Beyond Brazenness - Blagojevich, Madoff and More

From Meghan McArdle in The Atlantic
L'audace, l'audace, toujours l'audace!
16 Dec 2008 02:33 pm

I've made this the comment of the week, because it's exactly right:


The SEC is very good at rooting out sophisticated fraud, especially in accounting gimicks. But they, like most human beings, are simply not that good at identifying accounting statements that are simply made up out of whole cloth. Hindsight is 20-20 though and I'm sure plenty of people will be calling for heads to roll.


The brazenness of the fraud was, in some part, the reason it was easy to keep going. The SEC is looking for people pushing the envelope. It is not looking for people who have set fire to the envelope and substituted a piece of old newspaper recently used to wrap fish.

It's actually easier for someone committing outright fraud to slide under the SEC wire, because when you're making up financial statements out of whole cloth, it's not hard to make them conform to SEC regulations. Similarly, Stephen Glass and Jayson Blair and Jack Kelley were able to get away with their frauds precisely because they fabricated things out of whole cloth. If you misquote an actual person, or misreport something that really happened, there's a strong risk that you'll be caught. But manufactured sources never complain that you spelled their name wrong or twisted their words.

In the long run, of course, such fraud guarantees that you'll be caught. But as Madoff shows, the long run can be long enough for someone entering old age to hope to beat the law of averages, Keynes-style.

On a somewhat related tangent, here's the question that really bothers me about Blagojevich: what if the reason that he thought he could get away with it is that a lot of other politicians he knows about have?

Hedgefund Hypocrisy or Madoff's Maneuvers

You know that I just want to post about shopping for the holidays but one again we're dealing with Wall Street Fraud which continues to be a target rich environment.

Bernard Madoff arrested over alleged $50 billion fraud

So now we have the former head of Nasdaq....NASDAQ!!!

accused of running an investment Ponzi Scheme and racking up 50 billion dollars in losses.

50 billion dollars...seriously....this is getting close to being some real money!

On the good side...after being caught with his hand in the honey jar he's manly enough to step up and admit his culpability.

"There is no innocent explanation," Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he "paid investors with money that wasn't there," according to the complaint.

The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history.

While I'm all for limiting the downside risk....his particular strategy for doing this might not be what you or I would do.

The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.
Jon Najarian, an acquaintance of Madoff who has traded options for decades, said "Many of us questioned how that strategy could generate those kinds of returns so consistently."

This is the part of the story that I really love.

Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.

The website also states that Madoff himself has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

Oh it's just so good to know that Madoff had high ethical standards.