Weekend At Bernie’s
“If the performance is good enough, we’re willing to overlook a lot.” – Many billion dollar pension manager to me after describing my fraud detection research.
If you ever wonder how these frauds happen, this is usually the answer. The performance is SO good that people are willing to deal with the risk – in this cause fraud or more generally operational risk.
I remember when the Bernie Madoff story broke on CNBC – “$50 billion Ponzi Scheme.” I thought it must be a typo – surely them mean $50 million right? But no, the real number is estimated to be close to $65 billion.
When I found out it was Madoff I was not surprised. Bernie has so many red flags it’s truly hard to figure out where to start:
- He claimed in his 2005 Form ADV that his hedge fund was a $22 billion shop …. with one C-level executive and one owner.
- His accounting firm was next door to Saul Goodman’s office. (aka in a mini mall)
- He didn’t have independent pricing.
- If his fund was the entire S&P 100 options market, there wasn’t enough volume to support his claimed trading strategy.
- JP Morgan couldn’t even come close to replicating his performance in 1999.
- His firm was run off a 1960s IBM AS400 (I assume this is where the old computer idea in the movie Get Hard came from)
And the list goes on and on … oh, but those returns. People were throwing money at him. Bernie’s ADV was one of the worst my colleagues and I saw in our Journal of Finance research paper.
But Bernie was also very unique which allowed the fraud to be THIS big and go on for so long:
- Bernie helped create a lot of the tech that is used in financial markets today.
- Bernie was the chairperson of the NASDAQ *3* times.
- Bernie was considered FOR SEC CHAIRPERSON in the 1980s
- Bernie ripped off his own friends, associates, and community
Ultimately, if something is too good to be true, it usually is. Do you research. Verify results. Make sure things are independent. Don’t end up duped like so many in the Bernie Madoff case.
(BTW, the movie Weekend at Bernie’s is a cult classic from the 1980s that is about a guy named Bernie performing financial fraud. Maybe they knew too.)