The NASP Institute June 10, 2009 by B233X9

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The NASP Institute
June 10, 2009

AVOIDING INVESTMENT SCAMS AND
EXPLORING YOUR OPTIONS IF THINGS GO
WRONG
Track 202, 3:45 p.m. – 4:10 p.m.
Marvin Barge
Chief Executive Officer
Barge Consulting, LLC
             What happened with Madoff?




The NASP Institute
   Madoff Firm Affiliations

    Bernard L. Madoff Investment Securities LLC
       – broker-dealer; market maker
       – investment adviser to wealthy clients/banks
       – hedge fund manager, later an RIA (at SEC’s
         request)
    Cohmad Securities Corp.
       – broker-dealer owned by Madoff and Maurice
         Cohn used for feeding Madoff hedge fund




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   Madoff’s Cultivated Reputation

    1. Very elusive to individual investors creating an
       air of exclusivity/denied due diligence
         • Credible background (i.e., NASDAQ
             Chairman)
         • Noted for exceptional attention to detail
    2. Historically reported extremely consistent
       returns/gains in any economic environment
    3. Referrals from very wealthy investors via word
       of mouth
         • Investors assumed that since Madoff was
             being so highly recommended that he must
             be reputable.
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   Markopolos sends Red-Flags to the
   SEC/Lax regulatory oversight


    • 2000, 2001, 2005, 2007, 2008 – Harry
      Markopolos submits letters and evidence to SEC
      laying out the Madoff fraud
    • January, 2006 – SEC investigated Madoff firm,
      but found only minor violations
    • The SEC and FINRA had been in the Madoff firm
      8 times in 16 years




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   Madoff Confession/Arrest

    • December 10, 2008 – Madoff confesses to his 2
      sons that he has been running “giant ponzi”
      scheme that has cost clients over $50 billion;
    • December 11, 2008 – Madoff arrested by FBI.




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   Regulators Listen to Markopolos


    December 18, 2008 – Markopolos again shares
      documents with SEC re: red-flags (2005 letter to
      SEC)




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   Madoff confesses Ponzi Scheme to FBI

    • In early December 2008, Madoff told senior
      employees that he was struggling to find liquidity
      for client requested redemptions.
    • Madoff tells FBI that firm he was “broke” and the
      firm “insolvent” for years.
    • Investors had been paid for years out of other
      investors’ principal.
    • Madoff: “it’s all just one big lie”




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   Madoff Family - The ties that bind

    • Federal investigators have found no evidence so
      far that members of Madoff’s family helped him
      carry out the largest financial fraud in history.
    • YET!
    • Andrew Madoff held a senior position in the firm.
      Andrew and his brother Mark ran the BD.




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    Then SEC Chairman Cox has the SEC’s
    Inspector General look into staff contacts
    with Madoff




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   Madoff’s victims
    Name                                    Loss
    Fairfield Greenwich Advisors            $7.5 billion
       (investment management firm)
    Banco Santander                         $2.87 billion
      (Spanish bank)
    Access International Advisors           $1.5 billion
    Carl Shapiro                            $500 million
      (apparel entrepreneur)
    Jewish Community Foundation of LA       $18 million
    Steven Speilberg                        still unknown
    United Assc of Plumbers & Pipefitters   still unknown
      (15 years of investing with Madoff)


The NASP Institute
   Lessons

    1.   If it seems too good to be true, it usually is.
         (All investments have positive and negative performance.
         Markopolos stated that he figured out Madoff’s fraud in about 15
         minutes.)
    2.   Do your homework.
          (Due diligence was lax or non-existent. Many investors had over
             concentrated in one manager.)
    3.   Ask questions re Conflicts.
         (Does the adviser self custody? What is the independence of the
         auditor? Family relationships?)
    4.   Account Reviews.
         (Valuation of securities? Reconciliation with independent
         documents? )



The NASP Institute
    February 4, 2009: Markopolos Testifies
    Told lawmakers that turf battles between the
    Boston and New York offices of the SEC were at the
    heart of the agency's bungling of the case.




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   Markopolos Testifies
    • Based on his submissions to the SEC, the fraud should have
      been stopped in 2000, at $3- billion.
    • “The SEC lacks the financial expertise and is incapable of
      understanding the complex financial instruments of the 21st
      Century.”
    • Ed Manion in the Boston Regional Office was his champion
      and urged him to continue his investigation.
    • “The SEC is captive to the industry it regulates and is
      unwilling to pursue the big cases.”




The NASP Institute
   New SEC Chairwoman
    • Schapiro vows to make SEC a tougher regulator (February
       7, 2009)
    • The new chief vowed to make the beleaguered regulator a
      tougher and faster cop on Wall Street, saying her staff will act
      like their "hair is on fire".
    • Amid an avalanche of criticism against the agency for failing to
      detect Madoff's fraud in spite of apparently credible
      allegations brought to its attention for nearly a decade.
    • She said "a strong and reinvigorated SEC will be on the beat
      like never before to catch wrongdoers".
    • Announced steps to expedite enforcement cases by removing
      some procedural hurdles faced by investigators.


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                     QUESTIONS?



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