No One Would Listen: A True Financial Thriller (55 page)

ABCDEFGH and I had dinner with a savvy European investor that studies the HFOF market. He stated that both RBC and Socgen have removed Madoff some time ago from approved lists of individual managers used by investors to build their own tailored HFOFs.

More importantly, Madoff was turned down, according to this source, for a borrowing line from a Euro bank, I believe he said Paribas. Now why would Madoff need to borrow more funds? This Euro Investor said that Madoff was in fact running “way over” our suggested $12-14 billion [Fairfield Sentry is running $5.3 BB by themselves!). Madoff’s 12 month returns is about 7% net of the feeder fund’s fees. Looks like he is stepping down the pay out.

C. An official from a Top 5 money center bank’s FOF told me that his firm wouldn’t touch Bernie Madoff with a ten foot pole and that there’s no way he’s for real.

 

17.
Red Flag # 21:
ECN’s didn’t exist prior to 1998. Madoff makes verbal claims to his third party hedge FOF’s that he has private access to ECN’s internal order flow, which Madoff pays for, and that this is a substantial part of the return generating process. If this is true, then where did the returns come from in the years 1991-1997, prior to the ascendance of the ECN’s? Presumably, prior to 1998, Madoff only had access to order flow on the NASDAQ for which he paid 1 cent per share for. He would have no such advantage pre-1998 on the large-cap, NYSE listed stocks the marketing literature says he buys (Exxon, McDonalds, American Express, IBM, Merck, etc...).

18.
Red Flag # 22:
The Fairfield Sentry Limited Performance Chart (Attachment 1) depicted for Bernie Madoff’s investment strategy is misleading. The S&P 500 return line is accurate because it is moving up and down, reflecting positive and negative returns. Fairfield Sentry’s performance chart is misleading, it is almost a straight line rising at a 45 degree angle. This chart cannot be cumulative in the common usage of the term for reporting purposes, which means “geometric returns. ” The chart must be some sort of arithmetic average sum, since a true cumulative return line, given the listed monthly returns would be exponentially rising (i.e. curving upward at an increasing rate). My rule of thumb is that if the manager misstates his performance, you can’t trust him. Yet somehow Madoff is now running the world’s largest, most clandestine hedge fund so clearly investors aren’t doing their due diligence. And why does he provide the S&P 500 as his benchmark when he is actually managing using a S&P 100 strategy? Shouldn’t the performance line presented be the S&P 100’s (OEX) performance?

19.
Red Flag # 23:
Why is Bernie Madoff borrowing money at an average rate of 16.00% per annum and allowing these third party hedge fund, fund of funds to pocket their 1% and 20% fees based upon Bernie Madoff’s hard work and brains? Does this make any sense at all? Typically FOF’s charge only 1% and 10%, yet BM allows them the extra 10%. Why? And why do these third parties fail to mention Bernie Madoff in their marketing literature? After all he’s the manager, don’t investors have a right to know who’s managing their money?

20.
Red Flag # 24:
Only Madoff family members are privy to the investment strategy. Name one other prominent multibillion dollar hedge fund that doesn’t have outside, non-family professionals involved in the investment process. You can’t because there aren’t any. Michael Ocrant, the former MARHedge Reporter listed above saw some highly suspicious red flags during his visit to Madoff’s offices and should be interviewed by the SEC as soon as possible.

21.
Red Flag # 25:
The Madoff family as held important leadership positions with the NASD, NASDAQ, SIA, DTC, and other prominent industry bodies therefore these organizations would not be inclined to doubt or investigate Madoff Investment Securities, LLC. The NASD and NASDAQ do not exactly have a glorious reputation as vigorous regulators untainted by politics or money.

22.
Red Flag # 26:
BM goes to 100% cash for every December 31
^st
year-end according to one FOF invested with BM. This allows for “cleaner financial statements” according to this source. Any unusual transfers or activity near a quarter-end or year-end is a red flag for fraud. Recently, the BD REFCO Securities engaged in “fake borrowing” with Liberty, a hedge fund, that made it appear that Liberty owed REFCO over $400 million in receivables. This allowed REFCO to mask its true debt position and made all of their equity ratios look better than they actually were. And of course, Grant Thorton, REFCO’s external auditor missed this $400 million entry. As did the two lead underwriters who were also tasked with due-diligence on the IPO - CSFB and Goldman Sachs. BM uses his brother-in-law as his external auditor, so in this case there isn’t even the façade of having an independent and vigilant auditor verifying the accounting entries.

23.
Red Flag # 27:
Several equity derivatives professionals will all tell you that the split-strike conversion strategy that BM runs is an outright fraud and cannot possibly achieve 12% average annual returns with only 7 down months during a 14½ year time period. Some derivatives experts that the SEC should call to hear their opinions of how and why BM is a fraud and for some insights into the mathematical reasons behind their belief, the SEC should call:

Leon Gross, Managing Director of Citigroup’s worldwide equity derivatives research unit; 3
^rd
Floor, 390 Greenwich Street; New York, NY 10013: Tel#
or
[Leon can’t believe that the SEC hasn’t shut down Bernie Madoff yet. He’s also amazed that FOF’s actually believe this stupid options strategy is capable of earning a positive return much less a 12% net average annual return. He thinks the strategy would have trouble earning 1% net much less 12% net.

 

b. Walter “Bud”Haslett, CFA;
LLC; Suite 455;
NJ 08065; Tel#:
or
[Bud’s firm runs $ hundreds of millions in options related strategies and he knows all of the math.]

c. Joanne Hill, Ph.D.; Vice-President and global head of equity derivatives research, Goldman Sachs (NY),
; One New York Plaza, New York, NY 10004;