Sentences that make my spleen itch

[fivemack]

http://www.time.com/time/business/article/0,8599,1867092,00.html

includes the wonderful quote

"It is not the responsibility of the accountant for a capital management firm to audit the underlying investments of the firms it invests in," says Fornelli. "The auditor is not in a position to test the existence of the underlying securities — especially in a fund-of-funds situation."

This is a definition of 'auditor' with which, for example, Emperor Gregor would not immediately concur; I would have assumed that, had the auditor the slightest uncertainty as to the existence of the underlying securities, he would be obliged to bring this to the attention of men in blue hats with stripes on their shoulders.

I'm also not altogether sure what the investors in 'Ascot, which was managed by GMAC chairman J. Ezra Melkin and invested all its money with Madoff, [losing] a reported $1.8 billion' could have been thinking - I can barely understand the argument for funds-of-funds, but a fund whose sole purpose in life is to invest in a single other fund only makes sense to me as a mechanism for delivering money to Mr Melkin while appearing to be investing it.

There seem to be an awful lot of people involved in this who need a training course of the form "Now, here are some pins, and here is a big pot of water, and if you look under these rocks you may find a whelk ..."

Comments

[hairyears.livejournal.com]

Also: some of the institutions - notably SocGen - did their due diligence before investing with Madoff and came back with a 'veto' rating from their audit team: do not invest, warn clients away, do not lend to institutions with exposure.

[fivemack.livejournal.com]

That's good to know. I presume due-diligence of this form tends not to get widely published for both proprietary-information and potential-libel reasons.

[hairyears.livejournal.com]

DD is plastered with confidentiality clauses: the only thing you're allowed to do (and, indeed, obliged to) is notify the authorities if you spot something illegal. This, SocGen could give confidential guidance in the form of an opinion to its clients and internal subsidiaries, but their analysts could not release a 'sell' note to the general market based on the Due Diligence finding.

I do not doubt that SocGen notified the SEC and other regulatory authorities if they had any concrete concerns. The only comment that's emerged - from an unattributable briefing - is the phrase 'obvious warning signs' with this specific example: the compliance director was Bernie Madoff's brother.

Confidential information from a due diligence investigation is a regulatory nightmare, because it's 'insider' information, in the sense that the marketplace doesn't have it, but you have a duty of care to act upon it in your investors' best interests.

[ewx.livejournal.com]

Those feeder funds need a name with the word "laundering" in...

[dd-b.livejournal.com]

The one legitimate point I've found in feeder funds (as opposed to a real fund-of-funds, which makes sense in theory for spreading money across strategies) is to allow people who don't meet minimum investment criteria for a special fund to still invest in it. Since this is somewhat likely to mean they're not expert enough investors to sensibly decide to invest in the end fund in the first place, this is not a very strong argument for feeder funds.