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Five Years Later: How Bernie Madoff Has Transformed the Investment Industry

By Kaleigh Alessandro,
Thursday, December 12th, 2013

Yesterday marked exactly five years since the infamous Bernie Madoff was arrested for executing the largest Ponzi scheme in U.S. history. As a result, Wall Street and the investment community has undergone a plethora of changes designed to avoid such scandals in the future. Let’s take a look at the lasting impact of Madoff and what changes we can still expect to see in the future.

The History

Unless you’ve been living under a cave for the last several years, you’ve heard the name Bernie Madoff and understand its association with all things negative: scandal, fraud and disgrace. The former NASDAQ chairman and founder of Bernard L. Madoff Investment Securities LLC (BLMIS) swindled billions of dollars and affected more than 12,000 investors, faking investment returns over the course of multiple years. 
 
Amidst the nation’s most serious financial crisis since the Great Depression, we all learned of Madoff’s devastating scheme. He eventually turned himself in at the urging of his sons and is currently serving 150 years in federal prison for his crimes.

The Impact Bernie Madoff - Cover of Portfolio Magazine

The effects of Madoff’s investment scheme can still be felt throughout the investment community and across Wall Street. Shortly after Madoff’s confession (and the US financial crisis), the Securities and Exchange Commission (SEC) began taking steps to combat similar scandals and protect future investors. One of the first initiatives put into place post-Madoff was the Dodd-Frank Act, also known as the Wall Street Reform and Consumer Protection Act In addition to registration requirements and new rules for exemptions, Dodd-Frank also prompted hedge funds and investment firms to adhere to new reporting requirements and gave the SEC authority to monitor financial firms with the potential to pose systemic risk.
 
Around the time Congress began working on Dodd-Frank, the investment industry also began making general calls for greater transparency to investors. The rise in comprehensive due diligence inquiries from investors over the past years has been significant, as investors want more clarity and insight into the funds they are allocating their investments to. We continue to assist our hedge fund clients in completing due diligence questionnaires relative to their technology and security practices to satisfy investor requests and give them greater piece of mind.
 
More recently, the SEC has adopted additional reporting requirements to prevent future Madoffs from arising. In July 2013, the SEC voted to approve a rule requiring brokers to file quarterly reports detailing how they maintain customer securities and cash.
 
Lastly, according to Forbes, the SEC has continued to file record numbers of investigations and enforcement actions against advisors and other investment firms, making good on their promise to pay closer attention to the actions of those in the investment world.

The Future Due Diligence Prep Tools

Though Bernie Madoff may reside in a North Carolina prison, the fallout of his incredible Ponzi scheme is very much part of our world today. Five former Madoff employees are currently standing trial for their alleged participation in the scandal. Beyond their individual fates, Wall Street and the greater investment community will continue to feel the effects of Madoff’s fateful decisions. Investors have come a long way in demanding greater transparency and reporting standards from firms, and we expect that will only continue in the years to come. On the technology side, investors are careful to inquire about the specific systems and infrastructure used to secure and protect their assets – another critical component to ensuring a similar financial crisis does not take place. Only time will tell how else the industry will continue to adapt following the Madoff scheme and other financial crises.

To read more about hedge fund due diligence, check out these articles:

Photo Credit: Flickr

Categorized under: Hedge Fund Operations  Hedge Fund Due Diligence  Hedge Fund Regulation  Trends We're Seeing 



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