NAV Premiums of Certain Precious Metal Trusts and Funds - Chasing Madoff, Chasing Metals

"The dissenter is every human being at those moments of his life when he resigns momentarily from the herd and thinks for himself."

Archibald Macleish

I had the opportunity to watch the documentary Chasing Madoff yesterday.

It is largely about how Harry Markopolos and his two associates discovered the likelihood of fraud in the Madoff fund, and their decade long battle to bring that fraud to light.

I do recommend you see it if you can.

What is most important, what everyone seems to be missing, is that Bernie Madoff was not some mad genius acting in secrecy through his cleverness. The dodgy nature of his fund was known by many hundreds of firms on the Street, and most anyone with a decent level of financial sophistication could readily see that something was wrong with his business model and returns.

Indeed, one could not see his scheme for the most part by willfully not looking at it, which is the course that the SEC took.

The scheme 'worked' for so long because Madoff let his enablers, the Street and the feeder funds, take the bulk of the fees from unwitting investors. So quite a few of the people who should have known were caught in a credibility trap. To expose Madoff would involve some risk for themselves, and to say nothing and plead ignorance was lucrative.

As for the media, Markopolos had written and gift-wrapped the story, made a list of witnesses, and mailed it to the Wall Street Journal years before the scheme was exposed. And it was killed from above. It wasn't until Madoff publicly confessed that the media responded, and then it was with spectacle rather than insight.

As for the SEC, although a few people were forced to resign, not one person involved was prosecuted. As has recently come out from a determined whistle-blower little mentioned in the press, it was a top down policy decision not to pursue any corruption in the investment management industry that caused the SEC to ignore this vast criminal conspiracy during the first decade of 2000.

And the irony is that even the work of Harry Markopolos did not lead to Madoff's downfall. The market panic in 2007 caused a run for liquidity, and at that point Madoff's scheme fell apart of its own weight. Madoff himself was able to plan his own confession, and make whatever provisions he wished beforehand as far as records and evidence.

In court he 'copped a plea' and was sentenced to 150 years, but did not speak, did not implicate anyone else.

There is a strong suggestion that very powerful and well connected people were involved in this, and that if he had taken some other course of action, Madoff would have been a dead man.  This occurred before as the documentary shows, including the silencing of witnesses.

The plutocrats would like us to think that Madoff was just a clever rogue trader, some outsider.  That the SEC were just lawyers incompetent in finance.  That the press was too preoccupied with other things to investigate.  And Markopolos was an obsessive oddball who happened to get it right.  What happened was an anomaly.  The system is secure.

This documentary reminded me very much of the precious metals market, although as a global market  it is on a much grander scale. If so, I think that there is a good possibility that things will play out in the same way.   Do I think this is some tortured analogy?  Do you think that prices falling in the face of rising demand, stubborn secrecy, and numbers that never add up over a long period of time make sense?  Good luck with that.

The regulators will keep stonewalling.  The scheme to sell paper gold and silver, essentially the same bullion many times over, will go on until some event forces a run on supply, and then the scheme will collapse.  It is both embarrassing and lucrative.  It is all carrot and little stick.  And so frauds like this can continue on for a long, long time.

I think we should remember that despite all the histrionics in the Congress, and the fine talk of reform from the new president Obama, little to nothing has changed in the US financial industry. The same environment of compliant conspiracy to gain huge sums of easy money through a pathological criminality exists today.   There are few investigations and even fewer prosecutions.

I think we have had our wake up calls several times, in the collapse of MF Global and what followed, the widespread rigging of the key LIBOR interest rate, and most recently in the odd market divergences between paper and reality. It is hard to believe these things when they happen, unless you understand what lies underneath them. 

Take this for what it is worth.  As the story Chasing Madoff says, because you see figures on a piece of paper, that does not necessarily mean that there is anything behind them.  And when the scheme unravels, events move quickly.  And many people are ruined, and no one seems to care.

Their hypocrisy knows no bounds, their willingness to hide the truth no limit. They do it to protect themselves, and 'the system' that serves them.   One has to wonder how far it can go, and what happens when it can't.

There is a sad story in Chasing Madoff about a smart young man named Abe, whose father-in-law had a huge sum of money with the Madoff fund.  Harry Markopolos handed over the evidence to him, and he showed it to his father-in-law.  After the Madoff scandal became public, Abe called Harry Markopolos' associate and thanked him for what he did.  He lost everything, because despite the evidence, his father-in-law could not believe that there could be a lie so huge for so long, and that Bernie, whom he had known for years, would cheat him.

I do think that the precious metals markets and a good part of the banking system today are such a scheme.  And when something happens to break such a scheme, prices will adjust rather suddenly.  I do expect a profound cover-up and a declaration of force majeure on some pretext. 

There may even be some move to make people do something that they do not wish to do, such as hand over their metal in storage, which is not there anyway, or bail-in their bank deposits, or turn in their dollars for new dollars, at a rate of about 100 to 1.  Or just take a big loss and shut up.  Or something even harder to imagine.  What limits are there to madness?

And then we will see what happens next. But I do not believe for one minute that this is over.  To the contrary, I think we have only just begun.  There will be no sustainable recovery without significant reform.  Whether it is austerity or stimulus makes little difference when you are caught in a Ponzi scheme, and living a lie. There is no other option than increased transparency and reform.

Whatever wealth is provided goes to the top, and to continue to support the scheme.  And the urge from the plutocrats and their enablers will be to silence the dissenters, and lash out at the weak, at the defenseless, and finally at the other.  And if taken, history shows, almost without fail,  that this is a Faustian bargain, a mariage de convenance with evil. And that madness serves only itself.

"I believe we have a crisis of values that is extremely deep, because the regulations and the legal structured need reform. But I meet a lot of these people on Wall Street on a regular basis right now. I'm going to put it very bluntly. I regard the moral environment as pathological. And I'm talking about the human interactions that I have. I've not seen anything like this, not felt it so palpably.

These people are out to make billions of dollars and nothing should stop them from that. They have no responsibility to pay taxes, they have no responsibility to their clients, they have no responsibility to people... counterparties in transactions. They are tough, greedy, aggressive, and feel absolutely out of control, in a quite literal sense. And they have gamed the system to a remarkable extent and they have a docile president, a docile White House and a docile regulatory system that absolutely can't find its voice. It's terrified of these companies.

If you look at the campaign contributions, which I happened to do yesterday for another purpose, the financial markets are the number one campaign contributors in the U.S. system now. We have a corrupt politics to the core, I'm afraid to say... both parties are up to their necks in this.

... But what it's led to is this sense of impunity that is really stunning and you feel it on the individual level right now. And it's very, very unhealthy.   I have waited for four years... five years now to see one figure on Wall Street speak in a moral language. And I've have not seen it once. And that is shocking to me. And if they won't, I've waited for a judge, for our president, for somebody, and it hasn't happened. And by the way it's not going to happen any time soon, it seems.

Jeffrey Sachs

Matt Taibbi Discusses the Market Rigging in the Swaps and LIBOR Markets By the Banks

Derivatives and many real world calculations of risk and price are based on a relatively few published data, such as LIBOR.

Similarly, the 'spot' price of gold and silver is based in large part on the front month contract for gold and silver on the Comex. And those prices in turn have enormous leverage over the price of mining stocks.

Some have pointed to the 'physical market' in London for metals at the LBMA as the true price market for physical bullion, with their AM and PM 'price fix.'  And while it is true that the LBMA is a market dominated by insiders, with less disclosure than many exchanges,  it has come out that even on the LBMA the price is largely based on paper trading with leverage approaching 100 to 1. 

And LBMA is heavily interconnected with the Comex.

Since those making markets on the Comex in metal futures deliver a very small percentage of the actual gold and silver that is traded on paper, and much of that is settled for cash, the opportunity for price rigging is significant, hugely so.

And as in the case of other long running market schemes, like Bernie Madoff's, the stony silence and arrogant denials of any irregularities, despite very unusual trading activity in quiet hours and around key dates, is disconcerting considering the opaque nature of some unusually large market positions and significant circumstantial evidence with regard to motive and opportunity.

"All of these stories collectively pointed to the same thing: These banks, which already possess enormous power just by virtue of their financial holdings ­ in the United States, the top six banks, many of them the same names you see on the Libor and ISDAfix panels, own assets equivalent to 60 percent of the nation's GDP ­ are beginning to realize the awesome possibilities for increased profit and political might that would come with colluding instead of competing. Moreover, it's increasingly clear that both the criminal justice system and the civil courts may be impotent to stop them, even when they do get caught working together to game the system.

If true, that would leave us living in an era of undisguised, real-world conspiracy, in which the prices of currencies, commodities like gold and silver, even interest rates and the value of money itself, can be and may already have been dictated from above.

And those who are doing it can get away with it. Forget the Illuminati ­ this is the real thing, and it's no secret. You can stare right at it, anytime you want."

Matt Taibbi: Everything Is Rigged

The Man Who Exposed Madoff Cites Government Complicity in Fraud

This is only the tip of the iceberg, but even it may never be seen.

We ask now why the economists and regulators and media said little or nothing while the frauds and bubbles were developing, then.

But what are they saying now, about the new frauds, and injustices, and the blatant manipulation of the markets wherein some traders turn in financial results that are improbable to produce without inside information and breaking the rules?

A few heroes speak out, but most of the intellectual leadership cower in the shadows, asking 'Where is the outrage?' And the media baits the crowd with this or that distraction, and inflames them to think whichever way it pleases.

Here is an audio interview with Harry Markopolos in which he gives his views on the Federal Reserve as a regulator, financial reform, and the 'recovery.' Harry Markopolos Interview with King World News

Let us start here, and now, to demand the change required. Let us begin by auditing the Fed, and refusing to tolerate the granting of more regulatory power to an institution spawned in a deception in 1913, and at the heart of so many of our financial crises ever since. The Creature from Jekyll Island: A Second Look - G. Edward Griffin (2007)

As of yet, nothing has changed. The silence is deafening.


AFP Interviews Harry Markopolos

...In May of 2000, he submitted an 8-page report to the Boston Regional Office of the Securities Exchange Commission (SEC) listing red flags and mathematical proof of a major fraud but got no reply. He re-submitted his evidence to the Boston and other SEC offices in 2001, 2005, 2007 and 2008, to no avail. By this time, Markopolos was realizing that Madoff had been operating with protection from the inside.

In late 2008, when the stock market crumbled and investors rushed in to redeem their investments, Madoff ran out of cash, turned himself in to authorities, and pleaded guilty in federal court last March 12th.

Markopolos said that all the members of his team feared for their lives during the long investigation and he for more reason than any of the others because of his visibility. He was the one who was submitting all the complaints each year, and he knew that any leak from the SEC could make him a marked man.

He explained that the “offshore feeder funds” were only one step removed from organized crime. “If organized crime knew that Madoff was stealing their money, he would have been killed. Therefore, if Madoff had ever found out that we had a team tracking him through Europe and North America and that he risked getting exposed, it was a good bet that he would have had several billion reasons to want us silenced first. To compartmentalize the damage, I was the only one who went to the SEC.”

No one there knew Markopolos had an assisting team in the field. But Markopolos has proof that the SEC was culpable, too, and says publicly that he has tremendous anger at the agency and sadness for the victims. He says that there were SEC lawyers who were “in bed with Madoff ” and helped destroy lives.

“Madoff paid people to look the other way,” says Markopolos and reminds us that there is a federal report scheduled to come out by the end of the year. He emphasizes that unless there is a cover-up, “the SEC will cease to exist...”

Madoff is Pleading Guilty Without a Deal

Reports are that Bernie Madoff is pleading guilty WITHOUT a deal with the prosecution?

Is there a separate deal with a third party?

He gets to live, albeit in prison, if he doesn't testify about who he worked with and where the money came from and went?

Follow the money (if you can).

According to the US government the total of the Claimed Account balances is now $64.8 Billion with $170 Billion in forfeitures.

Bernie beats the estimate of $50 Billion stolen. Rally time.

Oh and according to Bloomberg, the judge has ruled that the only victims who will be allowed to speak on Friday in court will be those who do NOT think Bernie should be sentenced to any jail time.

Do the thousands of other less forgiving victims get to have their say in a free speech zone in the south Bronx?

Wall Street Execs Knew Madoff Was a Fraud Years Ago But Kept Silent

There is no way that the top execs on Wall Street did not know Bernie Madoff was running a scam. No way.

Why? Because once they heard he was pulling down those kinds of returns in all types of markets they would have had their own whiz kids climbing up his company's investment portfolio looking to see how he did it. They would want to do it too. It took Markopolos how many minutes to figure out it wasn't legitimate?

But now you know why so few Wall Street firms lost any money with Madoff despite his 'superior returns.'

Why did they keep quiet? Professional courtesy amongst scumbags is not likely, because there isn't any. More likely Bernie knew about some of their frauds, and that made him untouchable.

If they dig deeply enough they might find the real truth behind the Madoff scam, and it won't be pretty. This is no lone trader operation.

We may never hear the details behind this scam. It might shake our confidence in the system.


NY Post
Madoff Wall of Silence
By James Doran
February 16, 2009

Senior executives at some of Wall Street's biggest firms were convinced Bernard Madoff was a fraud as early as 2005 - yet none alerted authorities, documents filed with the Securities and Exchange Commission reveal.

Leon Gross, the former managing director in charge of worldwide equity derivatives research for Citigroup, told friends and colleagues on Wall Street in 2005 that he thought Madoff was being less than honest about the returns he could make for investors but did nothing to prevent the fraud.

Likewise, Joanne Hill, Goldman Sachs' global head of equity derivatives research, believed there was something wrong with Madoff's investment scheme because the returns he boasted in marketing materials seemed too good to be true.

Like Gross, Hill did not alert her superiors or regulatory authorities. She did, however, tell friends and colleagues about her suspicions.

Bud Haslett, of Write Capital Management, an investment firm, also suspected something fishy. But he told no one of his concerns.

The actions - or inaction - of the bankers is unveiled in a 700-plus-page dossier of e-mails, letters and analysis filed with the SEC by Harry Markopolos, the fraud investigator who tried to blow the whistle on Madoff for eight years.

The silence by the executives is disturbing to some, who claim a second alarm bell could have forced the SEC's hand and brought Madoff's alleged scam to an end sooner.

Markopolos told the SEC, according to the documents in the file, that he had been in contact with Gross, Hill and Haslett and that they would give evidence to the SEC so long as they were never required to speak in an official capacity.

Citigroup confirmed that Gross had been an employee but had left the bank some months ago. The company declined to comment about his views on Madoff.

A source close to Citi said Gross should not be singled out, as his views about Madoff were commonplace on Wall Street, adding that Gross did not spend much time analyzing Madoff's investment strategies.

Goldman Sachs did not return calls seeking comment. Write Capital Management, meanwhile, has not filed records with the SEC since 2006.

Where is Bernie's Trade Book? Who Were His Partners?

FINRA has found no evidence of trades by Bernie Madoff on behalf of his private investment fund through Bernard L. Madoff Investment Securities, a commercial brokerage founded in 1960.

This appears to be a brick in the wall of 'rogue trader' status. He could do it himself because he made no trades at all.

However this was not Bernie's only commercial operation in the securities business, in addition to his now nefarious private fund.

Primex was registered as Primex Holdings, L.L.C. in NYS in October of 1998. Primex is a joint venture involving a digital trading auction which operates out of Bernie's 18th floor office at 885 Third Ave.

Madoff's business partners in the Primex Exchange were Citigroup, Morgan Stanley, Goldman Sachs, and Merrill Lynch.

Did Bernie give any business to this joint venture? Did any of the above brokers have any investments or losses with the Madoff Fund? If not why not? It was one of the most successful funds, on paper, on the Street?

More questions than answers. Let's hope this one does not disappear down a black hole like the enormous put option positions placed on the airline stocks just prior to 9/11.


Madoff's fund may not have made a single trade
By Jason Szep
Fri Jan 16, 2009 6:55am EST

BOSTON (Reuters) - Bernie Madoff's investment fund may never have executed a single trade, industry officials say, suggesting detailed statements mailed to investors each month may have been an elaborate mirage in a $50 billion fraud.

An industry-run regulator for brokerage firms said on Thursday there was no record of Madoff's investment fund placing trades through his brokerage operation.

That means Madoff either placed trades through other brokerage firms, a move industry officials consider unlikely, or he was not executing trades at all.

"Our exams showed no evidence of trading on behalf of the investment advisor, no evidence of any customer statements being generated by the broker-dealer," said Herb Perone, spokesman for the Financial Industry Regulatory Authority.

Madoff's broker-dealer operation, Bernard L. Madoff Investment Securities, underwent routine examinations by FINRA and its predecessor, the National Association of Securities Dealers, every two years since it opened in 1960, Perone said.

Madoff, a former chairman of the Nasdaq Stock Market who was a force on Wall Street for nearly 50 years, allegedly confessed to his sons the firm's investment-advisory business was "basically a giant Ponzi scheme" and "one big lie," according to court documents.

He estimated losses of at least $50 billion from the Ponzi scheme, which uses money from new investors to pay distributions and redemptions to existing investors. Such schemes typically collapse when new funds dry up.

Each month, Madoff sent out elaborate statements of trades conducted by his broker-dealer. Last November, for example, he issued a statement to one investor showing he bought shares of Merck & Co Inc, Microsoft Corp, Exxon Mobil Corp and Amgen Inc among others.

It also showed transactions in Fidelity Investments' Spartan Fund. But Fidelity, the world's biggest mutual fund company, has no record of Madoff or his company making any investments in its funds.

DISCREPANCIES

"We are not aware of any investments by Madoff in our funds on behalf of his clients," Fidelity spokeswoman Anne Crowley said in an e-mail to Reuters.

Neither Madoff nor his firm was a client of Fidelity's Institutional Wealth Services business, their clearing firm National Financial or a financial intermediary client of its institutional services arm, she said.

"Consequently, his firm did not work with our intermediary businesses through which firms invest their clients' money in Fidelity funds," she added.

There also appear to be discrepancies between monthly statements sent to investors and the actual prices at which the stocks traded on Wall Street.

For example, his November statement showed he bought software maker Apple Inc's securities at $100.78 each on November 12, about a month before his arrest. But Apple's stock on that day never traded above $93.24. The statement also showed he bought chip maker Intel Corp at $14.51 on November 12, but Intel's highest price on that day was $13.97.

"You could print up any statements you want on the computer and send it out to a client and the chances are the client wouldn't know, because they are getting a statement," said Neil Hackman, president and chief executive of Oak Financial Group, a Stamford, Connecticut-based investment advisory firm.

To some, the numbers did not add up.

About 10 years ago, Harry Markopolos, then chief investment officer at Rampart Investment Management Co in Boston, asked risk management consultant Daniel diBartolomeo to run Madoff's numbers after Markopolos tried to emulate Madoff's strategy.

DiBartolomeo ran regression analyses and various calculations, but failed to reconcile them. For a decade, Markopolos raised the issue with the U.S. Securities and Exchange Commission, which has come under fire in Congress in recent weeks for failing to act on Markopolos's warnings.

Caveat Emptor - Buyer Beware - In Times of General Corruption

Here are some excerpts from the Op-Ed piece by Michael Lewis and David Einhorn that appeared in the NY Times on Saturday.

It is a portrait of government in partnership with a corrupt financial system, in a remarkably cynical and materialistic age, generally ignored by a frightened and complacent people.

And where was the outrage? Where was the rest of the world? Turning a blind eye to the corruption and enjoying the returns. Like many of Madoff's enablers and investors they thought they were insiders, the smart ones, and saw only the gains, ignoring the rest, and the eventual outcome.

This is not an historical review, as the problems still remain, a little exhausted, but largely uncorrected. No confessions of guilt, just denials, excuses, diversions and coverups.

Caveat Emptor. Buyer beware.


NY Times
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street...

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness...

Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense...

Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest...

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become. Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it...

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival...

Madoffed: Dr. Doom of Solly's Heyday

Economist may be latest hurt in Madoff scheme
Wed Dec 31, 2008 6:05am GMT

(Reuters) - A prominent Wall Street economist... the latest people to have lost money on investments connected to accused swindler Bernard Madoff, according to media reports.

Economist Henry Kaufman lost several million dollars, which he had in a brokerage account with Bernard L. Madoff Investment Securities for more than five years, the Wall Street Journal said, citing Kaufman in an interview on Tuesday.

The president of financial consulting firm Henry Kaufman & Co said his Madoff loss was no more than a couple of percent of his entire net worth and immaterial to his financial well-being, the paper said.

Kaufman became known for correctly forecasting higher inflation and interest rates when he was chief economist with Salomon Brothers in the 1970s and 1980s, when he acquired the moniker "Doctor Doom."

Madoffed: Kevin Bacon and Kyra Sedgwick

Why do people trust enormous sums of money to a stranger without due diligence, often on the word of another person who they may know only indirectly?

A good part of it is reputation and past performance, and who that person knows.

So Kevin Bacon and Kyra Sedgwick, in a lapse of sound portfolio theory, entrusted a sizable share of their wealth to Bernie Madoff, and are now apparently regretting that decision.

The average person likes to read about celebrity events. It provides an excitement to what might otherwise be a dull period of life. It also makes the ordinary person seem fortunate, smart, to hear of the misfortunes of the rich and famous. Misery loves company, and there is a bit of the voyeur in all of us.

Who would trust their wealth to an opaque and inherently arbitrary store of wealth, based solely on past performance and general reputation?

You would of course.

Don't believe it? Check you wallet and you bank accounts. Where is the majority of your wealth being held, if not in US dollars and dollar related financial assets?

Its not the same thing eh? Let's see how you feel about it at this time next year when Zimbabwe Ben has the monetization machine up to ramming speed.


New York Magazine
Madoff’s Latest Victims: Kevin Bacon and Kyra Sedgwick
12/30/08 at 10:15 AM

...We'd heard that along with Hollywood boldfacers Jeffrey Katzenberg and Steven Spielberg, Bacon and his wife, Kyra Sedgwick, lost money in Madoff's devastating $50 billion Ponzi scheme, and Bacon's rep, Allen Eichorn, confirmed it for us.

"Unfortunately, your report is true," he wrote. He wouldn't elaborate on whether, as we'd heard, they'd lost everything except for their checking accounts and the land they own. "I can confirm that they had investments with Mr. Madoff — no further specifics or comment beyond that," he said, adding: "Please, let's not speculate or rely on hearsay."

But we can't help but speculate! Just think about it: Footloose money: gone. Wild Things residuals: gone. The Singles stash: obliterated. If there's anyone in Hollywood who didn't deserve this, it's Kevin Bacon and Kyra Sedgwick. Those two have worked. It sincerely pains us. At least they have The Closer to fall back on. (For the record I take absolutely no joy in their misfortune. They seem like fine people. I feel genuinely saddened by their misfortune, in the same way I would feel sorry for your misfortune if I knew you. They have a strong cash flow and will recover. You may not be as lucky. Take away a message. Diversify. - Jesse)

Madoff Enablers: Everyone Was Getting Paid

As we said the other day in Rogue Nation, schemes like this continue on because everyone is getting paid, directly or indirectly, not to look closely.

Go along to get along with plausible deniability. The 'dumb CEO' and 'overworked civil servant' chasing kittens and alley cats while the lions are on the prowl.


Financial Times
Madoff feeder funds levied high fees
By Henny Sender
December 16 2008

The “feeder” funds that channelled money to Bernard Madoff charged their investors high fees that in some cases exceeded the norms of the hedge fund industry, people familiar with the matter say.

Mr Madoff received much of his funding from feeder funds run by so-called funds of hedge funds. These funds of funds are paid by investors to perform due diligence on hedge funds and allocate money among approved managers.

Typically, funds of hedge funds charge a 1 per cent management fee and take 0-10 per cent of the profits. This would be in addition to the fees charged by the underlying hedge funds – which usually take a 2 per cent management fee plus 20 per cent of the profits, above a certain level, known as the hurdle rate.

Fairfield Greenwich, a feeder fund that invested $7.5bn with Mr Madoff, charged a 1 per cent management fee and took 20 per cent of the profits, according to a person familiar with the matter.

Suzanne Murphy, managing director of Tri-Artisan, a hedge fund consultancy, said she believes other Madoff feeder funds charged fees similar to those at Fairfield Greenwich. At such levels, she claimed, “These organisations were more partners of Mr Madoff than clients.”

In general, generous arrangements such as large performance fees “raise questions about conflicts of interest and caveat emptor,” according to the general counsel of the alternative investment division of one bank. The head of the hedge fund practice at one law firm, added: “At a certain point, if you get outsize compensation, you can argue that you lose the incentive to do due diligence.”

In many cases, the feeder funds that worked with Mr Madoff also did so with few conditions, such as ones requiring that minimum returns be reached before fees would be paid, according to people familiar with the matter.

In some cases, the private wealth arms of banks that channelled money to such feeder funds also received payments from these funds.

Mr Madoff did not charge his investors fees but was paid through commissions on his trades, all of which went through the broker-dealer he controlled. Because he did not charge typical fund performance fees, he earned a reputation among some investors for being a lower-cost manager. (But severely back end loaded. Jesse)

Former NASDAQ Chairman Charged in $50 Billion Ponzi Scheme

"Do you know where your money is?"


Bernard L Madoff Investment Securities is the 23rd largest market maker on the Nasdaq for hedge funds and banks handling about 50 million shares per day.

The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

Their Financial Advisory Business is separate from their market-making business with approximately 20 customers.

The $50 billion in confessed total losses does not quite square up with $17 billion under management at the advisory firm, even in these heady days of leverage.

Where and when is the unidentified loss of $33 billion going to hit?

Naked shorts which cannot be covered? Levered positions that are now vaporized?

Who are the twenty or so customers of the Financial Advisory business?

Who was his auditor? Who in the NASD knew about this? Who was handling his back office work?

Is the ghost of Richard Whitney walking the floor of the Exchange tonight?

cf. Richard Whitney, President of the NYSE 1930-35

Richard Whitney Warning Against the Securities Act of 1934 - Video

Securities and Exchange Commission
SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
FOR IMMEDIATE RELEASE
2008-293

Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." 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. 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. (From 17 billion under management? Offer him the position of Treasury Secretary. This guy is a financial genius! - Jesse)

"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."

Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The SEC's investigation is continuing.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York.