Posts filed under “Legal”

Pondering Madoff as we enter 2009

Pondering Madoff as we enter 2009
by David Kotok
December 23, 2008

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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“This is a major disaster for a lot of people. You work all your life, you finally manage to save up something, and somebody who’s entrusted with it, it turns out suddenly he’s a crook. Lots of people are getting fully or partially wiped out.”
-Lawrence Velvel, 69, Dean of the Massachusetts School of Law who said he and friends had lost millions among them.

“Those with the biggest financial gains generally had their money managed by Madoff. It was an honor having him handle your fortune. He didn’t take just anybody. He turned down all kinds of people, and that made you want to give the man even more of your money. When he took your fortune, he told you that he would tell you nothing about how he achieved his returns.”
-Laurence Leamer, a Palm Beach based journalist, writing in the New York Post, December 13.

First to the structural business issues.

Cumberland Advisors did not and does not have a single penny in any fund directly or indirectly positioned with, having custody with, or in any way associated with Madoff. The Madoff structure violates all of our internal disciplines. Madoff required that investment management, brokerage, and custody all be with him under the same roof. At Cumberland we require that each of these three functions be separated by task, separately evaluated, and separately reported.

Cumberland will not invest in any conduits or vehicles where the sponsor refuses to disclose the contents of the investment. Furthermore, we recommend that our clients avoid any investments they do not understand. We also avoid any investment about which we cannot obtain a full and completely clear description, so that the investment’s merit may be independently evaluated.

Moreover, at Cumberland, all discretionary managed accounts separate asset custody from brokerage and from Cumberland as manager. Our performance reports and asset lists are separate and independently compiled from those of the custodian broker or bank. Managed accounts that are in custody at a broker have explicit permission for us to trade “street wide” when it benefits the client. We will not accept a managed account where the brokerage transactions are captive to the broker custodian unless there is a specific pricing of transaction costs and the client knows what their broker will charge them. Cumberland never acts as broker and never mixes commissions with fees. We are a fee-for-service only manager.

We recommend this structure for all of our institutional consulting clients where we are not the discretionary manager but only consultants on the strategy. We also recommend this for those whom we are advising on boards and as trustees. In fact, we advise that those who place funds as a fiduciary in any other format should consult their legal counsel before doing so, in order to ascertain if they are in compliance with fiduciary standards.

The Madoff affair’s implications for lawyers, accountants, trustees, boards, etc…

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Category: Bailouts, BP Cafe, Hedge Funds, Legal

The New 140 Amendment

Dec. 22 – A year and a half ago the FASB announced a new regulation, FAS 157, requiring companies to use more stringent mark-to-market appraisals for their portfolios.

Howard Silverblatt, S&P Index Analyst

Category: Legal, Markets, Video

1st Madoff-Related Suicide Hits the Tape

Won’t be the last one, either: Thierry Magon de La Villehuchet, who ran a fund that invested with Bernard Madoff, was found dead at his Madison Avenue office today, a New York City police officer at the scene said. The death appeared to be a suicide, he said. De la Villehuchet, 65, was a founding…Read More

Category: Hedge Funds, Legal, Markets, Regulation

What Does Regulation Regulate?

Here’s one of the simple truisms that gets lost in the political (i.e., bumper sticker) discussions. Don’t regulate the free markets! Don’t interfere with innovation! Don’t stifle incentives! What bullshit. One of the best ways to win a debate is to control the language used. This was one of the elements George Orwell was discussing…Read More

Category: Bailouts, Legal, Regulation

Madoff Red Flags Were There All Along

In 2001, reporter Erin Arvedlund wrote an article for the financial weekly Barrons that was skeptical of Bernard Madoff’s strategy and performance on Wall Street. She questioned how Madoff was able to offer good returns. She talks with Steve Inskeep about the impetus for her story and what she learned in the process.

Morning Edition, December 18, 2008

Category: Financial Press, Legal, Regulation, Video

Audit Interview: Jack Dolan

Columbia Journalism Review interviews the Miami Herald reporter whose series we have highlighted here many times. JD: I expected there would be some criminal histories. There’s gonna be a few pot possessions and stuff like that. The law said that they were supposed to screen brokers for crimes involving fraud, dishonesty, and “moral turpitude”, which…Read More

Category: Financial Press, Legal, Regulation

SEC Ignored Detailed 2005 Complaint re: Madoff

What follows is the Harry Markopolos complaint to the SEC, circa November 2005, identifying 29 red flags that Madoff was a fraud. This highly detailed complaint was filed regarding the apparent Fraud at Madoff Securities. It was ignored by the Christopher Cox SEC, which was too busy concocting schemes to dismantle the SEC rather than…Read More

Category: Hedge Funds, Legal, Regulation

Circle of Friends

Via the WSJ:

Category: Digital Media, Legal

Hedge Fund Partners vs Managed Account Investors

Today’s NYT (and Monday’s WSJ) each have articles which compare Madoff investors with those of recent $400 million dollar hedge fund fraud Bayou Group. I believe this misunderstands the applicable law of partnership, fraud, and investing. Hedge fund investors are limited partners, and as such, they have a fiduciary duty to their other partners. Regardless…Read More

Category: Hedge Funds, Legal, Regulation

Vast Under-Investment in Due Diligence

With everyone tsk-tsking the Madoff scandal — the amount lost, the after-the-fact obviousness, the SEC incompetence — I thought now was as  good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds. Not surprisingly, it is tiny — at least, when compared with the…Read More

Category: Bailouts, Hedge Funds, Investing, Legal, Regulation