Powers On … is a monthly opinion column from Marc Powers, who has spent much of his 40-year legal career handling complex securities-related cases in the United States after serving with the SEC. Today he is an adjunct professor at Florida International University School of Law, where he teaches a course on blockchain, crypto and regulatory considerations.
I was downstairs in a bar on the Upper East Side of Manhattan that Thursday night, December 11th, 2008, playing a Texas Hold’em friendly when the calls started.
One by one, they came and went back to the office the next day. The theme was consistent. I was asked by this guy, Bernie Madoff, to represent various victims of a scam.
I had never heard of him at the time, but in a few days the whole world would know about this evil misanthropist and his fictional transactions that would become the world’s largest individual financial fraud and Ponzi program. Some calls came directly from the victims themselves; others came from their accountants and non-securities attorneys who from time to time referred affairs and clients to me.
What I heard was ugly. Many of the callers seemed to have lost millions. For some it was their life savings. Others had relied on the funds entrusted to Madoff to pay the pending costs of their children’s college education. Many victims had put almost all of their available resources into this man’s “mutual fund,” where they had received high investment returns on a regular or quarterly basis for their living expenses.
Madoff’s infinity scam, which involved many Jewish communities and charities in New York, Los Angeles, Palm Beach, and parts of Minnesota and Michigan, was harmful. He presented a touch of secrecy and exclusivity in his activities and submitted to a circle of “friends and family”. He had held prominent positions on exchanges such as the NASDAQ and the Cincinnati Stock Exchanges. His obvious position as a reputable financier resulted in many victims falling for this facade of credibility and trustworthiness.
As the national director of my law firm’s Securities Litigation & SEC Regulatory Enforcement Practice and one with experience representing victims of Ponzi schemes and internal investigations, I would be invited to attend a meeting with Irving Picard with a small group of attorneys Trustee appointed by the SIPA Court to oversee the SIPC’s recovery efforts for those who lost funds to the failed broker-dealer Madoff, Bernard L. Madoff Investment Securities, Inc.
When Irving joined Baker Hostetler and was selected by the court as SIPA trustee, our efforts temporarily expanded to over 250 attorneys across the law firm.
For over four years, I was a key member of the Trustee’s efforts, directing our national efforts here in the United States to research, develop liability theories, and litigate hedge funds to settle the $ 65 billion reported. As it turned out, the number was actually less than $ 20 billion; still a large number.
My small team was personally responsible for getting the largest settlement to date against a hedge fund, Tremont, and the second largest settlement against anyone during the twelve years that my company reclaimed – over $ 1 billion in cash.
Lessons still need to be learned from the Madoff scandal
With Madoff’s death on April 14th, I pondered his scam and how the saga offers some interesting and helpful lessons for those who are now able to step into the crypto space as investors – particularly with regard to “Memecoins “In the age of social media and the rapid spread of viral information.
These observations include the continued appeal of the “follow the crowd” mentality and the lack of financial and investment acumen of those investing in the stock and crypto markets. The same is true of a large number of Madoff’s individual victims, and even institutions that failed to understand and question his trading strategies, which allegedly (and amazingly thoughtfully) made “profits” in both the upward and downward markets. Red flags were widespread. Especially for the supposedly sophisticated hedge funds that have invested in Madoff’s alleged mutual funds.
Today we have groups of individuals buying stocks like GameStop who have grown its market cap from under $ 1 billion to over $ 12 billion since the beginning of this year. Many just follow the crowd, which some did in Madoff days. But what are these Reddit pirates doing? really know about the business? His prospects? Or how can you analyze a company’s share price?
My guess is that many who followed the crowd that drove the stock price above $ 400 and briefly pushed GameStop to a market cap of over $ 20 billion lost a lot of money, as evidenced by the significant margin calls and liquidity issues that the the Robinhood Exchange had the most frenetic trading periods.
Dogecoin should scare you by now
Let’s also look at Dogecoin. It was created in 2013 as a hoax to mock all the different altcoins. As of January 26 of this year, it was worth less than a dime – and rightly so, since it was at best used to inform others on social media websites.
Now it’s one of the largest cryptocurrencies in the world, trading at a high of over 70 cents this week before tumbling as the main booster, Elon Musk, apparently failing to impress the so-called Doge Army with a performance live on Saturday night.
Will this end well for TikTok fans and Musk’s astronomical Twitter? Social phenomena are often short-lived and it’s hard to imagine that there would be a sustainable use case for Dogecoin, no matter how much we love Shiba Inus.
What about NFTs? For me, I am currently ambivalent about this use case of blockchain technology. On the one hand, I see the appeal of owning a unique digital work of art like evidence from a physical artist. On the other hand, I just don’t get the great value here. At the very least, you can hang art on a wall or in a gallery, or donate it to a museum for the public to see. What do you do with a $ 69 million beeple? Are you pulling out a 6 inch smartphone or laptop to show off your own art?
All of this is a way of saying there are many trends in the crypto space and like any technically challenging new financial technology, it is full of scammers and scammers 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 defended myself against the SEC for apparently going too far in the lawsuit between the SEC and Ripple. The SEC had cited half a dozen financial institutions and a local Federal Reserve over eight years of personal records of the two Ripple executives named in the lawsuit. Well, I’m happy to report that Judge Sarah Netburn has agreed with me. Finding that the inquiries had inappropriate reach, she ordered the SEC to withdraw her subpoenas. Let’s hear it for our justice!
In my first monthly column in February, I expressed concern about the possible decline in the global dominance of the US dollar if we didn’t accept the central bank’s digital currencies sooner. I was concerned that China was already developing and accepting a digital yuan, which I saw as a threat to the dollar. Well, I am happy to report that others are now also affected, including Congress. Last month, GOP House Minority Chairman Kevin McCarthy raised a similar alarm.
Marc Powers He is currently an Associate Professor at Florida International University School of Law, teaching Blockchain, Crypto and Regulatory Considerations. He recently retired from Am Law 100 law firm, where he built both the national securities dispute and regulation enforcement team and practice for the hedge fund industry. Marc began his legal career in the SEC’s Enforcement Division. During his 40-year tenure, he was involved in agencies including the Bernie Madoff Ponzi program, a recent presidential pardon and the insider trading trial against Martha Stewart.
The opinions expressed are the sole proprietorship of the author and do not necessarily reflect the views of Cointelegraph or Florida International University School of Law or their affiliates. This article is for general informational purposes and is not intended as legal advice and should not be construed as legal advice.