| If an economic sink hole brought on by creative | | | | for. Take a look at the many hedge funds that are |
| financing and lax regulatory controls weren't enough, | | | | now defunct because they were not only suffering |
| there's nothing like straight forward criminal actions to | | | | huge losses in the market, but their overhead never |
| really paralyze investors. As a fund manager of an | | | | changed, and their only choice was to close up shop. |
| extremely transparent fund, there is nothing that | | | | Getting back to sound economics is what you really |
| brings out more fury in me than a few bad apples | | | | should be looking for in an investment fund instead of |
| scaring people to a point of not even wanting to put | | | | corner, glass office. |
| their hand in the barrel. Sure Madoff is the poster | | | | Independent Auditor: I can see the benefits of having |
| child, but there are a host of others that have | | | | an independent auditor, but it is another issue when |
| created schemes of the Ponzi sort that are equally | | | | the auditor is possibly in the back pocket of the fund |
| as devastating to the people invested in them. | | | | being audited. In Stanford's case, the independent |
| Now Stanford Financial is being accused of | | | | auditor was in Antigua, and though I am not well |
| misrepresenting the safety and security of their C.D. | | | | versed on the auditing sector, I have a sneaking |
| offering while also providing returns that the SEC is | | | | suspicion that Antigua is not a hot bed of precise |
| called in its filing "improbable if not impossible". In | | | | auditing firms. I would argue that an independent |
| other words, they are saying it's fraud. In the midst | | | | auditor is a god idea in many cases, but who do you |
| of all this fraud, we are seeing fingers pointing the | | | | end up choosing for the independent auditor? There |
| blame at every government regulatory body possible; | | | | just seems to be a barrage of unethical behavior |
| we are hearing a battle cry for some sort of | | | | even from some of the largest firms. For instance, |
| protection through regulation. I do believe that the | | | | the UBS case in which they have admitted to |
| creators of these fraudulent schemes should meet | | | | conspiring to defraud the Internal Revenue Service |
| the firing squad, but it's important to understand that | | | | by helping investors hide money in Swiss banks. An |
| the people investing in these schemes really didn't | | | | institution of this size must surely have had one of |
| understand the investments in the first place. | | | | the best independent auditors in the business. The |
| In Madoff's case, he was creating such a complex | | | | problem is that you only get to audit what you have |
| illusion, that unless you were in the business you | | | | access to and can see. I am guessing nobody at UBS |
| wouldn't understand that it was all a lie. We are | | | | handed the auditors a book and said, "Oh yes, this is |
| reading all kinds of accounts where Madoff's | | | | the Illegal Swiss Bank Account Ledger for US |
| investment strategy even had many fund managers | | | | Citizens." |
| in the industry baffled. Some of these managers | | | | Exclusivity: I think this is the portion of the Madoff |
| were smart enough to know a black hole when they | | | | story that creates an inordinate amount of head |
| saw it and walked away. Others either figured | | | | shaking. Nothing like using an elementary school tactic |
| Madoff was a genius and you shouldn't ask to fix | | | | of telling people that you don't want to be their |
| something that you thought wasn't broken, or they | | | | friend which in turn makes them want your friendship |
| were so intimidated by him that they thought too | | | | even more. Take this into the adult world of |
| many questions would have either insulted him or | | | | investing and think about the psychological aspects of |
| made themselves look foolish. | | | | an investor going into an investment agreement with |
| There is nothing like admitting when you don't know | | | | Madoff. The interviews of burned Madoff Investors |
| something and for example, I have a pretty good | | | | talk about how it took persuasion and references to |
| understanding of the stock market but not enough | | | | get Madoff to consider taking new investors on. By |
| of an understanding to invest heavily in it, and | | | | the time the investors were ready to invest, they |
| therefore I don't. I do have an understanding that | | | | were already feeling that they were lucky Madoff |
| commodities like precious metals and oil are limited, so | | | | was even going to allow them to invest. This ends up |
| the natural economist in me understands the long | | | | causing a lack of questions being asked in a "don't |
| term supply and demand story. Again, if I understand | | | | bite the hand that is going to make you huge |
| it I invest in it, and if I don't I won't. It may seem like | | | | returns" kind of way. These investors had the |
| an elementary philosophy, but one that has made | | | | psychological deck stacked against them from the |
| and saved investment dollars over the years. | | | | beginning, and then in a typical Ponzi type of way, |
| What is on everyone's mind right now is how you | | | | brought more investors in under the same conditions. |
| can tell if something is a Ponzi scheme or just plain | | | | Understanding the Model: Western culture celebrates |
| fraudulent. There have been all kinds of opinions on | | | | and marvels at genius, and this type of mentality has |
| this and like most knee jerk reactions they are not | | | | really helped professionals like doctors create their |
| very rational. I thought it would be helpful for all of us | | | | famous "God complexes". However when it comes |
| to re-examine some fundamental considerations | | | | to being sick, I am just fine with the God complex |
| when weighing an investment opportunity. | | | | since most of us understand money better than we |
| Track Record: A fund manager's track record, in | | | | understand medicine. Financial instruments no matter |
| most cases, gives a history of performance and the | | | | how complex come down to one very basic premise. |
| appearance of being reliable. The question is whether | | | | I invest money, and I am going to receive that |
| or not you can you identify if a fund or its managers | | | | money back with some sort of profit. This is not to |
| are on the up and up from their track record. Madoff | | | | say that everything goes as planned, but every |
| had a pretty good track record and he used the | | | | investment should be able to be followed from |
| confidence built from that track record to deceive | | | | beginning to end to see how that profit and original |
| people. I do agree that a track record is a valuable | | | | principal is going to be returned. If you don't |
| gauge when tempered with other qualifying factors, | | | | understand how the money is being made, then why |
| but it is not the end all be all of litmus tests for trust. | | | | are you comfortable investing your money? A lot of |
| Fund Structure: Everyone is up in arms because | | | | passive investors feel like investing with a money |
| Madoff wasn't a registered investment advisor. You | | | | manager should be a Wizard of Oz experience and |
| would have to have 1950's style innocence to believe | | | | you should never look behind the curtain. Being a |
| the government would somehow have discovered his | | | | fund manager myself I am completely passionate |
| deception all because he was registered in a bloated | | | | about asking questions and I not only pull questions |
| government database. Whether he was registered or | | | | out of interested investors in our fund, but I ask |
| not, he was still going to deceive people and he was | | | | questions for them. There needs to be an open |
| still going to get away with it for as long as he did. | | | | dialogue anytime someone is investing your money |
| Government registration of either advisors or funds | | | | and you should feel comfortable contacting them at |
| doesn't mean anything. The government allows for a | | | | anytime to ask any questions. It's what the job |
| Regulation D filing that permits private investment | | | | entails and if anyone tells you different, start running. |
| funds not to be registered with the SEC. Before you | | | | But even before this you need to understand how |
| go and start writing your congressman to ban all | | | | they are actually generating the returns. During the |
| private funds, you might want to stop typing. | | | | summer of 2007, a childhood friend of mine kept |
| Gauging integrity based on whether a fund is private | | | | telling me about the Agapi Fund being run my Nick |
| or public is a pretty naïve view when you | | | | Cosmos, and the tremendous returns he was |
| consider we have had Enron, Worldcom, Subprime | | | | receiving through them. Since the Agapi Fund was |
| Mortgage Backed Securities (MBS) rated AAA, and a | | | | supposed to be acting as a bridge lender, which is the |
| whole host of other world class schemes that have | | | | same model as my own Fund, I knew something |
| taken down not only their shareholders, but in the | | | | was wrong because I truly understand how returns in |
| MBS case, it has now taken down the global | | | | this model are generated. Since the Agapi fund was |
| economy. Remember, these were all publically traded | | | | promoting returns five times higher than our own |
| and not private. In the Stanford scheme all of the | | | | fund, I kept telling my friend that these returns were |
| Stanford companies were either licensed or | | | | not possible and he should ask for his investment |
| registered in the United States. So much for the | | | | back immediately since it sounded like an investment |
| government registration theory to gauge investment | | | | scheme. Some time after that conversation, Nick |
| safety. | | | | Cosmos was indicted on running a Ponzi Sceme and |
| Appearances: The old saying goes, believe nothing | | | | my dear friend is out $100,000. He didn't understand |
| that you hear and half of what you see. Just | | | | how the returns were being generated and |
| because something looks or feels legitimate, doesn't | | | | therefore, he didn't understand how he was being |
| necessarily mean it is. Madoff had what appeared to | | | | deceived until it was too late. Transparency is |
| be a mini trading floor and this was probably created | | | | security. |
| to put any investor concerns to rest. Though if you | | | | It's easy to see the moral of the story. There are no |
| speak to anyone in the business they will tell you | | | | quick answers in identifying a fraudulent investment |
| that most trading floors are about as big as a football | | | | scheme and the typical answers are not always the |
| field and packed with frantic people. For my taste, | | | | right ones. The only thing that you can really rely on |
| the last thing I would like to see in any investment | | | | is your own common sense, and hopefully the above |
| strategy is an excessive amount of overhead that | | | | points help you organize that common sense in a |
| needs to be paid for by either investor returns or | | | | way that creates an early warning detection system. |
| higher risk strategies. The thought of a giant office in | | | | Said another way, don't rely on your neighbor, friend, |
| a prestigious part of town, or a building with a logo | | | | or even investment advisor to use their common |
| on it makes me cringe when I think about the costs. | | | | sense for your best interests. It's like volunteering to |
| Again, as an investor you always need to consider | | | | let yourself hang off the edge of the Grand Canyon |
| how all of these overhead costs are going to be paid | | | | with someone else holding the rope. |