A friend in money management wrote the following re Madoff. He asked that I keep his name off it:
There have been several red flags along the way that
Madoff's investors have ignored. I want to highlight these signs that
not all was above board, for they reflect a set of practices that
diverge widely from the ones good money managers adhere to:
1. Madoff had custody (physical possession) of his
clientsâ assets. Thus he had complete access and control over his
clientsâ funds.
In a proper relationship, a money manager does not hold any of his clients' investment assets. Instead, these are held by third-party financial institutions. The manager has authority only to "trade" in these assets; not to
withdraw funds from any client's account.
2. All the
investment reports to Madoffâs clients were created by his own firm —
not by a third-party — and that made fraudulent activities easier to
cover up.
In a proper relationship, the financial custodian provides a client with regular
reports — monthly statements, trade confirmations and other formal
documentation — as well as on-line access. You thus have the assurance
of being able to track and monitor the activity in an investment accounts. Madoffâs clients did not have that ability.
3.
Probably the key factor in Madoffâs appeal to investors was his seeming
ability to provide 10%-12 % returns year in and year out. (Allegedly
since 1990 Madoff lost money only in two quarters!)
Many
investment professionals have scratched their heads over this steady
and most unlikely performance, with doubts raised in Barronâs several
years ago. The market value of investments cannot but fluctuate with
market ups and downs. There is an old adage that warns when
something seems too good to be true, it probably isn't.
Perhaps
the most perplexing aspect of this story is how Madoffâs operations
have escaped exposure for so many years despite these warning signs.
Whether this was attributable more to regulatory failure or to the
blind greed of investors, it is hard to know.
