Monday, June 12, 2017

Investigator Who Exposed Madoff Fraud Reports New Boston Transit Authority Fraud

Harry Markopolos, the investigator who exposed the Bernie Madoff Ponzi scheme, has uncovered a new fraud. The unfunded status of the pension fund of the Boston Transit Authority (the “MBTA”) is $500 million bigger than previously thought, according to Markopolos. This will have a significant impact on the municipal bond market, especially if it turns out that the MBTA’s problems are endemic among similar pension funds, writes  Robert Huebscher.

Markopolos said the $500 gap is due to bad investments, fraudulent accounting and unrealistic actuarial assumptions.

According to Huebscher, Markopolos spoke on
June 9 at the Northfield Information Service’s 22nd annual summer seminar, held in Newport, RI.

At the seminar, Markopolos called what is left of the MBTA’s pension a “Tender Vittles retirement plan,” meaning (sarcastically) that its participants would be eating cat food.

The troubles at the MBTA began in 2012, when it was revealed that it had lost $25 million in an investment in Fletcher Asset Management, a hedge fund run by Alphonse “Buddy” Fletcher. The MBTA had been hiding this loss until it was exposed by an investigative reporter from The Boston Globe.

Fletcher had promised guaranteed returns of 12%, similar to Madoff’s sales pitch. It was nothing more than a Ponzi scheme. In addition to the MBTA, three Louisiana pension funds lost $100 million in the scheme.

What made the Fletcher loss so galling, according to Markopolos, was that its chief investment officer, Karl White, had been the executive director of the MBTA pension fund. One year after leaving the MBTA, he convinced it to fund Fletcher.

“There are a lot of Ponzis,” Markopolos said, “and they are stealing customers from legitimate managers.”

Fletcher used the money it raised to invest in a movie, Violet and Daisy, which his brother was making and in a “penny stock” called ANTS, on which it booked a 1,000% return over a 16-day period. At one point, Fletcher reported 127 months of positive returns without a down month; it later revised this to show 14 down months.

The Fletcher irregularities went unnoticed by the MBTA’s board, which Markopolos said consisted of mostly non-college graduates – union members who worked on or operated the city’s busses and subways. The board had one person with an MBA and a couple of lawyers, who Markopolos said were not experts in investing.

The MBTA is “one bear market away from disaster,” Markopolos said.

The MBTA's accountant, KPMG, should have found the discrepancies. But Markopolos said its auditors are typically “22-year olds who catch more colds than frauds."


(Source: Advisor Perspective)

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