Wednesday, February 11, 2009

Madoff - A Long List of Red Flags

Prof. Greg N. Gregoriou and François-Serge Lhabitant just published an interesting EDHEC position paper on the Madoff scam highlighting a long list of red flags worth noting:

Operational Red Flags:
Lack of segregation amongst service providers
Obscure auditors
Unusual fee structure
Heavy family influence
No Madoff mention
Lack of staff
SEC registration
Extreme secrecy
Paper tickets
Conflict of interest

Investment Red Flags:
A black-box strategy
Questionable style exposures
Incoherent 13F filings
Market size

They mention that early sceptics (see Mar/Hedge and Barrons' articles from 2001) were ignored and had no impact and conclude: "Let us hope that this will serve as a reminder that the reputation and track record of a manager, no matter how lengthy or impressive, cannot be the sole justification for investment."

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