
Markopolous' (ignored) complaint to SEC describing Madoff's fund as Ponzi scheme - kqr2
http://www.scribd.com/doc/9189285/Markopolos-Madoff-Complaint
======
rajat
One thing that's notable, from this report and others, is that there were a
class of investors who _knew_ that Madoff was doing something illegal to get
these kind of returns, and were bragging about it. These investors didn't
think it was a Ponzi scheme; they thought he was using insider knowledge from
his broker-dealer's access to order flow.

And they were happy to go along with this obviously illegal practice.

I don't think it's too much of a jump to speculate that the ones who knew
there was something illegal going on were the managers of the so-called Funds
of Funds and other hedge funds. These include managers of our public pension
funds. These managers are too knowledgeable not to know something's up when
these kind of returns are being posted, and when red flags were being raised,
and they were happy to go profit from it because they figured they were at a
safe enough distance from the illegal trading.

~~~
mattmaroon
I wouldn't say they knew it. I mean, they seriously suspected it. But there's
a big difference between 99 and 100 percent certainty.

~~~
Eliezer
No, there's a 1% difference between 99 and 100 percent certainty.

Or are we working with the log odds here? Are you going to tell me there's a
big difference between 99.999999% certainty and probability 1? I think at some
point you become morally liable and that's well before 99% certainty.

~~~
mattmaroon
I meant legally rather than morally. There's plausible deniability if they
highly suspect it, there's jail if they knew for certain.

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palish
A tangent. I wanted to copy and paste a paragraph that I thought was
interesting, but the ability to select text is broken in the Scribd document
viewer. I then tried to find a link to download the document in PDF form, but
almost couldn't. After a bit of searching, I found the PDF download link
hidden behind the "download" dropdown menu. When I clicked on it, Scribd
dutifully notified me that I was required to sign in before I was allowed to
do that. At that point, I gave up and took a screenshot of the paragraph:
[http://dl-client.getdropbox.com/u/315/random_pics/Markopolos...](http://dl-
client.getdropbox.com/u/315/random_pics/Markopolos_Madoff_Complaint_paragraph.PNG)
... specifically, it's interesting that Markopolous feared for his personal
safety because of this report.

~~~
Herring
<https://addons.mozilla.org/en-US/firefox/addon/6349>

~~~
palish
Thank you. +1 for the thought. Chrome is my primary browser, though.

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gojomo
It wasn't completely ignored; they investigated a little in 2006, but seem to
have trusted incomplete/forged records of funds under management. See:

[http://online.wsj.com/article_email/SB122956182184616625-lMy...](http://online.wsj.com/article_email/SB122956182184616625-lMyQjAxMDI4MjE5ODUxNjgxWj.html)

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kqr2
Markopolos actually tipped the SEC off in 1999. His complaint is actually
quite readable and gives good insight into the _split-strike conversion_
strategy and why it cannot possibly account for Madoff's reported gains.

I wonder if the SEC did not take the report seriously because of his somewhat
sarcastic tone, e.g. mention of tooth fairy, etc.

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Dilpil
My hunch is that stuff like SOX is not whats going to stop this, rather,
properly funding the SEC so that they can actually investigate cases like this
would. Of course, SOX doesn't require a tax increase, whereas funding the SEC
would.

~~~
patrickg-zill
Actually the SEC with increased enforcement, could probably fund itself
through fines levied against those they were investigating.

~~~
dangoldin
But if they do their job well they'll end up decreasing their own funding as
businesses become more legitimate.

~~~
byrneseyeview
We should privatize the SEC. Put a bounty on fraud detection, and then make
the following deal: the government puts up a lump sum now, and the recipient
must make whole all parties harmed by fraud, but only if the organization
approved the fraudulent financial statements.

You probably need to tweak the numbers to avoid some bad incentives, but the
general principle is sound: treat it as an insurance problem, rather than a
regulatory problem, and the funding you get will approach the point where the
marginal utility of more fraud detection falls below the cost.

~~~
anewaccountname
What happens when the new privatized SEC goes bankrupt?

~~~
byrneseyeview
The same thing that happens when any insurance company goes bankrupt.

Fraud is a normal, insurable risk. We just have a bizarre, underfunded,
overambitious regulatory apparatus bolted on to where insurance is supposed to
fit.

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raheemm
More about this guy Markopolos -
[http://www.google.com/hostednews/ap/article/ALeqM5ihAaFD-
AY7...](http://www.google.com/hostednews/ap/article/ALeqM5ihAaFD-
AY7JK68kC36YAT7cA_xIgD955PDQ00)

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kragen
To read this document, I would either need to install Flash or sign up for a
Scribd account to download the PDF. Is there another place where the document
can be found? Is it possible to redirect the original article link to a place
with an open-access version of the document?

~~~
mattmcknight
PDF hosted by WSJ here:
<http://online.wsj.com/documents/Madoff_SECdocs_20081217.pdf>

~~~
kragen
Awesome, you rock!

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tokenadult
This is indeed a set of specific and credible allegations that the SEC should
have investigated thoroughly. The level of detail is far above that of the
usual letter indicating suspicions about an organization, and the author shows
knowledge of the relevant law.

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trevelyan
Nice post. The section on fallout on page 15 is interesting and worth reading.
Anyone know how highly leveraged the front-running hedge funds actually were?
The 4:1 seems somewhat low given recent economic press coverage.

