June 30, 2009

Monetizing Truth from Fiction: The Madoff Dilemma

Madoff Investors have a right to be mad. Firstly, with Madoff for swindling them. Secondly, with the regulatory authorities for allowing Madoff to operate as he did. And thirdly, with themselves, for either investing in something the was incomprehensible, or for failing to execute their own due diligence.

Madoff investors are now left to contemplate next steps.

One such step is to go after the Federal Government for taxes paid on Madoff based investment income. This is, in my opinion, a very slippery slope. If the Federal Government was the beneficiary to ill gotten gains, the investor would be liable for the retained balance, which would also need to go back into the recoverable asset pool. This is clearly not what the investor who paid taxes would be looking to hear.

Next we get to actual amounts. Assuming Madoff compounded at ~12% per annum (which I believe is about right), and if you take Madoff's self evidenced confession, that it has been a Ponzi since 1993 (this would have to be verified) an investor from 1993 and prior would only be entitled to 29% of today's loss (assuming no damages).

For the Madoff investor to assume more, they would be forced to take the same belief position that got them here in the first place, and they would have to convince the Government as well.
The scope of the losses, while huge, are not 65 billion as reported. Fictitious gains cannot be counted as real losses.

Here is a summary of a due diligence piece I did on Madoff in 2000 for a client. By the way, the client remained invested, because "Bernie has always made us money".

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