www.meidling-forum.at

[Eberndorfer]

Early Suspicions About Bernard Madoff!

"... Madoff is one actor (a bit player) in a greater scheme with government in the lead role. [The scheme] "replaced industrial growth with purely financial wealth creation in the form of a real estate, stock market" and other asset class bubbles. Classical economics got turned on its head ..."

"... After repeated complaints to the SEC (over nine years) about a Ponzi scheme fraud, nothing was done to investigate ..."

Markopolos listed 29 Red Flags. Below is a sampling:

"- Why would Madoff Securities (BM) charge only undisclosed commissions on trades and not operate like other hedge funds - taking a 1% management fee + 20% of the profits;

- Why does Madoff not let hedge and fund of fund investors mention his firm's name in their performance summaries or marketing literature; why the secrecy; any money manager with great returns should want all the publicity he or she could get;

- Madoff's split-strike strategy was inferior to an "all index approach" and "incapable" of consistently generating high returns; "BM's strategy should not be able to beat the return on US Treasury bills due to" its glaring weakness;

- BM's protection "put" option buying strategy hurts returns; it should have challenged him to earn average 0% ones, not the spectacular performance he achieved;

- Given the estimated size of his assets, "there (weren't) enough index option put contracts in existence to hedge the way BM" claimed; his strategy was mathematically impossible;

- Counterparty credit exposures for firms like UBS and Merrill Lynch were too large for these companies to approve;

- BM's high returns could only be generated by so-called "front-running" his customers' order flows by using advance information unavailable to others; the practice is illegal and those using it are guilty of securities fraud ..."

Markopolos concluded as follows:

"... I am pretty confident that BM is a Ponzi Scheme, but in the off chance he is front-running orders and his returns are real, then this case qualifies as insider trading under the SEC's bounty program as outlined in Section 21A(e) of [The Securities Exchange Act of 1934 establishing the agency.] However, if BM was front-running, a highly profitable activity, then he wouldn't need to borrow funds from investors at 16% implied interest. Therefore it is far more likely that (he was) a Ponzi Scheme....The elaborateness of (his) secrecy, his high 16% average cost of funds, and reliance on a derivatives investment scheme that few investors (or regulators could comprehend provide strong evidence) that this (was) a Ponzi Scheme," and Madoff was a swindler ..."

"... it wouldn't be the first time that something (like the Madoff case) fell through the cracks. The revolving door there is the biggest problem. Many staff regulators who are ambitious and competent quit to pursue jobs in the financial industry that pay multiple times their government salaries.

During my time at the SEC, I heard the excuses about why cases that we, the examination staff, uncovered failed to warrant actions by the enforcement staff. Too small....too complicated....too politically connected, don't rock the boat....It is time to rethink the structure of the regulatory system because what we have isn't working ..."

"... Mary Schapiro will head the SEC for Obama. Under her stewardship, sharks on the Street will flourish. Business as usual will continue. She spent years advocating for Wall Street to be self-regulating, and is expert at quashing investigations about fraud ..."

http://baltimorechronicle.com/2008/122608Lendman.shtml