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Blame the Enablers

Posted By Barry Ritholtz On January 27, 2009 @ 7:34 am In Finance,Investing,Legal,Regulation | Comments Disabled

I couldn’t agree with this article more: Madoff Enablers Winked at Suspected Front-Running [1]. I look at Madoff as a Sociopath — he is a sick individual. The enablers, on the other hand, were simply greedy hacks who didn’t, (and probably couldn’t) do the suitable investigation and due diligence into Madoff’s asset management business.

Were they Corrupt? Incompetant? Both? Who is to say. The bottom line is they lost all of their clients’ monies, and need to be held accountable.

Excerpt:

If the 70-year-old money manager was running a con, then his marketers like Access International, wittingly or not, were part of the scam.

The purported mission of such feeder funds was to vet hedge funds for wealthy clients. Instead, the line between victim and perpetrator was blurred. Middlemen like Littaye funneled billions of dollars to Madoff, even, in some cases, when they suspected he was engaged in questionable trading practices. In return, they reaped hundreds of millions of dollars in client fees.

Lower Returns: Wolfer says he heard of traders trying to replicate the split-strike conversion strategy Madoff told investors he used — buying shares of large U.S. companies and entering into options contracts to limit the risk — and getting far lower returns. He also says he heard Littaye and other middlemen talk about how Madoff may have used the knowledge he gained from his market- making firm, New York-based Bernard L. Madoff Investment Securities LLC, to get in and out of stocks ahead of market swings.

That’s front-running, a term usually applied to brokers’ trading for their own account — and profit — ahead of clients. It’s also applicable to Madoff’s purported practice, says Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor.

“Front-running isn’t who’s getting the benefit; it’s who’s paying the price,” says Henning, noting that Madoff’s market- making customers expected the firm to obtain the best price available when buying or selling stocks. Instead, their interests were apparently subordinated to those of Madoff’s investment clients.

Front-Running: While front-running is illegal, it didn’t horrify Madoff’s champions.

“They were convinced that the risk was only that the Securities and Exchange Commission would do something about breaches of the Chinese wall in the Madoff organization,” Wolfer says. In the worst case, he says, “what could be expected was that at a certain point the SEC could say stop.”

Weasels all. I sincerely hope that the Trustee looks to confiscate the Funds of Fund managers’ houses, cars, watches, jets and boat — as the illegal proceeds of a crime. Auction ‘em off, put the proceeds into a fund for the scam’s victims.

The Madoff investors themselves aren’t blameless — as Paul Kedrosky [2] asked, “why so many smart people get suckered into losing billions on an implausible con” remains a mystery of the Madoff affair. But they are far less culpable than the Do-No-Due-Diligence fund of fees funds managers . . .
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Source:
Madoff Enablers Winked at Suspected Front-Running [1]
John Helyar, Katherine Burton and Vernon Silver
Bloomberg, Jan. 27 2009

http://www.bloomberg.com/apps/news?pid=20601109&sid=au4Y7Cudw2Xo&

They Knew What They Were Getting Into [2]
Paul Kedrosky
Daily Beast, December 16, 2008 | 7:36am

http://www.thedailybeast.com/blogs-and-stories/2008-12-16/how-madoff-made-off-with-the-money/


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URL to article: http://www.ritholtz.com/blog/2009/01/blame-the-enablers/

URLs in this post:

[1] Madoff Enablers Winked at Suspected Front-Running: http://www.bloomberg.com/apps/news?pid=20601109&sid=au4Y7Cudw2Xo&

[2] Paul Kedrosky: http://www.thedailybeast.com/blogs-and-stories/2008-12-16/how-madoff-made-off-with-the-money/

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