Mad Men

• By HOLMAN W. JENKINS, JR.

Feeder funds appear to explain the Ponzi longevity of money manager Bernie Madoff. To pay off early investors, mostly family and business connections in New York, he stuck his siphon into the moneyed worlds of Western Europe, Palm Beach and Hollywood.

Chad Crowe

The biggest of these feeder funds appears to be the now famous Fairfield Greenwich Group, operated by Walter Noel with help from Colombian toff Andres Piedrahita, who prospected among the watering holes of London and Madrid. Another was Access International, run by an unfortunate Frenchman who killed himself.

That their proprietors weren't aware they were servicing a Ponzi scheme is plausible -- because they had money invested with Mr. Madoff too. Yet this may be a conclusion too far. A Ponzi scheme can be profitable for its "investors," and having their own money hostage would have been a fitting incentive for the feeder's role of pulling in new funds to keep the scheme going.

Inasmuch as they were essentially extracting fees simply for placing their clients' money with Mr. Madoff, who extracted no fees, they'd have every reason to puzzle out exactly what it was Mr. Madoff was allowing them to be paid so handsomely to do.

But here is the most interesting question. Mr. Madoff gained access to billions through the feeder funds, allowing two possibilities: A pile of money exists somewhere, and Mr. Madoff knows where, as do others. His spontaneous confession to his sons, and their prompt move to inform authorities, along with the pretense that Mr. Madoff acted alone, may have been one giant theatrical confection.

Or -- the other, more likely, possibility -- the many billions raised by feeder funds were paid out as fat profits to investors, such that hundreds of Madoff clients lived very well off the Madoff scam for decades.

Under the law, you can enter a Ponzi scheme through lack of diligence, but you can't exit through proper diligence. If you leave because you smell a rat, you are complicit. Mr. Madoff may have gone on for 40 years, and one suspects a certain folk knowledge existed among many participants that something was not quite right (which is not the same as deciding not to participate).

Indeed, a continuum of complicity will likely be found, extending from the truly duped to the not-so-duped. A place to start applying the screws would be Frank Avellino and Michael Bienes, the two accountants hauled before the SEC in 1992 for illegally raising $440 million for Mr. Madoff. In the most eye-popping of its missed opportunities, the agency never ventured to look directly at Mr. Madoff's books after he somehow coughed up cash to pay back Messrs. Avellino and Bienes's clients.

That said, Mr. Madoff was not running a public company or a Fidelity mutual fund or an FDIC-insured bank. His rarefied customers chose not to afford themselves the checks and balances of institutionalized finance that, while no guarantee against loss or fraud, engage and incentivize many watchful eyes.

Journalism follows its own well-trod folkways, of course, and some now insist on trying to make Mr. Madoff symbolic of all that's wrong with our financial system. Yes, the SEC could have done a better job, but policing side deals that rich investors make with money managers arguably is not central to its mission of ensuring fair and orderly markets. And the law is already well-equipped to clean up after fraud. Bankruptcy judges are versed in the peculiar justice of "fraudulent conveyance" that allows them to claw back Ponzi profits from some clients for the benefit of others. And tort lawyers and prosecutors will likely find it shooting fish in a barrel to hold various "advisers" liable for steering clients into the Madoff scam.

In no book of wise investing, however, is it written: "Entrust all your money to a magical figure who claims to produce uncannily consistent profits by means he refuses to explain."

Nor is it written: "Pay princely commissions to any perfumed popinjay who can open the door to this mystical kingdom."

Barney Frank didn't help by fibrillating on Monday that investors everywhere would be afraid to invest after Mr. Madoff. Mr. Frank would have done better to emphasize the many ways a recognized mutual fund, and even most hedge funds, are different from a Madoff scam, beginning with an independent custodian of the underlying assets.

Better yet, Washington might spend its time profitably examining its own role in the recent housing blowout, which has destroyed more wealth than a hundred Madoffs, and about which Mr. Frank himself is an expert.