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Thursday, January 20, 2011

The Fraudian Slip

In 2010 we witnessed the first steps in an incredible movement towards suffocating regulations. Regardless of which side of regulation you personally lean towards the new regulations will be a form of strong suffrage. Certainly there needs to be a movement towards full disclosure, due diligence and clear transparency. These concepts can be easily created with a simple sprinkle of common sense.

A total overhaul of the system is not in order; in fact that type of movement can literally cripple our free market system. There has to be a reasonable middle ground between zero regulation and total government control. The American public needs to let our legislators know that common sense is the only answer.

Fraud will not be legislated or regulated away, in fact history has shown that the greater the regulatory environment the greater the propensity towards fraud. In reality severe and stifling regulation actually attracts fraudulent behavior. The other staple in the ever changing financial arena is the essence of conformity. The most damaging attitude possessed by the majority of investors is that of conformity. Like lemmings running towards the cliff, investors tend to believe everything they read in financial publications and immediately take the advice of these publications. Invariably losses follow and they are usually preceded by the handcuffs of conformity.

Please enjoy the following as we have decided to give you the best overview on Fraud and conformity. Please read Bernie Madoff’s mea-culpa in front of the judge. This confession can become the anthem of how to avoid scams. Who better to teach you then Bernie in his own words? The concluding piece will give you a very clear picture of conformity and why it is so damaging to YOUR financial future. Our commitment at Total Advocacy is to create a rewarding experience of due diligence, full disclosure and clear transparency.

The following are Bernie Madoff’s own words:

To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in the securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients' expectations, at any cost. I therefore claimed that I employed an investment strategy I had developed, called a "split strike conversion strategy," to falsely give the appearance to clients that I had achieved the results I believed they expected.

Through the split-strike conversion strategy, I promised to clients and prospective clients that client funds would be invested in a basket of common stocks within the Standard & Poor's 100 Index, a collection of the 100 largest publicly traded companies in terms of their market capitalization. I promised that I would select a basket of stocks that would closely mimic the price movements of the Standard & Poor's 100 Index. I promised that I would opportunistically time these periods in United States Government-issued securities such as United States Treasury bills. In addition, I promised that as part of the split strike conversion strategy, I would hedge the investments I made in the basket of common stocks by using client funds to buy and sell option contracts related to those stocks, thereby limiting potential client losses caused by unpredictable changes in stock prices. In fact, I never made the investments I promised clients, who believed they were invested with me in the split strike conversion strategy.

To conceal my fraud, I misrepresented to clients, employees and others, that I purchased securities for clients in overseas markets. Indeed, when the United States Securities and Exchange Commission asked me to testify as part of an investigation they were conducting about my investment advisory business, I knowingly gave false testimony under oath to the staff of the SEC on May 19, 2006 that I executed trades of common stock on behalf of my investment advisory clients and that I purchased and sold the equities that were part of my investment strategy in European markets. In that session with the SEC, which took place here in Manhattan, New York, I also knowingly gave false testimony under oath that I had executed options contracts on behalf of my investment advisory clients and that my firm had custody of the assets managed on behalf of my investment advisory clients.

To further cover-up the fact that I had not executed trades on behalf of my investment advisory clients, I knowingly caused false trading confirmations and client account statements that reflected the bogus transactions and positions to be created and sent to clients purportedly involved in the split strike conversion strategy, as well as other individual clients I defrauded who believed they had invested in securities through me. The clients receiving trade confirmations and account statements had no way of knowing by reviewing these documents that those false confirmations and account statements would be and were sent to clients through the U.S. mailsfrom my office here in Manhattan.

Another way that I concealed my fraud was through the filing of false and misleading certified audit reports and financial statements with the SEC. I knew that these audit reports and financial statements were false and that they would also be sent to clients. These reports, which were prepared here in the Southern District of New York, among things, falsely reflected my firm's liabilities as a result of my intentional failure to purchase securities on behalf of my advisory clients.

Similarly, when I recently caused my firm in 2006 to register as an investment advisor with the SEC, I subsequently filed with the SEC a document called a Form ADV Uniform Application for Investment Adviser Registration. On this form, I intentionally and falsely certified under penalty of perjury that Bernard L. Madoff Investment and Securities had custody of my advisory clients' securities. That was not true and I knew it when I completed and filed the form with the SEC, which I did from my office on the 17th floor of 855 Third Avenue, here in Manhattan.

In more recent years, I used yet another method to conceal my fraud. I wired money between the United States and the United Kingdom to make it appear as though there were actual securities transactions executed on behalf of my investment advisory clients. Specifically, I had money transferred from the U.S. bank account of my investment advisory business to the London bank account of Madoff Securities International Ltd., a United Kingdom corporation that was an affiliate of my business in New York. Madoff Securities International Ltd. was principally engaged in proprietary trading and was a legitimate, honestly run and operated business.

Nevertheless, to support my false claim that I purchased and sold securities for my investment advisory clients in European markets, I caused money from the bank account of my fraudulent advisory business, located here in Manhattan, to be wire transferred to the London bank account of Madoff Securities International Limited.

There were also times in recent years when I had money, which had originated in the New York Chase Manhattan bank account of my investment advisory business, transferred from the London bank account of Madoff Securities International Ltd. to the Bank of New York operating bank account of my firm's legitimate proprietary and market making business. That Bank of New York account was located in New York. I did this as a way of ensuring that the expenses associated with the operation of the fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses.

In connection with the purported trades, I caused the fraudulent investment advisory side of my business to charge the investment advisory clients $0.04 per share as a commission. At times in the last few years, these commissions were transferred from Chase Manhattan bank account of the fraudulent investment advisory side of my firm to the account at the Bank of New York, which was the operating account for the legitimate side of Bernard L. Madoff Investment Securities - the proprietary trading and market making side of my firm. I did this to ensure that the expenses associated with the operation of my fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses. It is my belief that the salaries and bonuses of the personnel involved in the operation of the legitimate side of Bernard L. Madoff Investment Securities were funded by the operations of the firm's successful proprietary trading and market making businesses.

Your Honor, I hope I have conveyed with some particularity in my own words, the crimes I committed and the means by which I committed them. Thank you.

Read the highlighted areas particularly closely, as these are the due diligence indicators that are always very evident, though people get caught due to their own personal greed. They want to believe the story so badly that they ultimately drop common sense from the equation and latch onto the story. Are there good strategies to grow your money? YES, however there never has been nor will be a magic bullet that is GUARANTEED or even comfortably risk free. All strong gains come with Risk and you need to totally review your risk tolerance. In doing so you also need to fully understand and comprehend all elements of RISK. Once this has been done you can safely enter into investing as you will now be ready to make smart decisions about money.


The Dangers of Conformity:

“When Too Many Think alike” As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing." -- William Stanley Jevons (1835-1882)

"In speculation, as in most other things, one individual derives confidence from another. Such a one purchases or sells, not because he has had any really accurate information...but because some else has done so before him"-- J.R. McCulloch 1830.

This is the first cycle when all asset classes have risen ranging from stocks to commodities. Everyone has had a taste of success. The explanation for it all is "the world is awash in liquidity". Everyone is also feeling rather complacent & secure.(right before the bubble burst) It reminds one of the Red Indians...."It was autumn, and the Red Indians on the remote reservation asked their new Chief if the winter was going to be cold or mild. Since he was a Red Indian Chief in a modern society, he had never been taught the old secrets, and when he looked at the sky, he couldn't tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared. But also being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked "Is the coming winter going to be cold?” It looks like this winter is going to be quite cold indeed," the meteorologist at the weather service responded. So the Chief went back to his people and told them to collect even more wood in order to be prepared. A week later, he called the National Weather Service again.” Is it going to be a very cold winter?" "Yes," the man at National Weather Service again replied, "It's definitely going to be a very cold winter." The Chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later, he called the National Weather Service again. "Are you absolutely sure that the winter is going to be very cold?" "Absolutely," the man replied. "It's going to be one of the coldest winters ever.” How can you be so sure?" the Chief asked. The weatherman replied, "The Red Indians are collecting wood like crazy."

And so it is with SPECULATION, please don't get duped!

Monday, January 3, 2011

Bull or Bear?

Below I will display some recent copy taken from a newsletter writer and let you decide whether he is Bullish or Bearish. Really makes little difference. I would suggest taking a reasonably contrarian view of the market. It would appearthat any reasonable investor with the ability to think forthemselves now realizethat the market has been artificially pumped up by the Fed for well over a year now. In fact I dare say the Fed has been manipulatingthis market since the Obama administration took office. This is not an opinion on this practice one way or another, it simply is what it is, to think otherwise is fallacy. QE whatever number is the same thing over and over, and it is simply a printing of money to keep a pyschologically pleasing index on the Dow and S&P. At some point real earnings and economic growth will have to backstop this practice, maybe 2011 is the year. As an investor you have to keep track of the best ways to gain absolute returns, doesn't matter what, who, how or where, it simply requires enough independent research to think for yourself and gain some perspective on how to best use your dollars. Read the following:

*****Since China is a major source of growth for the world economy, investors pay intense attention to its every move. So when China says it will continue to buy Spanish bonds, despite the well-publicized debt issues, it's an important vote of confidence.

And we have to acknowledge China's savvy move here. It depends on the global economy every bit as much as the global economy depends on it. So when China goes right to the heart of problem and voices support for Spain, it's a good thing.
*****Now, investors are clearly looking at the bright side right now. In fact, they have been doing so for a few months. And while there can be no doubt that the economic situation has improved, there are still risks to growth.
Given that investors have been solely focused on the upside, it would seem likely that the next shift in sentiment will be toward recognizing risks, rather than further upside.
When will such a shift occur? Well, that is the big question. The S&P 500 is in the midst of a strong support/resistance zone between 1,260 and 1,280. With the S&P 500 approaching the upper end of that range, we could see some more serious selling soon.
As I've been saying for the last couple of days, have cash and wish-list of quality stocks ready...

Me again: Remember pull backs make for great buying opportunities, so any market adjustment will give you a wonderful buying trend. Look for companies with real growth, not simply corporate cutbacks for bottom line wins, also companies that have strong cash positions and have wittled down debt during the last 6 quarters. Lastly, put on your alternative investment caps and look at private placements and hedge funds as there are some strong wins to be had in these areas. In the coming days I will give you an invitation for a unique webinar that will discuss Alternative Investing and the opportunities for 2011! Here's to making smart decisions about money!