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January 27, 2009 - Madoff Enablers Winked at Suspected Front-Running (Bloomberg)

That’s why it’s hard to weep for some of Madoff’s victims, says James Walsh,
author of You Can’t Cheat an Honest Man (Silver Lake, 1998), a study of Ponzi-scheme perpetrators and victims.  

“We’ve become a nation of investors, but nobody wants to do the work of applying Benjamin Graham’s analysis tools,” Walsh says, referring to the father of value investing. “They want a genius to give them a shortcut. That’s what made it a target-rich environment for Madoff.”

It’s the same mind-set that’s behind economic bubbles, which are “naturally occurring Ponzi schemes,” says Robert Shiller, a professor of economics at Yale University and author of Irrational Exuberance (Princeton University Press, 2000).
Successive waves of investors generate gains for the last wave until the bubble bursts.

Suspending Disbelief

“The essence of a Ponzi scheme is a story that justifies these enthusiasms,” Shiller says, whether the phenomenon is Internet stocks or housing prices or Madoff. “The social feedback loop of other people making money causes people to suspend disbelief.”
....
Invitations Needed

“He knew how to play on scarcity,” says Robert Cialdini, a professor of psychology at Arizona State University and author of a book on the subject of influence. “Madoff communicated the exclusivity of membership in his club. You had to be invited in. If you weren’t, you would lose the returns. That overwhelmed any caution people might normally have felt.” ... Madoff applied the same principle in the 1990s, as well- heeled investors began flocking to hedge funds.