Schadenfreude is not a very healthy emotion, so I try to keep my distance from it as best as I can. Yet the temptation to give in while reading the slew of articles covering the scandal concerning Nasdaq chairman Bernie Madoff over the weekend was just too overwhelming. On the one hand, it made me thankful that I could never have stumped up the minimum investment of a million dollars, not on a university professor’s salary, to even be considered a possible client. In fact, I could not come up with even just a fifth of that sum to hand over to the local branch of Banco Santander. The Spanish bank, through its Geneva-based Optimal Investment Services, faces losses of $3.1 billion in placements with Madoff’s firm. So much for counting your blessings. On the other hand, I must confess to some serious gloating over anecdotes from Madoff’s country club chums in Palm Beach. They now bother to ask about prices of items on the menu or on the golf course services list. The poor souls even have to make do with Lexus cars, when just two months ago they were nonchalantly driving around in Bentleys. Nonetheless, I genuinely feel sorry for the charities and non-profits that will have to curtail their good works or even close shop because their endowments have been all but wiped out. Those who think this recently uncovered fraud is just another case for greater regulation of the financial sector are wide off the mark. Madoff’s outfit was not an under-regulated hedge-fund, although it did business with many of these. I don’t know if there is any technical definition of a “securities firm”, but what comes closest to describing the operations of the Bernard L. Maddoff Investment Securities is that of a “Ponzi scheme” or a “pyramid scam”: high rates of return are paid off to clients with the money of incoming investors, without any real business opportunity being profitably and sustainably exploited. Such operations have long been illegal in over 20 countries, including the United States. With an estimated $50 billion down the drain, the racket perpetrated by Madoff may be the biggest so far, but it certainly won’t be the last. Why so? Because of greed and gullibility, two traits that have always accompanied our fragile human condition. All things being equal, the rational economic man is always supposed to choose the investment that promises a higher yield, and avarice blindsides him to the inconsistencies and risks of how such dividends are produced. Herd mentality, or uncritically doing the same thing as everybody else, the thought that some businesses are just “too big to fail” and an inborn optimism regarding the future take care of eliminating the remaining obstacles for people to buy into such dubious ventures. How can we avoid falling prey to these and similar practices? A rule of thumb in investment is that one can participate in the rewards only if he participates in the risks; so beware of “guaranteed returns” because they don’t exist; moreover, they can’t exist. At about 10 to 12 per cent a year, Madoff’s fund offered yields that were superior although close to those of the market, but his were unbelievably steady, defying volatility. His products had the reliability of “Jewish T-bills”, a friend remarked. The purpose of investment is, of course, to put one’s surplus resources to use as capital for another’s productive work, delivering real goods and services that consumers need. Only in a Ponzi scheme or a pyramid scam does money automatically give rise to more money as it passes through a revolving door. It’s definitely wrong to keep one’s resources idle, so there is a moral duty to invest. But the obligation extends to finding out how one’s money is put to use, whether it will be used well. If one does not reasonably understand the business plan, better not to invest at all, no matter what other people –purported financial wizards-- say or do. Certainly, one may miss out on a once-in-a-lifetime opportunity -- but also be spared the loss of a swindle. Madoff’s strategy did not come straight out of arcana. On the contrary, it was too simple to be true; nevertheless, people forced themselves to believe it. One shouldn’t be too quick in passing off responsibilities to regulators, auditors and financial intermediaries (hedge funds, investment banks, brokerage firms and so forth) either; for they can all be as greedy and as gullible as oneself, if not even more. The SEC had repeatedly investigated Madoff in 1992, 1999, 2005 and 2007, yet was unable to detect serious anomalies, only a few technical violations. Most puzzling is the disconnect between Madoff’s alleged misdeeds and the persona he has been able to project, not only for business partners and friends of the past 20 or 30 years, but also for close family and friends. His was the typical American success story: a young man from Queens who began as a lifeguard and sprinkler installer to become one of the most sought after wealth managers. He was also very much of a family man and drew in many of his close relatives, including his brother, Peter, his two sons, Mark and Andrew, a nephew and a niece into the business. (To date, none of Madoff’s relatives – not even the niece who wed a former SEC agent assigned to her uncle’s case have been accused of wrongdoing). Together with his wife, Ruth, he had set up the Madoff Family Foundation which funded schools and hospitals in Israel as well as centers for the performing arts in New York. Respected and admired in Jewish philanthropic circles, it was considered a badge of honour to have him serve on the board of institutions like the Yeshiva University. Although he played golf only in the most exclusive of clubs in the Hamptons, Westchester County and Boca Raton, and despite owning several homes and a yacht in the Bahamas, his lifestyle could not be regarded as extravagant compared to his peers. Rather, he was quiet and lived in understated elegance; some acquaintances described him as aloof, almost mystical. Perhaps this reputation was supported by the fact that, on several occasions, he had exercised the rarest of privileges –that of turning away investors. Madoff may have been cheating on his clients, but ironically, he was doing so with restraint, which made his front only a lot more credible and longer-lasting. Indeed, there is no simple explanation for all that has happened. However, even at this point, a final lesson may still be disclosed. It consists in man’s nearly limitless capacity for deception. In fooling others, a time may come in which one learns to do it so well, that he ends up believing his own lies. Fraud then becomes self-delusion. Alejo José G. Sison is a Business Ethics scholar at the University of Navarre. His latest book is entitled Corporate Governance and Ethics: An Aristotelian Perspective (Edward Elgar, 2008).