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What about Madoff though? In 1999, financial analyst Harry Markopolos had informed the SEC that he believed it was legally and mathematically impossible to ach

What about Madoff though? In 1999, financial analyst Harry Markopolos had informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. According to Markopolos, it took him four minutes to conclude that Madoff's numbers did not add up, and another minute to suspect they were likely fraudulent.[73] After four hours of failed attempts to replicate Madoff's numbers, Markopolos believed he had mathematically proved Madoff was a fraud.[74] He was ignored by the SEC's Boston office in 2000 and 2001, as well as by Meaghan Cheung at the SEC's New York office in 2005 and 2007 when he presented further evidence. He has since co-authored a book with Gaytri Kachroo (the leader of his legal team) titled No One Would Listen. The book details the frustrating efforts he and his legal team made over a ten-year period to alert the government, the industry, and the press about Madoff's fraud. https://en.wikipedia.org/wiki/Bernard_Madoff#Investment_scandal https://en.wikipedia.org/wiki/Bernard_Madoff#Investment_scan...

kahnjw 9y ago
1. A sufficiently large distribution will contain outliers. 2. Where is Madoff now?
- ta76567656 9y ago
  1. Enron? WorldCom? The entire real estate bubble collapse that blindsided the country, including the SEC and other regulators? 2. Madoff was caught because his scheme fell apart, not due to any SEC or other government action.
  - kahnjw 9y ago
    Maybe you didn't carefully read my original post. I'm not claiming the SEC has a perfect record in finding frauds before the hurt anyone (that would be nearly impossible). I am pointing out that getting away with fraud is extremely difficult. Eventually, you'll get caught, the SEC will uncover everything, and you'll be broke forever. From op: >...avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught. This statement is mostly what I was responding to. Here is a thought experiment. For the sake of this experiment lets say our economy is perfectly competitive. If all an entity had to do to get away with fraud was "set your mind to not getting caught," then every entity that participated in the economy would be committing fraud because it is in their best interest. That sounds wrong, probably because it is. White collar criminals don't plan on getting caught, they do everything they can to get away with their crimes. To me, that qualifies as setting their mind to not getting caught. Well, they get caught anyway. The companies you bring up (enron, worldcom, madoff) are outliers in the world of securities fraud. they achieved unprecedented levels of success and then failure. Using these cases are counterpoints to an argument that financial crimes are hard to get away with seems silly to me. After all, none of these frauds were successful in the end, instead, people ended up in prison.
    - zaphos 9y ago
      Even if it's relatively easy to not get caught, you can't be sure exactly how easy it is, and the downside is catastrophic. So no, I don't think every entity in your thought experiment would be committing fraud. Only ones that knew for sure exactly how easy it is and that they would not get caught for sure. And those ones, by definition, would never be caught so the public would never know ...
      - kahnjw 9y ago
        You can be sure exactly how easy it is because in a perfectly competitive economy everyone has perfect information, and the experiment's key assumption is getting away with fraud is a endogenous variable in the utility function. The fraudster can manipulate this variable to optimize their utility. This means that every actor knows exactly what they must do to avoid getting caught. It's a simplification so we can consider the implications of the notion that getting away with fraud is as easy as setting your mind to it. Another assumption is entities act solely in their own financial best interest. In this setup, everyone who will be better off by committing some form of fraud, which will be everyone who participates in the economy, will commit fraud.
        zaphos 9y ago
        Oh, okay ... but everyone having perfect information AND fraud being possible to get away with are fundamentally contradictory assumptions; fraud is based on exploiting some people not having perfect information.
        kahnjw 9y ago
        They are not fundamentally contradictory, everyone would know they are victims, still if it is in their net benefit to participate, they will. Again, this is an experiment with unrealistic assumptions (getting caught is an endogenous variable), it is intended to bring to bear the the absurdity of the statement that one can control their own fate if they commit fraud.
- dmix 9y ago
  > 1. A sufficiently large distribution will contain outliers. A sufficiently large enough example which failed to be stopped by investigators for a decade could easily outweigh thousands of outliers ultimately being a serious net-negative and outweighing such a dismissal of facts... The fact such a blatantly wrong example proceed to scale up for a decade and encompass billions of dollars before being shutdown is quite a good example of how any one investigator's knack for detail in their own limited exposure to particular cases (as in your personal analogy) is hardly sufficient to dismiss the idea that all complex cases need not worry of SEC investigation. Quite the opposite. If anything that means the SEC has smart people but only a limited capacity of attention as they tend to obsess over details in individual cases (as that is what is required in a significant percentage of them). So as long as you're not one of the easy cases (obvious ponzi schemes or involving large sums, significant amounts of people, or popular advertising) then it's not as worrying a threat as they'd like to make it appear.
  - kahnjw 9y ago
    Again, point is not just about SEC investigation. I'm pushing back against the notion that getting away with fraud is as simple as setting your mind to it.

kahnjw 9y ago

1. A sufficiently large distribution will contain outliers. 2. Where is Madoff now?

ta76567656 9y ago
1. Enron? WorldCom? The entire real estate bubble collapse that blindsided the country, including the SEC and other regulators? 2. Madoff was caught because his scheme fell apart, not due to any SEC or other government action.
- kahnjw 9y ago
  Maybe you didn't carefully read my original post. I'm not claiming the SEC has a perfect record in finding frauds before the hurt anyone (that would be nearly impossible). I am pointing out that getting away with fraud is extremely difficult. Eventually, you'll get caught, the SEC will uncover everything, and you'll be broke forever. From op: >...avoiding the ire of the SEC is relatively easy if you set your mind to committing fraud without getting caught. This statement is mostly what I was responding to. Here is a thought experiment. For the sake of this experiment lets say our economy is perfectly competitive. If all an entity had to do to get away with fraud was "set your mind to not getting caught," then every entity that participated in the economy would be committing fraud because it is in their best interest. That sounds wrong, probably because it is. White collar criminals don't plan on getting caught, they do everything they can to get away with their crimes. To me, that qualifies as setting their mind to not getting caught. Well, they get caught anyway. The companies you bring up (enron, worldcom, madoff) are outliers in the world of securities fraud. they achieved unprecedented levels of success and then failure. Using these cases are counterpoints to an argument that financial crimes are hard to get away with seems silly to me. After all, none of these frauds were successful in the end, instead, people ended up in prison.
  - zaphos 9y ago
    Even if it's relatively easy to not get caught, you can't be sure exactly how easy it is, and the downside is catastrophic. So no, I don't think every entity in your thought experiment would be committing fraud. Only ones that knew for sure exactly how easy it is and that they would not get caught for sure. And those ones, by definition, would never be caught so the public would never know ...
    - kahnjw 9y ago
      You can be sure exactly how easy it is because in a perfectly competitive economy everyone has perfect information, and the experiment's key assumption is getting away with fraud is a endogenous variable in the utility function. The fraudster can manipulate this variable to optimize their utility. This means that every actor knows exactly what they must do to avoid getting caught. It's a simplification so we can consider the implications of the notion that getting away with fraud is as easy as setting your mind to it. Another assumption is entities act solely in their own financial best interest. In this setup, everyone who will be better off by committing some form of fraud, which will be everyone who participates in the economy, will commit fraud.
      - zaphos 9y ago
        Oh, okay ... but everyone having perfect information AND fraud being possible to get away with are fundamentally contradictory assumptions; fraud is based on exploiting some people not having perfect information.
        kahnjw 9y ago
        They are not fundamentally contradictory, everyone would know they are victims, still if it is in their net benefit to participate, they will. Again, this is an experiment with unrealistic assumptions (getting caught is an endogenous variable), it is intended to bring to bear the the absurdity of the statement that one can control their own fate if they commit fraud.
dmix 9y ago
> 1. A sufficiently large distribution will contain outliers. A sufficiently large enough example which failed to be stopped by investigators for a decade could easily outweigh thousands of outliers ultimately being a serious net-negative and outweighing such a dismissal of facts... The fact such a blatantly wrong example proceed to scale up for a decade and encompass billions of dollars before being shutdown is quite a good example of how any one investigator's knack for detail in their own limited exposure to particular cases (as in your personal analogy) is hardly sufficient to dismiss the idea that all complex cases need not worry of SEC investigation. Quite the opposite. If anything that means the SEC has smart people but only a limited capacity of attention as they tend to obsess over details in individual cases (as that is what is required in a significant percentage of them). So as long as you're not one of the easy cases (obvious ponzi schemes or involving large sums, significant amounts of people, or popular advertising) then it's not as worrying a threat as they'd like to make it appear.
- kahnjw 9y ago
  Again, point is not just about SEC investigation. I'm pushing back against the notion that getting away with fraud is as simple as setting your mind to it.