Monday, March 16, 2009

Why Charles Johnson would never have been taken in by Madoff

Charles Johnson is the legendary blogger who has uncovered a series of media scams, most notably Dan Rather's career-ending "smoking gun" memo.

Correspondent Papa B writes in, asserting Johnson would never have been taken in by Madoff.

"I am sickened by Madoff’s conduct and baffled as to the behavior of his investors. I’m not saying that anyone could not get caught in a scam but look at the statement that Madoff sent to his investors. Aside from the fact that it looks like it was prepared on a 1980's printer, there is no indication of any involvement of any 2nd or 3rd party. Here's one of his statements."

"Compare my SEP statement as an example. My CFP, [name redacted] is with [firm name redacted]. The account is administered by FSC and the monies are managed by Pershing and they are in a Dreyfus account. I’m not saying that the four parties could not operate in collusion... but it’s unlikely. I’m sure that you know this but how could so many intelligent people receive a statement like his and not question it? Was it the “guaranteed return” or the trust factor? It was probably both. It’s an unbelievable tragedy!"

Papa B has a point.

I would contend that had Charles Johnson been a Madoff client, he would have smoked out the scam on day one.

But, in some cases, there were third parties involved. In those instances, you've got to wonder about the culpability of those players. Consider a firm named Fairfield Greenwich, which lost $7.5 billion of its investors' funds to the Madoff scam. This was roughly half of the total that they managed.

So what, exactly, was Fairfield Greenwich doing for its management fees? Did it perform any due diligence? Did it audit Madoff? What knowledge of Madoff's peculiarities did it have? Did it have knowledge of Madoff's clearing operations?

As Papa B alludes to, the imprimatur of a third party gives a cretin like Madoff an aura of respectability. It will be intriguing to discover how much Fairfield knew.

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