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Lessons From the Madoff Scandal

By James B. Stewart (Author Archive) Now that some of the dust is settling around the Bernard Madoff scandal -- he allegedly admitted to bilking his investors out of at least $50 billion -- there has been a growing tendency in some quarters to blame the victims, at least in part. According to these theories, they should have recognized that annual returns of around 10% in both good times and bad were too good to be true. They should have been suspicious of Madoff's vague explanations of how he arrived at those results. And to the extent he described his strategy, which involved the simultaneous purchase of stock and sale of option contracts, they should have noticed that there wasn't sufficient volume in those options trades to account for the reported gains. The lesson from such criticisms, I suppose, is that we should all turn ourselves into forensic accountants. I find that preposterous, not to mention distasteful, given that some of these people have lost their life savings. After all, consistent returns in good and bad markets are the selling point for nearly every hedge fund. There are plenty that have reported much larger annual returns without raising eyebrows. Indeed, Madoff's returns were good, but not so spectacular as to raise undue suspicion. As for his vague explanations, they were no vaguer than those of many other hedge fund managers and even mutual fund managers. No one wants to give away his or her trade secrets. And as for the volume of trading in options contracts, what investor has the time for that kind of detective work, even assuming it might have revealed some irregularities? To continue reading this interesting article from SmartMoney.com click here.

Full post as published by The Trade Secrets Vault on December 30, 2008 (boomark / email).