How Will the Markets React to the Madoff Scandal?

by: David McMillan

As the news is breaking about Bernard Madoff and the $50 billion ponzi scheme that has duped the likes of General Electric (NYSE:GE) and Citigroup (NYSE:C) as well as hedge fund of funds, affluent individuals and other institutions, it is with painful and somber reflection that we read the noble message carried on this titan's website:

The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark.

A mere couple of months have passed since we first heard of the initially dramatic news of Tom Petters and his associates in the estimated ponzi scheme totalling more than $3.5 billion. The case against Madoff dwarfs this in comparison, but has been structured in largely the same way, buried in alternative investment instruments and within hedge fund accounts that have somehow slipped through the expertise of due diligence teams and risk analysts.

It will be intriguing to see the reaction in the markets. Madoff has generally been well known only by institutional clients and others familiar with the industry, but fraud on such a scale as this will alert every investor's attention through prime time coverage. In a year when hedge funds and other alternatives have suffered in a liquidity crisis, this latest scandal will only bring further attention and questions to managers who by their very nature provide limited transparency and look through into their holdings and operations. It is only a matter of time before the SEC takes another long hard look at the accredited investor rules and the current access levels open to these investment vehicles.

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