Madoff Scandal

Contents Introduction2 Early C arer2 The plastered3 Sales Strategy4 enthronisation parentages Strategy5 The Scandal7 He was non al angiotensin converting enzyme9 The Markopolos Whistle11 The collapse13 Charges and Sentence13 The Victims14 2009 Ponzi Schemes16 The sulfur Failure17 sulphur post- Madoff19 hold over Fund Transparency20 Conclusion21 Bibliography25 disheartens Table 1 List of Madoff C lients ( recognisen from the The brand-new York Times, last updated June 24, 2009)15 Table 2 2009 Ponzi Scheme atomic number 16 Charges17 Figures Figure 1 Fairfield Sentry vs gate6Figure 2 Madoff Investor Funds (taken from http//orgnet. com/madoff. html)7 Introduction Operating from central Manhattan, Bernie Madoff developed the first base and biggest worldwide Ponzi plot, an even outt of greed and dish mavinsty that lasted for more than than 20 historic period, in which $65 billion dollars vanished from the pockets of some of the worlds richest state, charities and ordin ary investors alike. This plan lasted endless than some(prenominal) other white collar crime in level and a yearn the way ruined countless individuals and organizations. The Madoff Ponzi scheme has changed the forms of trust that goerned the coin game. Unlike other similar schemes, Madoffs Ponzi scheme in any model buncomed crocked and enthronisation savvy individuals that Madoff associated with. Bernard Madoff is a fountain financier, American surround- lineage investing manager, chairwoman of the NASDAQ ( bailiwick Association of Securities Dealers Automated Quotations) stock exchange, and chairman of the tauten Bernard L. Madoff investing Securities LLC. He is the main conspirator of the records largest investor fraud pull by a single somebody.As a result of his mask, Madoff was sentenced on June 29th, 2009 to unity hundred fifty historic period in prison for crimes that the judge c eithered extraordinarily evil3 and imposed a sentence that was three times as hanker as the federal probation office suggested and more than 10 times as long as defense lawyers had requested. Early Career Bernard Lawrence Madoff was born in refreshful York City on April 29, 1938 and grew up in a predominantly Judaic neighborhood. He earned a degree in semipolitical science from New Yorks Hofstra University in 1960 and founded the besiege alley theater Bernard L.Madoff Investment Securities LLC the same year. 1 He was a pillar of break and charity. As an extinctstanding philanthropist he served on boards of nonprofit organizations near the world much(prenominal)(prenominal) as parentagees, charities and foundations, more of which were entrusted by his endowments. The self-colored started as a penny stock swapr with $5,000 dollars he saved from functional as a sprinkler system seller and lifeguard. In the beginning the plastered started art common stock over the counter (OTC) through the National Quotation Bureau victimisation Pink shee ts.It later challenged the New York line Exchange (NYSE) old brokers by development powerful securities efforting techniques to bring forward clients and promoting electronic craft using innovative com modeler training technology. His trus 2rthy grew with help from people around him such as his father-in-law, who referred him to friends and family. Madoff helped created NYSE rival, NASDAQ, where he later became the chairman. The loaded Bernard L. Madoff Investment Securities LLC functioned as a securities broker and/or pass arounder in The United States and internationally. Headquartered in New York City, it provided executions for dealers, brokers and financial mental homes.The unattackable had been one of the top grocery ramp uprs on Wall Street with Madoff as the principal face. In plain terms, a food market maker is an institution (brokerage company or bank) that is ready to execute stock trades (buying and selling) at each scrap of the trading day and charges a small fee for each trade via the use of a spread in the ask or bid price. It functioned as a third-maker provider by directly implementing commands from sell brokers. At one set, Madoff Securities was the largest market maker at the NASDAQ and in 2008 was the one-sixth largest market maker on Wall Street.Sales Strategy round the 1970s, Madoff began administrating specie for investors, some on them he k tonic ainly and several others who belonged to clubs he was section of. He attracted billions of dollars and several large bilk parentages also invested in the unwavering because he did non charge usual fees and entirely collected fees for processing trades. Madoff offered modest and steady returns to exclusive clients instead of spectral offering spirited returns to all clients, giving the appearance of his upstanding to be exclusive. The solids annual returns were abnormally consistent, a key factor in achieving the fraud. Most business men believed the business r elationship that a single person could generate returns of 12 to 13 percent a year trading the stock market no matter what happens without a single fine-tune quarter. 7 some of these people applied for membership to the clubs that Madoff was a member of, in order to meet and be accepted by him. In addition, he neer hustled anyone for drop with him instead he let them gravel to him. Thus, he created this aura of exclusivity around him and everyone wanted to be a off sterilise of his club. One of the groups tar purported by Madoff was the Jewish circuit. Being Jewish, Madoff attracted more wealthy Jewish people he met at country clubs on Long Island and ornamentation Beach. This was an Affinity Ponzi Scheme, as it was called by Newsweek article. 7 Affinity fraud includes enthronement frauds that prey upon members of identifiable groups, such as religious or cultural communities, language minorities, and the elderly or professional groups. Around 1995, some of the more or le ss prominent Jewish individuals in finance and industry began to invest with Madoff. 1 His most effective recruiter, JacobEzra Merkin, was president of the Fifth Avenue Synagogue, member of yeshivah University, Carnegie Hall and other nonprofit organizations. Mr. Merkin started the investment firm named Gabriel Capital Group. Embraced by philanthropies and installed in a superior spot of trust, Merkin seemed to be a Wall Street wise and trusted person to manage other peoples silver. 1 Investment Strategy His investment outline consisted of purchasing blue-chip stock, from salubrious established companies like Coca Cola, Intel and General Electric, having stable gain and no extensive liabilities, and taking option contracts on them. Typically, a position go out consist of the makeership of 30-35 S&P 100 stocks, most correspond to that index, the sale of out-of-the- capital calls on the index and the purchase of out-of-the- nones puts on the index. When done correctly, this outline creates boundaries in the stock and protects them a pass waterst a quick decline in the sell price. The investment dodging used in Madoffs feeder ancestry, Fairfield Sentry, is called the split-strike rebirth dodging and sees a combination of stocks and options. In plain terms, Madoff bought 40-50 stocks from the S&P 100 index.He then bought put options on the index at strike prices below the markets current level and sold call options preceding(prenominal) the indexs current price. It is similar to using collars, an options strategy that limits losses along with the gains for a particular stock. The following chart outlines the returns of the Madoff feeder storehouse against Gateway, a computer storage running the same split strike strategy. A feeder fund is a fund that transfers virtually all of its investing through other fund. Madoff used such feeder funds to mask the fact that hes acting like a sidestep fund in order to avoid unsweet investigation.Figure 1 Fairfield Sentry vs. Gateway after(prenominal) the stock market crash of 2001, Gateway follows a downward path for a period of almost 3 old age, before it starts to gain cocksure traction that leave behind last until mid 2007, just in time for the mortgage meltdown that ignited one of the worst recessions in history. Interestingly enough, Madoffs returns shows no signs of volatility and continue to gain positive traction with only minor fluctuations. Apparently he worked with multiple feeders and the net income of individuals and funds were aline up to pass currency to him.Most of the investors did not know that all of their money was going to the same place Madoffs firm. The next diagram depicts the depth and interconnections of Madoffs funds. The directions of the arrows represent the direction of the money flow. Figure 2 Madoff Investor Funds The Scandal The investment poopization was unveil with Madoffs confession. He reportedly confessed to his two sons during the f irst week of celestial latitude 2008 that his business was gargantuan Ponzi scheme. Madoff sons, Mark and Andrew, turned him in to U. S government on the day after his confession.On December 11, 2008 he was arrested and charged with securities fraud also known as stock fraud and investment fraud, securities fraud covers a wide range of illegal activities, all of which involve the deception of investors or the manipulation of financial markets. He said to the agents that in that respect was no innocent explanation to the fraud that cost clients $65 billion dollars. He traded and lost money and paid investors with money that was not in that respect. How did Bernard Madoff set the most audacious fraud in history? Madoff said that had absolutely nothing, everything was just a big lie and it was essentially a giant Ponzi scheme. No one ever questioned the investment strategy and resources of the firm. No tick of the accounting was ever made. 7 A Ponzi scheme is a character of ill egal pyramid scheme. It is named after Charles Ponzi who became infamous throughout the United States for using the technique in the early 1920s. The Ponzi scheme operation pays returns to investors from their own money or from money paid by new investors, rather than from demonstrable return earned. This type of schemes attracts many investors because it offers high and consistent returns that other investments cannot provide. at last the system is destined to collapse under its own weight because earnings are usually less than the payments. The business had been insolvent for many geezerhood. Madoff was fraud to his clients when he said he was investing their money and generating stable returns. 3 The money of new clients was used to pay clients who wanted to cash out. most may still ask the question of why he started the scheme in the first place. A possible explanation of his actions could be that he incurred some trading losses and in order to recoup them quickly, put a q uick plan together where he would shuffle money between new and old accounts.Initially he may capture had the intention of paying all the investors back, but since his real investing strategy did not work fast enough, he stuck to the scheme. His initial intentions were probably not to carry on indefinitely to its present point. However, once his real trading strategies were not producing enough returns to cover his advertised returns (when the market was performing well), he continued until he lost control. If the providence were not in a recession, he would most likely keep going. The only reason he gave up is because investors started withdrawing money and he could not cover the upcoming withdrawals.If the economy kept going strong, Madoff would stool been able to attract new money and continue living his double life as usual. He was not alone Few people knew that Bernard Madoff had a highly structured second life for more than 20 years. Bernard Madoff confession and the after ward fraud dirt triggered the investigation to uncover Madoffs mysteries. He initially claimed that he en codted the crimes all by himself, but because it extended trough decades and continents a overcast of suspicion immediately engulfed Madoff family members who worked at the firm, as well as employees and business associates. There were some small clues on how he pulled off the wide fraud, for instance, the 1980s server that Madoff refused to replace even though some entropy had to be typed by hand. When government investigated the machine it discovered that it was the heart of the fraud. The statements printed out from this old IBM machine showed trades that were never made. 15 First, the investigators turned to the accounting department. Madoffs accountant David Friehling was also charged with securities fraud, investment adviser fraud and paradoxical files made to the randomness.Unlike any other professional who protects the interests of his clients, accountants induct the inscription to protect the public by ensuring accurate financial reporting. They are the first line of defense against fraud. Friehlings duty at the investment firm was to ensure clients securities and money were they when they wanted to withdraw it. In addition, the randomness filed a civil enforcement action against him alleging that he did not perform his duties as an attender. David Friehling was the auditor and the bookkeeper, which means that he audited his own work. Its no great storm that he found nothing wrong with any of his own work. 18 Next, they turned wariness to the person second in command at Madoffs firm. Frank DiPascali was Madoffs right hand man for 33 years and his unofficial deed of conveyance was director or of options trading and principal(prenominal) financial officer. Nobody was sure what he did or what his official title was, but everyone knew he was a big deal. DiPascali rose to the position of chief financial officer despite his lack of educa tion and financial experience industry.On high-flown 11, 2009, he pled guilty to ten counts of fraud related to the Madoff investment scandal and he is currently trying to negotiate his sentence (to be set on May 2010) in exchange of breeding of additional people involved in the scheme. Madoff trusted DiPascali completely to keep the secret of the scam operations. DiPascali manipulated fake returns on some key investors and if one of these clients had large gains, he would fabricate a loss to reduce the tax bill. 15 This means, if true, that these investors knew their returns were suspicious. JP Morgan go after was the primary bank Madoff used to make his Ponzi deposits. fit in to one estimate, his deposits come $5. 5 billion sometime in 2008, and the after-tax profits grew to $483 trillion over a period of sixteen years. The bank withdrew a sum of $250 billion in the summer of 2009, callable to suspicions arising from collectable diligence in Madoffs investment- informator y business. According to a pending lawsuit against the bank Upon acquiring this fellowship, succeed entered into a conspiracy with Madoff and BMIS in violation of the federal Racketeer Influenced and profane Organizations Act (RICO), 18 U. S. C. 1961 et seq. 19Depending on the outcome of the lawsuit, along with many more to come, JP Morgan Chase may have to shell out hundreds of millions of dollars in settlement. Madoffs family was also the center of attention to go out clues of Bernard Madoffs fraud, although none of them have been charged or accused so far. During the plea audition Madoff took all the responsibility of the fraud most likely to cover up his family. Peter Madoff, Bernard Madoffs brother, was the chief compliance officer of the firm. He was in charge of ensuring adequate internal control and that the client funds and securities were justly protected.Even though Madoff sons, Mark and Andrew, did not have any position with the investments firm, they were involv ed in other areas within the firm. They are the ones that turned Madoff in. The family must have known about the long running scheme and should be indirectly responsible for some of the investor losses incurred, as the scheme had support their lavish lifestyles. Irving Picard, the court appointed trustee in charge of liquidating Madoffs firm, sued some of the Madoff family members (two sons, brother, niece) for $198. 7 million seeking defrauded investor damages. The Markopolos Whistle Bernard L.Madoff Investment Securities LLC firm was inspected at least 8 times and he was personally interrogateed doubly in a period of 16 years by the entropy and other regulators before beingness uncovered. For years, he avoided regular reviews by motto that he was managing accounts for hedge funds instead of running an investment advisory business. During the years of 1999 and 2000 the unsweet was worried that the firm was violating a trading sway and sent examiners to investigate but in re sponse Madoff summarized new procedures to deal with the findings. 12 In 2001 some outsiders were becoming suspicious of Madoffs firm activities.Harry Markopolos, Barrons, a Dow Jones & Co. publication and Marhegdge, a hedge fund trade publication, burnd concerns about Madoffs steady returns. 12 In 2005 Mr. Markopolos met with reciprocal ohm investigators in New York and prepared a 21-page report entitled The beingnesss Largest Hedge Fund is a Fraud summarizing his concerns. The memo stipulate 29 red flags and in part concluded that Bernie Madoff is running the worlds largest unregistered hedge fund and yet since Bernie Madoff is not registered as a hedge fund but acting as one via third caller shields, the chances of Madoff escaping SEC scrutiny are very high. 12 The SEC examined Madoff and did not find any violations. He failed for 8 years to get SEC to step in until the scam collapsed and prompted Madoff to confess. In his report, Markopolos clear outlines some pretty obviou s (by now) facts that the regulatory government activity omitted. Here is a short summary of some points that stood out If the Madoff returns are legitimate, theyre due to insider trading ( conflictingly scenario). If theyre illegitimate, theyre due to the setup being a Ponzi scheme (likely scenario). The secrecy around the funds assets doesnt make sense as a typical hedge fund would overdraw about such returns.The secrecy is probably due to the fact that Madoff doesnt want the regulatory authorities to know he exists as a secret hedge fund. Since Madoff is a broker-dealer, he can generate any trade tickets he wants, therefore generate false education. The Madoff family has held important leaders positions in NASD, NASDAQ and other prominent industry bodies that would not be addicted to lead an investigation. Out of 174 months, only 7 months (4%) saw negative returns in Madoffs Fairfield Sentry fund. No MLB hitter bats . 60, no NFL squad has ever had a 96-4 record out of 100 ga mes, and no money manager is up 96% of the months. Since Madoff is not registered as a hedge fund but acting as one via third party shields, his chances of escaping SEC investigations have remained high. The collapse The final weeks of the biggest scheme in history began on December 2008 when the market continued to fall. Madoff struggled to keep the scheme undirected when investors tried to withdraw $7 billion from the firm. In typical Ponzi scheme fashion, Madoff desperately needed money from new investors to pay off living investors.Ten days before his arrest, he received $250 million dollars from Carl Shapiro, a 95 year old philanthropist and entrepreneur, and one of Madoff oldest friends. Mr. Shapiro helped Madoff launch his investing career by giving him money to invest in 1960. He also asked others to invest including Wall Street financier Kenneth Langone. Madoff said he was raising money, between $500 million and $1 billion, for a new investment vehicle for exclusive clien ts. Mr. Langone declined to invest. 13 Mr. Langones denial could have been establish on quantitative analysis that most of Madoffs investors failed to undertake.In addition, by the time Madoff proposed the new investment vehicle to Mr. Langone, rumors of his questionable returns had increase considerably. Charges and Sentence On March 10, 2009, a Criminal Information was filed in Manhattan federal court charging Bernard L. Madoff with eleven felony charges including securities fraud, investment adviser fraud, mail fraud, cable fraud, three counts of money laundering, false statements, perjury, false filings with the United States Securities and Exchange tutelage (SEC), and theft from an employee benefit plan. The case is United States v.Bernard L. Madoff, 09 Cr. 213 (DC). The criminal information or ill declared that Madoff had defrauded his clients for $65 billion. On March 12, 2009 he pleaded guilty to all eleven counts and on June 29, 2009 he was sentenced to 150 years of impr isonment at the Metropolitan Correctional Center in New York (he was later moved to a prison in Butner, North Carolina) and $one hundred seventy billion in restitution. A breakdown of his sentencing is given below19 40 years for two counts of international money laundering 20 years for securities fraud 20 years for mail fraud 20 years for wire fraud 20 years for false filing with the S. E. C. 10 years for money laundering 5 years for investment adviser fraud 5 years for false statements 5 years for perjury 5 years for theft from an employee benefit plan The Victims Some of Madoffs clients included hedge funds, banks, charities, universities, astute financiers, hospitals, film producers and many others. According to the latest Trustee Interim Report assigned for fund recuperation, as of June 30, 2009 the recovery of funds from Bernard Madoff has been $1,088,507,818 with an additional $13. billion in incoming recovery requests. A short amount of the investors with the largest losses follows CLIENTTYPE OF CLIENTEXPOSURE Fairfield Greenwich Group fiscal Firm$7. 5 Billion Kingate ManagementFinancial Firm$3. 5 Billion Tremont Group HoldingsFinancial Firm$3. 3 Billion Banco SantanderFinancial Firm$3. 1 Billion of client motion-picture show Bank MediciFinancial Firm$2. 1 Billion Ascot Partners, run by Jacob Ezra Merkin, GMACs chairmanFinancial FirmMost of the firms $1. 8 billion in assets Access International AdvisorsFinancial firm$1. 4 billion Fortis Bank NetherlandsFinancial firm$1. billion Union Bancaire PriveeFinancial firmunder $1. 08 billion HSBC HoldingsFinancial firm$1 billion Picower FoundationCharity$958 million Carl ShapiroIndividual$545 million Carl & Ruth Shapiro Family FoundationCharity$145 million Yeshiva UniversityCharity$100 to $125 million Hadassah, the Womens Zionist Organization of AmericaCharity$90 million Korea Life InsuranceInsurer$50 million Fairfield, Conn. pension fundPension fund$42 million Madoff Family FoundationCharity$19 million Jewis h Community Foundation of Los AngelesCharity$18 million Alicia KoplowitzIndividual$14 millionTable 1 List of Madoff Clients (taken from the The New York Times, last updated June 24, 2009) As if the loss of fortunes were not tragic enough, there were also 2 suicides that stemmed from the scandal. Rene-Thierry Magon de la Villehuchet, 65, who lost more than $1 billion of his own and his investors money, took his own life on December 23, 2008 after realizing that he would not be able to recoup his investment. The Magon de la Villehuchet family was one of the most prominent families in France, building its fortune in the transportation industry during the 17th century.William Foxton, 65, was the second suicide victim of the scandal, but unlike the first victim, he had never heard of Madoff and lost his investment through one of Madoffs feeder funds. 2009 Ponzi Schemes The now infamous Ponzi scheme may have been popularized by Bernie Madoff during the present year, but the SEC has been uncovering such schemes at a rapid pace since the Madoff scandal. The following is a list of all the Ponzi schemes charges the SEC has issued in 2009 so far DATEDEFENDANTSPONZI AMOUNT (In millions) 1/08/09Joseph Forte, Joseph Forte LP$50 1/15/09James G. Osie, CRE Capital$25 /19/09Robert Allen Standford$8,000 2/19/09Marvin Cooper, BCI Inc$4. 4 3/11/09Anthony Vassalo, Kenneth Kenitzer$40 3/26/09Millenium Bank$68 4/01/09Edward T. Stein$55 4/06/09Weizhen Tang$50-75 4/08/09Shawn Merriman$17-20 4/09/09Robert P. Copeland$35 4/13/09Clelia Flores, magnetic resonance imaging Inc$23 6/09/09Peter Son, Jin Chung$80 6/10/09Gregory Bell & Lancelot Mgmt$2,000 6/15/09David J. Hernandez$11 6/24/09Michael C. Regan, Regan & Co$15. 9 6/24/09Moises Pacheco, AMM, BD&C$14. 7 6/28/09John Bravata, Richard Trabulsy$50 9/08/09Philip Barry, Leverage Group$40 9/28/09Frank Bluestein$250 10/16/09Homepals14. 3 Table 2 2009 Ponzi Scheme SEC ChargesAccording to the SEC website, 2008 SEC Ponzi charges totaled $470 mil lion (excluding Madoff charged on December 11), compared to 2009s approximate amount of $11 billion YTD. The earliest Ponzi scheme on SEC recent records dating back to 1997 is reported on July 4, 2001 for $67. 5 million. There is no mention of some other such scheme until June 9, 2005 for $6 million, while the next such scheme is reported on July 24, 2007 for $41. 9 million. The SEC Failure Bernie Madoff was so above suspicion that he even got his name informally applied an SEC rule. The Madoff exception allowed market makers such as Mr.Madoff to sell stock short to facilitate a customer buy order, even if the stock in question was ticking downward. on a lower floor a rule that was in place until 2007, short sales on a downward-ticking stock were normally prohibited. In a short sale, investors absorb stock and sell it, hoping to repay with shares bought at a lower price. Madoff was a great deal and unsuccessfully investigated by the SEC. His firms first contact with the SEC was in the early 90s when he hired two accountants, Frank Avellino and Michael Bienes, for his first small investment advisory business. The accountants helped him recruit more than 3,000 clients.They were violating the law selling unregistered securities however they were not accused of securities fraud. The SEC shut down the Avellino & Bienes operation and forced Madoff to return more than $four hundred million to investors. 13 In 2000, the SEC Boston office is contacted by Markopoulos where he outlines his first concerns about Madoff. Unable to persuade an investigation, Markopoulos is told to contact the SEC New York office. 13 However, no further investigation is conducted partly because the information presented to the SEC is not understood by its investigators due to its highly composite nature.Since then many other letters from concerned outsiders are being sent to the SEC about Madoff. No action is taken from the SEC until January 2006 when it launches an investigation prompt ed by the Markopolos memo. After an interview with Madoff in May 2006 in its case-closing recommendation, the SEC said it found no evidence of fraud. 13 After the uncovering of the investment fraud, the SEC conducted an internal investigation entitled investigation of Failure of the SEC to Uncover Bernard Madoffs Ponzi scheme. A 477-page report was released in September 2009 were the SEC Office of Inspector General (OIG) analyzes the SEC harm to uncover Madoffs Ponzi scheme, how it missed all the red flags and identifies recurring opportunities to find the fraud and how unsuccessful their efforts were. In a recent PBS interview with Henry Pitt, precedent SEC commissioner from 2001-2003, Mr. Pitt indirectly pointed out some SEC flaws31 The SECs examination program was put in place in the mid 90s is fatally imperfect.The total staff of the SEC is 3,500 people (not all of them do examinations) and there are 11,000 registered investment advisers subject to the SECs jurisdiction. There leave alone never be enough money, enough people and enough sophistication to conduct examinations the way they needed to be conducted. The law for broker-dealers was setup in 1934 and in 1940 for investment advisers. The relationship between the two entities is treated separately. In right aways marketplace, this viewpoint needs to change. This is one of the reasons why Madoff continued to be in business after the Avellino and Bienes scandal. The SEC was heavily commission on legal analysis, while not paying too much attention to economic and financial analysis. There needs to be more hedge fund transparency, something the SEC has failed to convince the courts to do so up to now. Arthur Levitt Jr, source SEC chairman from 1993-2001, maintains a view that supports a more focused approach on risk-assessment within the SEC. Mr. Levitt has been drawing criticism lately regarding his personal and business relationships with Madoff. When asked about SEC resources, he raises a valid point Since 2002, the number of investment advisers such as Madoff Securities has increased by 50%.Yet enforcement resources have been flat or even reduced. The number of SEC enforcement division personnel was cut by 146, to 1,192 in 2007 from 1,338 in 2005. 37 SEC post- Madoff Since the Madoff scandal, the SEC has been taking significant steps to reduce the probability that such frauds will occur in the future. A summary of the post-Madoff Reforms are included on the following list Safeguarding Investors Assets Revitalizing the Enforcement Division Revamping the discussion of Complaint and Tips Advocating for a Whistleblower Program Conducting Risk-Based Examinations of Financial Firms Increasing revolve around on Agency-Wide Risk Assessment Improving Fraud Detection Techniques for Examiners Recruiting rung with Specialized Experience Expanding and Targeting Training Seeking more Resources Integrating Broker-Dealer and Investment Adviser Enhancing Licensing, Education and Ov ersight Regime for Back-Office Personnel In summary, the changes focus where the SEC had previously failed enhancing investigator financial education, providing incentives for whistleblower tips, allocating additional resources. Hedge Fund TransparencyOne of the SECs attempts towards hedge fund transparency came in 2003 where the entity unsuccessfully tried to enforce the registration of a majority of hedge fund managers by re-interpreting the definition of client to an investment-adviser. This rule would have required hedge funds to register as investment advisers. This attempt was dismissed by the U. S. Court of Appeals for the District of Columbia on June 23, 2006. The hedge fund industry as a whole is against decree in part because such regulations would reveal the trading strategies employed internally to the competition.This is a viable argument in favor of the hedge fund industry, however not viable enough to prevent further regulation, at least in the US markets. A possible suggestion could be to create a quasi-government committee made up of various former heads of finance-related industries that are given the power to review and approve hedge funds. The information they have on their hands is solely between them and certain high level members of the SEC, with secrecy comparable to that of the likes of the Department of Defense. In this way, hedge funds avoid public disclosure of their strategies, while theSEC accomplishes the regulation they have always been pursuing. There could be different levels of approval according to the market value of a hedge fund. While this suggestion may not be the most viable, it is serves an option for both the SEC and hedge fund managers. Conclusion Given its impact on the financial world, it would seem that this scandal could have been prevented much earlier. Why did FINRA (Financial Industry Regulatory Authority), SIFMA (Securities Industry and Financial Markets Association), SEC, and other regulatory bodies not act quicker? Below follows a list of possible concluding points for such long inaction. The world to which the securities laws put one across laws now 70 and 75 years old is light years away from the world we have today. 34 imply 1 Bernie Madoff was a legend on Wall Street. He and his family were among the elite of the Street and, due to his long career and connections, he obtained a God-like status on the Street and as someone who could do no wrong. As any religious individual, they do not question Gods actions, they just believe. Furthermore, individuals who commit fraud usually do not have Madoffs awful background, connections and reputation.Madoff used his status on the Street as an advantage to raise more money and fly under the radar for as long as he did. A scheme is the last thing one would expect from someone whose resume includes a time as former chairman of NASDAQ. In addition, Harry Markopolos admits that he did not contact FINRA due to his familys connections with the regulatory authority. In particular, Andrew Madoff served as an incoming District 10 member of FINRA in 2003 while his brother Mark served on FINRAs Mutual Fund Task Force in 2004. Also, Bernie Madoffs brother Peter served on the board of directors of SIFMA.Point 2 Madoff was not using any illegal trading strategies. The split-strike option is a legitimate strategy that has been employed for years by a few experienced industry professionals, such as Harry Markopolos. It is a highly complex strategy that even Markopolos in his SEC paper admits that few really understand, and then many of Madoffs experienced investors failed to quantitatively analyze, yet they rather based their assumptions on word of mouth. In the same token, the SEC did not pay attention to something that they could not completely understand and did not put as much emphasis as they should have.Point 3 Red flags were not raised initially due to the overall economys performance. When the market was performing well, a 12% return was within reasonable lines of S&P returns. Some flags came up when the market started producing negative returns, yet Madoffs returns kept their usual steady, profitable path. If the market were still performing nonsubjective to slightly above neutral levels, chances are that the scandal would still lie beneath fake returns. Point 4 The SEC did not act any sooner possibly due to the psychological structure of its own investigators.A typical SEC investigator is young, non-aggressive, and lacks enough resources to fully take on such a case single-handedly. The aggressive and talented individuals get absorbed by Wall Street due to obvious profitable reasons. This is not to say that the SEC does not employ talented, aggressive individuals all that is being conveyed here is that probably some of the investigators psychological and character structure coupled with the lack of resources was a key mixture of ingredients the organization was missing.Plus, in order to raise su ch a high stakes complaint an SEC investigator would have to go through the usual bureaucratic red tape inherent in government process. Point 5 The SEC is made up of lawyers, thus lack the experience and knowledge of financial markets. The institution is not a financial entity that relies on satisfying shareholder returns it is a regulatory authority that interprets and applies the law. Lawyers are not fund managers, thus are not familiar with the complexities and headaches that come with such territory.Point 6 The SEC failure in the Madoff case is yet another example of a failure of the invisible hand to regulate capitalist economys promotion of self-interests. While de-regulation of capital markets was very instrumental to modify the US economy into a global powerhouse, lack of de-regulation brought upon the Madoff scandal along with one of the worst recessions in US history. If the markets were more heavily adjust from the beginning, one can only speculate on how far the US ec onomy could have reached.In his testimony to Congress, Allan Greenspan admitted that his ideology of let loose market capitalism has a major flaw I made a mistake in presuming that the self-interest of organizations, specifically banks, is such that they were best fit of protecting shareholders and equity in the firms. In short, Greenspans flaw was a variable he never considered as part of his ideology of free market capitalism human greed. Not surprisingly, Greenspans flaw has influenced many areas of free markets from credit-default swaps and mortgage lending tactics, to unregistered hedge fund charge practices.Bernard Madoff has left his imprint on Wall Streets disgraced list and his case will be used as an example to further regulate hedge funds and transparency needed in the financial industry. His life story of rising to the top and falling from grace highlights the double-edged sword of capitalisms laissez faire attitude. It will be very interesting to see how effectively the regulatory authorities will tackle this issue, as Madoffs case moves from the public eye to university case study in the coming years. Bibliography