Sub thesis: Why the largest hedge fund is a fraud

Evidence 1: According to the unnamed source/author of a written analysis of

allegedly fraud committed by Madofff Investment Securities, LLC which have been
submitted to the SEC Boston office in May, 1999, the Madoff hedge fund cannot
be considered as a fraud. His reason in his report is that those people who are
engaged on that hedge fund are naïve, lack of expertise and possess no
quantitative finance ability. But he pointed out several possible scenarios in which
Bernie Madofff and his company indeed committed such crime. The Madoff firm
had 2-1/2 floors in that building. The trading floor was on 19, and the software
programmers worked on 18. Employees in those parts of the firm knew there was
a different, lucrative business on half of the 17th floor, but they didn't know
exactly what it did coming from testimonies of their own employees.

Evidence 2: In this report, the unnamed source said that Bernie Madofff, a
politically powerful personality performs a Ponzi scheme. He lured different
investors and pays profits to earlier investors with funds from more recent
investors. This scheme leads victims to believe that profits are coming from
product sales or other means, and they remain unaware that other investors are
the source of funds. In addition, SEC sent junior agents to corroborate Madoff’s
earnings and verify the legitimacy of his operations. Madoff would charm these
agents, make them feel special then he’d send them on their way, hiding a $65
billion scam right under their noses.

Evidence 3: The scheme was kept in secret. The strategy is that any third party
hedge funds should not be allowed to reveal that the actual manager of the
scheme is Bernie Madoff itself. Fund of funds (FOF) never tells their investors who
really manages their money, an act in which is questionable because it is not
normal for an investment company to keep their investors in wonder. Madoff also
didn’t allow his employees to archive e-mail on their hard drives or elsewhere,
despite SEC regulations that required Wall Street firms do so. Instead, he ordered
that all e-mails be printed out and then deleted from computers.
Evidence 4: Bernie Madoff only charge undisclosed commissions to their
investors. It is questionable because according to the source is that he could earn
a standard hedge fund fees of 1% management fee + 20% of the profit. In his
calculations, before fees they would have to be earning average annual returns of
16% minus the 1% management fee and investors are down to 15%. 20% of the
profits would amount to 3% (.20 x 15% = 3% profit participation) so investors
would be left with the stated 12% annual returns. Annual total fees to their third
party FOF's would amount to 4% but why would Madoff leave its 4% in average
annual fee revenue? Or the possibilities of the commissions are charged more
than 4%.

Evidence 5: Madoff does not permit any outside performance audits. He only
permits the accounting firm owned by his brother-in-law, Mr. David G. Friehling in
conducting such audits. It is reasoned out that to keep their secrets and secure
Madoff’s strategies so that nobody can imitate it. This is common practice of
modus hedge funds to cover their fraudulent schemes. According to the SEC, Mr.
Friehling sold his license to Madoff for more than 17 years while the latter’s Ponzi
scheme went undetected.

References:

“The World's Largest Hedge Fund is a Fraud.” November 7, 2005 Submission to

the SEC. Madoff Investment Securities, LLC (www.madoff.com)

“Accountant for Madoff Is Arrested and Charged With Securities Fraud,” William
K. Rashbaum and Diana B. Henriques, The New York Times, March 18, 2009.

“How Bernard Madoff escaped detection,” Erin Arvedlund, The Financial Times
Limited, September 5 2009.