International Law

The Madoff Risk

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Greg Newton, writing at his blog Naked Shorts, has a number of important background documents to the Madoff Ponzi.

This is going to a fascinating story, as it unfolds.  There are a number of elements which enabled the fraud, which are so clear in a business opportunity fraud, but may get hidden in the noise.

First, we have the implicit guarantee - in this case, unusually low volatility for an extended period of time, or impossibly low risk.

Greg has put up a nice article from 2001, which expresses doubt about the low volatility.

"Still, when the many expert skeptics were asked by MAR/Hedge to respond to the explanations about the funds, the strategy and the consistently low volatility returns, most continued to express bewilderment and indicated they were still grappling to understand how such results have been achieved for so long.

Madoff, who believes that he deserves "some credibility as a trader for 40 years," says: "The strategy is the strategy and the returns are the returns." He suggests that those who believe there is something more to it and are seeking an answer beyond that are wasting their time."

Oops.

Second, according to Felix Salmon, there were elements in common with an affinty fraud.

"Madoff didn't invest simply on behalf of a couple of dozen multibillionaires; he had many common-or-garden millionaire clients, many of whom were introduced to him -- I'm not making this up -- through the Boca Rio Golf Club in Boca Raton and the Palm Beach Country Club in Palm Beach. Apparently the ability to invest with Madoff was sold as a side benefit of joining the clubs -- as ever, if you make something seem exclusive, people will clamor to get it."

The affinity fraud angle will be worth watching for because of the length of the fraud.

Full post as published by Misleading Advertising Law on December 12, 2008 (boomark / email).