In another mind boggling finding from the SEC’s 477-page Madoff report, it is revealed that the agency’s examiners, while conducting a routine examination of hedge fund Renaissance, reviewed internal emails that were questioning Madoff’s legitimacy and whether he was involved in illegal activity, but failed to act on it.
The emails go into intricate details to examine and try to understand Madoff’s doings, and raised a series of red flags, including Madoff’s fee structure, his stock predictions “too good to be true” and the steady, non-volatile returns.
In a first email dated Nov.13, 2003, portfolio manager Nat Simons expresses his concern about the firm’s indirect investment with Madoff after having spoken to several people.
“The head of this well-respected group told us in confidence that he believes that Madoff will have a serious problem within a year.. The point is that as we don’t know why he does what he does we have no idea if there are conflicts in his business that could come to some regulator’s attention. Throw in that his brother-in-law is his auditor and his son is also high up in the organisation and you have the risk of some nasty allegations, the freezing of accounts, etc. It’s high season on money managers, and Madoff’s head would look pretty good above Elliot Spitzer’s mantle. I propose that unless we can figure out a way to get comfortable with the regulatory tail risk in a hurry, we get out. The risk-reward on this bet is not in our favour.”
Simons said that they did not report their suspicions to the SEC because they felt all of the information they were using in their analysis was… “readily available to the SEC.”
From the report: We did feel that despite the fact that we’re kind of smart people, we were just looking at matters of public record. I mean, you know, it wasn’t hard to get these statements. These statements, you know, hundreds of – lots and lots and lots of people had Madoff statements. So we didn’t really feel that we were dealing with something which is proprietary.
Responding to Simmon’s first email, Henry Laufer, a research scientist at Renaissance, said that Renaissance had “independent evidence” that Madoff’s executions were “highly unusual” and agreed with Simons that they should divest themselves of their Madoff-related investment.
From the email: “A last quote, from Jim [Simmons], I believe: “If you are going to panic, panic early.”
All those concerns came not from a $2 million basement-ran hedge fund, but from one of the best-known and respected quant shops around. Even that didn’t make the SEC bulge.
And the saddest part is that as Laufer told the SEC’ inspector general who published the report, someone at the agency should have been able to do the same analysis and draw the same conclusions. “This is not rocket science.”