Mr. Madoff and his Ponzi fund

Sanket Patel

i do stuff
Investor Who Lost Money in Alleged Scheme Seeks Relief From SEC

An article in the Journal today:

Investor Who Lost Money in Alleged Scheme Seeks Relief From SEC -

Investor Who Lost Money in Alleged Scheme Seeks Relief From SEC

A New York woman who lost nearly $2 million investing with Bernard Madoff has filed a claim against the Securities and Exchange Commission alleging the agency was negligent in failing to detect an alleged decades-long fraud.

The administrative claim for relief was filed with the SEC on Monday and is believed to be the first attempt by an investor to recover lost money from regulators. Phyllis Molchatsky, a 61-year-old retiree from Valley Cottage, N.Y., is seeking $1.7 million in damages from the agency.

The SEC's "statutory purpose is to protect the public interest. We feel they fell down on the job in this instance," said Howard Elisofon, the lawyer representing Ms. Molchatsky and a former SEC enforcement attorney.

The SEC declined to comment.

An administrative claim for relief is the first step in filing a lawsuit against the government. If the SEC doesn't negotiate or respond to the claim within six months, the investor can file a lawsuit in federal court.

The doctrine of sovereign immunity limits the kind of cases in which a U.S. citizen can sue the government for damages.

"It's an uphill battle to succeed with this," said Gregory Sisk, a law professor at the University of St. Thomas School of Law in Minneapolis. He said courts are reluctant to find that government agencies should act as insurance against any losses.

"The government undoubtedly would argue that if liability is imposed here it creates a disincentive for the government to do any regulation in the future," he said.

Last week, SEC Chairman Christopher Cox admitted that the SEC's examination staff had missed red flags over the years. He said the agency had credible and specific allegations about Mr. Madoff's alleged fraud going back nine years and added he was "gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations."

An SEC enforcement investigation in 2006, prompted by complaints from a former competitor to Mr. Madoff, found that Mr. Madoff had lied to SEC examiners during a routine review of his investment advisory business. The SEC closed the investigation without any public punishment and said it found no fraud. Previous SEC examinations of the Madoff trading business also didn't detect any investment fraud.

According to Ms. Molchatsky's claim, the SEC's "failure enabled Madoff to perpetuate and expand the scheme, drawing in more and more innocent investors."

In 2001, on the suggestion of her broker, Ms. Molchatsky invested $2 million -- nearly her life savings -- in hedge fund American Masters Broad Market Fund LP, which is associated with Mr. Madoff. Over the seven years, she took out $300,000 from the fund. Her broker wasn't named in the legal action.

By October 2008, her account statement said her investment was valued at $3.8 million. On Dec. 11, Mr. Madoff was arrested and confessed to a $50 billion Ponzi scheme.
I've been following this story pretty closely as my company is tangentially involved. For good, tabloid-esque coverage, see clusterstock: Bernie Madoff.

The big question for me is how long has this been going on? Was it a good fund that went bad? Some of the articles at clusterstock seem to indicate this may have been going on since the beginning- may have even been attempted before- by Madoff- and thwarted by the gov't- see Bernie Madoff: Ponzi For The Long Run
Was it a good fund that went bad?

I doubt Madoff had any financial acumen whatsoever. I think it never was a good fund. What Madoff did have in spades was poise and gravitas -- the key tools of a master conman. A master conman makes his marks come to him (I recommend the film The Sting, with Robert Redford and Paul Newman, in this connection); this is exactly how Madoff played his American marks.

At this difficult time in his life, my heart goes out to him and I hope he can afford the high-priced legal guns that will allow him to enjoy the untold millions he has doubtless stashed away surreptitiously.

Sanket Patel

i do stuff
The accountant, David Friehling, who did the auditing for Mr. Madoff has been issued a subponea.
The reliable Michael Hudson has written an essay at Counterpunch that puts Mr. Madoff and his remarkable fund in context. As with everything Hudson writes, I recommend a careful reading.
[FONT=Times New Roman, Times, serif]The Ponzi Paradigm[/FONT]

[SIZE=-1][FONT=Verdana, Arial, Helvetica, sans-serif]L[/FONT][/SIZE][FONT=Verdana, Arial, Helvetica, sans-serif][SIZE=-1]ast week the Good Lord evidently realized that not enough people had been reading Hyman Minsky’s explanation of how financial cycles end in Ponzi schemes – the stage in which banks keep the boom going by lending their customers the money to pay interest and thus avoid default.... What Mr. Madoff did was, in a nutshell, what the economy as a whole has been doing under the moniker “wealth creation.”[/SIZE][/FONT]

[FONT=Verdana, Arial, Helvetica, sans-serif][SIZE=-1]In the financial sphere, every bubble has been led by governments. Bubbles need to be orchestrated by opinion makers, topped by public officials giving a patina of confidence. The “madness of crowds” is a euphemism designed to divert blame away from governments onto the public. In the United States, Alan Greenspan played the role of public bubblemeister similar to that which Walpole had played in England’s South Sea bubble and John Law in France’s Mississippi bubble nearly three centuries ago, in the 1710s.[/SIZE][/FONT]

[FONT=Verdana, Arial, Helvetica, sans-serif][SIZE=-1]Today’s balance sheets confuse bubble wealth with real capital formation. “Investment” has become whatever accountants say they are. So have asset and debt values, given today’s leeway for financial fiction. The practice of “marking to market” permits accountants to project hypothetical gains at astronomical rates of interest, or trivializing by discounting, applying purely mathematical functions that have lost all connection to realistic rates of growth. The result is that the financial sector itself has become decoupled from the “real” economy.

[/SIZE][/FONT][FONT=Verdana, Arial, Helvetica, sans-serif][SIZE=-1]The tragedy of our time is that saving today is being diverted in ways that are decoupled from real capital formation, but merely add to the economy’s debt and property overhead.

[/SIZE][/FONT][FONT=Verdana, Arial, Helvetica, sans-serif][SIZE=-1]The recent stock market and real estate bubbles are much like pyramid schemes in the sense that what is bidding up stock and property prices is an exponential inflow of new money from pension plans and mutual funds (for shares) and bank credit (for real estate). Venture capitalists are “cashing out” while corporate managers exercise their stock options.[/SIZE][/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif][SIZE=-1]
Fooled by Ponzi (and Madoff)

Fooled by Ponzi (and Madoff)
<small>How Bernard Madoff Made Off with My Money</small>

by Stephen Greenspan

There are few areas of functioning where skepticism is more important than how one invests one's life savings. Yet intelligent and educated people, some of them naïve about finance and others quite knowledgeable, have been ruined by schemes that turned out to be highly dubious and quite often fraudulent. The most dramatic example of this in American history is the recent announcement that Bernard Madoff, a highly-regarded hedge fund manager and a former president of NASDAQ, has for several years been running a very sophisticated Ponzi scheme which by his own admission has defrauded wealthy investors, charities and other funds, of at least 50 billion dollars.

>>>>>>> To Read More, Go To eSkeptic: December 23rd, 2008
Fooled by Ponzi (and Madoff)
<small>How Bernard Madoff Made Off with My Money</small>

by Stephen Greenspan ..

The writer is engaging in misdirection. He's not wrong in what he says but the real issue lies elsewhere: the failure and inadequacy of regulation and oversight. The lay public -- but also sophisticated investors and analysts -- needs to know that there's someone keeping an eye on things. This failure and inadequacy is part of a broader pattern and is rooted in an ideology of deregulation and self-regulation going back three decades. I'm cynical and sceptical about anything being done.
In the FT:

A French money manager who placed $1.4bn with Bernard Madoff was found dead on Tuesday in what New York police called an apparent suicide as the financial industry continued to reel from Mr Madoff’s alleged $50bn fraud.

Thierry Magon de la Villehuchet, 65, co-founder and chief executive of Access International Advisors, was found dead, sitting in the chair of his New York office, by building security, police said. “Our investigative premise is that it was a suicide,” Police Commissioner Raymond Kelly was quoted as saying by Bloomberg.
Ah well, as long as Bernie's okay.

Meanwhile, the world’s second biggest investor in hedge funds responded to the Madoff by taking steps to demand that some of the largest US hedge funds – including Cerberus and Citadel – appoint independent administrators or face it pulling its money. Administrators value a funds’ assets and communicate with investors.

Switzerland’s Union Bancaire Privée, in an internal memorandum, instructed managers of the $56bn it has allocated in hedge funds to put in immediate redemptions for any fund that does not have independent administrators and custodians.

The move by UBP has the potential to reshape the US industry, where the oldest and largest funds typically do not use third-party administrators, a common practice in Europe.

Bill Brodsky, chief executive of the Chicago Board Options Exchange, said in an interview with the Financial Times that financial illiteracy among Securities and Exchange Commission staff made it easier for Mr Madoff to go undetected.

The US’s biggest options exchange said the scandal showed that inspector-level staff at the SEC had not received enough training to enable them to check for fraud effectively.

“The people doing the examinations have no clue what the right questions are to ask,” he told the Financial Times. “Going in and asking questions out of a manual doesn’t help you understand how a business works.”
This just gets funnier and funnier. The Keystone Cops couldn't be worse.
It bears repeating that what Made-off ran was not a hedge fund- and had it been a hedge fund, with a separate prime broker, he probably would not have been able to pull this off. I am with you on the fact that the current economic malaise has at its roots a fundamentally flawed ideology of deregulation, but think thats less applicable here. Madoff, as a separate account manager, and his accountants were still subject to SEC oversight- and it appears that the existing regulations simply were not applied in this case. It will be interesting to find out why not.

As for the actual hedge funds, those feeding Madoff capital, these will probably end up under greater regulatory scrutiny, but this appears to me to be fraud of the more typical variety: they promised to do something (due diligence on their sub-advisors) and it turns out they didnt. They'll quickly be sued into non-existence for their mistake, and the rest of the FoF industry will have to bear greater oversight.
... and the rest of the FoF industry will have to bear greater oversight.

I agree with everything else you're saying but this part is not so clear to me. Are there any indications that there is a change in the ideological wind, so to speak? Every piece of information I get suggests the powers-that-be are trying to maintain as much of the status quo as they can; inter alia this means they will maintain the current lax framework of negligent regulation and/or self-regulation to the extent they can. In short, for things to truly change there has to be a shift in political ideology and I don't yet see it.
NEW YORK – The founder of an investment fund that lost $1.4 billion with Bernard Madoff was discovered dead Tuesday after committing suicide at his Manhattan office, marking a grim turn in a scandal that has left investors around the world in financial ruin.
Rene-Thierry Magon de la Villehuchet, 65, was found sitting at his desk at about 8 a.m. with both wrists slashed, NYPD spokesman Paul Browne said. A box cutter was found on the floor along with a bottle of sleeping pills on his desk. No suicide note was found.

NYPD: Madoff investor commits suicide in office - Yahoo! News
I am sorry but to kill yourself over a bad investment, better yet - a ponzi scam, is not worth it.. not one bit.

Sanket Patel

i do stuff
This suicide faintly reminds me of J. Clifford Baxter - an Enron executive - who also committed suicide soon after company had imploded.
Mr Madoff and his split-strike conversions at Asia Times:

The sophisticated investor and money-manager class of Madoff victims will have a harder time explaining away their idiocy. Split-strike must have been, or certainly should have been, a question on the final paper in their MBA finance class; even if it wasn't, they undoubtedly would have access to option simulation software on their trading terminals that would have shown them the limited profit potential of the strategy. If that wasn't enough, there was a smoking gun. In 1999, physicist and math geek Daniel diBartolomeo compared Madoff's reported returns with another firm executing split-strike trades in exactly the same manner. No matter how many times he tried, no matter how many regression analyses he ran, he couldn't explain away Madoff's outsized returns from the application of Madoff's trading strategy.
Bernie Madoff's investment fund may never have executed a single trade, industry officials say, suggesting detailed statements mailed to investors each month may have been an elaborate mirage in a $50 billion fraud.

An industry-run regulator for brokerage firms said on Thursday there was no record of Madoff's investment fund placing trades through his brokerage operation.

That means Madoff either placed trades through other brokerage firms, a move industry officials consider unlikely, or he was not executing trades at all.
Source Madoff's fund may not have made a single trade - Yahoo! News

This is weird. What did he trade then?
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