“We wanted to keep the story alive because Congress hasn’t made the changes necessary to protect the average American investors,” said Tim Murray (a Madoff victim). Murray joined a number of other victims who gathered outside Madoff’s former offices in the Lipstick Building on New York City’s Third Avenue to promote the book on the one year anniversary of Madoff’s sentecing. Here is a video about the one year anniversary:

The book is published by The Doukathsan Press Of The Massachusetts School of Law. If you recall, as discussed in this post, Erin Arvedlund (who is the editor of The Club No One Wanted to Join) was featured in a video series discussing her book Too Good to be True- The Rise and Fall of Bernie Madoff with Lawrence R. Velvel, the Dean of Massachusetts School of Law at Andover and himself a Madoff victim.

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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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In particular it is being reported that Chimay, the CEO of Chimay Capital Management, utilized lies about his claims to the Belgian royal family to scammed clients out of more than $6 million, federal prosecutors said.

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After the news of this broke, a series of emails between Ms. Hoxie and Mr. Sebbag surfaced. It is widely believe that the pair really had know idea what they were doing. As an example, here is an email exchange between Hoxie and Sebbag where Sebbag became frustrated when Hoxie was not able to obtain Disney financial information fast enough.

The email also shows that Ms. Hoxie has expensive tastes – she wanted Sebbag to purchase $700 Stella McCartney handbags and shoes. The NY Daily News, however reports that Hoxie dressed quite modestly for her court appearance. In her defense, Patrick Hoxie (Bonnie’s father) says his daughter was duped by Mr. Sebbag. Ms. Hoxie was released on bail but Sebbag was denied bail.

Here is a video from Bloomberg describing the case:

And from CNBC:

Despite the sensationalism of this case, the facts involved contain a few important lessons regarding operational due diligence and hedge fund’s.

Information Security:

As noted above, Ms. Hoxie was a secretary to Zenia Mucha, Disney’s head of corporate communications. Zenia has a background in public relations and marketing for politicians including former New York Governor George Pataki and former United States Senator Alfonse D’Amato. In politics, as with hedge fund’s, certain information should be kept confidential. Regardless of who was responsible for information security at Disney, in the modern workplace information is the currency of the future. It is vital to maintain and protect proprietary information.

During the hedge fund operational due diligence process evaluating the systems in place for information security are vital. Can any employee simply plug in an external hard drive and walk away with the portfolio holdings, or proprietary models? What checks are in place to prevent this? How does the firm make sure people are looking into parts of the firm (i.e. – accounting, payroll etc.) that they have no legitimate reason to? Regardless of all the checks in the world, a dishonest employee can still steal certain types of information however, a number of physical (i.e. – non-computer) barrier to information leakage can also be established.

Insider Trading and Compliance:

In the wake of the Galleon scandal, the hedge fund community has undergone increased scrutiny in regards to insider trading. Fortunately in this case it seems that the hedge fund’s which received Ms. Hoxie’s email offering insider information reported the communication to the authorities.

These communications, and the hedge fund’s responses relate to the area of compliance. This is another aspect of a hedge fund’s operational infrastructure which should be reviewed during the operational due diligence process.

An investor must be able to diagnose not only what policies and procedures a hedge fund manager has in place to deal with the potential for insider trading within the firm (i.e. – employee self-dealing) but also, as in this case, from external information sources as well. Hedge fund’s generally receive a great deal of unsolicited information on a daily basis. It is the job of both the compliance department, administrative assistants and all employees to have enough common sense to raise a flag when this type of communication is received. If not, a hedge fund receiving (and potentially acting) on such unsolicited insider information could easily become an unintended accomplice simply because of lack of administrative assistance oversight.

Perhaps hedge fund’s should show bizzare videos like this (in which the people look like they are all from South Park) which I’m sure would prevent anyone even thinking about insider trading…

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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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Mr. Tourre is being reported as being admired by his Goldman colleagues for what they called his ‘goofy sense of humor’. He was reportedly  popular with clients, wooing them over games of tennis and often said he was from a refined French family. Email exchanges from Tourre, who referred to himself as The Fabulous Fab,  are purportedly key evidence in the SEC’s complaint against Goldman. Here is an excerpt from the emails:

“More and more leverage in the system. The whole building is about to collapse anytime now… Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Mr. Touree was a ‘straight-A’ student at the Lycee Henri IV, one of France’s most prestigious schools, housed in 6th Century abbey in Paris. He went on to study maths at the Ecole Centrale Paris, one of the top French universities and obtained a master’s degree from Stanford in the US. The SEC said a formal request would be made for Tourre to return to the country to face charges.

Bloomberg is reporting that Paulson, the world’s third-largest hedge fund manager, may face civil litigation. Paulson issued a statement on Friday in response to the SEC’s allegations against Goldman. In that statement, Paulson stated that it had no authority over the selection of assets linked to the Goldman fund.

Further complicating the matter was that Goldman told investors that ACA Management LLC, a credit risk analysis firm, was responsible for portfolio selection and, the SEC alleges, did not disclose that Paulson was responsible for selecting the underlying debt in the CDO. In other news it is also being reported that the CEO of ACA, Alan S. Rosenman, is the partner of Frances “Fran” R. Bermazohn managing director and deputy general counsel of Goldman Sachs….

In related, news here is an article about an email reportedly sent by a Goldman executive to clients on Tuesday disclosing that the firm’s Fundamental Strategies Group might have shared investment ideas with the firm’s proprietary trading group or some clients before sharing them with others which suggests that the firm is becoming more sensitive to such potential conflicts of interest.

Here is a video from CNBC where chairman of the House Financial Services Committee Barney Frank discusses Goldman Sachs:

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SEC’s complaint

The clip is available here:

The segment can also be viewed on the Fox Business News 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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Essentially if any of the above items are indeed true we can stop this story right here. There are certain basic red flags that should come up during the operational due diligence process. Confirming employment, reputation and education history should be a core part of any basic due diligence process. I would be more interested to learn which “investors” forked over the approximately $4.7 million that Houston in investors gave to Spyglass between 2004 and 2006.

The SEC complaint, filed in Texas, alleges that between in 2004 and 2006, Kim and Spyglass raised approximately $4.7 million from investors located primarily in Houston, Texas using offering materials that contained misleading information relating to Kim’s education, business experience, and compensation. I would hazard a guess to say that if any of those investors knew about any (or even knew about allegation of) any of these red flags (i.e. – educational, employment and reputation discrepancies) they wouldn’t have invested – or at least I hope they wouldn’t. If Mr. Kim’s Spyglass Management, L.P. presented such a compelling investment story that it seemed investors wanted to bear any supposed additional risks or questions that remained unresolved relating to Mr. Kim or Spyglass, at a very minimum investors who would have performed these basic operational due diligence screens, they would at least be mak

ing an informed decision.

The problem was, as is the case in most alleged hedge fund frauds, when everyone was making money operational due diligence took a seat on the back burner. As Hedgefund.net reports, problems arose when Kim’s Collateralized Mortgage Obligations (aka: CMO)  hedge fund counted on an interest rate climb which never came. That misstep

wiped out Spyglass Management, as Kim named his company. He continued his fund, providing misleading performance data, the SEC said. Here is a link to the SEC press release and the complaint. Notable quotes from the complaint include:

• “In reality, Kim was simply a day-trader who lost money.“

• “The offering materials represented that Kim had degrees in finance and economics from the University of Texas, and that he had 12 years of experience in the securities industry with several well-known brokerage firms. Although Kim had a degree in economics from the University of Texas, he did not have a finance degree.“

• “Kim failed to disclose that one of the brokerage firms listed in his biography had terminated Kim for engaging in unauthorized trading.“

• “In November 2006, after the investors became aware of Kim’s other business ventures and the dearth of information concerning the fund, Kim had Spyglass Management produce a false statement valuing the fund at $1.9 million, when in reality the fund only had approximately $1,000.“

And my favorite:

• “In addition, Kim told investors and potential investors that he would not take any compensation until investors in Spyglass Partners received a one-hundred percent return of their original investment.“

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