On 2009-01-05 05:23:56 -0800, Tman <no.email[at]no.email.com> said:

- quote -

People who are experienced and know the right questions to ask and how
to avoid scams when buying a car or hiring someone to fix their roof
can lose their common sense when investing large amounts of money. It
is amazing.

Don wrote:
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And, judging by the recent Madoff situation, experienced investors
should constantly bear in mind that "a sophisticated investor is an
oxymoron".

Seriously though, as someone who is an outsider (from the investment
industry), but a bit familiar (with the CFA curriculum at least), the
Madoff thing leaves me with a great deal of distrust for the
capabilities of the whole industry -- who can I trust? Madoff is not
the only to blame -- what about the dozens of fiduciaries and direct
investors that got suckered into skipping due diligence 101?

On 2009-01-04 07:33:07 -0800, BreadWithSpam[at]fractious.net said:

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It is hard for small investors without much experience to appreciate
that the best "financial advice" comes with a cost and the worst is
often offered free of charge. Apparently the same can be true of more
affluent investors. The desire to get something for nothing is so
strong, that people fail to ask simple and obvious questions. Why is he
telling me about this? What is his motive for recommending one thing
rather than another? How does he get paid for all his effort? Financial
advisors do not go around recommending various mutual funds, taking out
expensive ads in the media, and hosting free dinners, all because of
their charitable nature. They have to get paid somehow. When I need
someone to fix my furnace, I have to pay for the work. Why should I
expect someone to fix my finances free of charge? Inexperienced
investors should constantly bear in mind the saying "He who pays the
piper calls the tune."

norak <k.norak[at]gmail.com> writes:

- quote -

A hedge fund is like a mutual fund, but with stricter rules
about who may invest, and looser rules about what the manager
may do. Just like regular mutual funds, there are hedge
funds which invest in stocks, in bonds, in commodities, etc.
But there are also hedge funds which use more complex
strategies. Madoff's strategies supposedly included buying
a stock or an index then then buying and selling options
on those underlying securities in order to (theoretically)
eliminate the volatility and make a profit. Other hedge
funds will buy one thing and sell short another and thus
make bets on the relationships between the prices of those
two things. Those "things" could be anything from stocks
to bonds to currencies to index futures.

Notably, though, most hedge funds charge a percentage of
assets under management, plus a portion of whatever
profits are made for the clients. Madoff didn't charge
any of that at all. In theory, his entire compensation
was based on commissions that his advisory business
generated for the broker-dealer which he also owned.
To call that "questionable" is a vast understatement.



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norak wrote:

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Neither, he ran a Ponzi scheme. His victims believed it was a hedge fund.

Joe

norak <k.norak[at]gmail.com> writes:

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Neither.

--
Rich Carreiro rlc-news[at]rlcarr.com

Some people say Madoff was running a hedge fund, but I heard a friend
of mine saying he was running a bond fund. Which is correct?

Igor Chudov <ichudov[at]algebra.com> wrote:

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You are painting with far too broad a brush. Many hedge funds are run by smart,
conscientious, hard working managers. Some aren't. -- Doug

On 2008-12-19, beliavsky[at]aol.com <beliavsky[at]aol.com> wrote:
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And in reality, those hedge funds are run by enterprising assholes who
only are concerned about collecting their 2+20 fees.

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Tad Borek <borekfm[at]pacbell.net> writes:

- quote -

That's pretty surprising. State regulators, at least, on a
regular basis shut down folks who operate as IAs without
registering, or who register but then don't operate in
accordance with what they wrote on their ADVs. And they
are usually way more serious about anyone who's IA shop
either takes custody of client money or where the shop is
affiliated with a B-D or other custodian. If you go to
state securities regulators pages you'll regularly see
listings of enforcement actions and in my observation
a substantial number of the complaints include "failed
to register and acted as an investment adviser or investment
adviser representative in violation of the Act and
Regulations". Or something similar.

To find the regulators in any of the states, start
here: <http://www.nasaa.org/about_nasaa/2062.cfmSometimes you have to click through a couple of pages
to find their enforcement listings.

- quote -

It's really very surprising.




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On Dec 18, 2:01*pm, Igor Chudov <ichu...[at]algebra.com> wrote:

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In theory, the hedge funds who invested with Madoff should have been
more sophisticated than their investors and better able to sniff out
fraud.

"PeterL" <po.ning[at]gmail.com> wrote in message
news:fd484e74-a7ce-45d1-8376-ad96617e2a6e[at]u18g2000pro.googlegroups.com...
- quote -

suspect that you're not.

On 2008-12-18 11:26:49 -0800, Igor Chudov <ichudov[at]algebra.com> said:

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Yes, that sounds plausible. The admission of failure and loss of
respect could have seemed to him to be worse than the risk of arrest
and jail.

Maybe, like General Motors, he hung on to the slim hope that he could
turn it around and eventually make money legitimately for both old and
new investors.

Bernie, if you are reading this newsgroup, please clear up all the
confusion for us.

On 2008-12-18, Don <dwzimm[at]telus.net> wrote:
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My own speculation is that he started off with earnest intentions,
kept making money for a while, then finally lost a lot of money. At
that point he could not admit his failure and instead continued his
business as a Ponzi scheme.

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On 2008-12-17 06:27:59 -0800, BreadWithSpam[at]fractious.net said:

- quote -

It is interesting to speculate about what Madoff himself hoped to
accomplish by his scheme. One possibility is that he succumbed to the
same motives as the greedy investors who took his advice. Perhaps he
believed his Ponzi schemes could go on working forever, just as the
investors in those schemes believed their high income would continue
forever. Greed can take hold of people who should know better.

Another possibility is that he knew full well that the scheme would
eventually come to an end and that he would be arrested, but that by
that time he would have accumlulated enough wealth to offset the risks
of a trial and prison. Perhaps he stashed away considerable sums of
money in havens outside the USA. Perhaps he is counting on the
advantages possessed by the rich in the criminal justice system and to
the relatively light prison sentences given in cases of financial
fraud. Perhaps he is looking forward to the day when he will be
released and be able to leave the country and enjoy his riches (five
year sentence, out in two?). It will be interesting to see just what
penalties are handed down by the courts.

The only other possibility that I can imagine is that he was mentally
ill and prone to self-defeating, suicidal behavior. Or that his illness
took the form of those people who try to assassinate political leaders
because of a pathological desire to get attention and publicity.

Rich Carreiro wrote:
- quote -

It's even worse! He didn't even register until 2006 according to the
article in today's WSJ, but that wasn't such a big deal in the eyes of
the SEC:

Madoff Misled SEC in '06, Got Off, WSJ 12/18/08
"On Jan. 4, 2006, the SEC's enforcement staff in New York opened an
investigation...The SEC report also said Mr. Madoff had violated rules
requiring investment advisers to register with the SEC, which makes them
subject to inspections and examinations. Investment advisers must
register if they have more than 15 clients.

The staff recommended closing the investigation because Mr. Madoff
agreed to register his investment-advisory business and Fairfield agreed
to disclose information about Mr. Madoff to investors. The SEC report
said the staff closed the case 'because those violations were not so
serious as to warrant an enforcement action.'"

What a horrible precedent. Running an unregistered advisory business for
years, with billions under management, "is not so serious as to warrant
an enforcement action."

Then what is...?

-Tad

PS I suppose in the interest of disclosure I should mention that I am a
state-registered investment adviser...who like most advisers, assumes
that if even one tiny piece of paperwork is so much as wrinkled when
we're audited that we'll get a ding letter from the regulators.

On 2008-12-18, Rich Carreiro <rlc-news[at]rlcarr.com> wrote:
- quote -

I think that I am beginning to understand it a little better.

The issue is that this Madoff was a very bright guy with a huge
experience on Wall Street. He was not a random street thug with a
bright idea.

So, instead of opening his own hedge fund, instead he let other people
organize hedge funds, and then took their money to run his Ponzi scam.

In other words, investors were not investing directly into Madoff, but
instead they were investing into various "feeder funds" that Madoff's
accomplices would recommend to them.

That greatly cuts down on the possibilities of uncovering his fraud,
as Madoff would not send statements to investors, but only to hedge
funds.

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"rick++" <rick303[at]hotmail.com> writes:

- quote -

Easy. He wasn't running a hedge fund. He was an SEC-regulated
registered investment advisor.

--
Rich Carreiro rlc-news[at]rlcarr.com

Another question is that hedge funds (prospectus not required)
are limited to 99 or 499 participants.
Sounds like this guy had more than that investors.
How'd he get around that?

"HW "Skip" Weldon" <skip5700removethis[at]yahoo.com> wrote in message
news:a80ik45gnutka50k2b2nuu1nmhb0kjlspa[at]4ax.com...
- quote -

You haven't read the news stories about Madoff closely enough.

Madoff did not "beat the market consistently and in such spectacular
fashion". He falsely claimed to be producing about 11% a year. From 1995 to
1999 the S&P 500 total return by year was 37.58%, 22.96%, 33.36%, 28.58% and
21.04%. Madoff severely underperformed the S&P 500 (let alone the Nasdaq
Composite) from 1995 to 1999 for 5 years in a row, yet he didn't seem to
have lost many clients.

Madoff's clients liked the slow, steady returns and apparent low risk (no
losing quarters). If Madoff's clients were interested in spectacular returns
they would have taken back their investments in the 1990s and gone
elsewhere. Madoff's version of the Ponzi scheme was diabolical and
fiendishly clever in using low, but steady and above average returns
(compared to money market funds or corporate bonds) to hang on to clients
money and attract new money. If Madoff had been claiming 20% or 30% annual
returns he would have been caught many years ago.

Madoff's investors were too gullible and not willing to ask any hard
questions. They were more afraid of not being able to invest with Madoff
than with performing due diligence. The lesson of the Madoff fraud is that
if you find what appears to be the ideal invesment and you are very
comfortable with it, then is most certainly not legitimate. For every asset
class, below average risk with above average returns does not exist.