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Markopolous' (ignored) complaint to SEC describing Madoff's fund as Ponzi scheme
- trevelyan 18y agoNice post. The section on fallout on page 15 is interesting and worth reading. Anyone know how highly leveraged the front-running hedge funds actually were? The 4:1 seems somewhat low given recent economic press coverage.
- kqr2 18y agoMarkopolos actually tipped the SEC off in 1999. His complaint is actually quite readable and gives good insight into the split-strike conversion strategy and why it cannot possibly account for Madoff's reported gains. I wonder if the SEC did not take the report seriously because of his somewhat sarcastic tone, e.g. mention of tooth fairy, etc.
- palish 18y agoA tangent. I wanted to copy and paste a paragraph that I thought was interesting, but the ability to select text is broken in the Scribd document viewer. I then tried to find a link to download the document in PDF form, but almost couldn't. After a bit of searching, I found the PDF download link hidden behind the "download" dropdown menu. When I clicked on it, Scribd dutifully notified me that I was required to sign in before I was allowed to do that. At that point, I gave up and took a screenshot of the paragraph: http://dl-client.getdropbox.com/u/315/random_pics/Markopolos_Madoff_Complaint_paragraph.PNG http://dl-client.getdropbox.com/u/315/random_pics/Markopolos... ... specifically, it's interesting that Markopolous feared for his personal safety because of this report.
- Herring 18y agohttps://addons.mozilla.org/en-US/firefox/addon/6349 https://addons.mozilla.org/en-US/firefox/addon/6349
- palish 18y agoThank you. +1 for the thought. Chrome is my primary browser, though.
- mattmcknight 18y agoPDF was on WSJ a couple of days ago: http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf
- Prrometheus 18y agoAh, Scribd. Unnecessarily complicating the internet since 2007.
- gojomo 18y agoIt wasn't completely ignored; they investigated a little in 2006, but seem to have trusted incomplete/forged records of funds under management. See: http://online.wsj.com/article_email/SB122956182184616625-lMyQjAxMDI4MjE5ODUxNjgxWj.html http://online.wsj.com/article_email/SB122956182184616625-lMy...
- Dilpil 18y agoMy hunch is that stuff like SOX is not whats going to stop this, rather, properly funding the SEC so that they can actually investigate cases like this would. Of course, SOX doesn't require a tax increase, whereas funding the SEC would.
- patrickg-zill 18y agoActually the SEC with increased enforcement, could probably fund itself through fines levied against those they were investigating.
- dangoldin 18y agoBut if they do their job well they'll end up decreasing their own funding as businesses become more legitimate.
- byrneseyeview 18y agoWe should privatize the SEC. Put a bounty on fraud detection, and then make the following deal: the government puts up a lump sum now, and the recipient must make whole all parties harmed by fraud, but only if the organization approved the fraudulent financial statements. You probably need to tweak the numbers to avoid some bad incentives, but the general principle is sound: treat it as an insurance problem, rather than a regulatory problem, and the funding you get will approach the point where the marginal utility of more fraud detection falls below the cost.
- tphyahoo 18y agoThat's a really interesting idea. Did you come up with that yourself or has this been discussed elsewhere in more depth?
- byrneseyeview 18y agoI'm sure someone else has thought of it. But I can't remember reading it anywhere else.
- kragen 18y agoTo read this document, I would either need to install Flash or sign up for a Scribd account to download the PDF. Is there another place where the document can be found? Is it possible to redirect the original article link to a place with an open-access version of the document?
- mattmcknight 18y agoPDF hosted by WSJ here: http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf
- kragen 18y agoAwesome, you rock!
- tokenadult 18y agoThis is indeed a set of specific and credible allegations that the SEC should have investigated thoroughly. The level of detail is far above that of the usual letter indicating suspicions about an organization, and the author shows knowledge of the relevant law.
- raheemm 18y agoMore about this guy Markopolos - http://www.google.com/hostednews/ap/article/ALeqM5ihAaFD-AY7JK68kC36YAT7cA_xIgD955PDQ00 http://www.google.com/hostednews/ap/article/ALeqM5ihAaFD-AY7...
- rajat 18y agoOne thing that's notable, from this report and others, is that there were a class of investors who knew that Madoff was doing something illegal to get these kind of returns, and were bragging about it. These investors didn't think it was a Ponzi scheme; they thought he was using insider knowledge from his broker-dealer's access to order flow. And they were happy to go along with this obviously illegal practice. I don't think it's too much of a jump to speculate that the ones who knew there was something illegal going on were the managers of the so-called Funds of Funds and other hedge funds. These include managers of our public pension funds. These managers are too knowledgeable not to know something's up when these kind of returns are being posted, and when red flags were being raised, and they were happy to go profit from it because they figured they were at a safe enough distance from the illegal trading.
- joe_the_user 18y agoIt is a fascinating report. Yes, it seems like Madoff was able to able to convince his investors based on the implications that he made his money with insider trading, The classic approach of con-man is to attract the mark with the promise of ill-gotten gains. The report shows everything we've seen in the news and more. Remember, the report's scenario is for a Madoff scheme collapse in 2005. One would have to assume that in three years, the money hole has gotten bigger while market conditions have gotten far worse. One point of the report is that most reputable funds managers avoided Madoff but didn't actually help bust him. So we have not seen large US banks or pension plans hit by this, just small but wealthy individuals and European private banks. But as the report says, the hit these folks will take can affect everyone else.
- mattmaroon 18y agoI wouldn't say they knew it. I mean, they seriously suspected it. But there's a big difference between 99 and 100 percent certainty.
- Eliezer 18y agoNo, there's a 1% difference between 99 and 100 percent certainty. Or are we working with the log odds here? Are you going to tell me there's a big difference between 99.999999% certainty and probability 1? I think at some point you become morally liable and that's well before 99% certainty.