A somber presentation by the Jewish Community Federation's Business Leadership Council (BLC) on Tuesday night, "Business Ethics and Investing in a Post Madoff Environment," reviewed fraudulent schemes and notorious asset managers involved in the economic demise of 2008-9. Moderated by Laura Roden of VC Privé,, the panelists, including Leon Kuan, of Fisher Lynch Capital, Justin Hibbard, fraud investigator, James Knight of Vista Wealth Management, and Ben Berk, a tax partner at Howard Rice, tackled an overwhelming subject. Ms. Roden elegantly guided the forum with the questions: “why did you want to join our panel,” “why did these fraud revelations occur now?” “what should the new administration do to add missing regulations?” and “what is your solution?”
Who Was to Blame?
Fingers were pointed at the SEC, who, for decades, missed the elephants of corruption in the room, while busily regulating the mice, for example, penny stocks. Neglecting the big guys resulted in scandals that rocked the financial world and contributed to the meltdown. Vehicles of up to $50,000,000 were left unobserved, partially due to the obfuscation of assets by ‘style’ funds, such as ‘value’ or ‘growth.’ And, even though 2009 might be the year of new regulations, the jury is out on how Congress will deal with its banquet of hedge funds, short sellers, credit defaults, shadow baking system, and more. Don't gamble any time soon on new regulations coming along to help. The system, like so many others in our society, is too massive. As a matter of fact, now is a fruitful time for rip-off artists to concoct new schemes.
Mr. Hibbard pointed out that by its nature, fraud is hidden. With Madoff, the heart of the matter was not the simple placement of money into the Ponzi funds, but the extensive cover-up surrounding the scheme. And, because the market was due for a correction, when the bear market arrived, many varieties of fraud were exposed. Mr. Berk said that when the tide goes out, you see who is swimming naked on the shore. And, we certainly caught a whale.
How to Invest
For those with any money left, how to invest? The panel’s consensus: whenever trust is involved in handling your money, be certain to do your own due diligence. Check the basic information about a company, (look at their Form ADV or Form 13F [for assets over $100 million]) talk to its principals, find out about its attribution, (whether there is there real money there) investigate where the bulk of performance is coming from, and evaluate how the company compares to its peers. With Madoff, diligence advisors put money into unexamined feeder funds and blindly collected their fees; thus, expect the cost of diligence to rise in the future. Consumers might have helped themselves by examining everyone who had anything to do with their money. Some of these people, we hear today, are committing suicide.
Here is a recap of advice for future investments:
- - Do your own work and know what you’re investing in; don’t rely on large institutions without doing your own research;
- Look at a company’s audited financial statement and the auditor, their compliance policy, disciplinary issues, how and who regulates it, and attribution;
- Recognize that background checks on an individual may not reveal fraud;
- Look at the footnotes of the annual reports;
- Tax returns are not always valid resources of what is happening with a company;
- Don’t just rely on what others are doing or always take advice from friends and relatives;
- Watch out for conflicts of interest, like in Enron – if they are messing up one segment of society, don’t buy;
- Remember that strategic due diligence involves legal, financial, operational, and accounting departments;
- Use the Internet - take a look at sites such as The Internet Archive, which is building a digital library of Internet sites and other cultural artifacts in digital form that will help trace names and careers (thank you to Jerry Lerman for the tip); and
- Always budget for loss when you invest.
My prayers are that if (and when) some of us return to investing, we do so in a more sane and ethical world.
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