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Opinion

Regulation: The Madoff collapse shames us all

Five years ago, Euromoney was catching up over lunch with a senior figure at a large European bank. Something was troubling him. His private bankers were reporting that emissaries from a large US-based hedge fund had been approaching wealthy European clients telling them that they had unearthed a secret formula to extract regular, risk-free returns from the stock markets.

Against all common sense, some wealthy clients seemed to be falling for this outrageous pitch.

Euromoney asked around the hedge fund community and got a similar response from several sources: are you sure this isn’t Bernie Madoff they’re talking about?

Madoff’s reputation was long established. The most troubling aspect of the alleged fraud is that the warning signs were there for years for investors, risk managers, regulators and journalists to see.

Euromoney wasn’t the only news organization to try to nail the story, only to fail when no iron-clad proof could be produced of wrongdoing and when sources that were happy to assert on background that it was going on wouldn’t stand up on the record.

Everyone knew that something odd was happening but no one did anything about it. The strange relationship of the broker-dealer to the hedge fund being run, apparently, out of a corner office on the side; the incredible returns, graphed in a smooth line running from bottom left to top right and undisturbed by the volatility of returns evident in other long/short equity funds; the lack of oversight even following SEC registration and the absence of high-profile accountants or custodians: all should have flashed warning signs.

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