Steven Spielberg. Elie Wiesel. Mort Zuckerman. Frank Lautenberg. Yeshiva University. As one reads the list of people and enterprises reportedly bilked to the tune of $50 billion by Bernard Madoff, I recalled a childhood in which my father received bad news by asking first, "Was it a Jew?" My father coupled sensitivity to anti-Semitism with special sympathy for other Jews. In contrast, Mr. Madoff, it seems, targeted other Jews, drawing them in at least in some measure because of a shared faith.
The Madoff tale is striking in part because it is like stealing from family. Yet frauds that prey on people who share bonds of religion or ethnicity, who travel in the same circles, are quite common. Two years ago the Securities and Exchange Commission issued a warning about "affinity fraud." The SEC ticked off a series of examples of schemes that were directed at members of a community: Armenian-Americans, Baptist Church members, Jehovah's Witnesses, African-American church groups, Korean-Americans. In each case, the perpetrator relied on the fact that being from the same community provided a reason to trust the sales pitch, to believe it was plausible that someone from the same background would give you a deal, that if offered by someone without such ties would sound too good to be true.
The sense of common heritage, of community, also makes it less seemly to ask hard questions. Pressing a fellow parishioner or club member for hard information is like demanding receipts from your aunt—it just doesn't feel right. Hucksters know that, they play on it, and they count on our trust to make their confidence games work.
The level of affinity and of trust may be especially high among Jews. The Holocaust and generations of anti-Semitic laws and practices around the world made reliance on other Jews, and care for them, a survival instinct. As a result, Jews are often an easy target both for fund-raising appeals and fraud. But affinity plays a role in many groups, making members more trusting of appeals within the group.
On one level, the number of these affinity frauds is testament to the strength of communities in America. Alexis de Tocqueville—the one Frenchman generally admired by Americans for his good sense and understanding of our nation—observed that we are a nation of different organizations and clubs, of civic groups and church groups, a web of social and ethnic and religious communities. We define ourselves as Americans, but also as Jews and Catholics, Mormons and Baptists, as Cuban and Italian, Irish and Japanese, as Rotarians and Masons, Democrats and Republicans.
Predictably, the Madoff story has prompted speculation about potential new regulations that might be imposed to head off future problems. Politicians and pundits have called for the adoption of new rules for securities markets in general and hedge funds in particular, even though Mr. Madoff didn't run a hedge fund and there is no shortage of existing securities rules that were violated by his reported conduct. (Keeping two sets of books suggests his own recognition of that.)
The SEC's failure to pursue complaints about Mr. Madoff over the past decade wasn't the result of inadequate regulations but of disbelief that someone so well entrenched in the industry—a former Nasdaq chairman and SEC adviser—was capable of committing such a callous crime.
Although regulatory initiatives routinely are taken off the shelf and offered up as the solution to a newsworthy problem, the conduct Mr. Madoff is accused of was illegal long before Charles Ponzi made pyramid schemes synonymous with his name. With so many aspects of our financial system under scrutiny today, and so many people in the government who regulate and write the rules for that system set to change, it hardly makes sense to go looking for ways to prevent new Madoff-like schemes.
So far as news reports can be trusted, Mr. Madoff appears to be a special case, someone whose whole career made fraud on this scale possible. His contacts and connections, his religion and affiliations, his public and private positions, all worked to make his funds look legitimate and exclusive. And he knew how to play his prospects, when to turn potential clients down, when to give something extra.
In retrospect, the current Madoff story is about someone who was as perfectly suited to swindling as Horowitz was to playing piano. The violation of trust at the heart of that story—of trust by those with the greatest reason to trust—cries out for sympathy. It illustrates the limits of law, not the need for more of it.
Ronald A. Cass is Dean Emeritus of Boston University School of Law, president of Cass & Associates, and chairman of the Center for the Rule of Law. This article was adapted from one running in the Wall Street Journal.