A decade after Bernie Madoff’s arrest, FBI agents reveal more about his Ponzi scheme

ajacobson said:
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.
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What the heck kind of OTC dealer discloses their counterparties to anyone?
 
Part of the ISDA agreement and FINRA would examine those. Not publically reported, but the SRO community would have seen them. Back with Madoff - it was preFinra days so your b/d got an annual exam from an SRO. SRO's were rotated every few years. So Madoff and the counterparty would both have entered into the ISDA agreement. Plus when he was still doing the OEX collars he was adjusting pretty much every day. Here's the reporting problem - the SROs saw no evidence of trading. Any requirement to report that or even dig deeper? No trading no SRO action for his BD. He exploited this lack of a requirement to report.
The SEC had the pieces in 2001 - maybe earlier. They just never had a group that put all the pieces together. They're archivists, not sheriffs
Front page Barron's article in 2001 and still nothing.
It wasn't until his son rolled over that an investigation was triggered.
 
ajacobson said:
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."
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As far as I know about Madoff's hedging strategy, there is no way that it would allow him to earn such high returns as it the covered call part where he buy the stocks + sell the call would limit the upside potential but leave him vulnerable for all the downside risk when the stocks go down. The protective puts that he bought at the same time would offer some downside protection but that would depend on the strike of the puts and the price of the puts themselves. If the puts is too expensive it will eat away at the returns but if the puts is too OTM it won't offer much of the downside protection so either way the return would be that high. If he was only earning returns from the spread then they would be just in-and-out transactions and there would be no hedges then he would be vulnerable to stock downturns.
 
Sig said:
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.
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Even if it's OTC, the transactions would've still be recorded in DTC, which is a where all transactions whether it's from exchanges or through clearing counterparties are
recorded. https://en.wikipedia.org/wiki/Depository_Trust_&_Clearing_Corporation. It might not be THE one that would've discovered the fraud but it's one more thing that would've revealed more discrepancy. The more discrepancy that one finds the more that would force one to look further, no? Especially there had already been articles written by investment journals revealing the fund to be a possible Ponzi scheme plus Markopolos' reports.

No matter how limited how poor the government resources are, checking a DTC number, checking some transaction records should not take much. Checking a DTC number would not take 10,000 agents. That agent ASKED for a DTC number, WHY didn't he follow up? WHY didn't he check? It was part of the routine check during the Enforcement Investigation but yet SEC did not follow through. Hindsight might be 20/20 but that does not mean due diligence is not needed just because current efforts would never be enough. No matter how you slice it or dice it, there is no excuse, not in this case.
 
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None of this matters when the guy didn't actually place any trades, and cooked his books, yes? No need for worrying about counterparty risk and stock prices and whathaveyou...

Yer not trading. Yer making believe you trade. So the Madoff lackeys on the books just make shit up. The fact that the regulators did not catch it while it was going down for FORTY FUCKING YEARS is on them.

And why did it go down for so long? Because they are employees who had no work ethic, and simply did not do their jobs. The work ethic in this country has been going down the tubes for decades in the private sector. I suspect it is now at an all time low in the US. I DOUBT it EVER existed in the public sector.

Why do people not do the work they are told to do? Because they are not held accountable. Instead of doing real, actual work, they just fuck around and waste time to get free paycheck money. I am damned sure the entire federal government does this, because there is no accountability. There is nobody to fire them, because the boss is doing the same damned thing.

Buggers!

 
Sig said:
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.
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Since we are off-topic here, I have to post this guy's house in NY that he left to his wife before he committed suicide. It's just the most beautiful mansion that I've ever seen. If I ever make it in trading, I would DEFINITELY want to buy it and I don't care about all the "stigma" that might be associated with it. The guy bought it for $33.5 million before the financial crisis and can't believe the wife couldn't sell it for EIGHT years since 2009 after the guy's death and it was finally sold for $28.5 million only this year, at a loss of $5 million+ loss. The poor wife. Such a beautiful house. https://www.zillow.com/homedetails/7-E-67th-St-New-York-NY-10065/31533638_zpid/
 
NYSE Takes Over 131-Year-Old Exchange Once Tied to Bernie Madoff(headline from Bloomberg on the purchase of the NSX by the NYSE. NSX was the third reincarnation of the Cinncinati).

Traded a couple of million shares a day until decimalization killed it.

https://www.forbes.com/2008/12/19/m...arkets-cx_pm_0710eightynine.html#140457254ae3

I'll put this as delicately as I can - the guy was a real business until decimalization - he's still a crook and an asshole.
When he was real he adjusted to collar most days on the CBOE near the COB.
Needed listed or he wouldn't have gotten haircut relief. What do you think a typical specialist operation earned in the 90s?

Again doesn't make him any less of a crook and asshole.
 
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