Killer Economy: Greenspan's Body Count

What is Greenspan's Body Count? W.C. Varones has been reporting the various deaths, mostly suicides, related to the current economic crisis, on his blog of the same name. As of March 3rd, 2009, the body count stood at eighty-four.

Of course, W.C. Varones believes, like many others, that Alan Greenspan, the former chairman of the Federal Reserve, played a significant role in the economic down turn.



Photo via The Daily Banter, 2/17/09, via trackrecord.bitacoras.com

FYI: I came across the "Greenspan's Body Count" blog when I was searching for information about a financial adviser who recently committed suicide. This hit close to home, as my husband and I know a couple of people who invested with this person. From what my husband tells me, it is very likely that this trader was running a fraud. I'll share more about this in a future post.

UPDATE: I found the information I was looking for:
Charlotte N.C. Area Investment Fraud: $30 Million Gone, Swindler Bruce Kramer Committed Suicide

RELATED
Killer Economy? The deepening recession may lead to growth in suicide rates
Linda Stern, Newsweek, 1/14/09
His Legacy Tarnished, Greenspan Goes on Defensive
Wall Street Journal, 4/8/08

Greenspan quote from above article about the failure of market self-regulation:

"There were far more failures here than I expected. I've been chagrined at how badly some of the judgments of very sophisticated investors have been with respect to risks...It's all human psychology with which we're dealing, not institutions. The argument, therefore, is not to discard counterparty surveillance, but, essentially, to patch it back together."

Update: Allen Stanford and his Fictional Billions; What was Laura Pendergest-Holt's role in the alleged Ponzi scam?

Muckety Map of the Stanford Financial Group Scam




Here are some of the headlines and related quotes about the allegations of a possible Ponzi scheme run by R. Allen Stanford and other officials of the Stanford Financial Group:

New SEC Complaint Says Stanford Ran Ponzi Scheme
Sarah N. Lynch, Wall Street Journal, 2/28/09

"In carrying out this scheme, the SEC claims, Messrs. Stanford and Davis misappropriated billions of investors' money and falsified the Stanford International Bank's records to hide their fraud.

"Stanford International Bank's financial statements, including its investment income, are fictional," the SEC said."

Stanford Accused of a Long-Running Scheme
Julie Creswell and Clifford Krauss, New York Times, 2/27/09

"Mrs. Pendergest-Holt’s ties and loyalty to Stanford Financial appear to run deep. She married James Holt, who ran a hedge fund that managed a portion of the assets held at the Antigua bank. Her brother-in-law helped oversee a team of 20 analysts that monitored the performance of various asset managers."

Stanford Financial Group

Stanford Scandal
Sam Jones, Sheila McNulty, Michael Peel, Financial Times, 2/27/09

"The SEC document paints a curious picture of Ms Pendergest-Holt as both insider and ingénue, who became a senior executive of a vast business empire in spite of having “no experience in the financial services or securities industries”.


Stanford faced internal chaos before SEC swooped
Martha Graybow, Reuters 2/18/09

"Adding to the chaos of the past weeks: The founder of the small Antigua-based accounting firm said to have audited Stanford's books died last month."

Allen Stanford and his Billions

Allen Stanford, a Texas billionaire,was accused of defrauding 13,000 clients of his company, Stanford Financial, this week. Clients thought that their money was invested in certificates of deposit, but evidence was found that suggests that Stanford's investment strategies boiled down to a Ponzi scheme.




FBI finds Allen Stanford in Virginia
James Vicini and Jason Szep, Reuters, 2/19/09

R. Allen Stanford's Private-Equity Connections
Deal Journal, 2/18/09

Why We Keep Falling for Financial Scams - WSJ Essay

Stephen Greenspan Ph.D., a psychologist, recently wrote a book, "Annals of Gullibility" focusing on a multi-dimensional theory that attempts to explain how so many people can find themselves in situations that could have been avoided. After Dr. Greenspan wrote his book, he found that much of his retirement savings had been invested in the Rye Prime Bond Fund, part of the Tremont family funds, a subsidiary of Mass Mutual Life. Unfortunately, the Rye Prime Bond Fund was a feeder fund of Madoff's Ponzi scam.

Why We Keep Falling for Financial Scams (Stephen Greenspan, WSJ, 1/3/09)

The following is a quote from Greenspan's essay:
"In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case."

The article explores the topic in-depth.

Latest Ponzi Scheme:

Cosmo Ponzi Scheme Took in $370 Million, U.S. Says (Bob Van Voris and Patricia Hurtado, Bloomberg, 1/27/09)

Nicholas Cosmo of Agape World Inc. was accused of running a Ponzi scheme from 2003 through December 2008. He lied to his investors by telling them that the money was invested in "bridge loans". In reality, he invested in commodity futures, loosing about $80 million dollars out of an investment of $100 million.

According to the article, Cosmo was sentenced to prison in 1999 for misappropriating funds when he was a stockbroker. He also was ordered to receive therapy for a gambling problem. That information should have caused his investors to think twice before plunking down large sums of money into his scheme.

Nicholas Cosmo

Photo from Bloomberg.com

Bernie Madoff

Photo from NY Times

Perjury Charges Against Madoff? SEC Officials Believe That He Lied to Them During Past Examinations (Kara Scannell, WSJ, 1/27/09)

"Lawmakers expressed frustration at regulators' explanations for failing to catch Bernard L. Madoff's alleged multibillion-dollar fraud but drew little blood because officials declined to discuss details of the case.

Linda Thomsen, chief of the Securities and Exchange Commission's enforcement division, suggested in Tuesday's hearing at the Senate Banking Committee that federal prosecutors may pursue charges against Mr. Madoff over what they believe were his lies to SEC officials during past examinations."

MADOFF IS NOT JAIL!

Madoff's list of victims is getting longer. Alexandra Penney, the former editor of Self Magazine, gave her life savings to Madoff's firm. She has shared her experience on her blog, "The Bag Lady Papers", on The Daily Beast.

RELATED

Zsa Zsa Gobor lost millions due to Madoff (Reuters, 1/24/09)

91-year old actress Zsa Zsa Gabor lost up to $10 million dollars investing in Bernie Madoff's fraudulent investment firm.

Report: Larry King the Latest Big Loser in Bernie Madoff Scandal (FoxNews.com 1/23/09)

Of Human Competence - Stephen Greenspan's Blog

Keynesian + Behavioral Finance?

Robert J Shiller: Irrational Exuberance

George A. Akerlof and Rober J. Shiller Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

CNBC's American Greed Series

I just started watching CNBC's "American Greed: The Scams, the Schemes, the Broken Dreams". This is the third season of the show, so I visited the American Greed website to learn about what I've missed.

If you are looking for more information about this topic, visit the website to find information related to the theme of each show, including producer's notes, slideshows, links, video clips, evidence files, and "web extras".

More Hedge Fund Drama: Authur Nadel, Fund Manager, Goes Missing.

Authur G. Nadel, a Florida hedge fund manager, went missing on January 14th, and a story of fraud and lost fortunes unfolded:

Mace Loses $2 Million in Nadel Hedge Fund; FBI Takes Over Probe

"Mace Security International Inc., the maker of Mace self-defense sprays, said it lost $2.2 million in a hedge fund run by Arthur Nadel, the Sarasota, Florida, investor being sought by the FBI after disappearing last week."

FBI and SEC Probe Missing Fund Manager (Bloomberg News, New York Times, 1/18/09)
"The F.B.I. and securities regulators have joined the investigation of Arthur Nadel, a Florida hedge fund manager who disappeared four days ago, leaving clients concerned that they might have lost as much as $350 million."

FBI joins search for missing Florida money manager (Michael Peltier, Reuters, 1/18/09)
"Nadel and his wife Peg were prominent philanthropists and socialites in Sarasota, an upscale community south of Tampa, Florida. The couple was involved in many community organizations including Habitat for Humanity."

In Nadel Case, Warning Signals (John Hielscher, Anthony Cormier & Michael Pollick, Herald Tribune, 1/20/09)
"Two sources who have seen or been briefed on the note indicated Nadel told family members that he made a grave mistake and planned to kill himself. Once he spoke with family members by phone, however, the suicide fears dissipated and FBI agents began hunting him as a missing person"

Authorities think money manager planned to vanish (Christine Armario, Associated Press)
"... Later, Nadel called and said he'd left something for her in a desk drawer at their ranch-style home in Sarasota. That's where she found a suicide note, the sheriff's report states. In it, Nadel told his wife how much he loved her. He also said he felt guilty over losing other people's money....Nadel operated Scoop Management Inc., and was a trader for six different funds. According to Scoop's internal accountant, there are between 500 and 600 investors across the country. Last week, many were told that the funds are empty."

Timeline of Songs about the Economic Crisis (some humorous), from Williambanzai7

I recently discovered Williambanzai7 when I came across his comment to an article on the Seeking Alpha financial information website, "Madoff Hedge Fund: Wall Street's Biggest Ponzi Scheme Yet? " Sean Maher, Seeking Alpha 12/14/08

Williambanzai7's comment consisted of the lyrics to a song about the Bernie Madoff scandal, set to the tune of Rudolf the Red Nosed Reindeer. It gave me a chuckle, even though it is well past the holiday season. (Williambanzai7 often posts his lyrics as comments in response to on-line articles and blog-posts related to the current economic crisis.)

I checked out his blog, and discovered that most of his posts are lyrics dedicated to the "Great American Subprime Disaster". A few posts relate to the politics of our times. The songs are in lyrical form only. As far as I know, there is no audio.

Here is a solution- KARAOKE. Gather some friends and belt out the tunes while singing Williambanzai7's lyrics! (Your economic woes will disappear, at least for a while.)

SOME OF MY FAVORITES

September 2008
SUBPRIME BAILOUT PROTEST SONG (One, Two, Three What Are We Fighting For? -Joe McDonald)

I AM THE WAMU ("I am the Walrus" -the Beatles)
"I am he as you are he as you are me and we are all together. See how they run like hedge fund bums from a gun, see how they fly. I'm crying."

STUCK IN A MORTGAGE WITH YOU (Stuck in the Middle- Stealer's Wheel)

October 2008
MONEY FOR NOTHING -Residential Mortgage Backed Securities (Money for Nothing - Dire Straits)

I like the following two songs, because you can sing AND dance to them:
LET'S DO THE SUBPRIME WARP AGAIN! (Let's Do the Time Warp - Rocky Horror Picture Show)
BAILOUT THRILLER RETURNS (Thriller- Michael Jackson)

November 2008
THE AIG BALANCE SHEETS (The Adams Family)
BABY CAN YOU BAIL OUR CARS (Baby You Can Drive My Car - the Beatles)
WHERE HAVE ALL THE BAILOUT BUCKS GONE? (Where Have All the Flowers Gone- Pete Seeger)

December 2008
MADOFF, THE WALL STREET FAKER (Rudolph, the Red-nosed Reindeer)
HEDGE FUNDS ROASTING ON AN OPEN FIRE (Chestnuts Roasting on an Open Fire)
THE TWELVE WALL STREET DAYS OF CHRISTMAS (The Twelve Days of Christmas)

January 2009
YOU'RE JOHN THAIN (You're so Vain - Carley Simon)
CITIGROUP BITES THE DUST (Another One Bites the Dust- Queen)


"Wall Street: The Musical", anyone?
(Think Mama Mia and Moulin Rouge.)


RELATED
Seeking Alpha
THE WILLIAMBANZAI7 BLOG: The Great American Subprime Disaster

Another one bites the dust: Nortel is going bankrupt.

Nortel bites the dust, and fraud is part of the drama behind the headlines. I've collected a few articles, quotes, and links that I'm looking at right now, and I'll update this post as I dig a little more.

Long-struggling Nortel files for bankruptcy:
(Rob Gillies, Associated Press)

"Nortel was founded as Northern Electric and Manufacturing in 1895, supplying equipment for Canada's telephone system. The company pioneered digital network switches in the 1970s and grew into a major telecommunications supplier after the U.S. breakup of AT&T in 1984 expanded competition in the industry."

"In 2004, the U.S. Securities and Exchange Commission launched a formal investigation into Nortel's financial statements. The agency accused Nortel of manipulating its books in 2000, 2001 and 2003 to make it appear the company was holding up better during the technology implosion."

Nortel Files for Bankruptcy After Losses Mount (Bob Van Voris and Joe Schneider, Bloomberg, 1/14/09)

How did Nortel get to this point?

SEC Charges Four Former Senior Executives of Nortel Networks Corporation in Wide-Ranging Financial Fraud Scheme (US Securities and Exchange Commission, 3/12/07)

"Named in the Commission's complaint are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill."

""The fraudulent conduct at issue here was egregious and long-running. Each of the defendants betrayed Nortel's investors and their misconduct gave rise to billions of dollars in shareholder losses," said Linda Thomsen, Director of the Commission's Division of Enforcement. "The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets."

Nortel Networks Pays $35 Million to Settle Financial Fraud Charges (U.S. Securities and Exchange Commission, 10/15/07)

Of course, human greed had something to do with this:

SEC Complaint (pdf)
"This case involves two fraudulent accounting schemes, a revenue fraud scheme and an earnings management scheme, which enabled Nortel Networks Corporation (“Nortel” or “the Company”) to meet the unrealistic revenue and earnings guidance that its top executives had provided to Wall Street in 2000 and again in 2002 and 2003. The first scheme – led by three corporate executives – accelerated material amounts of revenues into 2000 and created the false appearance that Nortel was weathering an industry-wide economic downturn better than its competitors. The second scheme – led by two of the same corporate executives, a third (but different) corporate executive and four business unit executives – reduced or increased Nortel’s earnings as necessary to create the false appearance that Nortel had stabilized its operations and returned to profitability for the first time in over three years, and was designed to pay bonuses..." (My emphasis)

Accounting Scandals (Wikipedia)

Book:
Called to Account: Fourteen Financial Frauds that Shaped the American Accounting Profession



"Chapters describe the tricks fraudsters such as 'Crazy Eddie' Antar and 'Chainsaw Al' Dunlap used to fool their auditors. Readers will learn how MiniScribe employees disguised packages of bricks as inventory; how Equity Funding personnel programmed the company's computer to generate 64,000 phony life insurance policies; and how Enron inflated its profits by selling and then repurchasing money-losing assets.Complementing these chapters on high-profile crimes and criminals are chapters that trace the development of the public accounting profession and explain how each scandal shaped current accounting practices."

Satyam Computer Services Fraud

As the weeks unfold, more news of fraud and inappropriate transactions come to light.

According to an article written by Heather Timmons, of the International Herald Tribune, Ramalinga Raju, of Satyam Computer Services (India), resigned on 1/6/09 because of account falsification.


"Addel Halim/Bloomberg News: "Ramalinga Raju, chairman of Satyam Computer Services, told the Bombay Stock Exchange that he did not profit from the accounting problems he disclosed on Wednesday."

"A huge chunk of the company's finances were fake. Of the 53.6 billion rupees in cash and bank balances that Satyam listed as assets at the end of its second quarter, 50.4 billion rupees, or about $1 billion, were nonexistent, Raju said in a letter to the Satyam board that was distributed by the Bombay Stock Exchange"

"Satyam serves as the back office for some of the world's largest banks, manufacturers, health care and media companies, handling everything from computer systems to customer service. Clients have included General Electric, General Motors, Nestlé, McGraw-Hill and the U.S. government. In some cases, Satyam is even responsible for finances and accounting for these clients."

Although many businesses are run with high levels of integrity, it seems that a few people have succumbed to greed and falsification. If the actions of these few people were limited only to a few others within their circle of business associates, this would not be quite a concern.

Much of the financial decisions made around the world by movers and shakers are based on data that is assumed to be true. We put our trust in our financial institutions and the business related to making our financial world hum.

What does it mean for the bigger picture when large companies willingly put money and sensitive financial/accounting data in the hands of people who falsify information or even intentionally conduct their business in a fraudulent manner?

Each time that I learn of another scandal or fraud related to finance/economics, I wonder how these things could go undetected for so long. I have a few thoughts about how this is perpetuated...

• Marketing tools for financial institutions and related business have become sophisticated over the years. For example, websites are designed so that customers have a feeling of confidence and trust, in order to complete on-line financial transactions. Trust is "earned" by the image that the institution projects via the look and feel of the company's website and the messages that are provided visually and through text.
  

On the Satyam website, the following messages provides the reader with a sense of trust, but as we now know, it is false trust.

"Success: It is about having your eye on the outcome all the time"

Stephen Ward on Compliance Management
"Compliance isn’t just about reporting, or data management, or training, or having the right technologies; it’s all of these together. The overarching intent of all of these compliance programs is to help enterprises address four key areas: information integrity, process integrity, controlled access to information, and secure information retention."

"Creating value for society is an integral part of our business. We believe that contributing to the well-being and development of society is an extension of everything we do....While we undertake urban transformation initiatives through Satyam Foundation, we touch rural transformation through Byrraju Foundation"

Another example of this is what Bernie Madoff's clients and potential clients read on his company's website:

"The Owner's Name is on the Door"

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

"A Global Leader in Trading US Equities

"With more than $700 million in firm capital, Madoff currently ranks among the top 1% of US Securities firms. Our sophisticated proprietary automation and unparalleled client service delivers an enhanced execution that is virtually unmatched in our industry."

Who will be the next cockroaches we see scurrying around when the light shines?


RELATED

The Seeds of the Satyam Scandal (Elizabeth Corcoran, Forbes, 1/8/09)
"It was a horrifying turn for a man long considered one of India's self-made success stories--and active philanthropists. Other Indian executives are quick to contend this is an isolated case. Even so, a few quietly note that it's hard to imagine how a publicly traded company, which must comply with U.S. Sarbanes Oxley disclosure rules, could have been mislead for so long by one or even two individuals...Raju had been a one-of-a-kind man, deeply loyal to his family, patriarchal toward his employees, benevolent to the poor. And yet, suggest some who have known him, Raju grew up in an environment that enjoyed gambling and so ran his career with the bravado of a gambler."

Investors raise questions over PwC Satyam audit (Rhys Blakely, Times Online 1/8/09)
"It's hard to miss $1 billion of cash," Dennis Beresford, a former chairman of the Financial Accounting Standards Board, the US accounting watchdog, said...Satyam's bogus accounts had been audited by Price Waterhouse, the Indian-based auditor, which is a member firm of Price Waterhouse Cooper International, since the financial year 2000-2001... The company's balance sheet as of March 31, 2008 was signed off by Srinivas Talluri, a partner of Price Waterhouse in Hyderabad, the southern Indian city where Satyam is based."

Satyam scandal could be 'India's Enron' (Reuters/msnbc 1/7/09)
""If a company's chairman himself says they built fictitious assets, who do you believe here? This has put a question mark on the entire corporate governance system in India," said R.K. Gupta, managing director at Taurus Asset Management in New Delhi."
""It was like riding a tiger, not knowing how to get off without being eaten," Raju said in his letter, adding he was prepared to face up to the legal consequences."

Economic Sounds: Madoff Was Magnet For Some, Not All, Investors- Audio from NPR

Madoff described his system as a split strike conversion strategy?

New York Law School invested some money with Madoff, and now is preparing a lawsuit against this money manager. In this broadcast, Millicent Holmes discusses the concerns she had about Madoff's system a few years ago, and her surprise at how long it took regulators to go after Madoff after an article in Barrons brought up doubts about his system's methods.

Listen to the interview.

On-line article

MAR/Hedge no.89 May 2001 "Madoff top charts; skeptics ask how" (pdf) (Michael Ocrant)

Barron's 5/7/2001 Article about Bernie Madoff: "Don't Ask, Don't Tell"

SMF Blog Post: Don't Ask, Don't Tell: Barron's 2001 Madoff Article

"....But Madoff's investors rave about his performance -- even though they don't understand how he does it. "Even knowledgeable people can't really tell you what he's doing," one very satisfied investor told Barron's. "People who have all the trade confirmations and statements still can't define it very well. The only thing I know is that he's often in cash" when volatility levels get extreme. This investor declined to be quoted by name. Why? Because Madoff politely requests that his investors not reveal that he runs their money."

From the Wall Street Journal Online documents:

The World's Largest Hedge Fund is a Fraud pdf (11/7/2005 Submission to the SEC)
Suggests that Madoff Securities "is the world's largest Ponzi scheme".

Fakin' it: IT Factory's Stein Bagger, fooled banks, KPMG, Deloitte, and Ernst & Young

There has been quite a bit of discussion about the concept of trust in the financial world. As the world-wide economy continues to struggle, the fakes are like cockroaches scurrying about to get out of the light.

A recent article in the Wall Street Journal reveals that Denmark's Entrepreneur of the Year, Stein Bagger, was a fake. Bagger's "fake" company, IT Factory, was audited by Deloitte, and later KPMG, and even was named as IBM's Best Partner for software. According to the article, Bagger's company owes IBM about $23 million dollars. Danske Bank may be out $64 million.

Bagger's academic credentials were fake, too. Apparently he hired an artist/actress to "play the role of an official at San Francisco State University, and institution that does not exist", just in case anyone became suspicious.

"The gist of the allegations is that Mr. Bagger used a web of phantom firms to get money from banks and then used these same companies to place big purchase orders for IT Factory software and services. He was buying from himself using other people's money."

For Denmark's Entrepreneur of Year, Something Was Rotten: Stein Bagger Pleads Guilty to Faking Software Deals; His Ph.D. Was Phony, Too. -Andrew Higgins, WSJ 9/17/08
Emails From Bo Svensson to IBM Management
Email to Actress Hired to Play Role of University Official

One good thing about the struggling economy is that the cockroaches will have nowhere to hide when their houses of cards tumble down around them!

Francine McKenna's Blog: Re: The Auditors "Madoff and Blagojevich: Stealing - Easier When No One is Watching"

Francine McKenna's blog, re: The Auditors, is a great place to get good information regarding topics related to finance, accounting, and the economy. One of her recent posts sheds some light on the latest scandals in our society:

Madoff and Blagojevich: Stealing - Easier When No One Is Watching

I was delighted to discover that McKenna had posted a video of musicians performing a song related to her topic, also in keeping with the theme of the Economic Sounds and Sights blog.

Jane's Addiction's Been Caught Stealing, via Terranaomi


Quotes from McKenna's blog post:
"Ethical relativism is alive and well. The extreme sense of entitlement and unadulterated self-interest inherent in some of the worst offenders is an example of pure evil...I see bad people...."The smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme.
And here's the best part: That's why they invested with him." "


Related:

Naked Capitalism: SEC Skipped Normal Inspection of Madoff Hedge Fund

From Ponzi to Madoff: Interactive Graphic from the Wall Street Journal

Here is the link:

From Ponzi to Madoff

"The arrest of investment manager Bernard Madoff for allegedly running an ongoing $50 billion swindle is the latest scam of the kind made famous by Charles Ponz in the 1920's. In these schemes, early participants are paid returns from the principle received from later and different investors." -Wall Street Journal

Market Wizards or Wizards of Oz? Bernard Madoff, hedge funds, and loss of trust.

Market wizards, or Wizards of Oz?

Right now there is a discussion on CNBC about Bernard Madoff's fraud/ponzi scheme. "Low volatility, with consistent growth of 8-10 percent every year, quick liquidity... Put it all in there!".

People with millions listed to the wizard and put most of their money in Madoff's funds. And now the money is gone, and trust is lost.

Some of Madoff's clients:
Sterling Equities, owned by Fred Wilpon (NY Mets owner)
Benedict Hentsch (Swiss private bank)
Bramdean Alternatives (U.K. asset manager)
Fairfield Greenwich Group - Fairfield Sentry Ltd.(Hedge fund firm)
Kingate Management -Kingate Global Fund Ltd.
Fix Asset Management
Pioneer Alternative Investments- Primeo Select Fund
Union Bancaire
Optimal Investment Services SA
For more information, see "Factbox-Firms exposed to Madoff's alleged fraud"

Wizards of Oz = Hedge Fund Managers?

Kenneth C. Griffin, founder of the Citadel, has been called a hedge-fund wizard. According to an article in the NY Times (10/7/08), "Between 1998 and 2007, he handled investors an average annual return of 20 percent, more than three times that of Standard & Poor's 500-stock index."

An article in the Chicago Tribune (12/12/08), mentions that quite a few smart people work at the Citadel..."generous payouts helped Citadel recruit a stable of PhDs, market wizards and computer gurus who could engineer a recovery."

I guess things were too good to be true. According to CNBC, Citadel's funds are down about 50%, and the company will not allow investors to withdraw funds for several months.


Related:

Hedge Fund Wizards (Washington Post, 12/19/07)
Nearly one year ago, Dean P. Foster, a professor of Statistics at the Wharton School of Business, and H. Peyton Young, a professor of Economics at the University of Oxford, wrote this article. Here is a quote that foreshadowed the current crisis:

"Hedge funds are risky for another reason. It is extremely difficult to tell, based on past performance, whether a fund is being run by true financial wizards, by no-talent managers who happen to get lucky or by outright scam artists... Although individual hedge fund managers may drag their feet, it is actually in the industry's best interest to encourage greater regulation and transparency. Otherwise, a rising tide of failed funds could cause a collapse in investor confidence, putting both the good and the bad wizards out of business."

Top Broker Accused of $50 Billion Fraud (WSJ)

Fees, Even Returns and Auditor All Raised Flags (WSJ)

Fund Fraud Hits Big Names (WSJ)

Hedge Funds Mystify Markets, Regulators: Deeply Powerful, Largely Unchecked (David Cho, Washington Post, 7/4/2007)

Stockbroker Fraud Blog
(Attorneys: Shepherd, Smith & Edwards)

How do we invest in "real" when it has been "all one big lie'? What to make of Bernard Madoff

Do you remember the story, "The Emperor's New Clothes"? All of the adults in the story were convinced that the Emperor had wonderful clothes, and that the clothes were REAL. The only problem was they didn't seem to realize that the emperor was really NAKED. Just one little boy noticed that it was all fake.

Like the little boy in the story, we are now discovering that the trappings of many Wall Street investment companies are fake, and have been so for a very long time. The emperor is really naked. How could so many of us let ourselves become bamboozled?

Here is an excerpt from today's New York Times:

"Prominent Trader Accused of Defrauding Clients"
Diana B. Henriques and Zachery Kouwe

"Bernard L. Madoff, a legend among Wall Street traders, was arrested on Thursday morning by federal agents and charged with criminal securities fraud stemming from his company’s money management business."

"The arrest and criminal complaint were confirmed just before 6 p.m. Thursday by Lev L. Dassin, the acting U.S. attorney in Manhattan, and Mark Mershon, the assistant director of the Federal Bureau of Investigation."

"According to the complaint, Mr. Madoff advised colleagues at the firm on Wednesday that his investment advisory business was “all just one big lie” that was “basically, a giant Ponzi scheme” that, by his estimate, had lost $50 billion over many years."

"....The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Mr. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion, according to the regulatory complaint."

"Andrew M. Calamari, an assistant director in the S.E.C.’s regional office in New York, said the case involved “a stunning fraud that appears to be of epic proportions.”"

A visit to the Madoff Securities website provides a quick snapshot of what an investor sees at first glance:

A Global Leader in Trading US Equities

"With more than $700 million in firm capital, Madoff currently ranks among the top 1% of US Securities firms. Our sophisticated proprietary automation and unparalleled client service delivers an enhanced execution that is virtually unmatched in our industry."

An Intricate Interweaving of Advanced Technology and Sophisticated Traders

"Madoff Securities also utilizes its computers to seek out opportunities for hedging its inventory of securities. The firm uses a variety of futures, options, and other instruments to hedge its positions and limit its risks. While these hedging strategies are an important tool in protecting the firm's financial position, ultimately,these highly prudent risk management policies protect the interests of clients as well."

The Owner's Name is on the Door

"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

The "unblemished" record was fake.... Maybe it is time we invested in something real.


Related:

Interactive Map of Bernard L. Madoff Investment Securities

via Muckety "Exploring the paths of power and influence"

Did we for get the lessons learned from Enron?

Did we forget the lessons from Enron?
There was quite a bit of publicly available information around related to the Enron fiasco in 2001. Available on-line is the Enron Explorer e-mail visualizer, which was created from the database of all of the email messages between Enron's senior management team as things were falling apart between 1999-2002.






visualcomplexity.com

The following NY Times article (February 2002) will refresh your memory: Enron's Many Strands: The Company Unravels; Enron Buffed Image to a Shine Even as it Rotted from Within

Punishment was not swift, as the trial ended in 2006:
Two Enron Chiefs are Convicted in Fraud and Conspiracy Trial (NY Times, 2006)

"... the executives had sanctioned or encouraged manipulative accounting practices and then crossed the line from cheerleading into outright misrepresentations of financial performance."

"Enron's fall had a far greater impact than on just the energy industry by heightening nervousness among average investors about the transparency of American companies. "The Enron case and all the other scandals and cases that trailed after it may have finally punctured that romance with Wall Street that has been true of American culture for a while now," said Steve Fraser, a historian and author of "Every Man a Speculator: A History of Wall Street in American Life."