Echoing shades of the deceased Jeffry Picower and Rene-Thierry Magon de la Villehuchet in the Madoff scandal, Mr. Frerichs proved to be an interesting character in the K1 scandal whose full story will never be revealed. He

Mr. Frerichs, 72, died of a gunshot wound on Saturday after police officers went to his home in Palma, Majorca to serve a warrant for extradition to Germany, the Spanish police said Monday.

According to a police spokeswoman, three officers went to Mr. Frerichs’s home on the island at 11:30 a.m. on Saturday and found him sunbathing nearby on rocks overlooking the sea. When the officers identified themselves, they said, Mr. Frerichs took a gun from a bag that was lying beside him and leapt into the water.

Mr. Frerichs fired two shots, the spokeswoman said. The first, presumably to test the gun, the authorities said, was fired in the air; with the second, he shot himself in the head. Mr. Frerichs was picked up by a rescue boat and taken to the Son Dureta hospital in Palma. He died not long after arrival.

According to the New York Times, the case has sent shock waves through Spain, where Mr. Frerichs’s stepdaughter, Fiona Ferrer Leoni, initially told the media that the police had shot Mr. Frerichs. She also questioned the police account of him sunbathing with a gun.

Ms. Ferrer, a prominent television personality and model, is married to Jaime Polanco, a Spanish tycoon whose family controls Promotora de Informaciónes, or Prisa, the media group, whose assets include the newspaper El País.

She also told the Spanish news media that Mr. Frerichs had been sought only for his relationship to K1 Group executives and that he was innocent of any fraud.

The police spokeswoman, who cannot be identified because of department policy, denied that officers had fired at Mr. Frerichs. She said his weapon had been retrieved and would be used, along with an autopsy, to determine the exact circumstances of his death.

“It is not normal to be sunbathing with a bag that has a gun,” the spokeswoman said. “But that’s what he did.”

Dietrich Güder, the state prosecutor in Würzburg, declined to comment beyond confirming that the Spanish police had informed him of the events.

Lutz Libbertz, a lawyer in Munich for Mr. Kiener, argued in a November court filing that Mr. Kiener could “at the most be accused of making bad investment decisions, but not of actions constituting breach of trust.” Mr. Libbertz declined to comment on Monday, saying through an associate that “he had nothing to add to what’s already been said.”

Mr. Kiener promoted the power of his “K1 Fund Allocation System,” and is accused of taking advantage of lax lending oversight by banks during the credit boom. He claimed his investments had returned more than 700 percent from 1996 and the end of 2008.

Mr. Kiener, K1′s founder, is equally interesting. He was a former telephone book salesman and psychologist (who graduated from Johann Wolfgang Goethe-University in Frankfurt, Germany in 1987) who founded a seemingly successful and large asset management organization.

The case has been an embarrassment for Germany, as BaFin, the market regulator, had several times sought to stop Mr. Kiener’s activities because of significant legal questions but had its enforcement overturned on appeal.

Mr. Kiener has been in custody in Würzburg, Germany, since October on suspicion of operating a pyramid scheme, defrauding thousands of privat

e investors and banks including JPMorgan Chase, Barclays and BNP Paribas of more than 300 million euros, or $375 million. The F.B.I. is also investigating the group; so are authorities in the British Virgin Islands, Liechtenstein and Switzerland.

The two highly leveraged funds had a combined 421 million euros ($529 million) of liabilities when the accounting firm Grant Thornton was retained in November to liquidate them. The authorities say the prospects for recovering most of the money are poor.

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Here is the trailer:

Mr. Gecko is most famous for the line, “Greed, for lack of a better word, is good.“ Here the clip where Mr. Gecko says the famous line at a stockholder’s meeting:

This new movie revisits Mr. Gecko 23 years later, after he is released for stock manipulation and other securities crimes.

In this film, Mr. Gecko tries to warn the world of the 2008 financial crisis (before it happens). Along the way he crosses paths with a hedge fund’s prop trader, Jacob, (played by Shia LeBouf). In a plot twist Jacob suspects, who else but the hedge fund manager for the death of his mentor….

In the pre-Madoff environment, and particularly in the 1980′s when the first Wall St. film takes place, business and operational shenanigans, may have foolishly been subject to lesser degrees of due diligence – which is perhaps why they either went undetected or grew out of control (i.e. – Ivan Boesky)

All this made me think in the post-Madoff environment if the Gordon Gecko’s of the world would still stand up to modern due diligence techniques? ….

Perhaps maybe this theatrical shareholder’s speech sums it up best:

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The study, ‘The Madoff Effect – An Analysis of Operational Due Diligence Trends’, is available for download at www.Corgentum.com or directly here.

For this study Corgentum collected data from over 200 global hedge fund allocation organizations including fund of hedge funds, endowments, foundations, corporate pensions, family offices, large independent financial advisory practices, ultra high net worth investors and private banking organizations. “The data shows that frauds such as Madoff are an important, but potentially misleading guiding light around which investors tend to focus their due diligence on hedge funds” said Jason Scharfman, Managing Partner.

Investors, influenced by recent hedge fund failures, have refocused their due diligence efforts on operational risk areas where leading operational red flags were present. In particular, since the Madoff scandal broke, this study shows that the number of fund of hedge funds reviewing hedge funds cash management policies and controls increased by almost 60%.  Other operational risk areas covered in the Corgentum study that have realized double-digit increases in attention from investors include transparency in reporting and the role of service providers such as auditors and administrators.

Corgentum’s analysis also demonstrates that certain operational risk areas continue to be dangerously neglected during the investor due diligence process. Less than 2% of the fund of hedge funds included in this study considered the independence of a hedge fund’s board of directors during the due diligence process. Other frequently overlooked operational risk areas included information technology infrastructure, personnel turnover and the quality of overall operations management.

“Investor’s must not only understand historical red flags, but be prepared to anticipate new ones. By incorporating proprietary benchmark studies of hedge fund fraud and models of operational inefficiency into our evolving operational due diligence process, Corgentum’s approach ensures investors keep up with the changing nature of hedge fund operational risk” said Scharfman. “Corgentum will continue to partner with fund of hedge funds, pensions, family offices and other investors to create tailored comprehensive hedge fund operational due diligence and ensure that their operational due diligence reviews are not misguided by fraud.”

Opalesque, published an article regarding the study . The article is entitled, “Madoff Effect continues to see investors focus more on fraud risk than operational risk” and is available at www.Opalesque.com or via direct link here (subscription required). Additionally, the press release regarding this study is available  here. HedgeCo.Net and HedgeWeek also covered the study in this post.

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In their article on Madoff’s prison life, New York magazine also provides insight into how other inmates view Bernie with this sketch by fellow inmate (and convicted bank robber K.C. White):

The article goes on to quote Madoff in prison as follows:

“F— my victims,” he [Madoff] said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years.”

Oh by the way, here is a video that sort of flew under the radar, J. Ezra Merkin allegedly employed a convicted felon named Victor Teicher who reportedly advised Merkin from jail in 1994 not to invest with Madoff. These allegations came out of New York University’s lawsuit against him:

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Here is a series of interviews conducted at the end of 2009 with Erin Arvedlund. Ms. Arvellund first wrote about Bernie Madoff for Barrons in 2001 and published her book, Too Good to be True- The Rise and Fall of Bernie Madoff in August of 2009.  The interviews are conducted by Lawrence R. Velvel, the Dean of Massachusetts School of Law at Andover and himself a Madoff victim.

Part 1 –

Part 2-

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The Wall St. Journal is reporting that over the weekend a number of Goldman executives including Fabrice “Fab” Tourre (the trader accused of fraud last week by the SEC) and Chairman and CEO Lloyd Blankfein. They discussed the Abacus 2007-AC1 product sold by Goldman. Here is a pitchbook for the Abacus CDO:

To refresh memories the problem, the SEC alleges, was that Goldman did not disclose that the hedge fund firm Paulson helped to select some of the CDO’s underlying mortgages which it happened to be betting against. The SEC’s complaint began via a confidential Wells notice to Goldman in the summer of 2009 warning of possible charges. In September 2009 Goldman responded to the SEC in two documents. Here is the link to document 1 and document 2. Since the SEC’s charges were filed other documents have been released including:

* Goldman’s version of the firm’s 2006 and 2007 trading

*The Senate’s subcommittee release of Goldman emails

This guy says you should not buy Goldman stock now (and Paulson was no sub-prime expert…)

News is also being released that Goldman played a crucial role in building the mortgage businesses of Washington Mutual and Long Beach Mortgage Co. and that Goldman’s mortgage trading department held White Castle hamburger eating contests.

At Saturday’s interview with investigators, Mr. Tourre was accompanied by three lawyers, including white-collar securities lawyer Pamela Chepiga, a partner in the New York office of Allen & Overy LLP.

After the meeting Goldman, in some have argued is an attempt to distance Goldman’s senior executives from the  released a series of emails from the 31 year old Tourre, released Tourre’s emails to girlfriends. In those email,  which it can be argued, shows he had some doubts about both the products he was selling and the investors who were buying them. In one message, he wrote that he sold a product to “widows and orphans,” comparing an investment he helped create to “Frankenstein turning against his own inventor.”

Senate investigators have discovered a number of emails in which Goldman executives used the term “LDL.” The letters mean “Let’s discuss live.” The phrase occurred when Goldman executives began to discuss sensitive issues in emails, according to people familiar with the situation. At other times, executives would criticize each other for putting information in emails.

The White House’s Larry Summers argues that these emails show the need for increased transparency. In its defense Goldman claimed it lost $1.2 billion on the sub-prime market. Since when is the fact that you lost money a defense to fraud allegations?

In other Goldman news, it was reported that Paolo Pellegrini, a former Paulson executive who earned a reported $175 million bonus in one year and now runs his own hedge fund, told the SEC that he informed ACA Management LLC the so-called ABACUS portfolio selection agent, that Paulson intended to bet against the mortgage positions. If ACA did indeed know this, it might deal a blow to the SEC’s case which claimed that, along with investors, ACA was also a misinformed victim in the alleged fraud. More is likely to emerge about waht Mr. Pellegrini told the SEC as well as what was the role of ACA CDO head Laura Schwartz.

In other Paulson news, it is being reported that Paulson sent out a letter to investors on April 21 stating that, “I’ve made the decision that any legal fees or liabilities associated with any litigation regarding ABACUS 2007-AC1 will be borne by Paulson & Co. Inc. and not by the investors in any of the funds.” This still represents an operational risk to investors in the firm’s funds, an operational risk. If resources are drained which would otherwise be utilized to support the fund’s efforts there might not be a direct economic effect on investors but an overall drag, however minimal, due to the allocation of both money and time towards litigation.

Although perhaps the fact that 21 Paulson workers and seven of their spouses gave over $95,000 at an event at the Friars Club in Manhattan in support of New York Senator Chuck Schumer, a member of the Finance and Banking committees and a key player in financial reforms under debate in Congress, might not have been a bad investment….

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The SEC recently admitted that in the last five years, 33 members of staff have been investigated for surfing the internet for porn. 31 of these incidents occurred in the last two-and-a-half years when incidents like the Bernard Madoff scandal and the financial crisis hit.

These revelations came to light in a new report, David Kotz, the SEC’s inspector general. The report details that more than half of those found to have been looking for explicit internet images were senior staff – on salaries of between $99,356-$222,418.

In one of the worst examples, an accountant working in one of the SEC’s regional offices tried to access porn – she was blocked by the regulator’s internet firewall – almost 1,800 times in a two-week period. The same woman had almost 600 explicit pictures saved on her company laptop.

In another, a senior lawyer working at the regulator’s head office in Washington DC admitted that on some days he spent eight hours looking for porn. In fact, he downloaded so much that he ran out of space on the hard drive on his work computer, and began downloading images to disks he kept in boxes in his office.

The report was prepared for Senator Charles Grassley, following an earlier inquiry into how widespread this problem was at the regulator. Congressman Darrell Issa meanwhile said it was “disturbing that high-ranking officials within the

SEC were spending more time looking at porn than taking action to help stave off the events that put our nation’s economy on the brink of collapse.”

Reputational risk, information security, employee productivity – all types of operational risk (not to mention the potential for sexual harrasment charges). During the course of a due diligence review such items should be covered. Yet, it seems the questions remains who performs due diligence on the SEC? Is it Congress? Or are they being misled by the SEC”s self-investigative efforts of the inspector general….

An SEC spokesman said all “of the offending employees” had been disciplined: “We will not tolerate the transgressions of the very few who bring discredit to their thousands of hardworking colleagues.”

Here is a clip for Fox Business News discussing the controversy:

And from CBS News:

The SEC is countering that this is old news and reforms have been implemented to repair the problem….

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Proponents of this increased taxation argue, in part, that it is a good way to raise additional revenue for the government and that it is a technique to further align the interests of investors and managers.

Here is a link to a Reuters article which explains that under current law, profits earned by investment fund managers at hedge fund and private equity firms are taxed as capital gains, a 15 percent tax rate, instead of as ordinary income, which would subject them to the highest 36 percent marginal income tax bracket.

To learn more about carried interest you can visit this bizarre website put up by Representative Eric Cantor from the Seventh District of Virginia. While it seems Representative Cantor’s heart might be in the right place by showing us the adventures of Seth, Jason and Caitlin to protect “America’s retirement resources at risk” via this educational resource the introductory warbly robot voice, odd graphics, and grainy pictures remind me of those sci-fi movies of the 50′s  like Forbidden Planet. Eerie to say the least. America’s tax dollars at work….

Those against this tax argue (as does law professor Darryl Jones in the clip below) that the hedge fund manager is performing services and not investing capital so the capital gains tax rate should not apply to the management fees earned by the hedge fund.

One of the key questions, from a purely tax perspective, is whether carried interest is truly ordinary income. Here is a nice discussion about this point on Forbes.com.

Those who point to the fact that this tax has not gained much traction is due to the large political donations made by hedge fund managers.

Here is a CNBC clip in which Daniel Mitchell of the Cato Institute and Darryl Jones discuss the issue. My favorite quote from Mr. Mitchell is, “we have to take the keys to the liquor cabinet away from the alcoholics.” It is unclear to me who Mr. Mitchell is calling an alcoholic – investors, the U.S. government or hedge fund managers?…

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Topics Mr. Scharfman plans to address in this panel discussion include the implications of recently proposed regulatory frameworks for the pension fund hedge fund due diligence process, steps pensions should take to vet conflicts of interests between consultants and asset managers and the importance of documenting the hedge fund
operational due diligence process.

The conference will take place in Newport, Rhode Island on July 21, 2010. The full conference agenda can be viewed on Opal’s website.

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The Wall St. Journal reports that Mr. Madoff was treated for a broken nose, fractured ribs and cuts to his head and face, according to a felon currently at Butner serving time on drug charges who was familiar with his condition at the time. The former inmate said the dispute centered on money the assailant thought he was owed by Mr. Madoff.

“In December he [Madoff] told staff he was not assaulted, and an investigation was completed following his statements, which corroborated his statements,” said Traci Billingsley, a Bureau of Prisons spokeswoman. “Not one inmate has told staff he was assaulted.”  It’s not uncommon for prisoners to deny being beaten because they don’t want to risk a reputation as a snitch, according to prison experts and prisoner advocates. It’s good to know Madoff’s not a snitch…

In other news Law.com is reporting that an investor, Jermore Goodman, is suing Goldman Sachs over Madoff investments. Goodman alleges that Goldman had an internal ban in place on investing with Madoff since 1999 but didn’t think it was important to share with its investors like Goodman. Assuming these allegations are true, this is just another example of the imperfect nature of operational risk data in the hedge fund market.

Finally, the reportedly shy Harry Markopolos has written a book about his Madoff experiences appropriately entitled, “No One Would Listen.” Here is a video about the book:

Other reported key highlights from the book include:

• The Madoff case is just the tip of the iceberg of his multiple probes of financial shenanigans
• The health care industry “makes Wall Street look honest”
• If he felt threatened, he was prepared to kill Madoff himself
• Markopolos claims he tried to give his Madoff file to then-New York Attorney General Eliot Spitzer; Spitzer says he didn’t get it
• Markopolos slams the media, expressing his incredulity at their lack of initiative and says reporters ignored the story he told them about
• He was devastated by the suicide of friend and french money manager Thierry de la Villehuchet, who remained heavily invested in Madoff despite Markopolos’ warnings

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