Given how easily identifiable the Madoff/Ponzi scheme was mathematically, I must ask a simple question:

Does the SEC do any quantitative research ?

There is little evidence that the SEC is using any of the quantitative methods — now so common on Wall Street — for searching out and indentifying fraud.

I would suggest to the incoming head of the SEC to put together a blue ribbon of math professors, quant scientists and algo specialists to develop a few basic programs that ferrets thru market, options, and perfromance data looking for aberrational data series, and leading to criminals and fraud artists.


See also:
Numbers follow a surprising law of digits, and scientists can’t explain why
Lisa Zyga, 11:26 EST, May 10, 2007

Benford’s Law Part 1 – How to Spot Tax’s%20Law.html

Be Wary of Serial Correlation (December 2008)

Are They Cooking the Books?
Political Calculations, October 02, 2008

Multiple Red Flags in Madoff Case
WSJ, DECEMBER 12, 2008,

Bernard Madoff’s Prison Reading List

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

75 Responses to “Does the SEC Do Quantitative Research ?”

  1. Steve Barry says:

    Instead of all that either

    1) Regulate hedge funds and open up their books

    2) Make hedge fund investors sign a “surgeon general’s warning”…”investing in hedge funds may be hazardous to your wealth”

  2. Steve Barry says:

    Things are starting to make more sense now…I said a few weeks ago that hedge funds must be in shambles…it showed up in a lack of market liquidity, wild swings and extremely low short interest given the deteriorating market. Zero yields on treasuries seem to be hedge funds parking money in a total panic…now we have Citadel halting redemptions late yesterday. Add Madoff, who was huge in philanthropy and must have had many fanily’s whole life savings.

    Look to the hedge funds for what will happen next…any experts here? Barry?

  3. Steve Barry says:

    If an investor can’t get funds from his hedge fund, he may have to sell other stocks or funds. Maybe hedge funds are also causing the muni fund collapse.

  4. Steve Barry says:

    Per Bloomberg: “As of October, 18 percent of hedge-fund assets, or about $300 billion, managed by 5 percent of hedge funds, were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte.”

    300 billion is TARP sized money.

  5. VoiceFromTheWilderness says:

    Oh come on, the SEC is lobbying group. Well, I don’t quite believe that, but the idea that the SEC is in the business of investigating businesses hasn’t been true for almost 10 years now.

    Actually this whole brouhaha is quite funny. The whole justification for hedge funds was that only ‘sophisticated investors’ could be ‘allowed’ to take the risk of investing in them. That’s why us poor people don’t get to play supposedly. And the point was that these were relatively unregulated (compared to what exactly was never made clear) investments vehicles. The claim was that it was okay not to regulate them because only rich people got to play. Now it turns out you do want regulation and oversight? So, uh, exactly why is it again that the plebes don’t get to participate? Oh right, because this is an aristocracy.

  6. KidDynamite says:

    they MUST use some sort of quant models right? that’s how they identify unusual trading volumes in stocks or options which signals potential foul play. i guess that’s not so much a quant model as a “greater than x” model – not too sophisticated.

    one thing is clear: Cox is the definition of failure.

  7. Excuse me, while I cry some crocodile tears for Madoff’s investors. Done. Now, I mind not a whit that the SEC does not regulate hedge funds, and while getting a bunch of math geeks together to formulate algorithms to discern fraud sounds neato, I’d rather prefer that the responsibility for ascertaining fraud be pushed down to the folks that care the most–these “sophisticated” hedge fund investors.

    I do hope that Madoff’s investors do not get a bailout, but in this bizarro world, anything is possible.

    Now, about Citadel locking up its flagship hedge fund from redemptions until March of 2009 as I read in today’s WSJ–unless the investors had agreed to such a thing in writing, it’s theft. If they had agreed to allow it, and now are suffering for their stupidity, well, excuse me while I shed some more crocodile tears. The potential for big returns ALWAYS come with potentially big risks, you fucking morons.

  8. Mannwich says:

    Cox should be arrested and put in jail with Made-off immediately.

  9. Mannwich says:

    @Curmudgeon: I agree with you. Not crying any tears for these people. It’s sad but in many ways amusing.

    If they bail out Made-off’s investors, they’d better do it quietly. That could end up being the final straw for the sheeple. Even sheeple get mad once in a while.

  10. xon says:

    Memorandum for: Director, Enforcement Division, SEC
    From: Chief, Analysis Branch


    To date, we have conducted technical analysis of 1,743,673,250,456 individual data item in the Commission’s records. We have used heuristic, textual, statistical, and graph-theory methods to detect fraudulent activities. To date, we have identified 1,743,673,250,455 specific fraudulent documents. (As a side note, the one document that fell outside the reported set was a ‘test’ document we inserted into the database for tracking purposes.)

    We will be forwarding this information to Investigations and Sanctions Branch as soon as such a branch comes into existence. Please give me a call when you return from your electioneering activities in Geneva next month, and I will provide you with details that you can promptly turn over to Republican Party contributors.

    [name redacted]

  11. Does the SEC do any quantitative research ?

    Does the SEC do any kind of research at all? When is the last time they brought an enforcement action of any note? Christopher Cox has been asleep at the switch, so to speak. Can anyone tell me what the SEC has been doing the past eight years? Don’t forget that Cox sits on the board that oversees the TARP.

  12. willid3 says:

    it would appear that the SEC doesn’t do enforcement. they are just a cheerleader, another bunch of incompetent regulators who think their job is to treat their offenders as customers instead of potential offenders. just think had they infected the police, they would be trying to help rob the banks. oh they did that already, just not in the middle of the night. or maybe they did that too. they just didn’t have to break in>?

  13. ironman says:

    BR highlighted Benford’s Law, but don’t forget about the F-Score as another useful tool for rooting out fraudulent accounting at publicly traded companies.

    (ATTN SEC – I would be one of those people who would qualify for each aspect of BR’s blue ribbon!)

  14. KidDynamite says:

    now, I’m all in favor of Caveat Emptor, and my first reaction to the Madoff story is that people got burned by their own greed.

    However – if you’re an investor in the fund, and Madoff is sending you false trading confirms (which he reportedly did) – why would you question it? Said differently, I have a managed account. I get trade confirms and quaterly statements: I know exactly what my fund owns… but if it turns out that my account manager is just making up all the statements, how am i supposed to know that?


    BR: Here’s how: We (along with 1000s of other managers) house our managed accounts at TD and Schwab. Our clients have full access to their account, they can log in and see every position and every transaction.

    Simple, easy, transparent.

    And if they want to fire us, they simply tell TD to revoke our authorization. They can leave the money there, or liquidate the account, and then wire the money to their own bank accounts.

    (And that is how you avoid fraud.)

  15. KJ Foehr says:

    I assume you are being somewhat factitious and do realize that the primary objective of the SEC in a laissez-faire administration such as this one, prior to the collapse that is, is not to be proactive in preventing fraud and abuse, etc., but to only pretend that is doing so while actually standing aside allowing the raping and pillaging to continue unfettered.

  16. larster says:

    I read that he did not have to comply w/quarterly reporting requirements, since he was all cash at the end of each quarter. Assuming that this story is true, all investors and the SEC must be beyond dumb. First off, it smells of reporting avoidance and secondly, the work of rebuilding positions in a multi-billion dollar fund would be mind boggling at best. One might also mention that this would have a noticeable market affect. You cannot liquidat billions of dollars of investments and not cause a market reaction, except that there was no billions of dollars invested. Why do these things appear so obvious in retrospect.

  17. DL says:

    If I were a “fat cat”, I would sure be reluctant to give my money to any hedge fund with a “lock up” period. Not so much out of fear of a Ponzi scheme (by the money managers), but simply because I would want to have the option of moving to cash if I thought the market was headed lower.

    One of the questions I have is, even for those hedge fund managers who are more or less complying with the law, what happens exactly when they impose a lock up period on redemptions? Do the managers make sure they get their OWN money out first, i.e., is there some sort of “front running”…? We heard a lot about the so-called “market timing” on the part of some mutual fund managers (which Elliot Spitzer cracked down on when he was governor). This lock up business by the hedge fund managers seems to be a lot worse.

    On the other hand, if it’s just “fat cats” losing money, it’s hard to get too worked up about it.

  18. constantnormal says:

    Would not any serious analysis by the SEC imply a government that works?

    Isn’t that prohibited somewhere, like maybe the Constitution?

    Surely a thinking, rational government is not what we all signed up for — next you’ll be wanting thinking, rational businesses as well.

    Get Real.

  19. DL says:

    Steve Barry @ 10:11

    “[I propose to] regulate hedge funds and open up their books”

    There might be some merit to that, but I am against the idea of forcing hedge fund managers to disclose their positions to the public, or even to a government agency (which agency might then make information available to well-connected money managers). The strategies employed by a given hedge fund constitute a sort of “intellectual property”. To the extent that a given money manager is a creative, successful and original thinker, he should not be required to share the fruits of his labor (and insights) with others. I strongly suspect that B. Ritholtz would agree with that proposition.

  20. investorinpa says:

    Barry, I have to ask ya (and just about everyone else who always says this)…but what exactly is a “blue ribbon panel” or blue ribbon commission? I hear that all the time, but I don’t remember any awards being given out. This always seems to be the default answer to whatever complex problem there is. Usually they appoint 5 republicans, 5 dems and they end up agreeing that nobody is more at fault from one party than the other. They never seem to get anything done, these blue ribbon panels. How about instead of a blue ribbon panel you get in one “doer” who rules with an iron fist?

  21. VennData says:

    I disagree with earlier comments that the low paper asset prices are a result of hedge fund redemptions. Hedge funds don’t have anything to sell since they’re mostly ponzi… er… a… Madoff schemes.

    Citadel’s new gate – also cited above – is more of the same. Watch for some bankrupt trustfunders to storm their building – like they did to Madoff Friday – and steal that ridiculous gold-winged statue from Citadel’s lobby.

  22. r says:

    “I would suggest to the incoming head of the SEC to put together a blue ribbon…”

    Great idea, but ..

    Why would someone of vision, intelligence and leadership come to work for the government as the head of the SEC?

    Can anyone name more than 3 people with vision, intelligence and leadership who are or have been government employees? These people use their talents for much much better things.

  23. David Merkel says:

    Barry, that is a good idea, and I would be willing to serve on such a panel. In addition to quants, you should toss in a few investment actuaries. They view risk differently, and would provide a counterbalance to those who assume that markets are always liquid, whether they be academics or quants.

  24. leftback says:

    As you know, I can be cynical about the hedge fund industry. However, even I could find only sadness and not mirth in this letter written by Sandra Manzke just a few days before Bernie “Madoff” with all of her investors’ money. Surely she didn’t know, she was even on TV a day or so ago…?

    “As a group we can influence the future of the industry. We can start to define neutrally beneficial terms, not punitive investor terms. If we want to survive, we have to restore confidence and reshape the industry. I am not saying everyone out there is a bad apple, but there are too many bad apples for my taste and it only takes a few to bring the industry to its knees.”

    Prophetic words indeed, but too late to save those who invested in Madoff Investments through her fund-of-funds operation at Maxam. We really are starting to see all those people who have been swimming naked. To use another common phrase: when you see one cockroach, there is never just one.

    This event will haunt us all in months to come as a wave of redemptions distorts the markets again.

  25. KJ Foehr says:

    “Can anyone name more than 3 people with vision, intelligence and leadership who are or have been government employees? These people use their talents for much much better things.

    There is no point in naming any, because I don’t believe there are any people that you would agree have vision, intelligence, and leadership.

    But, IMO, such people are extremely rare everywhere, but do exist both in and out of government. And some of them go back and forth between the public and private sectors.

  26. constantnormal says:

    @ ironman — I was intrigued by the F-Score worksheet, and quickly ran through a bunch of data (from Yahoo Finance, I did not root out the actual numbers from the SEC data or the companies’ annual reports, just a quick & dirty pass through the worksheet) for a small sample of companies:

    GM 0.31
    F 0.84
    C 0.83
    BAC 0.34
    AAPL 1.17

    Of these, only AAPL was flagged as meriting further investigation. (my guess is that their subscription method of accounting for the iPhone distorted things a bit, but that’s just a guess, as I am clueless as to how the algorithm employed by the F-Score worksheet actually works).

    I sure expected to see some of these others with elevated scores as well. I guess that incompetent does not equal crooked.

    (exculpatory comment — I have no formal accounting training in accounting beyond a one-semester course in corporate accounting about 35 years ago, and did not run through this exercise multiple times or employ any independent verification to guard against fat-fingering the data — YMMV)

  27. wunsacon says:

    >> Why would someone of vision, intelligence and leadership come to work for the government as the head of the SEC?

    Do you think people go into government, charity, or political nonprofits because they’re losers? Not everyone places so much as emphasis on “self-interest” as their top motivation. Some people want to change the world for the better without regard to huge financial reward.

    I think the mainstream business media creates a negative perception about every pursuit other than money.

  28. Mannwich says:

    @wunsacon: Thank you for that. The media and those on the right have done a fine job of attaching a negative stigma on anyone who chooses to work in those sectors, especially government (and many in government have done a fine job of helping to perpetuate that mindset as well). Bottom line is when you gut those sectors of any/all competent, honest, decent people and replace them with people who believe that government’s sole purpose is to use it as vehicle to enrich yourself and your friends in the private sector at all costs, the results are not all that suprising. Not everyone is motivated solely by the pursuit/accumulation of material wealth. We need to remember that.

  29. ironman says:


    The F-Score more oriented for detecting accounting fraud, rather than potential business failure. Your results would suggest that GM, F, C and BAC’s statements are most likely okay in that regard, and that AAPL’s might deserve closer examination – although if you can find a plausible reason for their higher score, things are likely okay there as well.

    For detecting potential business failure, especially with non-financial companies, your best bet is Altman’s Z-Score. The link here presents data for GM available on 1 June 2006, which indicated that GM was very much a distressed company even in those days of surging SUV sales.

    Back on 2 October 2008, I re-ran the Z-Score calculation for GM to support a comment over at Econbrowser. To save the clicking (and scrolling) through all those comments, here’s what I found:

    In the past week, Political Calculations has had an upsurge in traffic for our Predicting Bankruptcy tool, much of it directed from the Yahoo! message board for General Motors.

    Even though the default data set up in the tool shows that GM was highly distressed back in March 2006 (their Altman Z-Score was 0.01 back in those rosy days), updating it with the most recent quarterly data as of 30 June 2008 reveals that things have become much, much worse. Their Altman Z-Score is now -1.35, which is the lowest I’ve personally ever seen.

    Perhaps that helps explain why the Congress provided $25 billion for the auto industry in their bailout package. At this time, I don’t believe that even if the full amount went to GM that it would be enough for them to avoid bankruptcy proceedings.

  30. Jurgen says:

    The SEC is extremely inefficient and incompetent. It is run by a clueless, arrogant and corrupt imbecile Mr. Cox.

    According to WSJ, in 1999 Harry Markopoulos wrote a letter to the SEC documenting that “Madoff Securities is the world’s largest Ponzi Scheme.” It took EIGHT years for the SEC to investigate and to conclude in 2007 (last year) that Madoff Securities was not a scheme.

    Mr. Cox must be fired immediately. He is the worst chairman ever.

  31. AGG says:

    From the NYT:
    . It is not clear whether the results of the 1992 inquiry discouraged the S.E.C. from examining Mr. Madoff again, even when new red flags surfaced. Lawyers at the S.E.C. did not return calls.

    Meanwhile, Fairfield Greenwich Group, whose clients have $7.5 billion invested with the Madoff firm, said it was “shocked and appalled by this news.”

    “We had no indication that we and many other firms and private investors were the victims of such a highly sophisticated, massive fraudulent scheme.”

    At the court hearing, an individual investor, who declined to give his name to avoid embarrassment, expressed a similar sentiment.

    “Nobody knows where their money is and whether it is protected,” the investor said.

    Welcome to the crowd, fellow Americans. If Maddoff was inadvertently handly some mob money then this should get REALLY interesting. Organized crime has some rather imaginative incentive programs to achieve a settling of accounts.

  32. Mannwich says:

    @Jurgen: That is truly incredible. It seems that Madoff got by without much scrutiny because of his early ties to the Nasdaq?

  33. dtsmith2001 says:

    I happen to know something about this subject. The SEC employed at least one quantitative analyst in 2004-2005. Basel II allowed banks to use internal ratings models to manage counterparty and other credit risks. The SEC also wanted to monitor DTCC’s internal models as well. I can’t say whether more analysts were hired since 2005.

    With regard to hedge funds, I’d like to point out that no hedge fund failure since 1998 has caused a systemic crisis, but plenty of bank problems have. And if the regulators of banks did such a poor job, what makes anyone think that regulating hedge funds more heavily would be better? Note that hedge funds are regulated by the Investment Company Act; that’s why they can’t release returns or other information unless the investor is appropriately qualified. Hedge funds are careful about screening investors because the SEC tends to get quite testy if they don’t. In addition, the SEC already regulated thousands of mutual funds under the Investment Company Act. Will they be more effective if the number of funds monitored is doubled? I think not.

    The SEC and bank regulators have sufficient power right now to monitor hedge funds via prime brokerage divisions of the banks. The key is this gives the SEC and bank examiners a rather small set of entities to cover, and ones they know quite well already. Adding a few staff members to handle this extra work load is a much smaller task than suddenly processing reporting from hedge funds as well as mutual funds.

    Here are a couple of relevant links in case anyone is interested.

    Sebastian Mallaby on hedge funds

    Blame the Banks

  34. AGG says:

    Was the SEC aware of the Maddoff malfeasance? Of course they were. Do the police in any city know most of the criminals? Of course they do. Catching them in the act when your boss is friendly or even family of the criminals is carreer suicide. This isn’t about crime. This is abut a culture of corruption that got out of hand. This all became a problem when the criminals started targeting the other high class criminals. Otherwise they would have been left alone. This is a war among the elite and promises big time fireworks. The milked us for all we were worth and then turned on each other. I agree that, as long as you sign on the dotted line that you can afford to lose all of it, the way the hedge fund uses your money doesn’t require regulation. The problem is that hedge funds, with their large pools of cash have jacked around with the price of commodities that common people need for everyday use. This is a crime. Whether you can define it as such because it involves speculation is not relevant. They crossed the line. Gamble all you want but don’t fuck with my needs because of your greed. So yeah, now the hedge funds have to have a web site where people in the fund can monitor transactions live and in living color. Tough shit guys. You blew the trust. Now suck it.

  35. Mannwich says:

    @AGG: Bravo, bravo. Well done, my friend. The ole US of A has been morally and culturally bankrupt for quite some time now. We’re just now seeing the fruits of that “labor” over the past 2-3 decades. Now let’s all pull up a chair, grab tub of popcorn and a soda , and enjoy the show…..

    My prediction? Most of Madoff’s clients will somehow get bailed out and made whole (or at least close enough) by the good ole US of A, but hush-hush on the down low. After all, in our morally and culturally bankrupt plutocracy, we can’t have our elite masters losing all of their dough. Our entire country would just fall apart at the seems.

  36. BR: Here’s how: We (along with 1000s of other managers) house our managed accounts at TD and Schwab. Our clients have full access to their account, they can log in and see every position and every transaction.

    Simple, easy, transparent.

    And if they want to fire us, they simply tell TD to revoke our authorization. They can leave the money there, or liquidate the account, and then wire the money to their own bank accounts.

    (And that is how you avoid fraud.)

    Transparency? wtf is that?

    IOW: WTG BR, that’s what makes you One of the Best.

    btw, as a reminder, when in the lead, Stretch it out~

  37. DaveO says:

    If a pile of FOF “pros” cannot figure it out the government never will, the SEC is one of the G’s worst performers, trying=failing.

    Mann, no chance of a bailout. Ponzi players take the rip to the grave. Given the abundance of red flags that is hos it should be.

    Checking craigslist now, hearing an east coast NL team might be listed.

  38. AGG says:

    I think you would make a superlative SEC chairman. As long as they let you staff the place and gave you a sufficient number of slots to fill plus personal backing by Obama and a hot line to the new justice department, we’d get real progress in this country.
    Question: Is Mukasey a friend of Maddoff? A connections chart like they made for Paulson would be iluminating. Who else does that small, obscure accounting firm that “audited” Maddoff do “work” for?
    Hello, FBI, Justice Department, CIA, NSA? Wake the fuck up, America!

  39. babycondor says:


    “Our entire country would just fall apart at the seems.”


    It’s all about appearances, isn’t it… how things SEEM. These days we collectively SEEM to be getting “reality checks” on a number of levels. Interesting times.

    I do hope your prediction doesn’t come true, though.

  40. Mannwich says:

    @babycondor: Perhaps you didn’t detect the snark in my comment? I was being sarcastic. The more I think about this, the more sickening it gets. Of course these folks should be allowed to fail, just like the banks should have been allowed to fail, nationalized, cleaned up, and re-privatized with different decent leadership (if any can be found at this point), similar to what Sweden did in their crisis. Not a perfect solution but certainly better than the half-baked one that’s going on right now…….

    If the feds had done this, they’d have more of a leg to stand on to let the autos BK and then clean up that aftermath as well.

    Unless the system is purged of most of the “bad actors”, how can we expect any confidence/trust to be restored to the “markets”? Until that happens, we are nowhere, I don’t care how much the stock market moves up or down in any given period of time.

  41. Mannwich says:

    Hate to say it, but maybe it’s time to bring Spitzer back. A little problem with prostitution seems quite minor in comparison to what’s going on right now.

    Somewhere he has to be quite relieved that these events have allowed him to slither away into relative obscurity so that he can refurbish his image and make a comeback, and make, no mistake, he WILL be back. This country loves comebacks…….

  42. AGG says:

    You have it exactly right. The official, non-published definition of a Blue Ribbon Panel is a smoke screen. The screen goes up, the press goes away, the screen fades away and the press is involved in something else. It’s harder now with the internet but they’re still at it. Reagan appointed a Blue Ribbon Panel after the 1981 air traffic control strike. They did nothing but jawbone and make sure no future union had the power that PATCO had. The solution was :We had a strike so lets make sure we don’t have a union. Par for the Course with politicians.

  43. AGG says:

    Agreed. Spitzer would keep his nose clean and would know who to indict. I hope Obama brings him back.

  44. DL says:

    Mannwich @ 4:32

    “Most of Madoff’s clients will somehow get bailed out and made whole ….. [by the U.S. government]”

    I really don’t see Obama doing that…. (unless he manages to bury it somewhere in his “stimulus” package).

  45. Mannwich says:

    @DL: I really hope you’re right. This thing is spiraling out of control rapidly. How do we even know where the TARP money has gone thus far since Paulson won’t release the information? So really, how do we even know that somehow some of these people/entities might get on that gravy train as well? The autos are now jumping on?

    With all due respect to those who think the recession is ending and new bull market is beginning, to coin a phrase from John McEnroe, “you can’t be serious?”

  46. DaveO says:

    Johnny Mac’s phrase is declarative and it ends with an exclamation point, but I agree with the sentiment.
    Why would The Bulldozer be a plus in this environment? He made noise, threats, and raged out of control. What exactly did the AG change? Management at AIG? Hardly a plus. Equity research provides the investing community with far less value that it did it the days of Blodgett @ ML. Frank the Q, the one with the correctly overturned conviction, is right about that business, not Client #9. The real world is a better place with Elliot on the sideline, that he has something to add is pixie dust and fairytale.

  47. AGG says:

    Speaking of crime with a capital C and smoke screens, here is a great example of political sleight of hand:
    McCain and another senator just “released” the results of a two year study on torture. According to the study, despite administration claims that it was field officer requests that triggered the “aggressive” interrogation techniques, not only did Rumsfield direct the implementation of said techniques, but the pentagon sought justice department “reinterpretations” of laws so they could authorize said techniques; thereby actively seeking to subvert the laws. The key to Rumsfields behavior was a Memo signed by Bush claiming that the Geneva conventions were no longer applicable. This was in 2002.
    This is EARTH SHAKING NEWS. Our leaders broke laws which veritably define us as a civilized nation. The “investigation report” is released coincidentally while a lot of noise is going on about a Democratic corrupt governor. Do you see how this works? If you don’t, just go back to sleep.
    AND I’ll say this: Bush, Cheney, Rumsfield, Maddoff, etc. are just the tip of this iceberg. Lot’s of good people have lost their lives or reputations. But now that the rich start losing money, all of a sudden this becomes serious shit!. Pitiful.

  48. Mannwich says:

    @DaveO: I agree with you to some extent, but let me offer one powerful word and motive: redemption.

  49. Reverb says:

    To answer your own question Barry, go to SEC job openings site. Only lawyers and accountants need apply, not a soul that can sling a slice a dataset. Shameful. Unexplicable.

  50. Reverb says:

    To answer your own question Barry, go to the SEC job openings site. Only lawyers and accounts need apply. Not a soul that can sling and slice a dataset.

  51. Mannwich says:

    Off to go see the movie, “Slum Dog Millionaire”. No, it’s not about one of Madoff’s former “clients”.

    Good night all.

  52. Steve Barry says:

    Two things I’m dying to know:

    1) What is the client list and how much did they each lose?

    2) Where did the money go?

    Now there’s a bestseller.

  53. leftback says:

    Steve, I am sure the press will have a field day with this one. The little yappy papers in NYC love this stuff and we will be following it carefully here at Schadenfreude Asset Management.

    With regard to the SEC, I think it is clear that the major problem is they are headed by a Cox Sucker.

  54. AGG says:
    Madoff is Russian for Made-Off-with-da-money. Madoff and friends are going to need protective custidy.
    Honesty may not be the most profitable policy but it’s great for longevity.
    As to the Madoff client list, a lot of it will be in the obits soon. The rest will be looking for people to contract for imaginative deeds. The rats are on the run.

  55. AGG says:

    Move over Madoff. Here comes Rubin the Robber.

  56. Jojo99 says:

    You make the basic mistake in assuming that the SEC actually wants to catch criminals.

    Quis custodiet ipsos custodes?

  57. DC says:

    Does anybody here actually believe that Madoff is a lone wolf? Not me, and I gather I’m not alone. All the “forced redemptions” in recent months may have been the last buckets bailed on the S.S. Ponzi.

    Have to take this golden opportunity to also point out the comedy channel known as CNBC. Now Gasbag and his gang of mooks are outraged, asking “where were the regulators!!!???”

    CNBC spends the bulk of its time pissing all over regulation of any sort, but they reserve special scorn for the Spitzers and Cuomos of the world. Their investigations are always “witch hunts” and settling scores. How would CNBC have covered the story if Madoff had been targeted by the SEC? They’d have raised bloody hell that a good man was being pilloried without merit.

    The problem with WSJ and CNBC and most business media is the same problem that DC media has: they are too close to the people they cover.

    Maria and Larry and Erin and Michelle and almost all the rest of them are on a first-name basis with the big wheels. Gasbag was in the pocket of Jimmy Cayne. Erin loves dropping first names and playing globetrotter. Becky flies on planes with T. Boone. On and on. (Santelli is a notable exception, as is Griffith.)

    It’s incestuous beyond redemption. We’ll just have to wait it out and try to rebuild a better system after this one eats itself.

  58. mark mchugh says:

    Wow AGG is going off today, and I’m lovin’ it!

    The SEC doesn’t do any research at all. They are the classic example of someone trying to manage that which they do not understand. I would bet my last nickel that Chris Cox couldn’t even pass a Series 7 test. The complete lack of Justice burns me more than the crimes. I’d rather see Cox go in the wood-chipper, than Mozilo, Madoff or anyone else.

    True Story: I wrote the SEC in January of 2007 about Mozilo’s insider trading, the mysterious “resignations” on the board of directors (that never got replaced), Countrywide bank switching from an FDIC bank to an OTS Thrift – They replied “no comment”.

    So in March 2007, I applied for an Insider Trading bounty with the SEC, regarding Mozilo (10% of the recovered amount of the fraud), making what I thought was a very strong case for investigation. Again, nothing. Apparently, if you don’t turn yourself in, the SEC will never come after you.

    More than quant research, the SEC needs people with the integrity to follow leads and swift, terrible justice for violators. That will do more to inspire investor confidence than not showing, or allowing discussion of the Dow futures on CNBC while the PPT scrambles to paint the tape (again).

    Anyway, when I get that $30 million, we’re all goin’ out to dinner.

  59. Jojo99 says:

    The SEC doesn’t get leads on financial cheating because all they pay a reward for is “inside trading” info.

    There are many other schemes being perpetrated that should be investigated. Unless and until the SEC offers a registration and reward process for all information (like the IRS does), they will only catch a very few of the most blatant.

  60. AGG says:

    mark mchugh,
    My hat is off to you sir. People like you give us hope. After January 20 and a new SEC chairman is named, you might try again. Also, if you fed what you know to Barry, he might be able to save people some money and help the crooks go broke.

  61. karen says:

    Sweet quote from 1440wallstreet:

    “The saga today with Madoff pretty much throws a cherry on 2008…it has been brutal.

  62. mark mchugh says:

    Thanks AGG,

    On a related side-note, I refrained from shorting CFC, because I thought I might be perceived as someone trying to manipulate the stock for my personal gain.

    We will probably never find out how many people called for the SEC investigate Madoff, but given the 2001 article Barry linked to yesterday, I’ll assume that the SEC got lots of warnings and ignored them.

  63. AGG says:

    Grear article. Thanks. Dis you know that Madoff was 23rd in Nasdaq trading volume? If a significant percentage of the other players were playing the same kind of games, we’re headed for a december crash.
    And to mark mchugh. You are very welcome.

  64. DavidB says:

    DaveO Says: December 13th, 2008 at 4:39 pm

    If a pile of FOF “pros” cannot figure it out the government never will, the SEC is one of the G’s worst performers, trying=failing.

    The government really is only good at one thing. Killing people for doing bad. They need to start getting back to what they do well and then everything else will take care of itself

    AGG Says: December 13th, 2008 at 4:40 pm

    I think you would make a superlative SEC chairman. As long as they let you staff the place and gave you a sufficient number of slots to fill plus personal backing by Obama and a hot line to the new justice department, we’d get real progress in this country.

    Wait a minute. I thought we already hired him to run both the Fed and the Treasury. I will admit the guy is talented but there are only so many hours in the day. Besides who will run the blog….and we’ll never see the linkfest again. Are you sure you’re thinking this through? Priorities man!

    We also haven’t seen tomorrows news yet. We will be needing him to run the IRS and the defense department too…..and there are rumblings about the dog catcher and the dope ring running out of that office as well

  65. AGG, no doubt that it’ll people like Mark McHugh that’ll help illuminate the path out of this morass.

    I said as much, about Tanta.. An example of one, out of the many, who, while knowing, chose to speak instead of remaining silent.

    She, by telling of the knowledge, that her experience had lent to her, showed, single-handedly, Robert Rubin, among others, for the Olympian Liar he has always been.

    We’ve a great choice to make, we can remain passive, and silent, thereby, or seek the Truth, and tell of the task that must be done.

    one way is that of mice, the other of a People deserving to bask in Liberty’s warm glow..

    with that we should remember Kissinger’s contribution of Realpolitik, to our local political theater– Liberty is a threat to Control/ Freedom is a threat to Stability.

    “”The liberties of our country, the freedoms of our civil Constitution are worth defending at all hazards; it is our duty to defend them against all attacks. We have received them as a fair inheritance from our worthy ancestors. They purchased them for us with toil and danger and expense of treasure and blood. It will bring a mark of everlasting infamy on the present generation – enlightened as it is – if we should suffer them to be wrested from us by violence without a struggle, or to be cheated out of them by the artifices of designing men.” -Samuel Adams”

  66. DavidB says:

    After some sober second thought I need to correct myself:

    The government really is only good at one thing. Killing people for doing bad. They need to start getting back to what they do well and then everything else will take care of itself

    What I should have said is:

    The government really is only good at one thing. Killing people. They need to start getting back to what they do well and, as long as they kill a lot more bad people than good ones, everything else should take care of itself

    There, I feel much better

  67. DavidB says:

    That bounty idea is a great one BTW. Can you imagine the money the US government would save if they gave all department heads 10% of every dollar they reduced their budgets by? Or maybe they do that already? If not maybe someone should slip the idea to Obama in case he ever plans on balancing the budget

  68. Jurgen says:

    Mannwich, “That is truly incredible. It seems that Madoff got by without much scrutiny because of his early ties to the NASDAQ?”

    Here is your answer via Bloomberg, “Madoff, 70, who had advised the SEC how to regulate markets and donated regularly to politicians”

    I will not be surprised if Mr. Cox and/or Bush family were Madoff’s clients (directly or indirectly).

    Barry, the Dow would rally 5000 points on the news of someone like you replacing Mr. Cox

    We need:

    1. The creation of new trading exchanges for instruments such as CDS. We need transparency.

    2. Fix credit rating duopoly by implementing Credit Rating Agency Reform Act of 2006, that Mr. Cox just starting to consider implementing this law (two years after the law was passed)

    3. Fix Mark-To-Panic stupidity that is pro-cyclical and inflates gains (during upside) and exaggerates losses (during downside). It allowed Enron to mark up its books during a booming energy market despite no cash coming in, and it is forcing banks to take billions in “unrealized” losses (even if the loans on their books are still performing and they have no plans to sell them)

    4. Reinstating the uptick rule immediately. The SEC likes quoting extremely poorly designed studies to justify their stupidity for removing the rule without realizing that those studies were done in up-trending low volatility markets, ignoring that the rule was created to work in high volatility down-trending markets. The studies were like testing the effects of seatbelts in a non-moving vehicle and saying that seatbelts do not work during a crash.

    5. Easing rules that discourage use of the equity market for growing businesses, such as Sarbanes-Oxley.

    6. Complete transparency of the hedge funds and levering off the playing field with regular investors. The hedge funds and WS firms like Goldman must report not only their long positions but also short positions. In addition, they should report them at least every month. This information must be available to the public. We need transparency to discourage market manipulations.

    7. Etc.

  69. Winston Munn says:

    This just in: Cox Admits SEC “Nothing But Ponzi Scheme”.

  70. Steve Barry says:

    So, what is the key short-term implication going forward…hmmm…it finally dawned on me:

    People are going to flee any hedge fund with even the slightest hint of opaqueness, basically many of them, forcing fire sale liquidations off a 2 Trillion dollar asset base. Now we know why Citadel suspended redemptions…The Madoff Affect. If they all decide to suspend redemptions, there will be a torrent once they re-open, making matters even worse. Many of these investors are older and should put their assets into…yes bonds, not equities.

    Someone smart needs to step in an make an orderly plan for unwinding hedge funds now…nobody in the government qualifies…they will likely just do a bailout (next chapter in BN?)

  71. Steve Barry says:

    Part two of the above: who is now going to put any more money into a hedge fund? The industry is dead now.

    Jsu saw Barry’s post on Merrills outlook..funny, CNBC coined a new term…”the great recession”.

    Now the bottom will not come till they acknowledge the depression.

  72. Reinko says:

    A short comment on the first link in the source files:

    It is about Benford’s law stating the first digit of a number is often related to log(1 + 1/d).
    The source link says scientists don’t have a clue, I myself has solved this problem about a decade ago and if I can solve it very likely a lot of other folks can solve it too.

    There is more written on that stuff:

    At first I wondered why the author takes the Fourier transform but from page 17 of the 22 page pdf file he nicely coughs up all the important results. To me that was new; I just dived into the end results directly via ‘sheer calculation’ but you can do it with the Fournier transform too.

    So I am glad I have learned a little bit today…

    At last:

    The way Benford’s law is always formulated is rather misleading; there is no reason to look at the first digit only.

    Better is stating: The likelihood that a number starts with the digit’s abcd is proportional to
    log(1 + 1/abcd).

    Lets leave it with that.

  73. Jurgen says:

    It is a well known fact that the SEC is a dysfunctional and incompetent government agency. I do not expect anything more from them.

    What is shocking to me is that so many funds of funds and banks (aka “Wall Street fat cats”) have invested billions with Madoff.

    Have they ever examined Madoff’s 13-F?

    It has a bit more than $200 million of securities, but Madoff was supposedly managing over $17 billion.
    (View it in Firefox, Opera or Safari browser; IE-7 does not display it correctly)

    Did any of those “fat cats” ask themselves where the rest of their unaccounted billions that they invested with Madoff were?

    Amazing “fat cats” groupthink phenomena!

  74. swong59 says:

    The SEC is essentially an agency of lawyers so most of their “data” is in the form of documents, which are not conducive to software modeling. However, their insider trading system is very “tight.” Everyday, they get feeds of feeds all the day’s trades on the stock markets. This data is loaded into a data warehouse and analytical queries are run to spot statistical anomalies. These anomalies are reviewed by enforcement staff to determine which ones to pursue. Essentially, they have perfect information on the timing, volume and price of trades surrounding “material events.”

  75. swong59,

    with this: “..most of their “data” is in the form of documents, which are not conducive to software modeling. ”


    LSS: the technology exists, long has, that can slice and dice ‘documents’ any which way from Sunday..

    the rest, though, re: ‘trading’ is spot-on, and should lend, additional, incredulity to the Fact of so few ‘insider trading’ “busts”..