Now that Bernie Madoff is behind bars, and likely to remain there for a considerable time, recriminations have begun to ricochet amongst the various parties responsible for creating and sustaining the largest single fraud in history; investors, advisors, feeder funds, bankers, lawyers, hedge fund managers, regulators and government officials.
One oft repeated line is "How could Madoff continue to get away with this for so long?' Indeed, had the recent economic meltdown been less severe, Madoff would probably still be operating his massive Ponzi scheme with investors and regulators oblivious to his shenanigans.
The benefit of hindsight is usually always good as is the fact that so many are now reflecting on the extent of systems failure but why were those critics decrying Madoff's financial system long before his collapse ignored.
One of the best known whistleblower's was Harry Markopolos who spotted Madoff's Ponzi scheme after an investment firm he worked for tried to emulate Madoff's methods but failed to reproduce the same steady high earning results.
Markopolos warned the Securities and Exchange Commission (SEC) about Madoff's activities but his cries failed to ignite a serious investigation of Madoff's affairs.
A number of major investors, including Deutsche Bank and Fund of Fund asset manager Ermitage Group were highly skeptical of Madoff's operation and declined to invest any funds with him.
A healthy suspicion that something too good to be true probably is, resulted in these investors being spared financial Armageddon.
Many smaller investors, small to medium sized businesses, local government agencies and non government organisations watch the Madoff debacle and think, `If all these established investors and government agencies were duped, what chance do we have?' The red flags for Madoff were clearly visible for those willing to see them.
Established fraud investigators should be able to spot these when tasked.
Hence, before undertaking a major investment, joint venture, appointment of subcontractor, acquisition, merger etc a review and due diligence should be performed including: 1.
Key parties - who are they, antecedence, prior performance, other interests, former executives, etc 2.
Market situation - size, competitors, trends, future expectations, government regulation etc 3.
Opaqueness - willingness of parties to divulge and grant access to fiduciary information 4.
Concerns - technology, demography, geography, legal 5.
Official records - any mention of prior bankruptcy, criminal conviction, regulatory investigation, civil litigation, subject of prosecution Had some of Madoff's victims [and market regulators] opted to undertake some objective due diligence as to his operations, then they may have been saved serious heartache.
Instead, too many professionals, who should have known better, chose to accept the easy route; Madoff was a mature and widely regarded funds manager who was too big to be involved in something so dishonest.
Financial and commercial frauds have been around for centuries and will continue to occur in the future.
Some healthy skepticism, objective analysis and pre transaction due diligence will go along way to avoiding the pitfalls of fraud.