Monday, January 5, 2009

Congressional Hearing Today On Madoff

As we reported last week, the House Financial Services Committee will convene a hearing at 2pm today on the Madoff scandal. Set to appear are SEC Inspector General David Kotz, Securities Investor Protection Corp. President Stephen Harbeck, investor Allan Goldstein, former Paloma Partners hedge fund executive Leon Metzger, and Boston Univ. Law Professor Tamar Frankel. (We cited some of Frankel’s remarks in our blog almost a year ago today – Jan. 4, 2008 – when she reflected on the subprime crisis and changes in the products, services and culture of financial services firms, and said of the regulatory framework: “Perhaps we have to reconsider the system rather than do some patchwork." She is co-author, with Mark Fagan, of the course Trust and Honesty in the Real World.)

Harry Markopolos, who previously worked at a competitor to Madoff and sent an extensive written memorandum to the SEC alleging activities at Madoff were at best front running, and at worst a Ponzi scheme, was reportedly invited to testify at the hearing today, but has cancelled due to illness, according to David Scheer and Ian Katz of Bloomberg, in their article today, SEC Must ‘Defend Its Existence’ After Madoff Lapses The WSJ posted a copy of Markopolos’ Nov. 7, 2005 19-page memo he sent to the SEC, entitled, “The World’s Largest Hedge Fund is a Fraud.”
In related news, Kara Scannell of the WSJ recaps info from past investigations of Madoff conducted by the SEC and FINRA in her article today, Madoff Chasers Dug for Years, To No Avail. And, former SEC Chairman Arthur Levitt, Jr. addresses the question How the SEC Can Prevent More Madoffs in his oped in today’s WSJ by that title, with the answer in the subtitle: “Bolster the [SEC’s] risk assessment and enforcement staff.”

Separately, Madoff complied with the deadline to provide the SEC a listing of his assets, as reported by Amir Efrati and Jesse Drucker in the Jan. 2 WSJ: Madoff Gives Prosecutors Details of His, His Firm’s Assets.

Rick Telberg, author of has been writing about the Madoff fraud as well, particularly with respect to Madoff’s alleged ‘auditor,’ Friehling and Horowitz. (See e.g. Telberg’s posts on Dec. 18 and 19.) I asked him what he thought about the peer review controversy concerning the audit firm. Telberg said, “My understanding is that the Madoff CPA firm evaded an AICPA peer review because the firm denied it was doing audits -- and thus exempt. (Indeed, there's also a question whether the financial statements that were issued said anything about "audit" at all. Have you the seen so-called "audited" financial statements?) So the AICPA's position seems to be that the firm misrepresented its activities to the trade association.”

Telberg continued: “That said, the lack of a peer review should have been as big a red flag as a hole-in-the-wall office in an out-of-the-way 'burb.” Additionally, he said: “I'm not sure that any state law, no matter how well drafted, can protect us from every determined liar, cheat or thief. That's a job for the cops and the judges.”

In our last post (Dec. 31), we provided a link to “Bernard Madoff’s Blog” - which is to Bernard Madoff what Tina Fey is to Sarah Palin or Fred Armisen is to Barack Obama. An interesting juxtaposition is to read “Bernard Madoff’s” Jan. 2 blog post, “New Year Resolution #2, From Me, Bernie Madoff” in which he says, “I still attribute my initial trading program to Eddie Antar, the genius behind Crazy Eddie's” - and then read Sam Antar’s post in his WhiteCollarFraud blog on Dec. 29, A New Year’s Message From a Convicted Felon: While You Hope, Criminals Prey.

Sam Antar, convicted for his role as CFO in his cousin “Crazy” Eddie Antar’s fraud in the 1980’s, has since become a consultant and trainer on anti-fraud programs. The comments in Antar’s Dec. 29 blog post illustrate classic elements of fraud for which parallels can be drawn to the Madoff situation:
  • My cousin Crazy Eddie Antar taught me that ‘people live on hope.’ As white collar criminals, we preyed on your hopes and dreams by feeding you our spin and lies…. Eddie and I built walls of false integrity around us to gain the trust of our victims. We claimed that Crazy Eddie's accounting policies were "conservative." In addition, we gave huge sums of money to charity and were involved in many popular social causes in an effort to make investors comfortable with us. While we were in effect, “helping old ladies cross the street,” we were heartlessly executing a massive fraud that wiped out the life savings of thousands of investors and ultimately caused a few thousand people to lose their jobs. …Do not get mesmerized by neatly packaged story lines and well researched sound bites written by professional high paid media consultants. Criminals know how to ‘talk the talk and walk the walk’ as they inspire you with false promises of a prosperous future….Have a skeptical New Year.”

Speaking of Skeptics, there was a great article in the weekend WSJ, Why We Keep Falling for Financial Scams, by Stephen Greenspan, Clinical Professor of Psychiatry at the University of Colorado and emeritus professor at the University of Connecticut. The article is based on an essay which will appear in Skeptic magazine in early 2009, which in turn is based on his book, Annals of Gullibility.

Greenspan notes that even he was a victim of the Madoff fraud, and uses the Madoff scheme to illustrate his theory of gullibility. Although not discussed by Greenspan in this particular order, I found it easy to remember his theory by focusing on SCEP, as in, “don’t be suSCEPtible,” with the SCEP standing for Greenspan's 4 point theory of gullibility: situation, cognition, emotion and personality. If you’re the type that likes to read dialogue/commentary in blogs, see related post Dec. 23 by Michael Schermer on The Ponzi Dilemna in The Skeptic Blog .

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