls came directly from the victims themselves; others came from their accountants and non-securities lawyers who, from time to time, referred matters and clients to me.

What I heard was ugly. Many of the callers appeared to have lost millions. For some, it represented their life savings. Others had relied on the monies entrusted to Madoff to pay for their children’s upcoming college education expenses. Many victims had plowed almost all their disposable funds into this man’s“investment fund”, where they had been receiving high investment returns periodically or quarterly for their living expenses.

Madoff’s infinity fraud involving many Jewish communities and charities in New York, Los Angeles, Palm Beach and parts of Minnesota and Michigan, was pernicious. He presented an air of secrecy and exclusivity in his activities, insinuating himself into a circle of “friends and family”. He had obtained prominent positions with exchanges such as NASDAQ and the Cincinnati stock exchanges. His apparent position as a reputable financier caused many victims to fall for this façade of credibility and trustworthiness.

As the national leader of my law firm’s Securities Litigation & SEC Regulatory Enforcement practice, and one with experience in representing victims of Ponzi schemes and internal investigations, I would be invited to participate with a small group of lawyers to meet with Irving Picard, who would become the SIPA court appointed Trustee overseeing the recovery efforts by the SIPC for those who had lost monies through the failed broker-dealer Madoff ran, Bernard L. Madoff Investment Securities, Inc.

Once Irving came on board to Baker Hostetler and was selected by the court to be the SIPA Trustee, our efforts expanded at times to over 250 attorneys throughout the law firm.

For over four years, I was a core member of the Trustee’s effort, and would lead our national efforts to investigate, develop theories of liability, and bring litigation against hedge funds here in the United States to recover the reported $65 billion lost. As it turns out, the number was actually less than $20 billion; still a huge number.

My small team was personally responsible for obtaining the largest settlement to this day against a hedge fund, Tremont, and the second largest cash settlement against anyone, during my firm’s twelve years of recoveries — over $1 billion in cash.

Lessons still to learn from the Madoff scandal

With the death of Madoff on April 14th, I have been thinking about his fraud and how the saga provides some interesting and helpful lessons for those now in and thinking of entering crypto space as investors — particularly with regard to “memecoins” in the age of social media and the rapid dissemination of viral information.

Among these observations is the continuing appeal of the “follow the crowd” mentality and the lack of financial and investment acumen of those investing in the stock and crypto market. The same can be said of a large number of Madoff’s individual victims, and even institutions, which failed to understand and question his trading strategies which purportedly (and astonishingly, on reflection) provided “profits” in both up and down markets. Red flags were prevalent. Especially to the supposedly sophisticated hedge funds that invested in Madoff’s purported investment fund.

Nowadays, we have groups of individuals buying stocks like GameStop, pushing its market cap from under a billion dollars to over $12 billion since the beginning of this year. Many are just following the crowd, which is what some in the Madoff days did. But what do these Reddit pirates really know about the business? Its prospects? Or for that matter, how to analyze a company’s stock price?

I suspect many who followed the crowd that pushed the stock price over $400 and briefly drove GameStop to a market cap of over $20 billion lost a great deal of money, as evidenced by the significant margin calls and liquidity issues the Robinhood exchange experienced during the most frenetic trading periods.

Dogecoin should scare you right now

Let’s also look at Dogecoin, It was created in 2013 as a joke to lampoon all the various altcoins. Until January 26th of this year, it had a value of less than one cent — rightfully so, since at best it had been used as a way to tip others on social media sites.

Yet now it’s one of the largest cryptocurrencies in the world, trading at a high of over 70 cents this week before plunging as its chief booster, Elon Musk, apparently failed to impress the so-called Doge Army with an appearance on Saturday Night Live.

Will this end well for TikTok fans and Musk’s astronomical Twitter following? Social phenomena are often short-lived, and it’s hard to imagine that there’s a sustainable use-case for Dogecoin, no matter how much we may love Shiba Inus.

What about NFTs? For me, I am presently ambivalent on this use case of blockchain technology. On the one hand, I see the appeal of owning a unique digital piece of art, like a physical artist’s proof. On the other, I just don’t quite get the great value here. At least you can hang art on a wall, in a gallery, or donate it to a museum for the public to view. What does one do with a $69 million Beeple? Pull out a 6 inch smartphone or laptop to show off the art you own?

All of the above is a way of saying, there are a lot of trends out there in the crypto space, and like any technically-challenging new financial technology it is full of con artists and fraudsters all trying to separate you from your money.

So, know what you are investing in, do your own research, and don’t always follow the crowd.

Updates from Powers On…

In my last column, I railed against the SEC for what seemed to be overreaching in the SEC v. Ripple litigation. The SEC had subpoenaed a half dozen financial institutions and a local Federal Reserve for eight years of personal records of the two Ripple executives named in the lawsuit. Well, I am pleased to report that Magistrate Judge Sarah Netburn agreed with me. She found the requests an improper overreach, and ordered the SEC to withdraw its subpoenas. Let’s hear it for our judiciary!

In my first monthly column back in February, I raised concern about the possible decline of the U.S. dollar dominance worldwide if we did not move faster to accept Central Bank Digital Currencies. I worried about China already developing and embracing a digital yuan, which I saw as a threat to the dollar. Well, I am pleased to report that others, too, are now concerned, including Congress. Last month, GOP House Minority leader Kevin McCarthy sounded a similar alarm.

The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph, nor Florida International University School of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.