Madoff and Sarbanes Oxley 2622



  • OK, let an Austrian living in Switzerland provide a lecture on bank regulation in the US to someone living in the UK.
    The U.S. Securities and Exchange Commission (SEC) regulates:

    1. full disclosure in securities prospectuses, annual and quarterly reports and ad-hoc reports to investors by companies that use the public capital markets of the US. If a bank does not offer its securities (shares, bonds, etc.) to the public, the SEC does not look at the information.
    2. regulation of national securities exchanges and over-the-counter trading in the US
    3. regulation of brokers and dealers
    4. regulation of investment funds that are offered to the public
    5. regulation of investment advisors that provide advice to the public
      The prudential regulation of the safety and soundness of banks in the US is fragmented and parallel. It depends whether a bank has a state charter or a federal charter and whether the bank is insured by the federal deposit insurance corporation. Banks with a state charter are supervised by the banking commisioner of the respective state, the ones with a federal charter by the Office of the Comptroller of the Currency. Banks who want their deposits insured by the Federal Deposit Insurance Corporation are also regulated by the FDIC. In addition, the US Federal Reserve also performs some supervision.
      In conclusion, the SEC only regulates the broker/dealer, fund and investment advisory parts of banks, but is not responsible for the prudential supervision of banks (minimum capital requirements, investment policy for investments on the banks’ balance sheets).
      Section 302 and Section 404 are only concerned with assuring the accuracy and reliability of the financial reporting and non-financial disclosure in the annual and quarterly reports. SOX contains no provision to prevent bad investment decision to investment in assets that turn out to be so risky later that the market for them dries up. As long as the valuation of the bad assets in the financial statements is correct, there is no problem. I have not heard of many restatements of historical financial statements of banks due to accounting errors or accounting fraud in conjunction with the banking crisis.


  • OK, let an Austrian living in Switzerland provide a lecture on bank regulation in the US to someone living in the UK.

    :lol:



  • The Russian term from the Reagan-Gorbachav days…perestroika? Doesn’t that mean (loosely), ‘trust, but verify’?



  • The literal meaning of perestroika is restructuring, reconstruction or rebuilding. Source: Wikipedia and my girlfriend who has a degree in Russian and used to live there for a while during ‘perestroika’.



  • I’m sorry gmerkl but this sounds like the emperor’s clothes.
    I understand all your arguments but it seems to me that because everyone who was interested in making money out of this were happy to accept each others’ approach then they were happy bedfellows. Each agreed a box of air was worth something so they accounted for it as such and there cannot be a restatement because how do you revalue something that depends on current market value?
    The Execs all said the clothes were fantastic. The independent SOX team said the clothes were fantastic because the Execs said so. The independent auditors all said the clothes were fantastic because they still wanted to line their pockets with the buckets of silver they were making from saying so. And the shareholders were happy because they couldn’t see what the emporer was wearing but trusted all these independent parties. So when the little boy cried out the emperor was naked everyone was astonished, pocketed the money they had been making and cried it was a business risk and the shareholders went home empty handed.
    I disagree that this was just a business risk. There were serious consequences in investing in some of these lines of business and this was not being properly recognised in the accounts. Insufficient provision was being made, for example, in the mortgage market for defaulters based on assumptions that were not being properly questioned. Assumptions that were material to the shareholders but I guess not important to the auditors as long as everyone knew what the assumptions were and then calculated their accounts correctly.
    You see I would argue that assumptions are key to SOX because they are highly sensitive and have material impacts on the accounts. Yet it would appear that assumptions are not touched by SOX, or touched only lightly because either the auditors do not understand them, they accept managements explanation without question because they are their paymasters and bosses or in the case of an external auditor ‘never look a gift horse in the mouth’ because you wouldn’t want to be the one to lose the account.
    This is not just SOX’s fault, there were many regulators who could have stepped in but most were also enjoying their booming bank accounts. What it does show is that for all the industry that has been built up around SOX it is an impotent piece of legislation where individual experts line their pockets with increased fees and when found out shrug their sholders and say it was a business decision, outside the scope of SOX and, after all, everyone else was doing it so that makes it OK.



  • The point of my explanation was to demonstrate that it is unfair to blame the SEC, because the US securities laws do not put the SEC in charge of regulating the investment decisions or the minimum capital requirements to support the investment risk of banks. One can blame congress to leave certain gaps in the regulation of securities and banks.
    Most external auditors are not experts in the valuation of companies or securities, especially not complex funds or structured products. The less knowledge you have, the more you will accept management’s assumptions and just verify the calculations or compare assumptions/input factors to publicly available sources. In the case of investments in funds, an auditor will often rely on the auditor who audited the fund. The longer the chain from the real asset (or real debtor) to the end investor, the more information is lost due to the intermediation. Auditors or bank regulators also relied on the ratings of securities provided by rating agencies.
    The valuation of securities or funds is based on assumptions of future events (such as future default rates). If the historical default rates at the time of the rating/valuation were low, they were used as an input to arrive at the assumptions for the future. One of the problems was that there were only short track records of experience for some new products (e.g. subprime loans) and that the credit quality documents (income or assets of the borrower) were sometimes forged by the agent who knew he would sell the mortgage (and the corresponding credit risk) anyhow.
    In conclusion, there were a lot of people involved in a very long chain and it is hard to determine whose fault is was in lawsuits.



  • Some links from today’s trial. Judge Chin revoked bail and he now has to start immediately serving his sentence in jail
    Trial of Bernie Madoff held on March 12, 2009
    http-and-#58;//www.msnbc.msn.com/id/29651773/
    QUOTE: He told the judge that he believed the fraud would be short-term and that he could extricate himself.
    Authorities said he confessed to his family that he had carried out a USD50 billion fraud. In court documents filed Tuesday, prosecutors raised the size of the fraud to USD64.8 billion
    Exhibit A - Madoff’s List of Customers (Victims) - 167 pages
    http-and-#58;//msnbcmedia.msn.com/i/msnbc/sections/business/madofflist.pdf



  • He told the judge that he believed the fraud would be short-term and that he could extricate himself.
    They always believe that don’t they :roll:



  • Wikipedia also offers a detailed write-up. He certainly violated trust and his fiduciary responsibilities, whether he had intentions to get back on the right path again. He also had to have help as well to maintain this ponzi scheme for 2 decades:
    http -and-#58; // en.wikipedia.org/wiki/Madoff_investment_scandal
    Plea proceeding
    In his pleading allocution, Madoff admitted to running a Ponzi scheme, and expressed regret for his ‘criminal acts’. He stated that he had begun his scheme some time in the early 1990s . He wished to satisfy his clients’ expectations of high returns he had promised, even though it was during an economic recession.
    He admitted that he hadn’t invested any of his clients’ money since the inception of his scheme , but instead, deposited money in a business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC returns. When clients requested account withdrawals, he paid them from the Chase account , claiming the profits were the result of his own unique ‘split-strike conversion strategy’.
    He said he had every intention of terminating the scheme, but it proved ‘difficult, and ultimately impossible’ to extricate himself. He admitted his day of reckoning was inevitable.



  • He told the judge that he believed the fraud would be short-term and that he could extricate himself.
    They always believe that don’t they :roll:
    Hey,
    man i did it too, now we both do 😎 Reality words: ‘In God we trust, all others pay cash’…
    Thanks, micky Simulation pret [/URL]



  • People in the Northwest that have devoted a lot of time to there trails aren’t going to say anything about them in a forum. Very secretive.
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  • I wrote some brief research articles back in March, related to the topic of Ethics. The 2nd of 3 articles combined in the link below, discusses the ‘Madoff incident and Ethics’. At the time, I knew much less than today as Madoff not only cheated from a business perspective, but on his wife as well. In other words, I may have given him too much benefit of the doubt.
    http-and-#58;//harry.waldron.home.att.net/EthicsMar2009.htm


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