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Low Tide Will Reveal Rats Scurrying Amidst The Garbage

Posted by Larry Doyle on April 28, 2009 9:09 AM |

Every exterminator will tell you that he never finds just one rat. Bernie Madoff has been exposed as an enormous rodent. Is Allen Stanford also a rat? Who else may be in the pack? Mary Schapiro, head of the SEC, revealed yesterday that the SEC is reviewing 150 other hedge funds to determine whether they also operated Ponzi schemes. Reuters reports, U.S. SEC Has About 150 Hedge Fund Probes.

Hedge funds are currently unregulated. How could the SEC have found potentially another 150 “rats” in the space of a mere three months since Ms. Schapiro has been on the job? My instincts lead me to believe the following:

1. Ms. Schapiro is trying to convey a sense of leadership and progress on fraud investigations after the abysmal performance on the Madoff scheme.  The SEC needs to burnish its image and Ms. Schapiro is trying to address that with this news release.

2. I have no doubt that many other hedge funds did operate as Ponzi schemes and likely had money invested in Madoff knowing he was the largest rat.  As investigators from the SEC have reviewed the list of Madoff investors, the info there has likely led to other hedge fund frauds.

Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.

3. We know that FINRA, the self-regulatory organization overseeing Wall Street, had investments in hedge funds, fund of funds, and private equity. That info was provided in the FINRA 2007 Annual Report. We are STILL waiting for the release of the FINRA 2008 Annual Report. Could FINRA have invested in Madoff? Could FINRA have invested in other hedge fund Ponzi schemes? Why by April 28th has FINRA still not released their Annual Report?

In addition to releasing hints of hedge fund Ponzi schemes, Schapiro also provides hints of ongoing investigations into criminal activity in the municipal finance and credit derivatives sectors. “Low tide” in the markets will certainly reveal more rats scurrying amdist the garbage. Where’s FINRA? Actually, none other than Ms. Schapiro herself would know of FINRA’s investment activities as she headed FINRA prior to her move to SEC. Call me suspicious, but I view FINRA’s delayed release of its 2008 Annual Report as more than a casual event.

The investing public deserves so much better.

LD






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