Madoff in Limerick Form

freakonomicsFreakonomics ran a contest for the best definition for Bernie Madoff in limerick form.

They had special guest judge Chris J. Strolin, founder and editor-in-chief of The Omnificent English Dictionary In Limerick Form announce The Winning Definition of “Madoff,” in Limerick Form.

The best of the best was #98 by sqlman:

His investments’ ascent: like a rocket.
His method: his hand in your pocket.
His scheming: detested.
His freedom: arrested.
His future: a day on the docket.

With rhyme and meter perfect throughout, this limerick encapsulates a complex story in just five lines, giving the details very well and in an interesting format. This one shimmers!

Second place goes to #104 by The Tortoise:

The Madoff scam: what’s it about?
Paying Paul (and thus fending off doubt)
By robbing poor Peter;
And what could be neater?
But it palled when the funds petered out

Presenting a strong summing up of the situation, this limerick ends with double wordplay in the fifth line so elegant that I can overlook the lack of an ending period.

And lastly, the title of Miss Congeniality (a.k.a. third place) goes to #78 by Robin:

With Bernie’s cachet as the lure,
Even smart folks invested, quite sure
That with Madoff, funds grow
And sweet dividends flow.
Now they find themselves swindled … and poor.

More perfect rhyme and meter throughout and an accurate telling of the history of this event, but with an interesting pause for dramatic effect at the end — very nice touch!

Book Review: The Black Swan

The Black SwanI just finished reading The Black Swan by Nassim Nicholas Taleb. The title of the book comes from the observations of Europeans that all swans are white. Much to their surprise, they came to Australia and found their first black swan. The book starts with this story to illustrate the “limitations to our learning from observations or experience and the fragility of our knowledge.” As Taleb points out, it very different to think there is evidence of no possible black swans, than there is no evidence of the possibility of black swans.

Taleb has received lots of press and admirers given the recent meltdown in the financial markets. The book was published in 2007. Taleb seems to have perceived the coming collapse (and probably got a rich financial reward based on his strategy).

His supreme self-confidence (arrogance) shines brightly through in his writing. He has little time for shallow thinking and those who think they understand risk or the financial markets.

Another example running through the book is the first 1,001 days of a turkey’s life. For a 1,000 days the farmer brings food to the turkey every morning. On that last day, things change dramatically. The farmer shows up with an axe instead of food. A surprise and horrible change in circumstance for the turkey. But all the historical evidence for the turkey indicated that the farmer would show up with food and not an axe. Of course, on the flip side, the farmer saw the axe day coming.

As Yogi Berra philosophized: “It’s tough to make predictions, especially about the future.”

It is the unknown unknown that is most dangerous. We spend too much time focusing on knowing what we know. We need to spend focusing some energy in realizing what we do not know and what we do not know what we do not know.

As a compliance and risk professional I was particularly intrigued by the story of the four largest losses by casinos. As you might expect, casinos run very thorough security programs, compliance programs and risk management programs. The four largest losses fell completely outside the casinos’ models. One was the white tiger’s attack on Roy, the second was a disgruntled contractor who attempted to dynamite the casino, the third was the kidnapped daughter of a casino owner, and the fourth an incompetent employee who failed to file the 1099 reports with the Internal Revenue Service.

It is also important to draw the distinction between positive contingencies and negative contingencies. The black swan can be one that brings unexpected destruction or one that brings an unexpected windfall. His philosophy is to play it safe, but hedge for a disastrous losses and spectacular windfalls. Mitigate the unexpected consequences.

I expected to get a lot of insight from the book. But it was one of the few books that changed the outlook on my profession.

When Markets Turn

The EconomistThe Economist ran a special report on the future of finance last week. One item caught my eye – When Markets Turn: A Parable of How Modern Finance Can Go Wrong. The story looks back at the collapse of the Long-Term Capital Management in 1998. The article puts some of the lessons of that funds collapse to the current collapse of the credit markets.

They identify the theory put forth by Mr. Soros on “reflexivity.” Once people come to believe that an economic theory is true, they over invest in that economic theory. “Once people come to believe that house prices never fall, they will buy too much property—and house prices will fall. When they believe that shares always do well in the long run, they will buy too many shares—and the market will do badly for years.”

Relexivity makes financial markets more dangerous than the casinos. “The numbers on a roulette wheel never change, but markets offer no guarantee that yesterday’s odds will be the same tomorrow.”

Hedge Fund Transparency Act of 2009

Senators Chuck Grassley and Carl Levin introduced the Hedge Fund Transparency Act (S.344). Instead of amending the Investment Advisers Act of 1940 (as Senator Grassley tried with S.1402 in the 110th Congress), this bill would amend the Investment Company Act of 1940.

The first step is defining a “hedge fund.” (Not an easy task)

Rather than trying to define a hedge fund, the proposed law instead applies to any investment company that has at least $50 million in assets or assets under management and relies on Sections 3(c)(1) or (7) as an exemption from the requirements under the Investment Company Act.

The proposed law will not require full compliance with Investment Company Act, but instead submit to a limited regulatory regime:

  1. Register with the SEC.
  2. Maintain books and records that the SEC may require.
  3. Cooperate with any request by the SEC for information or examination.
  4. File an information form with the SEC electronically, at least once a year. This form must be made freely available to the public in an electronic, searchable format. The form must include:
    • The name and current address of each individual who is a beneficial owner of the investment company.
    • The name and current address of any company with an ownership interest in the investment company.
    • The primary accountant and primary broker used by the investment company
    • An explanation of the structure of ownership interests in the investment company.
    • Information on any affiliation with another financial institution.
    • The name and current address of the investment company’s primary accountant and primary broker.
    • A statement of any minimum investment commitment required of a limited partner, member, or investor.
    • The total number of any limited partners, members, or other investors.
    • The current value of the assets of the company and the assets under management by the company.
  5. Establish an anti-money laundering program and report suspicious transactions

This bill is far from becoming law. BUT, there is a groundswell of support in Washington to increase the regulation of private investment funds. We will keep an eye on this legislation.

See also:

First Report of the Walker Guidelines Monitoring Group

The Guidelines Monitoring Group has published its First Report (.pdf) on the UK private equity industry’s conformity with the Walker Guidelines.

The Guidelines are intended to have funds enhance their reporting and the reporting by their large portfolio companies. They define a portfolio company as one with a market capitalization (prior to be acquired) was in excess of £300 million, more than 50% of the revenues were generated in the UK and the UK employees totaled in excess of 1,000 full-time equivalents.

The Guidelines propose that the portfolio companies should annually disclose:

  • the identity of the private equity fund (or funds) that own the company
  • the composition of the portfolio company’s board
  • a financial review of its risk management and uncertainties facing the company
  • a business review in compliance with Section 417 of the Companies Act.

The Guidelines propose that a private equity firm should publish a description of its investment approach, investment holding periods, leadership of the firm, arrangements for dealing with conflicts of interest, and categorization of its limited partners/investors.

Thirty two firms made reports. (see Appendix 1 of the Report) and 54 portfolio companies (See Appendix 2 of the Report).

Recommended Annual Review for Hedge Funds and Other Private Fund Managers

bingham_logoBingham McCutchen has put together a Recommended Annual Review for Hedge Funds and Other Private Fund Managers.

Bingham put together a laundry list of regulations, policies and filings that you should review on at least an annual basis:

  • Compliance Policies and Procedures
  • Form ADV Part 1 and Form ADV Part II
  • Form SH
  • Anti-Fraud Rule Adopted by the SEC for Naked Short Sales
  • Blue Sky Filings and Amendments to Form D
  • Form 13F
  • Schedule 13D/13G
  • Forms 3, 4 and 5
  • Audited Financial Statements
  • Offering Document Updates
  • Ongoing ERISA Compliance
  • Section 457A
  • Section 409A
  • CFTC Requirements
  • Liability Insurance
  • Employee Training
  • Privacy Policy

Disclosure: The Wife is an attorney at Bingham.

Decoding the Science of Compliance — Are you Ready for 201 CMR 17.00?

Compliance Week broadcast a webcast on the new Massachusetts data privacy regulations: Decoding the Science of Compliance — Are you Ready for 201 CMR 17.00? (and sponsored by Iron Mountain).

Garry Watzke, Esq., Senior Vice President Legal & Business Development at Iron Mountain, Inc. started with the basics which I have noted in several other places:

John Jamison, Vice President Consulting Services at Iron Mountain, Inc. moved on to implementation challenges. He points out that this is not a pure IT project. There is no single tool that provides coverage across the multiple platforms in most businesses. There is IT, but there is also a business-wide program that needs to be in place and maintained.

Garry points out that you need to maintain employee compliance and have a way to detect and prevent system failures.

See also these prior posts:

Trading in Distressed Debt

Richard G. Mason, Steven A. Cohen, Ian Boczko, Sarah A. Lewis, and David Gruenstein of Wachtell, Lipton, Rosen & Katz, have prepared a memorandum concerning the possession and use of information when buying and selling distressed debt (an abridged version of which was published in The New York Law Journal): Trading in Distressed Debtpdf_logo .

  • Although bonds are generally considered securities, interests in bank debt are typically not considered securities. (see Banco Espanol de Credito v. Security Pacific National Bank, 973 F.2d 51, 55–56 (2d Cir. 1992). There is not universal agreement on this position.
  • Knowledge of bank debt can lead to insider trading in other securities.

Insider Trading by Congress

Apparently members of Congress and their staff can make trades using non-public information obtained through their official positions.

House Rules Committee Chairwoman Louise M. Slaughter, D-N.Y., and Brian Baird , D-Wash., are sponsoring what they call the Stop Trading on Congressional Knowledge Act (HR 682) that would prohibit Members of Congress and their staffers from using nonpublic information obtained through their official positions to benefit themselves financially.

In a statement, the two said the legislation  is more important now, given the amount of money Congress has authorized to help right the economy under the financial services bailout program.

See also: