Madoff Scandal

On February 21, 2009, the Madoff Scandal investigators and Trustee revealed another surprising tidbit. It appears that there is no evidence of Madoff stock trades. To those in the financial services industry, and even those somewhat knowledgeable investors whoever even bought and sold a single share of stock, this is mind boggling.

Two major things immediately came to my mind a couple of weeks ago when I first heard there may have been no actual trading from the beginning.

First, How could a person have taken in money from day one and not have even made one trade? Especially when that person was the former Chairman of the NASDAQ stock market. It really makes you wonder what kind of person Bernard Madoff was to have done such a thing. This also went on for years. Something just doesn't make sense. I would have thought that, what is usually the case in this type of fraud, the person committing the scam or running the Ponzi scheme started out thinking they could manage the money and make a good rate of return. Then, after a year or two, they start losing money and so the Ponzi scheme or Madoff fraud begins. What seems so unusual here is that evidently the Madoff scandal was perpetrated from the very beginning and grew over the years to 50 billion dollars.

Second, How could he have gotten away with this for so many years? Some news reports have stated that Madoff used Friehling & Horowitz as his auditor. Other news reports, however, indicate that Friehling & Horowitz was not an auditing firm at all and has been telling the American Institute of Certified Public Accountants (AICPA) for 15 years that it doesn't conduct audits.

If Friehling & Horowitz did tell the AICPA it did not conduct audits for Madoff and only acted as a glorified bookkeeper or accountant, then more blame would lie with those money managers, Fund of Funds and institutions that allocated money to Madoff for investment and did not examine the firm that supposedly conducting his audits.

There has been much talk about hedge fund regulation, accountability, and registration requirements to avoid hedge fund fraud. Madoff was not set up as a hedge fund but was allocated funds to manage. Rather than require mere registration of hedge funds a more significant solution to the problem would be the formation of the Investment Company Accounting Oversight Board or ICAOB, similar to the Public Company Accounting Oversight Board or PCAOB.

The PCAOB is a private sector, nonprofit corporation that was established by the Sarbanes-Oxley Act of 2002 to provide oversight of auditors of public companies for investor protection.

The ICAOB should be formed and regulations enacted requiring all investment companies, investment advisers, money managers,hedge funds and anyone who manages money even indirectly, such as in the Madoff scandal, to have a yearly audit performed by an ICAOB auditing firm. This single requirement alone in my opinion would have prevented the Madoff scandal and most of the former and recent alleged frauds of Art Nadel, Samuel Israel III and Daniel Marino (Bayou), Nicholas Cosmo (Agape), and Martin Frankel.

Here's some information on Hedge Fund Formation that you might find interesting.

You can find more info here on the Madoff scandal and the investigation by Congress.