The skeletons from Bernie’s fraud keep popping up. At least two suicides can be attributed to the scheme. Pension and private funds from around the world have been devastated with little hope of recovery. As I said in an earlier piece I feel this event will scar the hedge fund concept for decades. This morning, for example, a Swiss manager demanded that several of the funds with which it invests will now require an independent clearing agent. And yesterday, in Greenwich, a well known manager closed his largest hedge fund for lack of performance.
A word on the $50 billion: we don’t really know how much was managed/lost. It seems the $50 billion came from the initial conversation Bernie had with his two sons, when he admitted the scheme.
The matter will be front page news for years so I thought it might help if I re-ran my notes on this scheme.
And aren’t you sick and tired of seeing his smirking face walking down Park Avenue?
December 12th
Bernie Maduff was a famous guy when I worked in New York. Did not know until this morning he managed money. When I knew him he had a huge business of handling listed business that firms like ours could not execute. We would get an institutional order of, say, a sale of 500,000 shares. Before total electronic trading we had to show the order to the floor. If no one was in the crowd or the specialist dropped the price, we’d trade a little to satisfy our obligation and then pull the order and go to Maduff. He may have positioned the order at a slight discount to the last sale or he would take it to work, usually on the Cinncinati Exchange. This Exchange was no more than a matching computer. So, Maduff was a broker’s broker. And he made a fortune,.
Evidently, he got into money management about fifteen years ago. He was convinced that by trading huge amounts of stocks around the expiration of options he could score little gains at small risk. Not sure how it was supposed to work. His pitch to clients was a 2-3% (that is high, I now understand it to be 1-2%) monthly return. It didn’t work so he had to continue to attract funds to pay the promised returns. He had $15 billion under management and levered it up to $50 billion. He executed and cleared his own trades so the fraud went on for years. His fraud and failure will be a huge nail into the hedge fund coffin. Technically, Maduff wasn’t a hedge fund but he has damned the industry, nevertheless. Clients will be pulling their money from even the most “trustworthy” managers. That could pressure the market. It is hard to overstate the significance of this fraud. Individuals, charitable offices, universities and family offices have been ruined. The SEC will be under even more pressure to reform both itself and the industry. Notwithstanding the Commission’s begging for more auditors it is probably finished in its present structure.
December 17th
More on Maduff. It turns out I had most of it correct. But I missed the front running part. When we handed off an order to Maduff he would own it. In other words it was off our books and on his. So, to use my earlier example, if we were a seller of 500,000 shares…we would show a piece to the NYSE specialist and sell a little to him. Then we would pull the order and sell the remainder to Maduff. We would do this to get it done, and off our books. (and we would collect a commission from the seller)) If the stock was a thin trader, volume not too great, then Maduff would essentially own the market. Evidently, Maduff the Money Manager knew our trade and would front run it. This is verbotin in any language. So, he would probably short, maybe, 20,000 shares, probably electronically via the Cincinnati Exchange (which he essentially owned) and wait for his desk to sell the remainder of our order. Our order, as it was fed out, would push the stock down and Maduff would cover, perhaps a half point, lower. My example seems like small potatoes but multiply it a hundred times and there is real coin to be made. The SOB violated every written law and every implied best business practice. He has tarnished money mangement and brokerage for a long, long time.
December 22nd
In prior posts I explained how Maduff operated with brokerages. We would sell big pieces to him and he would cross them internally or lay them off on the Cincinnati Exchange. He could make juice on the bid/asked spread. One piece I forgot; he would pay us a penny a share for the merchandise. So, we would get, maybe, five to seven cents from the institutional seller and then another penny from Bernie. And, importantly, we got rid of the merchandise and didn’t have to hold it overnight. At the height of NASDAQ hysteria Bernie’s share of the volume would be almost 10%. Oh, and don’t forget he would front-run his own orders and put those trades in his money managed accounts. Its somewhat hard to understand how the rest of the street didn’t understand this. Or, did we just look the other way? And this from today’s NYTs regarding Fairfield Greenwich money finders for Maduff: “Internal documents from Fairfield show that the firm has taken more than $500 million in fees since 2003 alone from the money it placed with Mr. Madoff. Nearly all those fees went to a handful of Fairfield executives, including Walter M. Noel, Fairfield’s founder, who used the money to build a glamorous life, splitting his time between homes in New York, Connecticut, Florida and the Caribbean.”
