Sunday, December 14, 2008

Perspectives On Madoff Fraud Case

A lot has been written since the stunning revelation about Bernard L. Madoff's massive $50 billion Ponzi-scheme fraud. See FraudTalk's original post on this story here. The fact that his own two sons, Mark Madoff and Andrew Madoff, reportedly turned him in, is about the only positive thing to come out of this story. The New York Times has written several extensive and very good pieces on the case. One Times article discusses some of the skepticism that existed prior to the fraud being revealed:

... on Friday, less than 24 hours after this prominent Wall Street figure was arrested on charges connected with what authorities portrayed as the biggest Ponzi scheme in financial history, hard questions began to be raised about whether Mr. Madoff acted alone and why his suspected con game was not uncovered sooner. ... some investors said they had questioned Mr. Madoff’s supposed investment prowess years ago, pointing to his unnaturally steady returns, his vague investment strategy and the obscure accounting firm that audited his books. Most Ponzi schemes collapse relatively quickly, but there is fragmentary evidence that Mr. Madoff’s scheme may have lasted for years or even decades. A Boston whistle-blower has claimed that he tried to alert the S.E.C. to the scheme as early as 1999, and the weekly newspaper Barron’s raised questions about Mr. Madoff’s returns and strategy in 2001, although it did not accuse him of wrongdoing.
The Times article suggests the reason so many "sophisticated" investors were duped was due to the fact that "Madoff sent detailed brokerage statements to investors whose money he managed, sometimes reporting hundreds of individual stock trades per month. Investors who asked for their money back could have it returned within days. And while typical Ponzi schemes promise very high returns, Mr. Madoff’s promised returns were relatively realistic — about 10 percent a year — though they were unrealistically steady." This steadiness in returns, coupled with the size and relative obscurity of Madoff's accounting firm, Friehling & Horowitz, described by the Times as a "tiny auditing firm based in New City, N.Y.", should have raised flags.

The Los Angeles Times echos those sentiments in an article published yesterday:

For years, the investment funds run by Wall Street legend Bernard L. Madoff turned in such consistently strong results that they seemed unbelievable.It turns out that they were, federal authorities say. As details of one of the largest alleged frauds ever to rock Wall Street began trickling out Friday, it became clear that warning signs about Madoff's funds had abounded for years.But many investors, in a bull-market rush to get in on the action, either ignored the red flags or didn't bother to look
for them."We felt it was too good to be true," Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, said of Madoff's investment performance. "You can't go 10 or 15 years with only three or four down months. It's just impossible." But some of Gradante's clients dismissed his admonitions and invested with Madoff anyway. has a piece with advice on how to avoid a financial fraud entitled, "Meltdown 101: Steering clear of investment fraud." Among the red flags and advice is not getting regular statements, which should come quarterly. The article suggests checking out any investment advisor carefully with regulators.
We at Marquet International, which has a specialization in vetting hedge fund managers, suggest that if any significant sum is to be invested, a serious look ought to be taken at the firm, its management and track record.

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