Recessions expose financial scandals

Low tide in the economy sometimes reveals financial scandals that otherwise might not have been easily detected.

That's the case once again as Bernard Madoff, the perpetrator of the largest financial fraud in history, pleaded guilty on Thursday to a Ponzi scheme that sucked in billions of dollars.

Some of the scandals, now and in the past, are discovered as a result of closer scrutiny as regulators roll up their sleeves to look for copycat crimes. Sometimes, companies mysteriously close their doors, causing investors and investigators to dig deeper. And, sometimes, the scams themselves come undone by the economic pressures around them.

"When the economy suffers, people reach out for their money, or what they think is there, because they need it to live or they psychologically want to know it's there," says Jim Cohen, a criminal law professor at Fordham University Law School in New York.

In this particularly recession, the scandals just keep on coming.

Investigators are trying to figure out what's happened to billions of dollars from Stanford International Bank in Antigua. Earlier this month, the Securities and Exchange Commission charged Sunwest, an operator of Assisted Living facilities, with a $300 million securities fraud. And on Wednesday, the SEC alleged a California company, Equity Investment Management and Trading was running a $40 million Ponzi scheme – where money from future investors is used to pay off money owed to past investors.

Barton Chilton, the head of the Commodities Future Trading Commission, told reporters at the end of February that more tips are rolling in every day. He termed it a "Ponzi paloosa."

Meanwhile, some experts believe that Mr. Madoff's plea of guilty to 11 felony counts will help some of his victims to get past their sense of loss. "People will feel some sense of relief," says Mr. Cohen. "There will especially be some relief that he is behind bars."

But, Cohen says the magnitude of his betrayal has shattered so many lives. "Some people may never get past this," he says. "This is not just your garden variety kind of thief. He betrayed his religion, religious organizations, and even his friends."

In the wake of all the scams, lawyers expect law enforcement officials to begin to focus more on financial crimes.

"The government has limited resources so they will have to focus less on traditional terrorism and more on financial fraud types of crime," says Gary Markoff, a partner with Sherin and Lodgen, a law firm in Boston. "The government's going to be hiring more prosecutors, more investigators."

This has happened in the past when there has been a spate of other white collar crimes. In the mid-1980s, Rudolph Giuliani, then US attorney for the Southern District of New York, decided to focus on white collar crime. This resulted in the prosecution of Michael Milken, Ivan Boesky, and other Wall Street denizens.

In the recession of 1991-1992, the Bank of Credit and Commercial International was exposed as a money laundering organization. At the end of the recession, there was a major charity accounting scandal. And, Congress tightened banking regulation after the saving and loan scandal.

In the last recession, in 2001-2002, major corporations and their executives from such companies as Enron and Tyco were prosecuted for fraud. TV news shows featured executives being led off in handcuffs. In the wake of those scandals, Congress toughened accounting standards with the passage of the Sarbanes-Oxley legislation.

In New York, on Thursday, Madoff was remanded to jail by US District Court Judge Denny Chin. Madoff, who has said little to date about the crime, told the judge he had operated a Ponzi scheme.

"I always knew this day would come," he said. "I thought it would end quickly but it proved impossible."

Madoff, who could face life in prison, said he was deeply ashamed of his actions. "I cannot adequately express how sorry I am for my crimes," he told the court.

Investigators continue to sift through the case, trying to determine where the billions of dollars disappeared. It's possible other members of Madoff's firm will face charges as well.

• Monitor intern Brendan Conway in New York contributed to this story.