Should Regulators' Audits Be Geared to Finding Ponzi Schemes Like that of Madoff?

No, no link. You're probably tired of reading all those Madoff stories already. And the other guys, Nadel, Cosmo, et al.

I believe it is fair to say that the SEC and the states' routine compliance audits focus on routine and rather mundane procedural compliance matters. Do you have the proper files, are they current, do you avoid various specific fiduciary or suitability no-no's? Have you done whatever the last guy to hit the newspapers and embarrass the agency was guilty of doing? I other words, are you honest but guilty of sloppy record-keeping? Are you guilty of whatever the latest hot-button issues are?

I would submit that it would be a good and reasonable goal to get beyond that kind of predictable bureaucratic thinking. A suggested goal, which would require legislation and funding: In the types of investment vehicles where Ponzi-scheme bahavior has occurred, regulate them. Require the types of accounting and other controls under discussion. Third-party, arm's-length portfolio valuation and client reporting. If portfolio holdings are illiquid or unmarketable, require regular, more frequent disclosure, and conservatively value them. If that impacts fees, too bad! Audit them. Regularly. And make those auditors utterly independant of political interference.

Here's an idea the hedge funds will just love! Tax them to pay for the cost of regulating and auditing them to keep them clean.

So, what do you think? Should SEC and other regulatory audits of entities such as hedge funds be designed to do this, to get beyond the usual regulatory issues, to do more, to reasonably minimize the opportunities of men like Madoff and these other bad actors we've been reading about to hurt good people and wonderful charities?

What Was the SEC Thinking??

I'm with Larry Kudlow on this. In a time when we have a naked (essentially fraudulent, If you ask me,) short selling problem in the markets, what on earth was the SEC doing making it easier to short sell? Eliminating the up-tick requirement can only make for more brainless volatility, and it's mostly mom and pop main street investors who get hurt in wildly volatile markets.


Kudlow's Money Politic$: More on What Was the SEC Thinking


Here's the link to the WSJ story he mentions.

Here's What the Accounting Watchdog Keeps Hidden: Jonathan Weil / Bloomberg

Not in the CPA realm, never have been. The conflicts which can come at those doing audits, who after all do wish to keep their clients, can be serious indeed. Many times investors have been stunned at things which come out after a company gets a "clean", unqualified auditor's opinion. Accounting firms have been sued by investors and others, and in well-known instances have been devastated by the outcome. As investors, whether you invest in stocks of single companies or in mutual funds, you need to know that decisions on direct holdings or underlying portfolio holdings are made based on fair presentations of the financial picture.

Hold that thought, and read this:
Bloomberg.com: Opinion

Cheaters in CNBC's stock-picking game? What a Hoot!

I think it is beautifully ironic. Sublime in its own way.

Just for fun, there was a stock-picking "paper portfolio" contest in my class in investments (the CFP curriculum class to prepare for the CFP comprehensive exam,) a few years ago. Being the serious fellow I am, I asked the instructor if the contest wasn't an exercise in bad investing, and would it encourage the class to engage in bad investing? He indulgently and patiently assured me that it was just for fun.

As it happens, my wife happened to see a promo for the recent contest on CNBC with its million-dollar prize, and asked me why I hadn't entered. My answer was the same as before. Even though it is all in fun (I thought,) it still, if I won, would send the wrong message about investing and about me. It is not about utterly disregarding risk in search of maximal short-term gains. Well, what it did was worse -- it lured in some (alleged) out-and-out stock manipulators.


CNBC Calls In a Judge

Hedge Fund Manager, Fugitive Berger of Manhattan Investment Fund Caught in Austria

Good! Now let justice be done.


Bloomberg.com: Worldwide

UBS Cited By Massachusetts for 'Dishonest, Unethical' Hedge Fund 'Quid Pro Quos'

This sort of thing smells soooo bad.


Bloomberg.com: Worldwide

In today'a WSG: Brit Hedge Fund GLG Settles Short-Selling Accusations

The SEC's claim is that GLG, which purely coincidentally is going public itself, made illegal short sales in connection with 14 public offerings.

You know, you could almost do a "Hedge Fund Scandal of the Day".

I have a modest little proposal ...

Might I suggest: Before anyone invested in a hedge fund, what if they asked for and require written statements by authorized persons that the fund has not and will not violate short selling rules, has not engaged in and will not engage in or collude with other hedge funds in attempts to manipulate the market, has not and will not falsify its reporting to clients, will not lose most of their money and abscond with whatever is left, or engage in any other illegal practices whatsoever, and that the fund will disclose upfront how much leverage it will use and will not exceed that amount of leverage. Perhaps the fund should also be required to produce objective proof of its claimed superior trading skills!

Just a modest proposal. We might also add sort of a scarlet letter concept, a simple English one page disclosure of every regulatory scrape the fund or its executives have ever been in, however they might have been resolved.


GLG Settles Short-Selling Accusations - WSJ.com

SEC allows short sales after down-tick, and vows to stop naked short selling

I don't know what the effect of either will be! The old rule barring short selling after a down-tick was of limited effect, that's for sure. You just had to create an up-tick first. It's the naked short selling that's got to be shut down. Chairman Cox called it "a fraud that the commission is bound to prevent and to punish." The linked article discusses the ludicrous situation of Overstock.com, on the Regulation SHO list of stocks with heavy 'fails to deliver' for 538 days. Good grief.



SEC ends decades-old price limits on short selling - International Herald Tribune

Bloomberg's Mysak on the Lazard Scandal -- 'Fiduciary Duties Violated', 'kickback scheme'

Mr. Mysak says this one will provide more reading in the days to come.

None of this kind of thing would happen if people could find a way to settle for a good honest profit. "We can get more..." the first step on the road to fiduciary disaster.



Bloomberg.com: Lazard Scandal of 1990s Tells Tale

Remember that story about brokers selling inside info to hedge funds?

One of the indicted persons shows up in the news again....

Why blog this? Investors need the cleanest possible financial markets. I didn't say perfect, I just said 'the cleanest possible' markets. When people know, it's better than if they don't.



Bloomberg.com: Worldwide

More on China's Banks, including comment by Mark Mobius -- Bloomberg

I've blogged recently about banking in India, touching on China and Japan. Here's more. It's a good meaty article:


Bloomberg.com: Exclusive

It's business as you would expect in developing market economies. knowing what it's like should be part of how you allocate foreign investments, just about however you approach constructing your own portfolio. Generally, you should be careful. Hold down the amount of your money which you so invest to a reasonable level.

This is Really Good: AFP/Breitbart -- New [computer] techniques help fight old practice of insider trading

Finally! What took so long? It would seem that the publicized application of computer technology to insider trading and the resulting fear of discovery would raise the bar for would-be insider traders. The good guys win when the bad guys are either put out of business or decide the gains might not be worth the risks.

Honest investors and honest reps alike should rejoice, not at the fall of some corrupt people, but that the rewards of investing well, and of helping people invest well both come with a clean conscience.

BREITBART.COM - New techniques help fight old practice of insider trading