Preventing Madoff-Style Ponzi Enabled by Jewish Reputation, Incompetent Regulators and Auditors

Abstract:     
The worldwide reach, size ($50B) and durability (since 1960) of Madoff's alleged Ponzi is attributed to the high reputation of Jewish money managers, serious regulatory lapses including incompetence and possible conflicts of interest by FCC, SEC and other regulators and auditors. Madoff seems to have been an equal opportunity thief, who shamelessly made off with funds from close relatives and charities in his scheme. We discuss some ideas on preventing future Ponzi schemes by focusing on corruption, conflicts of interest and fraud. Legally permitted secrecy for the operators of hedge funds is clearly to blame here. We suggest reforms, which will immediately improve transparency in financial transactions and in accounting and audit reports. Since self-regulation does not work in the presence of conflicts of interest, beyond obvious disclosure requirements, divesting of custodial and brokerage operations from financial advisors is an immediately feasible reform. Such separation through divestiture can prevent future Ponzi schemes and minimize broker frauds. I also propose stricter regulation of off-shore entities. We also need to test all managers and regulators at financial institutions for a clear understanding of a few dozen tools and risk assessments in modern quantitative finance.

Number of Pages in PDF File: 8

Keywords: Ponzi, Conflicts of Interest, Regulation of Hedge Funds, Transparency, Divestiture

JEL Classification: G18, G28, G38, M41, M43, M49

working papers series