Saturday, December 20, 2008


Ponzi scheme. Thats what everyone is calling the curious case of Bernard L. Madoff. The quick story is that he owned a hedge fund that he ran basically single handedly. For years he paid out handsome profits of 10- 17%. Until recently when he declared the fund had been empty for some time. 

Arrested he claims it did not begin as a scheme, yet when he began to lose on his stock bets instead of keeping it real, he lied to his investors and continued to hand them the normal returns. But since the money was not coming from winning bets on wallstreet it began to come from new investors. 

One issue that should have raised red flags but didn't was his audit firm. With the amount of money bernie was handling most would have suspected he use a big outfit. Yet he used a small Friehling & Horowitz which reportedly had offices in strip malls and had only three emplyees, a sectratary an accountant and a partner in his 70's living in Florida. It also seems that while accounting firms are required to undergo peer review to ensure firms are standards are up to par, Friehling & Horowitz have not been peer reviewed in 15 years by claiming they do not do audits. The firm Friehling & Horowitz are now under an ethics probe by the main trade organization of accountants.

One aspect few have reported is that even if you got out of the fund a year ago with your winnings you still might have to return them, according to a previous court precedent.

In 2005 a judge ruled that based on the collapse of the hedge fund The Bayou Group, all parties who took their money out of the group had to return it.  "The idea being that the whole thing was a fraudulent undertaking, so no one should profit from it." 

The end result was that instead of a very small amount of people cashing out, every investor is able to recoup something. The case with The Bayou Group will see all investors receiving between 20 and 40% of their original return.

But this can also lead to problem. What if i spent the money after taking it out of Madoff's fund. What if its in another fund, what if I lost it in another fund? What if I am a retiree and the money i extracted from my Madoff acount is what is keeping me from foreclosing on my home and becoming homeless?

But on the side of the story, we want to know who the investors are who pulled their money. Was it a relative, a close friend? Did Madoff really lose 50 billion or is a few billion in the caymen islands waiting for Madoff to claim it?

We also have another case of the government watchdog not only sleeping at the wheel but also throwing away information of people trying to turn in Madoff, and everyone closing their ears.
One individual, Harry Markopolos has been calling Madoff a fraud for decades.

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