Red flags in Bernard Madoff’s fund

Found 2 articles (see below) on red flags in Bernard Madoff’s fund.
We can get a glimpse of which portion of due diligence can uncover the red flags in Madoff’s case.

Some insights:
1. whether volatility, returns are tally with investment strategy claimed; backtesting using investment strategy and compare

2. "literature" study: whether others have due diligence check and result; news of feeder fund’s shutdown

3. trading records, regulatory filings to compare with trading (volume) claimed

4. corporate governance : comptroller, auditor of firm, feeder funds; independence of comptroller/auditor/compliance officer etc.

Article: The Red Flags In the Madoff Fund's Past (from CNBC)
link to CNBC's article
Who: Aksia, a firm that does due diligence on investment advisers
What: investigation for client
When: Apr 08

Red flags:
[1. The Madoff investment strategy, called "split-strike conversion," is known to be very volatile; it involves trading huge positions around options expirations. Despite that volatility, its returns over the past decade were an amazingly stable 8-10 percent.

2. Aksia discovered a 2005 letter to the Securities and Exchange Commission from a financial advisor who supposedly studied Madoff's operations. That letter asserted Madoff was running a Ponzi scheme. There was also a Wall Street Journal story at the time about one of the Madoff's associated "feeder funds" getting shut down in 1992.

3. Madoff's strategy was bizarre: He said he would move $13 billion in various trades at once, yet Aksia couldn't find traders who saw his trades. There were also no regulatory filings. And family members were running the firm.

4. The comptroller of the firm was based in Bermuda. Most mainstream hedge fund investment advisers have their comptroller in-house. Madoff's so-called feeder funds, meanwhile, were audited by respectable auditors. That gave the impression that Madoff had a professional operation. But the central investment action wasn't with the feeder funds, but in Madoff's New York City headquarters. And those activities were audited by a smaller, lesser known firm.

5. Madoff sent out accounting statements by mail. Most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.]
(but I haven’t figured out what’s wrong with this)

[….warned clients not to do business with Bernard Madoff's investment fund.]

Article: European banks tally losses linked to Madoff (from International Herald Tribune)
link to IHT's article
Who: Société Générale
What: routine due diligence audit
When: early 2003

Some findings:
[…strategy consisted of balancing holdings in large Standard & Poor's funds with options to buy and sell shares, known as puts and calls;….. when Société Générale back-tested the strategy, it could not match the results that Madoff claimed to have produced.
…troubled by the fact that Peter Madoff, Madoff's brother, was the chief compliance officer.]

[…..Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments]

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