Opinion

The Great Debate

from The Great Debate UK:

Where did all the “Madoff” money go?

Erin Arvedlund- Erin Arvedlund is a journalist who has worked for Dow Jones, The Moscow Times, TheStreet.com, Barron's and the New York Times.  She is author of "Too Good to be True: The Rise and Fall of Bernie Madoff". The opinions expressed are her own. -

Where did all the money go?

After I wrote "Madoff: The Man Who Stole $65 Billion" this was probably the first question I received from almost everyone. And I am forced to tell the bizarre truth: there's probably no money left.

This is the nature of what are known as "Ponzi" schemes, or a classic pyramid scheme--Bernard Madoff constantly had to raise money from new investors to cash out the old investors, or "redeem" them, as a traditional hedge fund or mutual fund would.

But Madoff was not running a traditional hedge fund--not at all. He was running a cash-in/cash-out fraud, using the London branch of his brokerage firm as the piggy bank where he would wire money to and fro to make it look like he was trading for the hedge fund.

But there was no hedge fund, and there was no $65 billion at the end. Madoff lied about the amount of assets he was overseeing.

The tough questions after Madoff

Matthew Goldstein– Matthew Goldstein is a Reuters columnist. The views expressed are his own –

Even as Ponzi king Bernard Madoff goes away to prison for the rest of his life and then some, there are still so many unanswered questions — both big and fundamental.

Were Madoff’s sons involved? What did his wife Ruth know? Were the operators of the giant feeder funds that sucked in tens of billions of dollars in investor money in on the charade?

from Commentaries:

Allen Stanford’s many lives

The clock is still ticking on what would appear to be an inevitable indictment for disgraced Texas financier R. Allen Stanford, the man who allegedly ran an $8 billion Ponzi scheme out of his Antigua-based bank. It appears the federal prosecutors manning the investigation are trying to make sure they have an airtight case before filing criminal charges--something Stanford and his lawyer expect will happen any day.

At first blush, it's hard to fathom why it should take this long for prosecutors to file charges, given that Stanford and two of his top associates were the subject of a civil action by the Securities and Exchange Commission nearly three months ago. One of those associates, Laura Pendergest-Holt, has even been indicted on federal obstruction of justice charges. But still nothing on Stanford.

Bryan Burroughs, in the most recent issue of Vanity Fair, does a good job detailing how just about every US investigative agency was on Stanford's tail for more than 15 years. But whether it was allegations of money laundering, or fleecing investors with the sale of dubious CDs, no one was ever able to get the goods on Stanford.

Why did the SEC fail to spot the Madoff case?

mark_williams– Mark T. Williams, a finance professor at the Boston University School of Management, is a risk-management expert and former Federal Reserve Bank examiner. The views expressed are his own. –

With Congress now probing the Bernard Madoff case, some claim the SEC missed the risk because of under staffing. Even if that’s an issue, one SEC enforcement officer using basic risk-management skills, asking probing questions, searching for clear answers, and exercising timely follow up could have helped in detecting this fraud before it grew to such a staggering size.

The central flaw at the SEC is that its current oversight approach is not sufficiently risk focused. Moreover, any changes in approach have tended to be in response to a specific event instead of incorporating an overall risk-based approach across all areas under their regulatory purview.

We are all Madoff investors

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

It was perhaps inevitable that we ended 2008, the year we learned we were up the creek, with a great financial scandal: the Madoff Ponzi case.

What is even more remarkable is the way in which the alleged fleecing of many billions of dollars from wealthy people and charities — investors who should have known better or employed people who did — serves as a mirror for the broader culture, showing how we went wrong and where we are left now that we realize our errors.

Minimizing exposure to investment management fraud

williams_mark– Mark T. Williams, a finance professor at the Boston University School of Management, is a risk-management expert and former Federal Reserve Bank examiner.  The opinions expressed are his own. —

It looks like the oldest trick in the book was used to allegedly bilk wealthy investors, banks, charities, endowments, and hedge funds out of their money.  How could sophisticated investors have been duped by what could potentially be the largest Ponzi scheme in U.S. history?  The answer may center on their due diligence prior to signing up with the investment firm run by Bernard Madoff, accused of masterminding the massive fraud.

Due diligence is the rigorous process undertaken to evaluate the controls, credibility, and capabilities of an investment firm prior to putting money at risk.  This process doesn’t stop once a money manager is chosen, but continues over the life of the relationship.  The $50 billion in reported losses and the fact that this scheme went undetected for so long are stark reminders that there is no substitute for solid investor due diligence and ongoing monitoring.  Unfortunately, it has taken a down market to expose such fraud.

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