This blog post originally appeared on RealMoney Silver on Dec. 15 at 8:03 a.m. EST.Life at its best is bittersweet. I have had a good year investing. Some of my oldest friends are also my Limited Partners. My performance in 2008 is a sense of personal achievement for me. Through hard work, a skeptical and independent view and by virtue of hard-hitting analysis, I have made money for my investors in a challenging period. Meanwhile, many of my other friends have been caught up in the alleged Madoff fraud -- many others. As I related on Friday, if accurately reported, the Madoff Ponzi scheme is the biggest fraud of all time, bigger than Bayou and Enron combined. In that column, I detailed my experience of analyzing a Madoff account in 2005, the process of which made me an early nonbeliever because the numbers simply did not add up. I also enumerated six red flags that should have been picked up by investors (and their agents), many of whom put their entire investment capital with Madoff.
The improbability of achieving smooth and high-risk adjusted returns with a split-strike conversion strategy while not charging management and incentive fees but only charging commissions, an unknown and inaccessible accountant, the lack of evidence of a sizeable research and trading staff to complement a large investment management effort and the general lack of transparency were among my concerns. I live in Palm Beach, Fla., the epicenter of the alleged Madoff fraud, and I can tell you firsthand that the effects here have already been felt:
- On Thursday night, I attended a black-tie gala party for a charity that has a large percentage of its endowment with Madoff. Unfortunately, this is more typical than not with the many organizations around the country impacted by Madoff. I also know people who work at charities in New England that had all of their endowments with Madoff; some are being laid off now.
- During the weekend, I received calls from a number of acquaintances who had all their money invested with Madoff; some were crying. Their lives will never be the same.
- At a private club in Palm Beach on Saturday night, I sat next to someone who was purported to have lost as much as $400 million in the alleged scam.
- It is already apparent that the high-priced luxury market will be impacted by the alleged fraud. On Sunday, a real estate friend reported to me that already a number of high-priced Palm Beach homes were put on the market over the weekend by victims who have been nearly wiped out financially.