As boldfaced names who lost millions with Madoff continue to pop up in the news, Portfolio offers up the story of one regular investor who unwittingly became a Madoff victim. Tom Tugend ended up giving $25,000 to Madoff investor Stanley Chais and losing $150,000.
Portfolio: [I]n 1992 [when I was 67], [my wife] and I found ourselves with an extra $25,000 in the bank and decided to invest it, but knew enough to know that we knew nothing about the market.
So we turned to a trusted friend, whom we shall call Phil, who was our sometime lawyer and a fellow volunteer in local political campaigns. Phil had many years of successful investment experience, and although $25,000 was pretty small potatoes in his league, we insisted that we wanted into the game.
Thus I became one of some 99 limited partners in Caroline Investment Co. Phil told me that the partnership had consistently returned 15 per cent to 16 per cent a year, sometimes as much as 20 per cent, and added that he had millions of his own money in the fund.
But he warned me that even he, with decades of experience, had no idea how the partnership managed to generate such high and steady returns.
Phil sent me a 73-page document, which I never read closely until after I learned about my link to Bernard Madoff. In the papers, I have learned that Caroline was a limited partner in the Lambeth Fund, operated entirely by Beverly Hills investor and arbitrage maven Stanley Chais, whom Phil had known for many years.
Chais, in turn, passed on the funds in Lambeth, Caroline and other partnerships to an unnamed brokerage and investment firm in New York. That firm, we learned since, was Madoff Investments; Chais had known Bernie Madoff for decades, but the name never appeared in any papers and was unknown to Phil.
But like many Madoff investors, Tugend didn’t think there was anything suspicious about Caroline Investment’s consistently good returns.
For years, this opacity didn’t matter. Like most small-time amateur investors, with a full work and family life, I had happily watched as my stake steadily grew. Even with 25 per cent of the profits going to Chais and 5 per cent to Phil for their administrative work, I averaged an annual net return of 10 per cent to 14 per cent.
This compounded rapidly, since I didn’t need the income to make ends meet. Since my investment was in the form of an I.R.A. account, I didn’t have to withdraw money until I was 70½ years old and started receiving mandatory minimum distributions.
I had about $150,000 accumulated in Caroline on Dec. 11, when I received an e-mail from Phil, which started, “I have some terrible news for us.”…
On the upside, our mortgage is paid off, I still earn money as a journalist, and I get Social Security. Although my retirement-savings plan with the University of California is sinking like a stone, I’m pretty confident that my wife and I will not go hungry.
Tugend’s $150,000 was wiped out, but the real victims, he thinks, are his heirs.
I take some irrational satisfaction from the thought that, for the first time in my life, I’m in the company of so many millionaires and billionaires, and we are all going down together on the same financial Titanic.
The real losers, I’m afraid, will be the families of my three daughters, and my eight grandchildren, to whom I will now leave a rather meager monetary inheritance.