Monday, July 28, 2014

Lessons from Bernie Madoff: How to Spot Red Flags on Your Financial Statements

By Pam Martens

Millions of Americans, if not most Americans, have no idea how to go about checking their investment statements for accuracy and to protect against fraud. In that respect, Bernard L. Madoff might render a service to the country – if we pay close attention.

To veterans of Wall Street who handle retail accounts (those for the average individual investor), there has been the ongoing mystery as to how Madoff could have created fake account statements for thousands of clients showing the nitty-gritty details that we know to be captured on legitimate account statements.

For example, every transaction that generates cash into the account must be captured: the quarterly payment of dividends on a stock or semi-annual interest on a bond; the proceeds of a sale of a security; the payment of interest on a money market fund used to “sweep” the proceeds of sales. (And, of course, there are also the transactions that remove cash from the account such as stock purchases and payouts.)

To determine how Madoff carried out his fraud for decades, the Trustee of the recovery fund, Irving Picard, hired super sleuth Bruce G. Dubinsky, a Managing Director at Duff and Phelps, to conduct a forensic accounting of the Madoff business. Dubinsky found that during the 1970s when Madoff was claiming to deploy a convertible arbitrage trading strategy, “dividend payments and/or accrued interest were not reported” on many of the account statements. That this went undetected by customers and their accountants is testimony to how many Americans, even today, open their account statements, check the total value on page one, then shove the document into a file never to be seen again.

Read the rest here.

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