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It's hard to believe that there are still pirates among us, but following the recent disclosure of the massive Ponzi scheme that Bernard Madoff is alleged to have perpetrated, its hard to deny that they are real and that not all of them are operating from havens on the coast of Somalia. The real question is: Will they face justice for their crimes?
For most people, pirates have been near-mythic figures who faded into history and today exist largely in the imagination of Hollywood filmmakers. Old-school cinematic pirates used to brashly swing aboard victim's vessels with a knife clenched between their teeth, but our age seems to prefer pirates who run with mincing steps and bear a vague resemblance to Rolling Stones guitarists. Whether as peg-legged rapscallions, or hook-handed fairy tale villains, the only real harm inflicted by these imaginary pirates has been when they inevitably supply the punch line to what has become a popular sub-genre of wince-inducing jokes.
Contrary to popular fantasy, pirates have always been murderous thieves with little regard for lives or property. Today, modern pirates operating zodiacs and sporting AK-47s are plaguing shipping off of the Horn of Africa, stealing fortunes and killing many.
You might be asking yourself where are the parallels between those pirates and the stock market? Let me try to connect the dots.
A large part of investment success is being among the first to locate the trading ideas that lie like buried treasure beneath the economy's surface. The first to exhume the chest gets to reap outsized rewards before the Johnny-come-latelies who inevitably follow. It has never been an easy process, and fortunes have been made based on sound investment advice, but veteran traders know that even with hard work, few can consistently beat the market. In this industry, there has always been a shortage of old maps where "X" marks the spot. Inevitably, however, there have always been shady characters willing to sell the credulous a questionable piece of parchment.
Traders have been particularly conservative when casting about for new investment ideas recently. It is indicative of these perhaps overly cautious times, that the most exciting idea lately has been to buy long-term treasuries in the hope that the Fed will drive up the price as they undertake quantitative easing (sounds like a diet plan). The appetite for risk is virtually absent from our markets, and I don't expect that many new investment expeditions are getting ready to set sail. Not particularly surprising, perhaps, since the waters seem to be infested with Buccaneers.
Investors haven't always felt that way.
For most of the last twenty years, investors did very well buying a wide variety of instruments. Some grew increasingly adventurous, as it seemed that high returns were available to those who were willing to do a little digging. A few investment advisors seemed to have the Midas touch, and investors flocked to them. Too much money was made, and too few questions were asked. You know the rest of the story.
Like pirates of yore, modern ones don't actually wear colorful headscarves and sing "yo, ho, hum and a bottle of rum." Nowadays, they wear suits and pose as well-respected businessmen, seemingly above reproach. The most notable recent brigand to prey upon the unsuspecting appears to have been Bernard Madoff, former NASDAQ chairman and industry leader. Left in the wake of his alleged fraud is the smoldering wreckage of other people's lives and fortunes. The methods may have been different than those employed on the high seas off of Somalia, but the results have been all too similar.
This is not the first time that a captain of Wall Street has been accused of high crimes. In the late 1930's New York Stock Exchange Chairman Dick Whitney was convicted of embezzlement from the Exchange's widows and orphans fund and other accounts for which he served as a trustee. He was disgraced and served a brief period of time in prison, but many contemporary observers felt that he got off easy. Unfortunately, his sentence is all too common. The list of disgraced financiers is long, and few of them have faced serious punishment. Over the next months, as investigators sift through the detritus of our recent financial crisis, I suspect that a few more well-respected names may become notorious. Will they get off easy, too?
As we watch the Madoff story unfold, let's not be drawn into the temptation to view this as another harmless white collar example of the rich preying upon the rich. Lives have been ruined and charitable organizations have been gutted just as surely as if a cutlass was used to coerce the victims. Meanwhile, the alleged perpetrator is under house arrest in his luxury Park Avenue apartment and will surely be marshalling a flotilla of lawyers to minimize his punishment.
The United Nations recently authorized the use of force against modern day pirates in recognition of the seriousness of their crimes and retribution appears to be close at hand. The problem has become so severe that China has mounted its first long-distance naval operation since the 15th century to help eradicate the Somali pirates; and warships from other nations are joining the operations. I suspect that most of the criminals preying upon the world's shipping will not be slapped on the wrist and sent to a country club prison for a year or two, and this is as it should be.
As our own authorities belatedly move against the perpetrators of financial piracy, the public is understandably skeptical that the Madoff affair will turn out to be one more example of a powerful figure who perpetrated massive crimes and managed to escape serious prosecution. With public cynicism at an all time high, and in the wake of shaken investor confidence, it is vital that we prosecute financial misdeeds with appropriate zeal.
Please understand that I am not advocating capital punishment, let alone walking the plank, but let's hope that when it is time to mete out some rough justice to our own white-collar pirates, that we fit the sentence to the seriousness of their misdeeds.
About Bernard McSherry McSherry is senior vice president of strategic initiatives at Cuttone & Company, where he is a member of the management committee involved with strategic planning and market strategy. He has served in a number of leadership positions within the Industry and has chaired several New York Stock Exchange committees, including the Equity Traders Advisory Committee. He was also a member of the Market Performance Committee and served as a New York Stock Exchange Governor for six terms. He is a past President of the Alliance of Floor Brokers, an industry trade group and is a member of both the Security Traders Association of New York (STANY) and the National Organization of Investment Professionals (NOIP).
McSherry began his career as an options trader, overseeing floor operations for Walsh, Greenwood and Company. He founded McSherry & Company in 1988, eventually growing it into one of the largest independent brokerage firms on the floor of the NYSE. In 2000, McSherry & Company was acquired by SunGard Global Execution Services. Mr. McSherry served as CEO of its New York and London-based Broker Dealers for two years following its acquisition. He then joined Prudential Equity Group and held the position of Head of Sales Trading and NYSE Operations before joining Cuttone & Company in 2007.
