SEC Discovers Fraud Exists/Smart Money Buys Gold

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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Yesterday, SEC officials raided the offices of R. Allen Stanford, a Texas billionaire listed as one of the 400 richest by Forbes magazine, and froze the assets of three companies he controls. The SEC is accusing Stanford of perpetrating an $8 billion investment fraud, something that would have had to have been conducted over many years if not decades because of its size. The fraud was centered around CD's, usually considered the safest of investments, with higher than the going rate of return. Just as with the Madoff investment scam, the too good to be true returns were a fantasy. At the same time that the Standford fraud news appeared, figures for gold consumption in 2008 were released and they indicate that the smart money was loading up on the precious metal last year.

When news of the Madoff scam broke, only the incredibly naive would have thought it was the only one being perpetrated. Madoff's fraud indicated an SEC permeated with corruption. It is not far fetched to say that the SEC itself was in on the Madoff scam. Madoff himself sat on an SEC board. At least one (more likely several) former SEC regulator left the SEC and started a feeder hedge fund that funneled at least $7 billion into Madoff's operations. That fund changed its auditors every year (something which is not done) in an obvious attempt to hide what it was really doing. Even though Madoff's operations would have required that he was conducting more than 100% of the trades in the SP100 futures markets, the SEC didn't see anything suspicious about this. FINRA, the other regulatory agency that investigated Madoff, reported that parts of Madoff's firm had no customers, but was still making money. They didn't find anything impossible about that one either. The head of FINRA at that time is now the current head of the SEC.

The most recent statements from the SEC indicate they believe the Madoff scam began in the 1970s. In over three decades they noticed nothing. How long the $8 billion Standford scam has been going on is not yet known. However, it usually takes a long time to steal $8 billion. Stanford has significant operations in off-shore money haven Antigua, where he has been knighted. It is quite possible Madoff has stashed a lot of money at one or more off-shore locations himself. It takes a lot of money to bribe judges and other U.S. government officials after all.

Lost amidst all the fraud news was that gold demand hit a record in 2008, surpassing the $100 billion mark for the first time ever. Demand for the precious metal in the form of jewelry, for industrial uses, gold bars, coins, and gold exchange-traded funds, hit $102 billion, up 29% from 2007. Many of the buyers of Standford's 'safe' CDs may have shunned gold because it was 'risky' and the wanted 'cash flow'. Many of those people will lose everything. The actual smart money knows that paper assets are now the riskiest of all and has been loading up on gold behind the scenes for awhile now.

NEXT: Gold and Silver Rise, Oil Falls

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.

New York Investing Meetup Versus the SEC

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.

Our Video Related to this Blog:

I would like to thank the 145 people who braved a snow storm last night to come to the February general meeting of the New York Investing meetup. In addition to the scheduled talks on the State of the Market (and why gold is looking good and oil could have a pop up in the near future), the Credit Crisis Update and Art Investing, Shelley Gould flew in from San Francisco and gave a couple of minute introduction to her new SmartStops service. While New York Investing meets the needs of the investing public as long as New York City hasn't been shut down, investors unfortunately don't receive such dedication from the watchdog government agencies that are suppose to be protecting their money.

New allegations arose last night against the SEC and FINRA (the the brokerage industry's self-policing organization). Harry Markopolos, the securities industry executive and fraud investigator who brought allegations against Bernard Madoff to the SEC by 2000, if not earlier, is now saying he feared for his personal and family's safety because of the SEC's inaction (and indeed he should have). Markopolos submitted detailed evidence to the SEC in Boston, New York, and Washington about Madoff's scam and as we all know too well, the SEC did nothing. Markopolos will be appearing before a congressional investigatory committee today.

Markopolos was not alone in being suspicious of Madoff. Anyone who examined his trading strategy knew immediately it was a fraud. How? His trading would have been bigger than the entire volume of the markets he claimed to be trading in. While even a casual observer would realize something crooked was going on, the public watchdog SEC couldn't figure it out. While you may think nothing like this could have happened before, you would be mistaken. The 1962 Salad Oil Scandal (a $175 million fraud then or about $1 billion in today's money) required the same suspension of common sense from the 51 Wall Street banks that lent money to the perpetrator, Tino De Angelis. De Angelis borrowed money from these banks based on his inventory of salad oil, stored in huge tanks in New Jersey which actually contained water with a thin layer of salad oil floating on the top (so field inspectors did indeed see oil when they looked into the top of the tanks). However, publicly available information published by the U.S. government indicated there was less salad oil in the entire United States than De Angelis claimed he had in his New Jersey storage facilities. Apparently this wasn't enough to make Wall Street banks avoid lending to him, just as their contemporaries would make loans to people without any income or assets. Consider this the next time you are tempted to follow Wall Street's investing advice.

In case you may also be thinking things are now going to get a lot better, I would advise you not to get too hopeful just yet. The new head of the SEC is Mary Schapiro (replacing See-No-Evil Christopher Cox). Ms. Schapiro was previously the head of FINRA (Financial Industry Regulatory Authority). FINRA at least investigated Madoff several times. They found nothing out of the ordinary and claim they couldn't have because they were only empowered to examine his brokerage business (an almost guaranteed destination of some of the missing $50 billion) and the fraud was perpetrated through his investment business. Congress claims that it was not particularly impressed with It's-Not-My-Job Mary Schapiro's performance in this circumstance. Nevertheless she is now in charge of protecting the public's investments.

NEXT: Only TARP Recipients Should Worry About Deflation

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.