The Madoff Effect

February 20, 2009 - 10:00AM

The disappearance of Texas billionaire Allen Stanford should come as no surprise. Back in December, Bernard Madoff was arrested for allegedly running a ponzi scheme that may have cheated investors out of more than $50 billion. From Wall Street gurus to cabinet appointees, the past few months have proven that Main Street must be vigilant about where to place its trust.

Earlier this week, feds charged Stanford with fraud, saying his firm -- Stanford Financial Group -- sold certificates of deposit in the amount of about $8 billion, guaranteeing “improbable and unsubstantiated” rates of return. Reportedly, Stanford presented hypothetical investment returns as historical data during sales pitches to prospective clients.

Stanford’s use of a little-known auditor rings reminiscent of the Madoff scandal, the latter of which used a 3-man accounting firm to inspect his multi-billion dollar financial empire. Practically speaking, inspection of firms with billions in assets under management would seem to require greater accounting oversight than the tiny firms employed by Madoff and Stanford.

UBS AG was in the headlines on February 18th after the disclosure that it helped 52,000 U.S. clients hide assets to the tune of $14.8 billion as of the mid-2000s. On Wednesday, the Justice Department said UBS will pay $780 million in fines for helping U.S. customers avoid paying taxes. The government has filed a lawsuit against UBS, asking the Swiss bank to disclose all 52,000 clients’ identities.

Wall Street isn’t the only group trying to pull a fast one on the public. Obama’s first Health and Human Services nominee, Tom Daschle, had to withdraw his candidacy following reports that he failed to pay better-than $140,000 in taxes.

Treasury Secretary nominee Timothy Geithner was another cabinet contender to run into a speed bump for failing to pay taxes. The former President of the Federal Reserve Bank of New York came under pressure for not paying $35,000 in self-employment taxes.

Unless the spotlight had shined on these specific cabinet appointees, would their delinquencies have ever come to light? How many more federal officials have “forgotten” to pay their taxes? How many more multi-billion dollar schemes are lurking out in the muck?

Currently, Bernie Madoff is under house arrest in his lavish Manhattan home while Stanford’s whereabouts are unknown.