Hedge Fund Drama: SEC Case Filed on Arthur Nadel, more about other scandals

"From at least January 2008 through the present, the Defendants, who provide investment advice to Scoop Real Estate, Valhalla Investment Partners, Victory IRA Fund, Viking IRA Fund, and Viking Fund (collectively the "Hedge Funds") have issued materially false and misleading account statements tot eh Hedge Funds' investors. The false account statements overstated the value of investments in the Funds by approximately $300 million."

US Securities and Exchange Commission
Litigation Release No. 20858/January 21, 2009
Securities and Exchange Commission v. Arthur Nadel, et al.
SEC Compliant (pdf)

Related:
"Poof! Another Fund Manager Disappears"
Liz Moyer, Forbes 1/21/09
"Some of the money in the funds was transferred to secret bank accounts only Nadel controlled.."

Other Money Managers of Note:

Marcus Schrenker - Faked his death by crashing his airplane, and was found in a campground.
Regulators were warned about parachuting financer (Rick Callahan, Associated Press, 1/19/09)

Adolf Merckle - Killed himself after losing several hundred million euros on the wrong end of a short sell.
Financial Casulty: Why Adolf Mercle Killed Himself (William Boston, TIME, 1/6/09)
Phoenix MAy Be Sold for Up to EU6 Billion After Merckle's Death (Ambereen Choudhury, Bloomberg, 1/22/09)

Photo from Bloomberg

Daren Palmer - Idaho Investigates Alleged Hedge Fund Fraud FINalternatives 1/20/09
Rod Stringer- SEC Charges Texas Man With Hedge Fund Fraud FINalternatives 1/21/09
Marc Dreier - Dreier Said to Promise Son $12.5 Million in Property (David Glovin, Bloomberg 1/21/09)
Bernie Madoff- List of Entities Announcing Exposure to Madoff Investment Fraud Wall Street Journal 1/20/09
Sam Isreal - Faked his death to escape a prison sentence and lived in a campground until he turned himself in.
Wanted fund chief rides scooter to police HQ, turns himself in. USA Today, 7/2/08

More from the past:

Steven Markovitz- Mellennium Partners Hedge Fund Trader
Small-Time Crooks Michael Maiello, Forbes 10/2/03
Three Merrill Brokers Fired in Hedge Fund Scandal Matthew Goldstein, The Street.com 10/2/03

Investors rush to exit hedge funds after record losses Miles Costello, Times Online 1/22/09

FBI sees more indictments from backdating: An assistant director says FBI is vigorously investigating 55 corporations. Shaheen Pasha, CNN Money, 10/12/06
"Hedge funds are the wild, wild west of investing," he said. "The problem comes when hedge funds become more and more like Ponzi schemes." - Chip Burrus, Assistant Director, FBI

Focus in Fund Scandal Turns to Bear Stearns Matthew Goldstein, The Street.com 11/13/03

The $500 Billion Hedge Fund Folly James M. Clash, Robert Lenzner, Michael Maiello, Josephine Lee, Forbes 08/06/01
"The industry--or, at least, the term "hedge fund"--dates back to 1949 and money manager Alfred Winslow Jones. He pitched the notion that a smart money man could protect investors against market spills by going long some stocks and short others."

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."

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"