Monday, December 15, 2008

This Is Not "Hedge Fund Fraud"

Can we please get off the hedge fund bandwagon when talking about Madoff. There is absolutely nothing in the indictment or the SEC complaint, or any of the main stream press or Madoff's filings (as reflected in the press) that would lead one to the conclusion that Madoff's investors money was in a hedge fund.

In fact, there reports are the opposite; that Madoff's clients had their own individual accounts at his brokerage firm. According to the WSJ reporter who reviewed Madoff's Form ADV (which is the registration form for an investment advisor) Madoff had less than 25 clients and 17 billion under management in January 2008. Other reporter have reviewed individual customer account statements.

A lot of this is still unclear, and perhaps won't be clear for a while. Quite frankly, some reporters are simply misinformed and confusing the advisory business with the brokerage business. Or maybe not, and maybe it doesn't make any difference.

However, if the fraud extends to brokerage clients, this will be a whole 'nother ball game, with lots of defendants and lots of investors involved. As shocking as the complaints are, that magnitude of fraud would involve so many people and entities as to make it truly earth shattering.

But, it is clear, this is not the case of an unregulated hedge fund committing a fraud. If these allegations are true, the fraud was committed by a REGISTERED investment advisor, clearing customer accounts through a REGISTERED broker dealer.

And while I am at it, there is a lot of blame to go around here. While everyone is jumping on the SEC, no matter how well deserved that criticism is, lets not forget that the PRIMARY regulator is FINRA, not the SEC, and FINRA is apparently too busy reviewing the books and records of small broker dealers to find $10,000 bookkeeping errors to possibly uncover a 50 BILLION dollar fraud.

These events, coupled with our current financial crisis, Marc Dreier and even Blagojevich are going to have a significant impact on investor confidence.

We don't need to add new groups or investment vehicles to the mix.
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