I was reading about the Madoff debacle the other other day, wondering how so many people could have missed what I thought was a basic rule of investing: don’t put all your funds in one place. My eyes wandered to a nearby article (I was actually reading a newspaper that day) about an assisted living firm in financial trouble. Having just moved my father to such a place, I naturally was interested.

     And there it was in the first sentence, Sunrise Senior Living. Uh oh. Trouble? Were our careful plans of having my father live close to us going to be upset? Would we have to move him?

     But what really struck me were the details of the the Sunrise difficulties. Basically, the company had both an accounting scandal and a questionable business model, the latter clearly exacerbated by the economic downturn. Their business model depended on producing new facilities and developing joint ventures. “To get the kid of growth to service their debt, they have to keep growing the business this way,” said Jeffrey Englander, a Standard & Poor’s analyst who follows Sunrise. With folks holding on to their homes and putting off moving to assisted living facilities, Sunrise's model was in trouble.

     Isn’t that kind of what Madoff was doing, I thought: getting new business to pay off existing debts? Had I put my father right in the middle of a Ponzi scheme without knowing it?  Was there really much difference between what Madoff did and what Sunrise did?

     Perhaps so. At least in the Sunrise situation, the SEC is involved and has forced the company to restate assets and to open its books to regulators. As a result, there have been changes in management and the possibility that Sunrise can find a way through it’s difficulties. Or at least I sure hope so.

     How many other businesses, I wondered, are in a similar situation - struggling because of a business model that worked in a rising market but depended on continuing inputs of funds to keep servicing their debt? Given mismanagement and a downturned economy, how many more Madoff/Sunrise type situations are there out there?

     At least Sunrise has a chance to survive.  Thank you SEC.

Update:  Frank Rich in the NY TImes 1.11.09 has a must read article arguing that we’ve had eight years of Ponzi schemes. Check it out.