Markopolous' (ignored) complaint to SEC describing Madoff's fund as Ponzi scheme
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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.
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.
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.
http://online.wsj.com/article_email/SB122956182184616625-lMy...
I wonder if the SEC did not take the report seriously because of his somewhat sarcastic tone, e.g. mention of tooth fairy, etc.
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.
Did you come up with that yourself or has this been discussed elsewhere in more depth?
Regulators could game this system by taking their lump sum and not doing the work involved with sniffing out fraud. If there's no fraud, they win, and didn't have to do any work.
If there is fraud, maybe they can squirrel some of that bounty into an offshore bank account and sneak out the back door like bernie madoff was hoping to do.
Darn.
This is a hard problem.
You'd probably end up with layers of insurance. So one company might give IBM's financial statements a Seal of Approval, stating that any investor can pay the company, say, $1,000 a quarter to insure up to $1 million in restatement-related losses. Then, they double-reinsure this (every $1 million they lose gets them $2 million from a reinsurer) and offer a bounty for anyone who catches fraud.
Or you could just expect people who suspect fraud to short the relevant stock, announce their findings, and make money if they're judged correct.
You're right that it's hard, by the way. I just think it would be easier if we were able to have multiple voluntary levels of insurance against fraud, instead of a single insurer -- especially because, in many cases, the SEC fines a company when management lies to shareholders. So if XYZ Co. overstates earnings by $100 million, investors are poorer -- and then the SEC makes the company give up another $20 million in restitution.
http://groups.google.com/group/rippleusers/browse_thread/thr...
Fraud is a normal, insurable risk. We just have a bizarre, underfunded, overambitious regulatory apparatus bolted on to where insurance is supposed to fit.