September 28, 2012
post contributed by Emily DeLuca
Fraud Investigator, Harry Markopolos, the whistleblower for Bernie Madoff’s operation of the largest Ponzi scheme in history spoke at the Roundtable’s September Event at the Bloomberg Tower in Midtown.
Proving Madoff to be a fraud was no simple task as Markopolos had to develop an investigative team, dedicate eight and a half years to the investigation, self-finance the project, and spend time on two continents in order to convince others of what was happening.
He stressed that he was not a genius, but did know derivative math. He also knew from the start that the returns Madoff claimed were not possible simply because not enough of the particular derivative Madoff claimed to have invested in existed in the market in order to accomplish the returns that he was claiming to have achieved.
Key red flags Madoff’s portfolio exhibited were a consistent performance line of 45 degrees, the research that proved Madoff only claimed to have picked stocks that either went up or stayed the same, and the fact that almost 96% of his monthly returns were positive with the greatest negative month being only -.55%. With the particularly short amount of time that Bernie Madoff claimed to be active in the market per year also would have required him to have found US Treasury Bills yielding 16%, a level last seen in the 1980’s.
Markopolos also described other warning signs like blatantly wrong account numbers, poor formatting of client statements with insufficient information, and having three different auditors in three different countries from 2004-2006. Markopolos reminded the audience that accountants are not legally responsible for reporting fraud and also questioned the due diligence of Fund of Funds as Madoff investors consisted of 339 Fund of Funds across forty different countries.
Markopolos ended his presentation by taking questions from the audience. One question related to how regulations for hedge funds have changed because of this Ponzi that was exposed. It seems that hedge funds are more closely regulated but the real problem is the lack of enforcement due to the SEC being underfunded and the working industry experience that some auditors lack. When asked the best thing an investor can do to protect themselves from fraud like this Markopolos didn’t hesitate, “Understand the strategy”, he said.