It was one year ago today, Dec. 10, 2008, that the two sons of Bernard Lawrence Madoff informed authorities that their father had just admitted to them that his asset management operation was "one big lie." He would be arrested the following day. That makes this an anniversary worthy of some reflection.
Those two sons, Mark and Andrew, worked in the trading operation, not asset management, thus they just might have been innocent of any criminal involvement themselves, though I'm sure investigations are continuing, the books are not closed on that.
This distinction between the trading and the asset management side is crucial to the Madoff saga. Madoff's trading operation, formally known as a "market maker," launched in 1960, was legitimate. It was controversial in some respects (especially among those of us who consider the practice of payment-for-order-flow inherently dubious) but it was legal. It also may have been integral to the success of his ponzi scheme, formally known as an investment advisor (IA), although not integral in the way that was so often suspected.
Madoff was often suspected of attaining the unusually consistent results of the IA operation by "front-running," i.e. by making illegal use of information he acquired as a market maker. The SEC would periodically investigate Madoff, only to find that he wasn't front running, so he must be clean! The truth of course is that he wasn't front running because he wasn't really trading through the IA wing of his company at all. It was all a sham, and those surprisingly consistent results were simply invented. So the possibility of front-runing was serving perhaps two purposes. First, as noted it was a false scent that kept the regulators busy. But, secondly, it may have helped attract investors. "Pssst, this guy is likely front-running the info from his market maker side. We should get us a piece of that action."
Or ... maybe not. But it is an intriguing idea: that the victims were in part victimized by their own desire to get on the winning side of a con game. That con game wasn't happening. So they ended up on the losing side of another one.
Showing posts with label ponzi scams. Show all posts
Showing posts with label ponzi scams. Show all posts
10 December 2009
05 September 2009
On the SEC, Madoff, etc.
The Inspector General of the Securities and Exchange Commission has this week come out with an elaborate (457 pages) report on the failure of the SEC to uncover what Madoff was up to, especially in the period subsequent to 1992.
Nineteen ninety-two is significant because that was the year the SEC investigated and shut down an investment firm known as Avellino & Bienes, which was actually just a feeder fund for Madoff. A more thorough scrutiny into A&B would have led to Madoff, because what they were (accurately) suspected of doing was just a microcosm of the bigger Madoffian picture.
The IG found that "the SEC had sufficient information to inquire further and investigate Madoff for a ponzi scheme back in 1992. There was evidence of incredibly conistent returns over a significant period of time without any losses, purportedly achieved by Madoff using a basic trading strategy of buying Fortune 500 stocks and hedging against the S&P index."
So why did the SEC not inquire further? I see no real effort at an answer here other than a lament about the "inexperience" of the examination and inspection staff members involved.
On another point, the IG's office says that it could find no reason to believe that the romantic relationship between Bernie Madoff's niece and an SEC official, Eric Swanson, did Bernie any good in the later years of the ongoing scheme. There is a brief biography of Swanson on page 89 of the report -- which, due to introductory materials, constitute page 109 of this pdf.
Swanson, who graduated from law school in 1993, joined the SEC staff three years later. He worked within the Office of Compliance, Inspections, and Examinations (OCIE), in particular in an SRO Group. The OCIE's SRO groups oversee the self-regulatory activities of industry organizations.
After working in the SRO Group for about two years, Swanson was promoted to Branch Chief. Thereafter, his career reads like that of a successful climber of such ladders. He became Senior Counsel, and soon thereafter Assistant Director of the OCIE.
Indeed, there's a bit of high-school-gossipy stuff in the interior of the report, since the OIG tracked down two of Swanson's former girlfriends, who apparently knew about each other but did not know about Shana Madoff, during the period when he was most involved in various Madoff-investigating capacities. Apparently Swanson and Jane Doe were set to be married on Florida in October 2005, before a hurricane scuttled those plans. Then they broke up in November.
I would suspect, giving those facts, that there was something other than a hurricane involved there. Its easy enough for two people who love each other to get married regardless of meteorology. But I'll make no hypotheses.
Nineteen ninety-two is significant because that was the year the SEC investigated and shut down an investment firm known as Avellino & Bienes, which was actually just a feeder fund for Madoff. A more thorough scrutiny into A&B would have led to Madoff, because what they were (accurately) suspected of doing was just a microcosm of the bigger Madoffian picture.
The IG found that "the SEC had sufficient information to inquire further and investigate Madoff for a ponzi scheme back in 1992. There was evidence of incredibly conistent returns over a significant period of time without any losses, purportedly achieved by Madoff using a basic trading strategy of buying Fortune 500 stocks and hedging against the S&P index."
So why did the SEC not inquire further? I see no real effort at an answer here other than a lament about the "inexperience" of the examination and inspection staff members involved.
On another point, the IG's office says that it could find no reason to believe that the romantic relationship between Bernie Madoff's niece and an SEC official, Eric Swanson, did Bernie any good in the later years of the ongoing scheme. There is a brief biography of Swanson on page 89 of the report -- which, due to introductory materials, constitute page 109 of this pdf.
Swanson, who graduated from law school in 1993, joined the SEC staff three years later. He worked within the Office of Compliance, Inspections, and Examinations (OCIE), in particular in an SRO Group. The OCIE's SRO groups oversee the self-regulatory activities of industry organizations.
After working in the SRO Group for about two years, Swanson was promoted to Branch Chief. Thereafter, his career reads like that of a successful climber of such ladders. He became Senior Counsel, and soon thereafter Assistant Director of the OCIE.
Indeed, there's a bit of high-school-gossipy stuff in the interior of the report, since the OIG tracked down two of Swanson's former girlfriends, who apparently knew about each other but did not know about Shana Madoff, during the period when he was most involved in various Madoff-investigating capacities. Apparently Swanson and Jane Doe were set to be married on Florida in October 2005, before a hurricane scuttled those plans. Then they broke up in November.
I would suspect, giving those facts, that there was something other than a hurricane involved there. Its easy enough for two people who love each other to get married regardless of meteorology. But I'll make no hypotheses.
21 February 2009
Madoff wasn't doing ANY trading??
This news comes as a surprise to me, because I thought I had the Madoff situation more-or-less figured out.
I suppose the Socratic virtue, knowledge of my own ignorance, is a product of advancing age.
I thought I had Madoff figured out because I was thinking of him as a ponzi scammer in the line of other recent ponzi scammers, such as the perpetrators of the Bayou funds fraud.
The Bayou funds started out as legitimate investment vehicles. They even started out with a legitimate auditor. But the trading didn't go well, and the managers succumbed to the temptation to pretend they were in fact making money in defiance of the facts. So they started cooking he books, fired their real-world auditor, hired a "new" auditor whom they invented, and the operation evolved by stages into a ponzi scam. But even at the end there was some actual investment going on.
I've covered that and similar episodes in my work as a reporter, and I mentally categorized the Madoff news when it broke in December under the same heading. Bad trader, unwilling to face reality, turned to book-cooker.
That isn't what happened. Or, to be strict about it, if that transition DID take place at some point n Madoff's career, it took place a looong time ago.
Bankruptcy trustee Irving Picard hosted a meeting of the creditors yesterday and gave them the bad, stunning, news. Not only was Madoff making it all up, he had been making it all up since 1994 or thereabouts. He was not only a fraud on a really large scale, which we knew already, he was a fraud through-and-through.
I suppose the Socratic virtue, knowledge of my own ignorance, is a product of advancing age.
I thought I had Madoff figured out because I was thinking of him as a ponzi scammer in the line of other recent ponzi scammers, such as the perpetrators of the Bayou funds fraud.
The Bayou funds started out as legitimate investment vehicles. They even started out with a legitimate auditor. But the trading didn't go well, and the managers succumbed to the temptation to pretend they were in fact making money in defiance of the facts. So they started cooking he books, fired their real-world auditor, hired a "new" auditor whom they invented, and the operation evolved by stages into a ponzi scam. But even at the end there was some actual investment going on.
I've covered that and similar episodes in my work as a reporter, and I mentally categorized the Madoff news when it broke in December under the same heading. Bad trader, unwilling to face reality, turned to book-cooker.
That isn't what happened. Or, to be strict about it, if that transition DID take place at some point n Madoff's career, it took place a looong time ago.
Bankruptcy trustee Irving Picard hosted a meeting of the creditors yesterday and gave them the bad, stunning, news. Not only was Madoff making it all up, he had been making it all up since 1994 or thereabouts. He was not only a fraud on a really large scale, which we knew already, he was a fraud through-and-through.
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