Friday, December 12, 2008

How Did Bernie Madoff Do It -- And For How Long?

Make no mistake about it: the arrest of Bernie Madoff kicks off one of the biggest scandals in U.S. history. Not Wall Street history. U.S. history.

The stunning criminal complaint -- not an indictment, as some are reporting -- filed in the case gives no perspective on how long Madoff has been operating a $50 billion (his estimate) Ponzi scheme. But the possibility is mind-boggling that he has been doing it for years, under the very noses of regulators (to the extent that what he did was regulated at all).

The SEC complaint says that he was doing it for an "indeterminate period." Wrong. He was engaged in that scheme for a determinate period, but the geniuses at the SEC simply haven't got the foggiest notion how long. Why should they? They're just the friggin' market regulators, after all.

Here are some excerpts from an article that ran in Barron's in 2001. The title is, ahem, "Don't Ask, Don't Tell." (The subhead: Bernie Madoff is so secretive, he even asks investors to keep mum.")

. . .what few on the Street know is that Bernie Madoff also manages $6 billion-to-$7 billion for wealthy individuals. That's enough to rank Madoff's operation among the world's three largest hedge funds, according to a May 2001 report in MAR Hedge, a trade publication.

What's more, these private accounts, have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year.

When Barron's asked Madoff Friday how he accomplishes this, he said, "It's a proprietary strategy. I can't go into it in great detail."

Nor were the firms that market Madoff's funds forthcoming when contacted earlier. "It's a private fund. And so our inclination has been not to discuss its returns," says Jeffrey Tucker, partner and co-founder of Fairfield Greenwich, a New York City-based hedge-fund marketer. "Why Barron's would have any interest in this fund I don't know."
Was Bernie Madoff running a Ponzi scheme when these immortal words were written? Was he running a Ponzi scheme when he was vice-chairman of Nasdaq? And what about SEC filings like this one, in which he listed stocks that were supposedly in his portfolio? Did he actually own those stocks?

I have no idea. But I can say that if the hedge fund industry had any hope of fending off regulation--well, that has just about vanished.

It also may be a nail in the coffin of the SEC, whose incompetence in just about every area under its purview is growing more apparent with every passing day. The Wall Street Journal reports today:
An executive in the securities industry, Harry Markopolos, contacted the SEC's Boston office in May 1999, urging regulators to investigate Mr. Madoff. Mr. Markopolos continued to pursue his accusations over the past nine years, he said in an interview on Thursday, and according to documents he sent to the SEC that were reviewed by The Wall Street Journal.

"Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC," Mr. Markopolos wrote to the SEC in November 2005.
I can easily imagine why the Markopolous complaints were disregarded. Madoff was a pillar of the Street establishment. Nuff said.

What else is the SEC ignoring -- in addition to the obvious stuff I've been writing about in this blog for the past two years? The mind boggles (at least for anyone who hasn't read Wall Street Versus America, which described the SEC's failings in detail).

I hope that Barack Obama is playing close attention. His transition advisors in this area are top-heavy with former SEC members and other establishmentarians, so it is not clear whether it will get through to him that an overhaul of the regulatory system is urgently needed.

© 2008 Gary Weiss. All rights reserved.

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