News and Finance

How did he fool all those people?

That question comes up every time a new investment con, especially any Ponzi-style scam, is exposed to the light of day. The Bernard Madoff case raises it one more time, along with a special sense of amazement.

For one thing, the numbers (something between $24 billion and $50 billion from a long list of clients) are unprecedented. But the particular people and institutions who lost all that money by investing with Madoff are even more intriguing.

The people at the head of the list are uniformly wealthy and sophisticated when it comes to money. The institutions — investment vehicles and private banks around the world — exist to protect their rich clients from hidden financial risk. These are the last people and organizations anyone would expect to get taken by an investment scam.

It turns out they were attracted by one reliable element of most long-term investment scams. Reports of consistently good but never spectacular gains can lull all kinds of investors into a false sense of security over time.

Though some Madoff investors are extremely wealthy, many others, such as George Rautenberg of Lexington, are merely well-off.

Rautenberg, now 85, first invested with Madoff in 1992 and earned very steady returns over the next 16 years. He kept a close eye on the details of his account and believed Madoff’s strategy would in fact produce the kinds of gains recorded.

"They weren’t outrageous compared with what all those other smart guys were doing," said Rautenberg, who invested after he and his brother sold their Boston manufacturing company. "He wasn’t winning big at all in the good years. He stayed fairly stable."

How stable? Here are the annual returns Rautenberg’s account earned over the last decade: 11.5 percent in 2007, 13.36 percent in 2006, 10 percent in 2005, 10.52 percent in 2004, 10.37 percent in 2003, 13.9 percent in 2002 and 14 percent in 2001.

Numbers such as that have an obvious appeal, and they are a staple of modern Ponzi schemes. Clients buy into the idea that they are acting conservatively, choosing a manager who never swings for the fences but still makes plenty of money for them individual health insurance. They believe they have chosen the responsible path and put their money in relatively safe hands. Be honest: Wouldn’t you?

Of course, there’s more to it than that. Big investment cons commonly penetrate tight social circles, and friends reinforce each other’s faith in the person holding their money. Hustler investment managers keep moving money, robbing Peter to pay Paul, until someone wants too much cash back and the whole con falls on its face.

The lure of solid, low-risk returns appeal to rich and middle-class investors alike. Clients who are savvy about money and those without much financial experience can feel the attraction.

While FBI agents were arresting Madoff in New York Thursday, another financial con man was making his own court appearance in Boston. Brad Bleidt was testifying in U.S. District Court via teleconference from his current home, the Federal Correctional Institution in Fort Dix, N.J.

Bleidt is serving 11 years in prison for swindling more than 100 clients who lost $27 million in what passed for a notorious case at the time. He testified last week in a lawsuit brought by investors trying to squeeze money out of his old firm’s bank, alleging it should have caught on to the scam.

The money in the Bleidt case pales in comparison with the billions lost by people who invested with Madoff. Most clients who gave Bleidt their money, sometimes their life savings, weren’t rich and never claimed to be financial experts. But they heard a familiar story.

Bleidt kept clients happy with promises of the same kind of reliable, moderate returns. He told them not to expect to shoot the lights out. They were sold.

No regulator or other outsider was paying very much attention to Brad Bleidt. Many people looked closely at Madoff’s business and some were skeptical, but no one stopped him.

Both were exposed the way all financial cons eventually end. Sooner or later, too many people want their money back, and it just isn’t there.

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