Big Bust on Wall Street

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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It's not everyday that a billionaire hedge fund manager gets busted for insider trading as happened last Friday. This is not because Wall Street isn't permeated with criminal insider trading activity at the very top, but because the SEC has turned a blind eye to it for a long, long time. In a celebrated case from just a few years ago, an SEC employee who tried to investigate a well-known hedge fund manager was promptly fired for his efforts. The SEC has claimed in the past that since hedge funds and big brokers trade continually it isn't possible to prove that they are engaging in insider trading. It was possible this time however because instead of just examining trading records, wiretapping was used.

Wiretapping was first legally permitted in 1928 by a U.S. Supreme Court decision, several years before the SEC was created. Left to its own devices the SEC would probably never have decided to use any law enforcement technology not available to the Amish, but the FBI was involved in this case. The insider trading investigation against Raj Rajaratnam apparently began in 2007. Rajaratnam runs the Galleon Group which has $3 billion under management. He has been charged with conspiracy and securities fraud. Reports indicate that he is at the center of an insider trading ring and more arrests are coming.

Where did Rajaratnam get his inside information? Other than sources that worked directly for the companies involved, Internet sources indicate that Rajaratnam seemed to have at least one informant at the rating agency Moody's, the consulting firm McKinsey & Company, and Intel Capital (the venture capital arm of the technology giant). These are all top firms. You should ask yourself how many other firms have employees involved in providing insider information, how many employees are involved and to how many hedge funds is this information provided? My guess is the answers to these questions is a lot, a lot and a lot. Why aren't there stricter controls within these firms that prevent this from happening? The public has a right to know.

At least some progress is being made in reigning in the Wall Street criminal operations. The biggest Ponzi schemer of all time, Bernie Madoff, is behind bars, not because the SEC caught on to his obvious $50 billion scam after numerous investigations, but because it finally blew up on its own accord. At least the SEC did finally close down the $8 billion 'investment fraud' run by Allen Stanford. The head of a top New York law firm, Marc Drier, has been sentenced to 20 years in jail for fraudulent activity. All of these cases were beyond outrageous and extreme examples of criminality. What about all the other criminal activity on Wall Street that is being done with at least a grain of discretion? Rajaratnam is merely the tip of that very massive iceberg.

NEXT: U.S. Dollar Down, Everything Else Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21




This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Indecent Exposure: Madoff Caught Swimming Naked

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Warren Buffett's famous remark that you only know who's swimming naked when the tide goes out is particularly relevant at the moment with the ultimate Wall Street insider Bernard Madoff accused of operating a $50 billion Ponzi scheme (with an additional $17 billion just 'missing'). The hear no evil, see no evil SEC gets no credit for unmasking this multi-decade fraud, with Madoff confessing to his sons as his scheme fell apart and they in turn notifying the FBI. There are even reports of in-the-know Wall Streeters having invested with Madoff knowing his operation was fraudulent, but they had assumed that it was based on an insider trading scam - it being common knowledge on the Street that the SEC rarely investigates citizens above suspicion (one SEC employee was recently fired for trying to open just such a case) for this behavior.

Madoff is the former chairman of the Nasdaq and the founder of Bernard L. Madoff Investment Securities, a closely-held market-making firm that has operated since 1960. He also ran a hedge fund, which is the source of the supposed $50 billion in fraudulent losses (sustained during the time that former Fed chair Alan Greenspan repeatedly said there was no need to regulate hedge funds). Madoff's hedge fund business didn't register with the SEC until September 2006. What took it so long to do so is a good question. An even better question is, did they investigate the hedge fund since that date and if so why couldn't they uncover the largest fraud in American financial history? Madoff's Investment Securities is also market maker on Nasdaq and huge amounts of funds pass through that operation. Are those funds safe or have some of them been pilfered too?

Investors in Madoff's hedge fund are a who's who of big money people, banks and other hedge funds who should have known better. These include banks Santander, Royal Bank of Scotland, BNP Paribas, HSBC, Nomura and hedge funds Man Group, Tremont Capital Management and Fairfield Greenwich Group. Some big names that have surfaced so far as Madoff investors are Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services (49% owned by looking for a government bailout GM). A number of charities also entrusted their money to Madoff, Senator Frank Lautenberg's family charitable trust among them, and at least one has already closed down as a result.

The revelations of the Madoff fraud are somewhat reminiscent of Richard Whitney scandal during the Great Depression. Whitney was the president of the New York stock exchange from 1930 to 1935 and was also a citizen above suspicion just like Madoff. He was assumed to be a brilliant financier, but this image was also false. He turned to embezzlement to cover up his mounting business losses and to maintain his extravagant lifestyle. The authorities eventually caught up with him, although it didn't take nearly as long as it has with Madoff, and he wound up in Sing Sing. Revelations of financial misdeeds indeed became commonplace in the 1930s as the economy fell apart and you should assume that this will be the happening once again.

NEXT: Excess Liquidity to Solve Excess Liquidity Problem

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.