$50 Billion Investment Scam - How Could It Happen ?
As if it isn’t enough for private as well as institutional investors world-wide to have the worst financial crisis upon them in decades, if not ever, to deal with, the world markets were rocked last week by the shocking exposure of the Bernard Madoff investment fund.
Investors are now scrambling to assess an alleged fraud up to US Dollar 50 billion and every type of investor is involved and exposed it appears, many of them high-profile (click here for a list over investors exposed). Mr Madoff’s Investment Securities firm is supposedly, and in the founder’s own words, “all just one big lie” and “basically, a giant Ponzi scheme”.
These investors are now angrily asking each other and more importantly the regulatory authorities : How could this be allowed to happen ?
This post looks into some of the prevailing arguments to this scandalous story of fraud, lack of control and personal greed.
Bloomberg reports that The Securities and Exchange Commission (SEC) apparently never inspected the firm:
U.S. regulators never inspected Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, after he subjected it to oversight two years ago, people familiar with the case said.
The Securities and Exchange Commission hadn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said.
Investors and analysts are shocked that a scam of this proportion could be allowed to go on for so many years and the article quotes a leading expert:
“Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered,” said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. “It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems.”
CNBC has an interesting storyon a firm, Aksia, that during its due diligence of Madoff’s firm and fund discovered several reasons for not engaging in business with the company:
The firm, named Aksiaand run by Jim Vos and Jake Waltour, based its warning on several red flags it discovered during an investigation. Those included ….
1. The Madoff investment strategy, called “split-strike conversion,” is known to be very volatile; it involves trading huge positions around options expirations. Despite that volatility, its returns over the past decade were an amazingly stable 8-10 percent.
2. Aksia discovered a 2005 letter to the Securities and Exchange Commission from a financial advisor who supposedly studied Madoff’s operations. That letter asserted Madoff was running a Ponzi scheme. There was also a Wall Street Journal story at the time about one of the Madoff’s associated “feeder funds” getting shut down in 1992.
3. Madoff’s strategy was bizarre: He said he would move $13 billion in various trades at once, yet Aksia couldn’t find traders who saw his trades. There were also no regulatory filings. And family members were running the firm.
The Wall Street Journal points to even more red flags having been raised towards Madoff’s investment fund:
Harry Markopolos, who years ago worked for a rival firm, researched Mr. Madoff’s stock-options strategy and was convinced the results likely weren’t real.
“Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.
Mr. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston bureaus of the SEC, according to documents he sent to the SEC reviewed by The Wall Street Journal.
The article continue and quotes another expert, Chris Addy, for saying that there were also conflicts of interest involved:
Conflicts of interest also proved a concern. “There was no independent custodian involved who could prove the existence of assets,” says Chris Addy, founder of Montreal-based Castle Hall Alternatives, which vets hedge funds for clients seeking to invest money. “There’s a clear and blatant conflict of interest with a manager using a related-party broker-dealer. Madoff is enormously unusual in that this is not a structure I’ve seen.”
Recent securities filings showed that the firm held less than $1 billion of shares, raising questions about where the rest of the money was. Some of Mr. Madoff’s investors say they were told the firm put the bulk of its money in cash-equivalents at the end of each quarter, explaining why the public filings showed so few shares, but raising questions about where the proof was for all the cash.
Until at least November, 2006, the firm, which claimed to manage billions of dollars and be among the largest market makers in the stock market, used as its auditor Friehling & Horowitz, a small New City, New York firm.
Mr. Vos says his firm hired a private investigator and determined that the accounting firm had only three employees, one of whom was 78 and lived in Florida, and another was a secretary, and that it operated in a 13 foot by 18 foot office. His firm felt that was too small an operation to keep an eye on such a large firm operating a complicated trading strategy. A message left for the accounting firm was not returned.
Finally check out this video from YouTube on the scandal:
This post will continue to follow this amazing story ofd what could turn out to be the largest investment scam in decades if not ever.
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