Negligence and Culpability

Tremont’s Rye Investment Management unit had $3.1 billion, virtually all of its assets, invested with Madoff, said the person, who declined to be identified because the information is private. Tremont had another $200 million invested through its fund of funds group, Tremont Capital Management.

“We believe Tremont exercised appropriate due diligence in connection with the Madoff investments,” the company said in a statement.

The above comes from the latest revelation on Bloomberg from the Bernard Madoff ponzi scheme scandal. I believe that not only is the above statement completely and patently untrue, but that there is an excellent case for scores of enterprising lawyers to litigate anyone who recommended others to invest in Madoff for a fee or invested other people’s money in Madoff for a fee. There is simply no possible way that anyone did their financially fiduciary responsibility to clients by investigating Madoff.

There are three key points that should have stopped people from investing with good ol Bernie:

1)He held custody of his own money. Every financial fraud of recent memory all had one thing in common, the person committing the fraud had possession of the money. There are simply too many conflicts of interest when the person managing the money possesses the money and there are no safeguards.

2)His auditor was a firm no one ever heard of. Not only that but it had three employees, one of whom apparently worked in a tie die shirt for 15 minutes a day. Not only do I have a big name auditor, who is expensive, but I actually have three different accountants from different firms. One is my auditor, one is my administrator and the other approves whenever I, personally, withdraw money. These are all safeguards for investors, so that they know there are procedures and many eyes making sure everything is picture perfect.

3)Abnormal consistency of his returns. As this year shows very clearly, there is simply no way for an investment strategy to show consistent positive returns. There is always something that throws a monkey wrench in it, even for a short period of time and you should be paranoid by someone claiming to never show volatility.

The fact is that simple due diligence on the auditor, checking that he had custody of the money or verifying the consistency of the returns should have raised many red flags. There are even some reports that the monthly numbers did not add up to the yearly numbers! The reason why many of these firms really did no due diligence is that they were getting sweetheart fee deals from Madoff. Greed apparently trumps fiduciary responsibility.

All those advisors, funds of funds and marketing people that made money by Madoff better hire really good attorneys. Because with all of that money gone, all those burned investors will soon be coming for every accomplice, and there are many of them. And they apparently have been feeding at trough for years.

What makes me write this blog entry is that I spend tons of money doing the right thing and being buried under a regulatory burden that is financially tough and time consuming for a small fund manager such as myself. And I hear talk now of adding even more regulations and burdens to my life and more expense, it makes me angry. There are plenty of regulations, it just appears that none of them were enforced and that the SEC and NY State were asleep at the switch and consistently failed to investigate Madoff, despite repeated warnings.

Its not only the financial advisers and funds of funds that are culpable here, it is the regulators and government officials, who were clearly too busy working on their witch hunt of short sellers. The negligence and culpability in the Madoff saga is widespread and it disgusts, saddens and angers me.