dec 16, 1992 WSJ, page c1. The Securities and Exchange Commission recently cracked down on one of the largest-ever sales of unregistered securities. Investors had poured $440 million into investment pools raised by two Florida accountants, who for more than a decade took in money without telling the SEC or making required financial disclosures to investors. The pair had promised investors hard-to-believe annual returns of 13.5% to 20% -- to be obtained by turning the money over to be managed by an unnamed broker. Regulators feared it all might be just a huge scam. "We went into this thinking it could be a major catastrophe," says Richard Walker, the SEC's New York regional administrator. But when a court-appointed trustee went in, the money was all there. Indeed, the mystery money manager was beating the promised returns by such a wide margin that the two accountants ditched their accounting business in 1984 to concentrate on their more lucrative investing sideline. Who was the broker with the Midas touch? The SEC, which last month went to court to shut down the operation, won't say. Neither will the lawyer for the two accountants, Frank J. Avellino and Michael S. Bienes of Fort Lauderdale. But the mystery broker turns out to be none other than Bernard L. Madoff -- a highly successful and controversial figure on Wall Street, but until now not known as an ace money manager. (snip) Mr. Madoff's firm can execute trades so quickly and cheaply that it actually pays other brokerage firms a penny a share to execute their customers' orders, profiting from the spread between bid and asked prices that most stocks trade for. (snip) Mr. Madoff said his investment strategy changed around 1982, when his firm began using a greater variety of strategies tied to the stock market, including the use of stock-index futures and "market-neutral" arbitrage, which can involve buying and selling different stocks in an industry group. Mr. Madoff said, "The basic strategy was to be long a broad-based portfolio of S&P securities and hedged with derivatives," such as futures and options. Such a strategy, he said, allowed the investors "to participate in an upward market move while having limited downside risk." For example, he said, the Madoff firm made money when the stock market crashed in 1987 by owning stock-market index puts, which rose in value as the market declined. (snip) Perhaps the biggest question is how the investment pools could promise to pay high interest rates on a steady annual basis, even though annual returns on stocks fluctuate drastically. In 1984 and 1991, for example, the stock market delivered a negative return, even after counting dividends. Yet Avellino & Bienes -- and Mr. Madoff -- maintained their double-digit returns. The answer could be that Mr. Madoff's use of futures and options helped cushion the returns against the market's ups and downs. Mr. Madoff says he made up for the cost of the hedges -- which could have caused him to trail the stock market's returns -- with stock-picking and market timing. (rest snipped)
and the unfortunate part..both arthur leavitt and harvey pitt were out talking over the past couple days; leavitt said that there were so many obvious red flags, pitt said it's unfathomable it could have gone on so long without anyone knowing. i don't have to provide the unfortunate punch line.
Yeah, maybe in the future they can wire his cell with a trading computer and a bloomberg. He can provide the other inmates with investment advice also while he is recouping the losses. I can also picture him providing sound tax advice and retirement planning to the guards in order to get special favors for him and his cellie just like Andy Dufresne. However, I don't think this story has a happy ending of Bernie tunneling out of the penitentiary and retiring to Mexico though.
You can hear his pitch. " I can take a pack of smokes, and every month, you'll have two to three new butts. Think about it. 20 Camels today. 23 in 30 days, then, 27, or 28, and so on. Why, you'll be King of the Yard". Somehow, though, I don't think the inmates would be as lax as the Director of Enforcement at the SEC, Linda Chatem Thomsen.