by Deb Cupples | Media folks and even seasoned Wall Street players can be sooo gullible. They see a guy raking in millions and they swoon, like he's the investment equivalent of Christ's second coming.
During this very decade, they went ga-ga over all things Enron and even over Telecom stock analyst Jack Grubman -- back before Enron and WorldCom declared bankruptcy, that is.
Thursday, securities firm owner Bernard Madoff -- a former chairman of NASDAQ -- was arrested on charges related to a $50 billion ponzi scheme (see the SEC complaint here). The New York Times reports:
"For years, investors, rivals and regulators all wondered how Bernard L. Madoff worked his magic.
"But on Friday, less than 24 hours after this prominent Wall Street figure was arrested on charges connected with what authorities portrayed as the biggest Ponzi scheme in financial history, hard questions began to be raised about whether Mr. Madoff acted alone and why his suspected con game was not uncovered sooner.
"As investors from Palm Beach to New York to London counted their losses on Friday in what Mr. Madoff himself described as a $50 billion fraud, federal authorities took control of what remained of his firm and began to pore over its books.
"But some investors said they had questioned Mr. Madoff’s supposed investment prowess years ago, pointing to his unnaturally steady returns, his vague investment strategy and the obscure accounting firm that audited his books.
"Despite these and other red flags, hedge fund companies kept promoting Mr. Madoff’s funds to other funds and individuals. More recently, banks like Nomura, the Japanese firm, began soliciting investors for Mr. Madoff internationally. The Securities and Exchange Commission, which investigated Mr. Madoff in 1992 but cleared him of wrongdoing, appears to have been completely surprised by the charges of fraud.
"Now thousands, possibly tens of thousands, of investors confront losses that range from serious to devastating. Some families said on Friday that they believed they had lost all their savings. A charity in Massachusetts said it had lost essentially its entire endowment and would have to close." (NY Times)
I don't mean to kick people when they're down, but does nobody research or think or truly analyze anymore? Seriously.
The New York Times article has an answer: a few people do:
“'Our due diligence, which got into both account statements of his customers, and the audited statements of Madoff Securities, which he filed with the S.E.C., made it seem highly likely that the account statements themselves were just pieces of paper that were generated in connection with some sort of fraudulent activity,' Mr. Rosenkranz said.
"Simon Fludgate, head of operational due diligence for Aksia, another advisory firm that told clients not to invest with Mr. Madoff, said the secrecy of his strategy also raised red flags. And Mr. Madoff’s stock holdings, which he disclosed each quarter with the Securities and Exchange Commission, appeared to be too small to support the size of the fund he claimed. Mr. Madoff’s promoters sometimes tried to explain the discrepancy by explaining that he sold all his shares at the end of each quarter and put his holdings in cash.
There we have it: two different people saw evidence that suggested that Mr. Madoff's investment scheme was not real. Fortunately for some investors, the folks at Acorn Partners and Aksia were diligent enough and analytical enough to spot the evidence and warn clients away from Mr. Madoff's ponzi scheme.
The big question: why were other sophisticated (and likely well paid) advisers urging clients to invest with Mr. Madoff? Had they lazily failed to do the research and analysis? Were they blindly relying on word-of-mouth claims, media coverage, or Mr. Madoff's reputation? Did said advisers have financial incentives to steer their clients toward Mr. Madoff's scheme?
Lastly, on what grounds did those advisers and brokers and fund managers earn the salaries, commissions, or bonuses? Think about that when you entrust your financial security to a paid adviser.
Here's the really scary part: even our own Securities and Exchange Commission (SEC) failed to detect Mr. Madoff's fraud in recent years:
This begs the question, how diligently did the SEC look into Mr. Madoff's dealings?
Since researching corporate corruption became a hobby of mine back in 2002, I've had at least two consistent complaints: 1) the Bush Administration's seemingly hands-off approach to regulating the securities industry, and 2) Congress's under-funding of the SEC.
I realize that properly funding the SEC wouldn't do much good if whoever heads the agency takes a hands-off approach and relies on so-called "corporate integrity" (as did President Bush's first SEC chairman Harvey Pitt).
Fact: this nation saw huge potential for abuse turn into concrete reality during the wave of corporate scandals that hit during the early part of this millennium (e.g., Enron, WorldCom, Adelphia, Tyco...).
It was the perfect time for our government officials to make real reforms and push for real accountability. Instead, we got Sarbanes-Oxley, which left some serious problems inadequately addressed.
Something's gotta give, here: we need sensible regulations, sensible monitoring for compliance with the regulations, and proper funding for the SEC. Period.
For our nation's sake, Congress and the executive branch simply must resist the temptation to grant political favors to corporate folks and must instead focus on protecting us ordinary investors.
Memeorandum has commentary.
Other Buck Naked Politics Posts: