Thursday, December 18, 2008

Edelheit on the Madoff Scandal

This excerpt is from one of Aaron Edelheit's more informative recent posts, "Negligence and Culpability":

There are three key points that should have stopped people from investing with good ol Bernie:

1)He held custody of his own money. Every financial fraud of recent memory all had one thing in common, the person committing the fraud had possession of the money. There are simply too many conflicts of interest when the person managing the money possesses the money and there are no safeguards.

2)His auditor was a firm no one ever heard of. Not only that but it had three employees, one of whom apparently worked in a tie die shirt for 15 minutes a day. Not only do I have a big name auditor, who is expensive, but I actually have three different accountants from different firms. One is my auditor, one is my administrator and the other approves whenever I, personally, withdraw money. These are all safeguards for investors, so that they know there are procedures and many eyes making sure everything is picture perfect.

3)Abnormal consistency of his returns. As this year shows very clearly, there is simply no way for an investment strategy to show consistent positive returns [Madoff showed a positive return every month, I believe]. There is always something that throws a monkey wrench in it, even for a short period of time and you should be paranoid by someone claiming to never show volatility.

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