Hedge-fund managers Paul Greenwood and Stephen Walsh were arrested this week.Â Â The pony-collecting, teddy-bear treasuring scalliwags stand accused of pilfering $553 million from their investment clients.Â Those clients included Carnegie-Mellon University, the University of Pittsburgh, and the Iowa Public Employees and Sacramento County EmployeesÂ Retirement Systems.Â These institutions and funds were hornswoggled by a couple of fellow who fit the pattern, the Madoff pattern.Â What are its elements?Â Well, for one, the fund outperformed Standard & Poor’s 500 index for more than 10 years.Â If it sounds too good to be true . . . Then you have the lavish spending, weird even by Robin Leach standards.Â An $81,000 teddy bear collection?$3 million on a home for an ex-wife? Ponies galore at $100,000 a pop?Â And then there are the unanswered questions:Â How exactly are you fellows doing this?Â Oh, it’s complicated.Â Oh, he wrote his dissertation on stock-portfolio theory.Â The answers are elusive and carry that arrogance of, “You probably wouldn’t understand it all, but trust us.”Â From Enron to those pushing CDOs, we have heard that “we is sophisticated” con too many times.
So far, we have Madoff at $50 billion, Stanford at $8 billion, Marc Dreier at $400 million, and now WG Trading at well, we’re not sure because as late a february 2, WG was still raking in funds from educational institutions.Â The indictment, with its charges that the twoÂ looted that $553 million means there must have been a chunk of funds recruited.Â And the pattern was the same:Â lots of spending, lots of mystery, and lots of consistently high returns.Â The three components that enable the next Ponzi/Madoff artists to pull the con again.Â There is always a rogue in waiting, but we can head them off at the pass, that pass where spending and credibility meet.