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MAKING CENTS OUT OF THE NEWS
Blog #24
(June 18th, 2009)
THIEVES AND SCOUNDRELS UPDATE
By Tom McAllister, CFP™
The lead story on 60 Minutes this past Sunday related to Bernie Madoff. Having pleaded guilty to defrauding investors, Madoff has been sent to jail for the rest of his life. The focus of the 60 Minutes’ segment, however, was whistleblower Harry Markopolus. Beginning in 2001, Markopolus had repeatedly contacted the SEC, pointing out that Madoff’s claims of returning 12% to investors in good times and bad simply exceeded the realm of possibility. The SEC looked into Madoff’s operationTHREE times and found no evidence of wrongdoing.
Indianapolis scoundrel Marcus Schrenker, pleaded guilty on Friday June 5, to federal charges of intentionally crashing his million dollar airplane to fake his own death and flee financial ruin. Sentencing is scheduled for August 19th. Schrenker will face millions of dollars in judgments for his insurance fraud in Indiana and elsewhere, and, while no details are yet forthcoming, it is anticipated he will face further charges related to his money management activities.
On April 29th of this year, Arthur Geoffrey Nadel, the Sarasota, Florida-based manager of the hedge fund Scoop Management Company, was indicted on fifteen counts of securities fraud, wire fraud, and mail fraud in a federal court in Manhattan. If found guilty, Nadel could face 280 years in prison and be required to forfeit all assets connected to the fraud. Nadel is currently housed in the Metropolitan Correctional Center in Manhattan, the same facility to which Bernie Madoff was sent in March.
These three thieves, and the many more like them uncovered in the severe bear market of 2008-09, point out the inadequacies of the Securities and Exchange Commission and of the various state securities regulators who failed to identify these schemes.
The problem with our securities regulators is not the quality of the personnel, whom I have found to be quite competent, but rather with their approach. Regulators are generally selected, NOT from the securities industry, but from other disciplines, such as accounting or law. They are trained to provide oversight of transactions and enforce regulations, not to uncover other evildoing. As one sad example, the SEC personnel investigating Madoff’s firm focused on his , broker/dealer, not on the private unregistered purported hedge fund, where the fraudulent activity occurred. They apparently were not aware of the latter, in spite of Markopolus pointing the way for them.
It causes me pain that things have come to this, because I have been a member of various FINRA (and its predecessor, the NASD) committees for 31 years, also serving as an industry arbitrator for FINRA/NASD. I have always believed this self-regulatory organization did a good job. Unfortunately, FINRA is no longer truly self regulating. Since the merger three years ago of the New York Stock Exchanges regulatory elements and the NASD, in my opinion, it now largely functions as an arm of the SEC, a slow moving and inefficient government bureaucracy. (Note: FINRA does not regulate investment advisors, this function falls to the SEC and the States.)
As a veteran Due Diligence officer of our own small Indianapolis-based broker-dealer, I can honestly say the Madoff fund would not have survived the first three tests in our 20 step analysis. For starters, the monies and securities were not held by an independent custodian. Second, no one in the options market community ever reported having done business with Madoff’s fund. Last, Madoff was extremely private as to their offerings and strategies. In short, the Madoff hedge fund was decidedly not scrutiny-friendly. To my delight, I have passed on several opportunities such as these because they did not pass our “smell test”.
Several adages come to mind, but the obvious is, “If it sounds too good to be true – it probably is!”
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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