Kanonkop
The World's Largest Hedge Fund is a Fraud
November 7, 2005 Submission to the SEC
Madoff Investment Securities, LLC
www.madoff.com
Opening Remarks:
I am the original source for the information presented herein having first presented my rationale, both verbally and in writing to the SEC's Boston office in May, 1999 before any public information doubting Madoff Investment Securities, LLC appeared in the press. There was no whistleblower or insider involved in compiling this report. I used the Mosaic Theory to assemble my set of observations. My observations were collected first-hand by listening to fund of fund investors talk about their investments in a hedge fund run by Madoff Investment Securities, LLC a SEC registered firm. I have also spoken to the heads of various Wall Street equity derivative trading desks and every single one of the senior managers I spoke with told me that Bernie Madoff was a fraud. Of course, no one wants to take undue career risk by sticking their head up and saying the emperor isn't wearing any clothes but....
I am a derivatives expert and have traded or assisted in the trading of several billion $US in options strategies for hedge funds and institutional clients. I have experience managing split-strike options strategies for hedge funds and institutional clients. I have experience managing split-strike conversion products both using index options and using individual stock options, both with and without index puts. Very few people in the world have the mathematical background needed to manage these types of products but I am one of them. I have outlined a detailed set of Red Flags that make me very suspicious that Bernie Madoff's returns aren't real and, if they are real, then they would almost certainly have to be generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities, LLC.
Due to the sensitive nature of the case I detail below, its dissemination within the SEC must be limited to those with a need to know. The firm involved is located in the New York Region.
As a result of this case, several careers on Wall Street and in Europe will be ruined. Therefore, I have not signed nor put my name to this report. I request that my name not be released to anyone other than the Branch Chief and Team Leader in the New York Region who are assigned to the case, without my express written permission. The fewer people who know who wrote this report the better. I am worried about the personal safety of myself and my family. Under no circumstances is this report or its contents to be shared with any other regulatory body without my express permission. This report has been written solely for the SEC's internal use.
As far as I know, none of the hedge fund, fund of funds (FOF's) mentioned in my report are engaged in a conspiracy to commit fraud. I believe they are naive men and women with a notable lack of derivatives expertise and possessing little or no qualifying finance ability.
There are 2 possible scenarios that involve fraud by Madoff Securities:
1. Scenario # 1 (Unlikely): I am submitting this case under Section 21A(e) of the 1934 Act in the event that the broker-dealer and ECN depicted is actually providing the stated returns to investors but is earning those returns by front-running customer order flow. Front-running qualifies as insider-trading since it relies upon material, non-public information that is acted upon for the benefit of one party to the detriment of another party. Section 21A9(e) of the 1934 Act allows the SEC to pay up to 10% of the total fines levied for insider-trading. We have obtained approval from the SEC's Office of General Counsel, the Chairman's Office, and the bounty program administrator that the SEC is able and willing to pay Section 21A(e) rewards. This case should qualify if insider-trading is involved.
2. Scenario # 2 (Highly likely) Madoff Securities is the world's largest Ponzi Scheme. In this case there is no SEC reward payment due the whistle-blower so basically I'm turning this case in because it's the right thing to do. Far better that the SEC is proactive in shutting down a Ponzi Scheme of this size rather than reactive.
[...]
Harry Markopolos | Report to the SEC, November 2005
Cape Point
The Commander-in-Chief answers him while chasing a fly | Saying, "Death to all those who would whimper and cry" | And dropping a bar bell he points to the sky | Saving, "The sun's not yellow it's chicken"
This is weird shit man ...
Harry Markopolos's 2005 submission [pdf 1.5 MB] to the SEC is made more remarkable by it being the second time, since an original complaint lodged in 1999, that he alerted the regulatory body to Bernie Madoff's self-admitted $50 billion Ponzi scheme. Madoff was investigated in 1992 for brokering $500million in unregistered securities. ProPublica tells us:
Starting in 1999, Markopolos sent detailed memos to SEC staff outlining his case against Madoff. It had all started, he said, when he was working as a money manager at a rival investment firm. His bosses wanted him to match Madoff’s remarkable returns. But when he tried to replicate Madoff’s supposed strategy (trading a mix of stocks and stock-index options), he found that he couldn’t. And when he asked other derivatives experts, they agreed it was impossible to match Madoff’s legendarily steady returns. From there, he built a massive circumstantial case. He presented it in 1999, again in 2001 (an SEC official told him it appeared to have fallen through the cracks), and then again in 2005.In the wake of Madoff volunteering culpability, SEC chief Christopher Cox has 'apologized' for his organization's signal failure to act on Madoff but, as BusinessWeek points out, Cox's "grave concerns" ring exceedingly hollow:
ProPublica | ‘The World’s Largest Hedge Fund Is a Fraud’
If you stop and think about it, the SEC failed to do its job at almost every level of the current mess we’re in. Who allowed Wall Street firms to increase their leverage to 30 and 40 times their capital and endanger the entire financial system? Why, the SEC. And who was supposed to be regulating the rating agencies and policing them for conflicts of interest as they signed off on trillions of dollars of toxic mortgage-backed securities? Again, the SEC. When it turned out that Wall Street had rigged the entire $300 billion auction rate securities market, who was then regulator that investigated but did virtually nothing until after it was too late? Right again, the SEC. And when Bear Stearns was running a couple of over-leveraged, mislabeled, highly-risky hedge funds, which regulator’s inspector general said it had failed to act in time? Yep, the SEC. Finally, which agency had an inside view of the risk management procedures at all the big firms but never asked any tought questions? Right again, SEC.Acting specifically on Harry Markopolis's allegations, SEC Staff Attorney Simona Suh, Assistant Regional Director Doria Bachenheimer, and Branch Chief Meaghan Cheung concluded in their Case Closing Recommendation of November 21, 2007:
BusinessWeek | Lack of SEC oversight and enforcement at the center of too many messes
"The staff found no evidence of fraud."
Read Report to the SEC, November 2005. It is easily comprehended. A substantial, frightening, and highly informed document written in colloquial English, it raises — and details, twenty-five (25) Red Flags. Many of these constitute irreconcilable logical inconsistencies. Others posit that returns in certain circumstances — if valid, would constitute securities fraud or insider trading. At least half the allegations could not be explained away and should have led — several years ago, to Madoff's arrest.
Unless Markopolos is a fraud, there is something terribly wrong at the Securities and Exchange Commission. Either Suh, Bachenheimer, and Cheung were paid or coerced — from within the SEC — into NOT disclosing the nature of Bernie Madoff's scheme or their gross negligence warrants their arrest and conviction. The same applies to the Financial Industry Regulatory Authority, which has direct oversight over securities companies.
Look, I'm not weeping for those who take money from the poor. My brain and labor subsidize them and that hurts. However, there are millions of investors around the world — many of them retired, who are seeing their so-called 'wealth' or 'worth' plummet with the markets (truly the world's greatest Ponzi Scheme by dint of fractional reserve banking).
With investors now having to pay the Treasury to store their notes, investors are better off stashing their cash under their mattresses. Or in large warehouses.
Like it or not, the dollar is the global reserve currency and the SEC wields more than a domestic regulatory power. SEC chairman Christopher Cox, with Paulson, Bernanke, and Lukken, is a member of the Working Group on Financial Markets, i.e. the President's Working Group (PWG) or Plunge Protection Team (PPT).
These people have proved themselves worthy of less trust than even Bernie Madoff. They run, "... basically, a giant Ponzi scheme." Would that we had a Harry Markopolos to blow the whistle on them. For now though, we can but reflect on an earlier BusinessWeek article, Ponzi Nation, and draw our own conclusions.
Mama's in the fact'ry | She ain't got no shoes | Daddy's in the alley | He's lookin' for the fuse | I'm in the streets | With the tombstone blues
Bob Dylan | Tombstone Blues
Note: Paul Krugman pins the tail to the donkey with The Madoff Economy.
"Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?"Nope, you surely are not.
