Friday, 4 September 2009

Madoff Victims Should Not Blame The SEC

Something caught my eye in the FT's coverage of the SEC's inspector-general's report into the SEC's handling of the Madoff saga:
"Jacob Frenkel, an attorney with Shulman Rogers, said the report indicated that some SEC staff, “failed to recognise a blazing fire because they were too focused on the smoldering match in their fingertips.... Madoff investors would have been better off and far more skeptical had the SEC never investigated or conducted examinations.”"
While the SEC has a lot of improvements to make, Mr Frenkel's claim just doesn't stack up. Worse, blaming the SEC will mean that Madoff's victims will continue to behave in the way that got them into trouble in the first place.

In my book, victims really only have themselves and Madoff himself to blame, on three counts.

Firstly, the complaints to the SEC only reflect what was being published by the likes of Michael Ocrant in 2001. Harry Markopolos said it took him four hours to spot the Ponzi scheme in 2000, using publicly available documents. And according to the Telegraph, Goldman Sachs banned its asset management and brokering divisions from dealing with Madoff's funds ten years ago, while "a raft of blue-chip financial institutions have suspected something was wrong for years." So there's no reason that Madoff's victims and their advisors should not have detected these concerns with even a little due diligence.

Secondly, from my own observation of the SEC's approach to potentially wrongful activity (e.g. in relation to it's obvious that it can take several years for the SEC's enforcement machine to engage and eventually produce a settlement or prosecution. And, of course, such proceedings are subject to the usual vagaries of the appeals process (sustaining the doubt about whether viatical settlements are a security, for example, which has in turn left the status of other instruments unclear). While this is hugely frustrating for investors and competitors alike, it is clearly impossible to draw any conclusion from the fact that the SEC may have investigated something, unless and until the SEC issues a 'no action' letter (which can take a year, no joke), or ensuing proceedings are settled or otherwise concluded. So those who bet on the outcome of existing or potential SEC activity do so at their own risk. And clearly many people do make those bets.

Finally, what really seemed to cause Madoff's victims to invest was the bandwagon effect created by Madoff's skilful recruitment of socialites and other high profile names as key investors. This meant that investing with Madoff was more of a social badge than a financial decision. And that is hardly something that the SEC can be expected to do much about.

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