MADOFF, REN TEC AND WHAT YOU READ

So, little Bernie is a page one topic again. This time however, the prime suspect is the SEC. The SEC's Inspector General issued a report that casts the SEC in a very poor light. This report can be viewed in its entirety at this link.

How could he do this volume of options?While this report will be covered in detail by the financial press, I want to focus on a hedge fund, Renaissance Technologies, that decided to exit the Madoff funds several years ago because, they didn't like the answers they were getting and the answers they couldn't get. How was Bernie making such consistent returns? How could Bernie always be in cash just when he needed to be? The WSJ today has a good article on their decision. But is it the complete story on Ren Tech?

Check out this Zerohedge piece today which reads further into the SEC Inspector General's report and discovers that Ren Tech didn't take everything out of the Madoff funds and didn't disclose its suspicions to the SEC.

Many of the matters I worked on were covered by the financial press. One of our interns once said to me, "It was great working the summer on a matter that was in the business section every week. But I was very surprised how much was incomplete or wrong."

Good to bear this in mind when reading various financial pieces, including this blog!

Cheers, Mike

MADOFF TRUSTEE SUING MERKIN

The Deal of the NYTimes reports on Irving Picard's (Madoof SIPC trustee) lawsuit filed against Ezra Merkin. Merkin (pictured to the right from Bloomberg) ran three hedge funds and allegedly turned at least $1 billion of his investors' money to Madoff to invest. There are some reports that Merkin turned all of his investors' money over to Madoff. For this, Merkin allegedly earned over $400 million in fees.

Irving Picard is suing Merkin to get him to return over $500 million withdrawn over the last five years. Picard says that Merkin either knew or should have known that the Madoff scheme was not on the up and up.

I always like when someone says, 'he either knew or should have known'. The other person, in this case Merkin, is boxed in a corner. What does he say? 'I didn't know and I shouldn't have known?' Merkin alledgedy had all his investors' money with Bernie. He should have been all over Madoffs books and records. Picard sets forth over 500 trades on Merkin's funds' statements that showed stock transactions at prices that were outside the range the stocks actually traded at on those days. That doesn't look good for Merkin.

He collected over $400 million of fees from his investors. He probably didn't tell them, 'don't expect much because I don't know much about investing.' He probably has sales information touting his investment expertise and there will probably be investors willing to testify as such.

Furthermore, until earlier this year, he was the chairman of GMAC! It is going to be hard for him to plead that he wasn't up to the task, very hard.

Cheers, Mike

RESPONSIVENESS TO WHISTLE BLOWERS AND EARLY WARNING SIGNS

There are several root cause reasons for why we find ourselves in this global economic mess and a few critical improvements needed to learn from our mistakes and reduce future risk.

One thing that I feel must be done after reading about the Madoff and other frauds, as well as Mike's post on Wednesday Leaders Do The Right Thing, Even At Personal Risk is more serious and timely response to whistle blowers/early warnings.

There is now evidence that there were both whistle blowers and early warning signs about the Madoff mess that went unanswered. There have been several others over the years. Why bother to have the SEC enforcement and investigations groups or company hotline systems, if there is not timely follow up on the issue?

But I believe an even bigger issue is when people raise early warning signs and are ignored. Have you ever been in a meeting in which everyone has fallen in love with an idea and you or someone else questions it? You quickly feel alone and as an outcast.

What is great about early warning signs is the word early. That way you can actually do something to correct the issue before it goes too far. But that only works if people are willing to raise the issues.

In this case, I am discussing early warning signs in the broadest manner. Someone challenging an idea; questioning the assumptions; coming at the issue from a new/different perspective; raising concerns about the level of risk; making statements such as this doesn't seem right; etc.

This seems a good time for us all to ask ourselves the following questions:

Are you as a leader creating a culture in which people feel free to raise their concerns and challenge the popular point of view?

Are you as a leader comfortable that these questions or concerns are given serious consideration and not cast aside too quickly?

Are you as a leader comfortable with your organization's process and handling of whistle blower reports?

More to come on the root causes of this crisis and some of the future changes needed to reduce future risk.
Until next time,
Gail

BERNIE PROMISED OVER 40% RETURNS?

If Bernie started to promise people 40%+ returns, it must have happened toward the end when he desperately needed money and the markets were generating 20%+ returns for a couple of years. If this is true, he was speeding towards his demise at the end.

A 40% return doubles the principle in TWO years! Even for Bernie it was going to be impossible to bring in enough new money if some of it was supposed to double in two years. This further explains the enormous level of false profits in the size of the fraud.

It should be interesting to see what the prosecutors and the trustee have uncovered to explain all that happened over the past years.

Cheers, Mike

MADOFF'S $50 BILLION MADE UP?

Check out this article in the NY Times suggesting that Bernie's $50 billion is much lower in reality as I laid out on the Wednesday. The article didn't attempt to explain where the cash may have gone other than ficticious profits.

Cheers, Mike

BERNIE, IRVING, IRA, WHERE DID THE $$$ GO?

(The Madoff Palm Beach Home)
One of our followers posed the question, 'Where did the money go?' Back in January I speculated on where the money went, but that was before Irving Picard, the SPIC trustee, disclosed that Madoff didn't purchase any securities for his fund for 13 years.

I haven't seen any analysis to answer the question at hand. So I will try to speculate again. However, I am going to need help. Please comment or email me with suggestions, serious suggestions only Univac, as to where the cash may have been gone.

Here are my latest thoughts. First, it wasn't $50 billion, Bernie rounded to the nearest $50 billion. After all why would we believe the figure he said? It is probably lower. So let's say that the accounts totaled $43 billion at December 15, 2009.

Second, the figure was inflated by false profits for, let's say 30 years. At a 12% fake rate of return, the principal would double every SIX years. So for example, if Bernie was running $100 million in 1979, that be $3.2 billion in 2009! So that is $3.1 billion of fake profits or said another way, of the $3.2 billion in those investors accounts, 97% was from fake profits. Another example is one of the educational institutions that originally said it had lost $125 million and later said it only invested $14 million.

Additionally, say Fairfield/Greenwich, one of the feeder funds which allegedly had $7 billion invested with Madoff, put the money in on average in 2003. Therefore its hypothetical $3.5 billion investment would be worth on paper $7 billion at a 12% rate of return. Some $3.5 billion of fake profits. And if the rate of return was 20%, the initial investment may have only been $2.3 billion which would have tripled to $7 billion or fake profits of $4.7 billion!!!

Third, the compounding of returns from 12-20% over 30 years requires an enormous amount of cash coming in every year to fund redemptions and withdrawals.

Fourth, there still were investments that were made over 20+ years that lost value or at least didn't keep up with the fraudulent rate of return.

Fifth, and a minor number in this fraud, is the money that used to fund the operations and the extended Madoff family's lifestyle for 30 years. That may included the $70 million Ruth is trying to keep. Throw in the Palm Beach house, the Hampton house, the French Riviera house, a plane, the kids homes and spending for 20 years each since they worked at the fund. Then throw in all the donations made by the extended Madoff family.

So a hypothetical summary, with no empirical data to support it, may be as follows:

Fraud $50 billion

Rounding $ 7 billion
Fake profits 30 billion
Investment losses 5 billion
Withdrawals 6 billion
Madoff take 1 billion
Found by Trustee 1 billion

These number are submitted for illustrative purposes only. I made them all up without a shred of evidence. Let me know what you think.

Cheers, Mike

BERNIE, SUCH CHUTZPAH!!

Bernie, Bernie, Bernie. Seriously, you just bilked thousands of people and charitable & educational organizations. Your wife moved $10 million out of your Fund the day before you 'randomly' decided to 'confess' to your sons.

Now you want your wife Ruthie to keep her $70 million? Of course, none of this $70 million came from you Bernie or from your ill gotten gains. And, of course, she had no knowledge of your 30 year Ponzi scheme.

I don't know about you, well actually I do, we are all rooting for the prosecuters to take everything and send the whole bunch to jail. Incidently, what is taking so long? Cheers, Mike

(courtesy of AP)

IRVING, MADOFF DIDN'T MAKE INVESTMENTS?

According to Irving Picard, the SIPC trustee handling the Madoff situation, Madoff purchased no securities for 13 years!! Irving, what does that mean?

Here is some speculation as to what it means. First, it means that for over a decade there were no profits. If there were no profits, then the distributions that investors have been receiving during that period came from new investors.

Second, the distributions that investors received then are subject to clawback. This means that investors have to give back some of the distributions they have received in excess of their original investment.

So imagine this nightmare scenario. A couple loses all their retirement monies in this scandal. They have nothing left except their two homes which they are selling. In the past couple of years, they took out distributions to buy their second home in Florida, pay for their daughter's medical school bills, her wedding, their two sons educations and so on. Now the SIPC sends them a notice that they have to return the distributions they received over the past six years. And they don't have the money anymore.

Third, if there were no investments over this time period, then others certainly knew of the fraud. The sons? Ruth, the wife? Peter, the brother? No wonder Ruthie took $10 million out the day before Madoff confessed to his sons.

Fourth, the tax implications of all of this for the investors is another nightmare. What is a loss? When did it occur? Do they file amended returns? Do they take the loss this year? On top of this the IRS has given no guidance at all yet.

What a mess.

Mike

MADOFF FEEDER FIRM AUDITORS-ARE THEY IN TROUBLE?

A few people have asked me to comment on the article in yesterday's WSJ regarding the accounting firms that did work for the Madoff feeder firms. The article suggested that the feeder firms auditors may be liable for not uncovering the Madoff fraud.

I am not an expert on auditor liability. However, I have worked on several matters regarding failed audits. In my view, any liability may depend on the materiality of the Madoff investments to the particular fund being audited.

If a feeder fund had 100% of its investments with Madoff, as some did, it seems to me that the feeder fund auditor has to do more than send a year-end confirmation to Madoff confirming the securities held on behalf of the feeder fund. The auditor would have to do more verification of the investments controlled and held by Madoff. And if the auditor did such work, there would have to be a questions as to the lack of segregation of duties, quality of Madoff's audit firm and other items.

On the other hand, if the feeder fund had 5% of its investments with Madoff, it seems that sending a year-end confirmation with some post-year end testing would suffice. After all, if the same amount of investments was held by JP Morgan, no one would expect the feeder fund auditor to visit to JPM to do further audit work.

Oh, there is a the fund that is suing its own auditor for not uncovering the Madoff fraud. Really?? Let me get this straight. You charged your investors to invest their money. You invested it with Madoff. After you invested it with Madoff there wasn't much to do, other than attract more investors with more money. So, this must mean you did sufficient due diligence to decide to put a meaningful amount with Madoff. And now you are blaming the auditor?? Weak, very weak.

Cheers, Mike

MADOFF AND RUTH

Ruth Madoff, Bernie's wife, allegedly according to the WSJ, Bloomberg and other sources withdrew $10 million from a Madoff account on December 10, the day before Bernie confessed to his sons.

Hello!!!! I spent 25 years working on troubled companies and many financial frauds. This was all orchestrated. The question is how much, if at all, was Ruth involved?
Did Bernie just say,"Ruth, why don't you transfer $10 million today to a new account"? Or was Ruth involved and moved the money out of desperation knowing that the jig was up.

I have found that there is no such thing as a coincidence concerning a fraud and a related party. Bernie may have said, 'Ruthie, it is time to take the money out and put it somewhere safe.' She may said, 'What about the boys?' And he may have replied, 'I will tell them to call their attorney tomorrow to turn me in.' And so on. They may all need to go away. The brother Peter also.

But, this is just my conjecture.

Cheers, Mike

THE DISCLOSURE OF THE MADOFF INVESTORS

So, what do you think? Did the names and addresses of each Madoff investor have to be disclosed? What purpose did it serve? Some of these people have sinced suffered humiliation on top of the loss.

Are these people now going to be targets of other financial scams, contacts from other financial advisors or worse? Would you like to have you name and address out there for the world to see as someone who potentially had a lot to invest?

I think there was a better way to deal with this. The list could have been filed under seal with access subject to bankruptcy court approval. This may have been a better first step.

What do you say?

Cheers, Mike

MARKOPOLOS ON MADOFF

(Harry)
Harry Markopolos tried to warn the SEC about Madoff. He tried to warn his friends and he tried to warn other investors. He feels badly that he wasn't successful in all cases to warn people off of Madoff. Publicly so far, he feels more sorry that the perpetrator, Bernie!

Check out this piece in the WSJ on Markopolos. Further, here is the copy of the report that Harry submitted to the SEC in 2005 entitled, The World's Largest Hedge Fund is a Fraud!

Catchy title that didn't catch much attention at the time.

Cheers, Mike

A BERNIE CONFERENCE

Can't get enough Bernie? The Harvard Club in NYC is holding a Conference on Bernie, courtesy of CNBC, covering topics such as the different causes of legal actions and the tax ramifications of Bernie's scheme. Still time to sign up. Off to the Super Bowl.
Cheers, Mike

(The Harvard Club, wikipedia)

BERNIE HAD OCD?

What a great time to be blogging! Good thing I don't have a job because I don't have time for one. Check out this blog post from CNBC based on an article in London's Daily Mail. It is a classic.

The Bernie book is going to be great and the movie....... Now, who should play Bernie?

Cheers, Mike

BERNIE IS BACK

(courtesy of ablekeough.com)


Well it is good to see Bernie back in the news again. He took a backseat to the inauguration of President Obama and then Thain and Fiat took the news over. But Bernie is back. This NYTimes article is an extensive background piece and worth the read.

As I have been sending more time the Palm Beach area, I become aware of more and more people who were badly burned by Bernie. This includes two guys I have played golf with last year. More and more people are admitting they invested with Madoff. Larry King is one of the latest according to Fox News. And Zsa Zsa Gabor according to Reuters. It is really unbelievable. Should he really be at home?