Ok for you, @Sig, just for you, I got out my Harry Markopolos' book "No One Would Listen", on page 41, Markopolos clearly stated Madoff's strategy was buying a basket of blue-chip stocks and then hedge them with OTM OEX 100 (equivalent of SPX 500) put options and then also sell OTM OEX 100 call options with equal number for each. That strategy is what's called covered call with downside protection. All of the options would've traded on CBOE and all of the stocks would've traded on their respective stock exchanges, all those agencies have to do is go down to COBE and/or to any of the stock exchange where Madoff supposedly bought those blue-chip stocks and ask for transaction records. You are telling me that those agency auditors can't even do that??!! Just checking for some transaction records? Auditors never check for the entire month or entire period of records, they just check for sample of them, like several weeks or few days of them to see if they match. SEC might be underfunded to do that but what about FBI, DOJ? They have surveillance equipment that's worth millions more working for them and they set up shop in downtown NY to investigate the guy, you are telling me they can't simply go down to exchanges to ask for some transaction records???!! I don't buy it. They just needed to check for ONE and they would've uncovered the fraud lot earlier because there was NOT ONE transaction record that existed. And as a matter of fact, SEC, to its fairness, actually made an attempt and probably the only attempt among all agencies to check Madoff's transaction records. And it involved even simpler than going down to the exchanges to check for transaction records. It actually asked for Madoff's DTC account number to check for transactions during one of their Enforcement Investigation and Madoff gave them a fake DTC account number. Even Madoff himself thought he was done and he was actually expecting to be done because all SEC had to do was to go down to DTC to check for all of the cleared transactions and they would've discovered there were no transactions whatsoever and even the DTC account number was fake and his scheme would've been exposed. Because no matter how much statements he can do, he would not be able to fake DTC number, a broker-dealer identifier no. assigned to each dealer for clearing transactions. But for some very incredible and unexplained reason that even astonished Madoff himself, SEC never followed up or contacted DTC to check, and no else after them ever did either. DTC is actually an agency with SEC and they didn't even bother to contact SEC's own internal agency. And so Madoff narrowly escaped again. There is something very wrong when the crooks that you are supposed to catch even thinks that he should be caught and fully expects to be caught and is astonished to find instead that he's not. WHY didn't SEC simply just go down to DTC to just check out the number??!!! There is no math, or talent, or "fraud-minded" required, just doing the routine of checking out a number??!! As much as I understand government's hiring limitations for talent, I just think this is not the case here. Letting Madoff to have a ponzi scheme to go on for so long undetected is simply a lack of due diligence and laziness and complacency on those governmental agencies' part, aka dropping the ball on the American people. This is not a skill issue. This is an attitude issue.
Markopolos got a couple of things wrong, but the outcome is still the same. Madoff founded the Cincinnati stock exchange and went out and sold execution and payment on NYSE listed stocks - he then laid off the risk with an OEX collar. He did this for most of the regional brokerage houses and the industry loved him - including the regulators - because he was cracking the monopoly on NYSE traded names. Regulators loved him and the regionals loved him. The returns he quoted were about 1 1/2 to 2% a month. Markopolos's point included the fact that the strategy couldn't return that. Absolutely true after decimalization hit in 2001 and that is pretty much when he stops hedging and pretty much stops trading. Was he making those return prior to 2001 - probably, but as far as I know no entity ever confirmed it. CBOE buys the Cincinnati from Madoff and the OEX pit sees the volume dry up - people assumed he was hedging OTC which he wasn't and it's around this time the fraud starts and he pretty much stops trading and the Ponzi scheme kicks off. Much of the industry start scratching their heads and all the index desks are trying to figure out where the hedging is being done. Also when equities go to decimals you get the growth of the regional exchanges and the virtual monopoly of trading NYSE names on the NYSE cracks. When NYSE names traded in fractions - prior to 2001 - specialists still took the risk. In my view, it was because the spreads were so generous. None of this alters the fact that he was a crook - much of his fundraising occurs after the decimalization in 2001 and is needed to fund the Ponzi. Did he actually have a real business prior to 2001? Yes, he did! What were his returns? Don't know but as a b/d there must be focus reports from that period and I'm somewhat surprised they were never discussed. Was he a crook? Obviously and I can add he was a royal asshole. The challenge Markopolos faced was many considered him a bigger jerk than Madoff. There is a lesson here in that it's not only the message but the messenger as well. None of this alters the fact that he was a crook Again if you really want the color read Erin Arvedlund's book - "Too Good To Be True."
She wrote the Barron's cover story in 2001 and nobody listened. https://www.npr.org/templates/story/story.php?storyId=111959024
Actually per the MAR Hedge article helpfully provided by @Kevin Schmit he claimed all his option trades were OTC. Again your hindsite is 20/20 here which means you're focusing on the amount of work the government would have had to do in order to catch this one criminal knowing he was a criminal AND having the expertise to know what type of trading someone with his claimed trading strategy would do AND doing a trade audit of his books to the level of individual transactions. Multiply that by every fund in the world. Then add up all the entities that, like Madoff, actually aren't operating as a fund. Seriously, do a spreadsheet where you determine the level of agent you'd need, the time they'd need, what kind of subpoena power they'd require and the legal time and cost involved in that, multiplied by every entity out there that could be cheating. Much as we would like to think the government is out there with unlimited resources and should have the ability to detect any fraud the fact is that law enforcement is only ever going to be able to audit away a very small sample and will have to depend on the deterrent effect of that, which means there will always be some fraud. Should the SEC have caught a fake DTC number, again in hindsight absolutely. Is every operation that involves humans or is programmed by humans inevitably going to have fails like that, again absolutely. I would assert that the cost and civil liberties implications of setting up an organization with a near 100% catch rate of Madoff style operations far exceeds the amount Madoff stole. Just asking your to put yourself in the shoes of setting up the type of organization you envision. Heck, you might even try to get a job there doing it. I'd be the first person cheering you on when you proved me wrong.
The bystander effect. Someone else will stop it. It’s akin to a detective arriving to a possible homicide scene/home and not even looking in the door.
Now there's an outtrade of significant proportions! Madoff victim’s widow sues shrink over his suicide By Julia Marsh December 5, 2018 | 8:55pm | Updated Modal Trigger Charles Murphy and Annabella MurphyGetty Images MORE ON: HEDGE FUNDS Major hedge funds are scrambling to prevent financial wipeout Ex-Goldman Sachs partner still believes in cryptocurrency Ex-Lehman Brothers executive to shut down major hedge fund James Pattison sells The News Group to American hedge fund Her husband killed himself after losing millions to Bernie Madoff — but now his wife is blaming the shrink. The widow of hedge fund executive Charles Murphy, 56, whose fund at Fairfield Greenwich lost $50 million in the epic Ponzi scheme revealed in December 2008, filed suit in Manhattan Supreme Court on Wednesday against NYU Langone Professor Aaron Metrikin. In court papers, Annabella Murphy accuses the psychiatrist of failing to prevent her husband’s suicidal tendencies. Murphy jumped from the 24th floor of the luxury Sofitel New York Hotel in March 2017. Metrikin treated the fallen financier for nine months before his suicide leap. The suit says Murphy had previously threatened to kill himself by jumping from that very hotel. “Despite knowing that the decedent had attempted suicide in the past and had advised him of suicidal tendencies, [Metrikin] failed to provide proper medication or to hospitalize decedent,” the suit says. The suit also faults the doc for failing to refer his reeling patient to specialists. The shrink could have prevented Murphy’s death, the filing says. According to previous reports, he had apparently been planning his demise for weeks and added his wife to the deed of their 11,500-square-foot townhouse on East 67th Street shortly before his suicide. Earlier this year, she sold it for $20 million less than the initial asking price of $49.5 million. And the family apparently was having financial troubles before Murphy’s leap. A parking attendant at a nearby garage said his wife had crashed their Honda Odyssey but could not afford to fix it. SEE ALSO Investor burned by Madoff leaps to death from luxury hotel balcony At the time of his death, Murphy was working for Paulson & Co., a leading hedge fund run by billionaire John Paulson. Paulson remembered his business partner as a “brilliant man, a great partner and a true friend” in a statement released following the suicide. Murphy left behind five kids. His wife is suing for unspecified damages including funeral, burial costs and her husband’s “conscious pain and suffering” leading up to his death. “It’s a sad, unfortunate case,” her lawyer, David Jaroslawicz, told The Post. “He certainly shouldn’t have been in a non-institutionalized environment,” Jaroslawicz said, adding that he consulted an expert who said the widow had a valid claim. Metrikin did not return multiple messages seeking comment. Murphy’s was the third death connected to the Madoff scandal. The schemer’s elder son, Mark, hanged himself in December 2010 on the second anniversary of his dad’s arrest. Two other investors — William Foxton and René-Thierry Magon de La Villehuchet — ended their lives after losing vast sums to the scheme. A federal judge sentenced Madoff to 150 years in prison in 2009.
Not sure what you mean by that? CBOE disappeared? And in the contemporaneous article Madoff claims they were all OCT, which is of course the simple course of action one would take to avoid detection by matching to cleared trades.
He traded CBOE until he stopped so everyone assumed they had gone OTC, but none of the well known OTC dealers appeared or admitted to be trading with him. When decimalization hit - it appears he simply stopped. Plus there were only two or three OTC OEX licenses(lots of SPX), but nobody could identify the fact that any trading occurred at all.