More questions about the SEC’s role:
“Finding exactly when Madoff “turned Ponzi” will have important implications for the tsunami of lawsuits expected in the wake of his collapse, not least for the regulators.
If it was only in 2001 Madoff turned crook, then he was only operating for four years before the authorities received their first major warning something was amiss.
Because it was in November 2005 the Securities and Exchange Commission received a 21-page document entitled “The World’s Largest Hedge Fund is a Fraud“, which listed 21 “red flags” for believing Madoff was running a Ponzi scheme.
The author, financial fraud investigator Harry Markopoulos, had been trying to warn the SEC about Madoff for at least two years.
His document set out in detail why it was mathematically impossible for Madoff’s investment strategies to be producing the returns he claimed.
He also claimed every senior manager who understood derivative trading believed “Bernie Madoff was a fraud”, which explained why Madoff would not let feeder fund investors mention his firm’s name in their performance summaries or marketing literature.
“Madoff does not allow outside performance audits,” Mr Markopoulos wrote.
“One London-based hedge fund, fund of funds, representing Arab money, asked to send in a team of accountants to conduct a performance audit during their planned due diligence.
“They were told ‘No, only Madoff’s brother-in-law who owns his own accounting firm is allowed to audit performance’.”
What happened next is the subject of a Congressional investigation……
The SEC’s inaction has fuelled suspicion Madoff had friends in Washington who might have pressured regulators to lay off.According to the Center for Responsive Politics, Madoff, his companies and his wife, Ruth, have spent almost $1.4 million on donations and lobbyists since 1991….”
More at The Herald Sun.
Comment:
The SEC investigated Madoff 8 times over 16 years and still didn’t manage to catch the fraud. Meanwhile, Meaghan Cheung, who, as the SEC’s NY branch chief in 2006, looked at Madoff’s books and gave him a clean bill of health, shrugged off blame. She said she couldn’t be faulted for not knowing the books were false. Markopolous has suggested she didn’t have the mathematical background to understand what was wrong.
So, after Markopolous had alleged that Madoff was running the world’s largest Ponzi scheme, three SEC staffers authorized the January 2006 enforcement case: Cheung, attorney Simona Suh, and Assistant Director Doria Bachenheimer. After interviewing Fairfield Group, the NJ feeder fund involved, they closed the case, finding no fraud, in November 2007. The SEC didn’t respond in 2008 when Markopolous tried to reopen the issue.
It’s interesting that the case was assigned to three female staffers, who seem to be mid-level management. Especially after Markopolous’ very persuasive charges and a whole litany of complaints for years. That smacks of forethought. It’s often the case that women or minorities or people at the middle-level are brought into an investigation as future scapegoats, who can conveniently be rubbished as incompetent should the need arise.That allows for legal claims to be framed against the government.
Is that what happened here?
Otherwise, a matter like this would normally be the fault of the investment advisers who failed to do due diligence and to properly diversify their clients’ assets.