Back to Madoff

I want to re-address the Bernie Madoff story for a second here, because something is bothering me. Now, on the one hand, I want to chide the investors in the fund for being greedy and blind: refusing to ask questions about how the fund was making money as long as the money was coming in. HOWEVER, Dealbook, today, published some trading statements that Madoff customers received. Looking at these statements, I can’t think of any way that a customer could look at them and have any reason to conclude that the business was anything other than legit.
Said differently, I had a 401k account at Scudder in which I owned a variety of mutual funds. Every quarter, they sent me an accounting statement which shows the change in value of the funds. Obviously, I assumed that my money was actually being invested in these funds. I also assumed that the funds were honestly reporting their positions and trading. I have no reason to assume fraud anywhere in the chain – but Scudder could be completely fabricating my statements, just like Madoff did… I think this is highly unlikely, and thus I’m back to sympathizing with Madoff’s investors instead of blaming them for being blind and greedy.
So that takes care of the individual investors, but there was also a massive class of institutional investors (managing money for individuals) in Madoff’s fund. Do they have a higher fiduciary responsibility than individuals, and the obligation to know exactly what they are investing their clients’ money in? Yeah – I think they do, and I think they are to blame big time. Does the argument “hey, how could Nomura know there was fraud – they were receiving the same phony statements” hold water? I don’t know… I want to say “no,” but I’m not sure I’m being consistent here…
Anyone have a thought on this?

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