Catching Out the Fraudsters
Over on the CFA Institute blog, there is a cautionary tale from Norb Vonnegut, parsing three key lessons from the Bernie Madoff ponzi scheme. Useful for regulators (of all kinds) and investors alike, it’s worth a read.
He points out that these kinds of financial frauds:
- provide what is really a sales pitch wrapped up as due diligence information, creating confusion even amongst seasoned professionals.
- offer exclusivity as a way to make their scheme appear legitimate and attractive; and
- suggest outlandish performance based on questionable maths.
Mr Vonnegut seems to broaden his theories to cover, via the law of large numbers, a significant proportion of the Alternative Investment classes on offer today, but the article is still worth a read.
Financial and performance reporting, even when audited, occasionally falls prey to fraudsters. A combination of high quality structured data, more effective peer analysis, artificial intelligence to run down anomalous patterns in reporting; and good old common sense should limit this possibility going forward. Until then? Caveat Emptor! Read it yourself.
