Hedge Fund Manipulation

Happy New Year, everyone! What better way to start the year than highlight rampant fraud?

Hedge funds seem to make all the headlines. Rarely do we hear about plain old mutual funds much anymore. ETFs, derivatives and hedge funds are the investments du jour (or perhaps, “du la decennie” or “of the decade”?) There is a tremendous misunderstanding of what “hedge funds” are, how they invest and what to expect from them. The category is as broad and diverse as the “mutual fund” category is.

Fraud Central- Don’t invest with skinny dippers

I am fond of quoting Warren Buffett, so get used to it. He once said something you have probably read here in the past that goes “You only find out who is swimming naked when the tide goes out”. By this he is referring to business models that can’t swim when the water gets rough. It also applies to frauds. As we discussed at length, Madoff’s scheme unfolded when too many people wanted their money at the same time.

Blaming the Victim

I was chatting with a former regulator and he opened my eyes to an important perspective, so I am going to backpedal a little today. Admittedly, many have been harsh on those who gave money to Madoff for ignoring red flags and being suckered by the phenomenal “too good to be true” returns.

Madoff Update

Due to size and shock of this story, it has been all over the web and papers. The Wall Street Journal has an entire page devoted to it. This scandal is every bit as shocking and disruptive as Enron was. Because so much information is becoming available, I see no need to repeat everything the WSJ is reporting (visit their page, the source of the facts below). Instead, I’d like to summarize a few new facts and add a few questions of my own.

Madoff’s Ponzi continued

The story just keeps getting more outrageous. The two senior employees who questioned Madoff and uncovered the fraud happen to be his sons. They then turned him in. Imagine their horror at discovering the almost 50-year old family business was a complete fraud? (That assumes they weren’t part of it.)

“All just one big lie”

I am utterly shocked at this moment. Really. Though the details are few at this time, it appears Bernard Madoff was arrested today in a $50 billion Ponzi scheme. Madoff started a securities firm in 1960 and grew it by being innovative in the broker-dealer business. Some of his innovations were quite controversial at the time.

The Sorry Story of the SoftRAM Scam

I got a frantic phone call the other night from my friend Roseanne. Her computer had a virus and her virus scanner kept popping up a warning dialog but wasn’t fixing it. That Roseanne was even running a virus scanner came as a surprise to me. I had long ago put her on ignore on MSN Messenger because she had some virus that caused her Messenger to automatically fire me spam URLs. Anyway, since we both live in the same apartment building, I trudged over there and took a look. Sure enough after playing around with her wheezing eight year old computer I got her virus scanner to pop up the warning message about some nasty Trojan that was probably, as we speak, sending all of Roseanne’s credit card information to Romanian hackers. The warning message struck me as odd for a couple reasons. One, the scanner software wasn’t one I recognized like McAfee’s, Norton, or even Avast. Two, the dialog box urged me to click on a link and subscribe to their service and if I clicked now I could be fully protected from this nasty Trojan and others for the biweekly discount rate of $12.99. Of course I quickly realized what it was. It was one of those fake virus scanners that claims you’re loaded up with all kinds of viruses and you can make them all go away by simply paying for the software.

Ugg.

The Old Fashioned Way

I see that Paul Eustace, former manager of the hedge fund Philadelphia Alternative Asset Management, has been ordered to return $279 million to clients and pay a $12 million civil penalty (http://news.yahoo.com/s/nm/20080819/bs_nm/hedgefund_fraud_dc;_ylt=Al63G7G60fmYlUYT1QUXBce573QA).