Tomorrow’s WSJ (on line tonight, obviously) has a short article explaining why Madoff’s trading “strategy” couldn’t work. This neither hurts nor helps Bernie because the feds have figured out that he wasn’t trading anything at all, but he said he was, and that makes Walt Noel’s Fairfield Greenwich Group all the more vulnerable to charges that they willingly turned a blind eye to their money maker’s scam.
The other red flag easily available to investors was the shallow volume in the options Mr. Madoff claimed to use as a hedge.
About $3.25 billion of stock could have been protected by the total S&P 100 options outstanding at the end of November, according to the Chicago Board Options Exchange. Mr. Madoff was thought to have had as much as $50 billion under management.
A review of open interest in S&P 100 contracts showed that nobody owns more than 6,000 contracts at any single strike price, according to FactSet.
“All it took was simple math — ‘What’s the open interest of the S&P 100 option, and how many trades does he say he’s making?'” said Joe Kinahan, chief derivatives strategist at brokerage thinkorswim.
Noel’s son in law, Corina’s husband and founding FGG partner Andres Piedrahita told a friend that FGG had two PhDs working Bernie’s numbers to make sure the man was on the up and up. FGG’s pending due diligence defense would look better if those wizards had doctorates in math, instead of Medieval art history – just a suggestion from a former lawyer, so take it for what it’s worth.
Update: Still more bad news for Walt in, yet again, The Wall Street Journal
Suspicions about Mr. Madoff’s trading also go back further than whistle-blowers have alleged. In 1991, a consultant hired to review a corporation’s investments with Mr. Madoff made in the late 1980s grew suspicious about his returns. According to client statements and other information gathered by the consultant and reviewed by The Wall Street Journal, between 1980 and 1990, the consultant found that Mr. Madoff claimed to his client to have earned 22.6% per year, double the average return on the Dow Jones Industrial Average during that time.
The review of trades for that account showed frequent trades in options on stocks, but the consultant found that the number of options purchased for the strategy often outnumbered the amount of options that actually changed hands on public exchanges, according to the documents and a person familiar with the review. Mr. Madoff claimed to have traded more options than had been traded in the entire market on a given day, meaning his strategy would have been impossible to execute. That pattern was apparent on client statements from as recently as 2006, meaning Mr. Madoff had been making the same improbable claims to his investors for at least 17 years.
I can see why my former stock-fraud-hunting colleagues are chomping at the bit on this one.