It's hard for me to feel 100% empathy for the victims. Cuz if it sounds too good to be true... :person_shrugging_tone3:.
There were red flags, for crying out loud.
:triangular_flag_on_post: Split-Strike Conversion
Madoff was supposedly using a strategy that involved purchasing baskets of stocks that were highly correlated to the general stock market. He claimed to know which stocks were going up because so much buying and selling went through his brokerage. Madoff then said he hedged those investments with OEX index options. This was impossible. The number of options Madoff would have to buy within this strategy would be enormous, and that such purchases would show up in the market. Plus, there were only $9 billion of OEX index put options on the Chicago Board Options Exchange, not enough to fulfill the $3 billion to $65 billion of options Madoff would need to protect his investments. There simply weren’t enough options out there for Madoff to use the strategy he claimed.
:triangular_flag_on_post: Market Timing
It was said that Madoff was only in the market for a few days or a few weeks at a time, doing this only six to eight times a year. When Madoff thought the market was going to fall, he supposedly put all of his client’s money into cash, and apparently had the most perfect ability to time the market. He was always in cash at the year end, when the auditors were going through his financial data. This is a preposterous explanation to anyone with an ounce of sense. How the SEC and finance professionals (yes, those who were bringing him billions of dollars to “invest’) could hear this and not run the other way as fast as their legs could take them is beyond me.
:triangular_flag_on_post: Giving Up Profits
The strategy Madoff claimed to be using cost him big profits. His business with the feeder funds only paid him with commissions on trades. This means the feeder funds, who were essentially doing no work, were making more money than Madoff, who was supposedly doing all the heavy lifting. If Madoff had just run his business as a hedge fund, he could have charged a 1 percent management fee plus 20 percent of any profits he generated. Madoff would have earned about 4 percent on the assets he was supposedly investing each year. It is clear now that Madoff didn’t do a hedge fund because he wasn’t actually investing the money. He needed to give the feeder funds an incentive to bring him the new money his Ponzi desperately needed to stay afloat.
:triangular_flag_on_post: Cheaper to borrow
Doing business the Madoff way was expensive. He returned about 12 percent a year to investors, and this percentage was his cost of doing business. Madoff could have borrowed money at a much cheaper rate, and then done any trading and investing that he chose and could have kept all the profits for himself.
:triangular_flag_on_post: Secrecy
Every long-term fraud scheme lives and dies by the secrecy of those who participate. If too many people start talking, you risk having the scheme questioned. Madoff demanded secrecy from everyone who gave him their money. He threatened to kick them out of his fund and make them take their money back if they talked too much about investing with him. Anyone running a legitimately successful business doesn’t have a code of silence. They might not be seeking publicity, but they certainly aren’t going to forbid their clients to talk about how successful they are. When an investor is prohibited from talking about the investment, any reasonable person should know something is amiss.
:triangular_flag_on_post: The Performance Line was at a 45-degree angle
Legitimate investment returns plotted on a graph have one consistent theme: They go up and down. Yet Madoff’s returns showed a lovely 45-degree incline. This doesn’t happen in the real world. Investing is a game, and there are winners and losers. Even the winners lose some of the time. It’s impossible to generate returns that plot out at a nice 45-degree angle.
