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Why Did RenTec Keep Their Madoff TRS After Uncovering His Ponziness, And Other Questions

Tyler Durden's picture


Some stunning revelations have been disclosed in the David Kotz 477 page report on SEC's colossal (and in normal societies, terminal) blunder with Madoff. Primary among them is that everyone's favorite liquidity provider RenTec was not only an indirect investor in Madoff via its Meritage Fund of Funds, not only was fully aware based on internal correspondence that Madoff was a pyramid scheme, but that it did nothing to notify the authorities, and also decided to keep half of its investment with Bernie, even after numerous internal emails certifying the illegitimacy of the fund way back in 2003.

Turns out in 2004 the SEC was conducting a routine examination of RenTec, when it encountered, among other likely very juicy things which however the SEC has no idea how to interpret, some correspondence in which the RenTec brass basically made it clear that everyone in the firm was aware that Madoff was a ponzi, and yet that convinced the fund to only trim its holdings by half in a Total Return Swap controlled by HCH Management, a vehicle managed by Madoff, which traditionally is simply a investment mechanism allowing massive leverage. TRS'es have also recently gained notoriety for allowing hedge funds to sidestep public disclosure thresholds, as best seen in the CSX-Children's Fund case: "As discussed in CSX Corp. v. The Children's Investment Fund Management,
TCI argued that it was not the beneficial owner of the shares
referenced by its Total Return Swaps and therefore the swaps did not
require TCI to publicly disclose that it had acquired a stake of more
than 5% in CSX." Not all too shocking that RenTec, or more specifically Medallion, uses comparable mechanisms... however in venues controlled by Bernie? Now that's juicy.

According to an internal email from November 13, 2003 from Nat Simons, son of the Jim, who has been with the firm since 1994, and who, according to RenTec's marketing book, runs Rentec's "internally owned Fund of Funds" and "Manages fundamentally driven direct investment portfolio" to select firm members had this to say:

Committee members,

We at Meritage are concerned about our HCH investment [Renaissance’s indirect investment with Madoff]. First of all, we spoke to an ex-Madoff trader (who was applying for a position at Meritage) and he said that Madoff cherry-picks trades and “takes them for the hedge fund.” He said that Madoff is pretty tight-lipped and therefore he didn’t know much about it, but he didn’t really know how they made money. [A colleague] heard a similar story from a large hedge fund consultant who also interviewed an ex-trader. The head of this well-respected group told us in confidence that he believes that Madoff will have a serious problem within a year. We are going to be speaking to him in 11 days to see if we can get more specifics.

Another point to make here is that not only are we unsure as to how HCH makes money for us, we are even more unsure as to how HCH makes money from us; i.e. why does [Madoff] let us make so much money? Why doesn’t he capture that for himself? There could well be a legitimate reason, but I haven’t heard any explanation we can be sure of. Additionally, there is a $4 billion Madoff pass-through fund (Fairfield Sentry) that charges 0 and 20% and it’s not clear why Madoff allows an outside group to make $100 million per year in fees for doing absolutely nothing (unless he gets a piece of that). The point is that as we don’t know why he does what he does we have no idea if there are conflicts in his business that could come to some regulator’s attention. Throw in that his brother-in-law is his auditor and his son is also high up in the organization and you have the risk of some nasty allegations, the freezing of accounts, etc. To put things in perspective, if HCH went to zero it would take out 80% of this year’s profits.

Perhaps the best reason to get out is that we really don’t expect to make an outsized return on this investment. Sure it’s the best risk-adjusted fund in the portfolio, but on an absolute return basis it’s not that compelling (12.16% average return over [the] last three years). If one assumes that there’s more risk than the standard deviation would indicate, the investment loses it's luster in a hurry.

It’s high season on money managers, and Madoff’s head would look pretty good above Elliot Spitzer’s mantle. I propose that unless we can figure out a way to get comfortable with the regulatory tail risk in a hurry, we get out. The risk-reward on this bet is not in our favor.

Please keep this confidential.

Nat [Simons]

According to the report, "HCH appears to be a reference to HCH Capital Ltd., an affiliate of Khronos, LLC. Simons Interview Tr. at p. 9." We will get back to HCH and Khronos in a second.

Regarding the size of Meritage's investment in HCH, it was likely not insignificant, based on this disclosure: "To put things in perspective, if HCH went to zero it would take out 80% of this year’s profits." As for Meritage, which is run by Jim's son Nat, it is a "$5 billion fundamental vehicle that invests the assets of founder Jim
Simons and other Renaissance principals and employees and was once part
of Renaissance’s flagship Medallion Fund." Its General Counsel and Chief Compliance Officer is Nat's wife, Laura Baxter-Simons, and the fund's most recent public holdings can be found here. What is also interesting about Meritage, is that it was the seed investor for hedge fund Hutchin Hill, which is run by former Goldman and SAC quant, Neil Chriss. But that's a story for another night.

As to the reason why RenTec/Meritage had to invest indirectly, the report had this to say:

Renaissance invested with Madoff indirectly because Madoff would not accept a direct investment from them. Broder Interview Tr. at pgs. 6-7. Broder speculated that the reason for Madoff’s refusal was that Renaissance employees “were too smart.” Id. at p. 6.

Maybe a little too smart. But definitely smart enough to learn how to generate some very curious liquidity algorithms. Yet Broder's statement betrays an amusing breed of hubris... One knows what they say about what happens to pride before falls and such.

So once RenTec was made aware of Junior's views, the concerns percolated, and were recapped best by 15-25% Medallion equity holder and RenTec Chief Scientist Henry Laufer Ph.D., whose role at RenTec is to "conduct special strategic projects [and to give] final sign off on any changes to investment systems":

I share the concern at Meritage about the HCH investment.

In Nat’s note, I am most worried about the new information in the statement that “Madoff cherry-picks trades and ‘takes them for the hedge fund’.” We at Renaissance have totally independent evidence that Madoff’s executions are highly unusual.

I do not know what to make of the consultant saying

“Madoff will have a serious problem within a year.”

In all, I very much agree with the sentiment[,] “It’s high season on money managers, and Madoff’s head would look pretty good above Elliott Spitzer’s mantle. I propose that unless we can figure out a way to get comfortable with the regulatory tail risk in a hurry, we get out. The risk-reward on this bet is not in our favor.”

A last quote, from Jim, I believe: “If you are going to panic, panic early.”

Henry [Laufer]

Looks like RenTec is one of those places where a quote from the head honcho is required material for any distribution, especially when said head honcho is on the distribution list. Yet, Jim's quote may some day soon prove oddly prophetic.

So how did RenTec manage to so effectively reverse engineer Madoff's book?

Because they did not hold a direct investment with Madoff, they had to perform due diligence using only publicly available information and customer statements provided to them by two other Madoff clients. Laufer Interview Tr. at pgs. 15-16; Broder Interview Tr. at pgs. 13-14. They had no communications with Madoff or BMIS. Broder Interview Tr. at p. 14.

And here is how Junior explains the lack of reporting of their suspicions to the SEC:

We did feel that despite the fact that we’re kind of smart people, we were just looking at matters of public record. I mean, you know, it wasn’t hard to get these statements. These statements, you know, hundreds of – lots and lots and lots of people had Madoff statements. So we didn’t really feel that we were dealing with something which is proprietary, and therefore the conclusions that we came to were something that was – you know, other people were unlikely to come to. And it’s not like we needed a PhD in mathematics to do the … study on the OEX.94 Right? I mean, this is just – just looking at the size of the market.

Of course, it had nothing to do with trying to figure out a way to capitalize on their insight into what would eventually become the biggest Ponzi in history (until the eventual implosion of Social Security of course), as that would be somewhat unethical...

Yet at least RenTec is perfectly objective about their reverse engineering was trying to achieve. According to Henry Laufer:

And we would have loved to figure out how he did it so we could do it ourselves.

Good to know what noble causes drive RenTec to figure out what makes a massive criminal enterprise tick.

So did RenTec immediately bail out of the CHC TRS once the epiphany of Madoff's crookedness struck then? Of course not:

After performing their due diligence, Laufer stated that “we were very worried” about the investment with Madoff. Laufer Interview Tr. at p. 33. However, opinions diverged at Renaissance about whether to entirely divest itself of the investment. Simons Interview Tr. at p. 28. Broder and Simons wanted to get out of the investment. Broder Interview Tr. at p. 35; Simons Interview Tr. at p. 27. But one piece of information “helped to allay concerns” of other employees: “[W]e were aware that … [Madoff] had been investigated by the SEC.” Id. at pgs. 17, 28. Because of the competing viewpoints, Renaissance stated they initially reduced their investment by approximately one half and later got out of the investment entirely for unrelated reasons.

So RenTec wants the gullible SEC to believe that it would not eliminate its Madoff holdings just because the Ponzi had been audited in 1992, a whole 12 year prior to the time all these events were occurring? Good for them, and apparently the SEC bought it. Yet those astute enough to see beyond this amusing diversion would love to know what the real reason for Simons' persistence in holding on to Madoff was (and what was the final date of TRS disposition), as well as what was the ultimate P&L compliments of Madoff's gullible investors.

Going back to the original point by Nat "why does [Madoff] let us make so much money?" maybe it would be useful to uncover just how much money RenTec did make off Madoff's so called operations, and by implication how much RenTec should be on the hook for, if the Madoff trustee actually does his job properly of recovering capital for Bernie's bankrupt investors. After all has it not been the case that Madoff in essence never really traded? So just what exactly was Bernie doing managing a highly complex instrument such as a TRS? Inquiring minds want to know so much more.

And speaking of ever more questions, just how is Khronos involved? "HCH appears to be a reference to HCH Capital Ltd., an affiliate of Khronos, LLC." Has the $2 billion Fund of Funds, run by David and Rafael Mayer been compromised by Madoff a little more than has been let on? While Khronos seems to be a big fan of Einhorn, it doesn't seem to be too actively involved in the investing world these days. And we all know how much clout FoF's have these days, after the whole Fairfield Sentry fiasco.

We will have some additional color on Khronos soon, in the meantime, we would like to bring your attention to an interesting paper by Markov Process International, whose purpose, since we are discussing reverse engineering of funds, is to do just that, however not to Madoff, but to RenTec's non-employee investment vehicles, RIEF.

We won't discuss this paper at the time, save to highlight the conclusions:

During the recession of 1989-92, the hypothetical portfolio underperformed the index for four consecutive years–about 65% in total. During the technology “bubble” of 1999-2000, it underperformed by about 25%, trailing the index in each consecutive year.

Thus, the fund’s monthly 95% VaR computed in March 2007 is equal to 8%, indicating a potential 8% monthly loss during a twenty month period (assuming constant exposures).

If RIEF has an 8% VaR, one wonders where Medallion stands, and if adding a zero to the number would not be conservative. Then again, Medallion is in the noble liquidity provisioning business (and its entrails spill over absolutely in every corner of the market). And, if as Zero Hedge likes to warn on occasion, there is a total collapse in the computerized liquidity landscape that so many have gotten all too fond of, Medallion's VaR would really be 100%. Although with the "abundance" of public data on what really happens behind the scenes at those 2,600 cores, one can only hope that the SEC is up to par in determining just what the risk potential is in East Setauket (and we are not even talking about alleged abuses of impropriety)



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Sat, 09/05/2009 - 00:47 | 59647 Anonymous
Anonymous's picture

I think rentec is also a ponzi scheme. They closed medallion, started losing money and then opened a new fund to pay for themselves at the expense of math-impressed dumb money.

Sat, 09/05/2009 - 00:53 | 59654 slore
slore's picture

brilliant; now shove it down their fucking throats until they do something.

Sat, 09/05/2009 - 01:08 | 59671 Anonymous
Anonymous's picture

I cant see why we are getting hot and bothered over this:
1) Ok, so they figured or strongly suspected that Madoff was a Ponzi. Took part of their money off the table, so whats wrong with that. Didnt share their conclusions with anyone, so what? They are not policemen , or activist blogs..

2) I guess the real question is when they took the other half out? I havent seen anything in the article which suggests that they somehow colluded with Madoff and timed the exit before the denouement.So they took their chances, along with many others..


Sat, 09/05/2009 - 05:59 | 59744 OrganicGeorge
OrganicGeorge's picture

A fiduciary duty is a legal or ethical relationship of confidence or trust between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary. One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment. In a fiduciary relation one person justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests.

Sat, 09/05/2009 - 08:08 | 59764 Anonymous
Anonymous's picture

Madoff was the fidiciary here... Ren-tec was a fiduciary for Ren-tec's clients... as a result, they had a fiduciary duty to get the hell out of dodge as soon as they smelled something fishy (aside from the duty to prudently invest in the first place). I think what you're advocating is the good samaritan rule, which doesn't exist.

All I see from this article is that Ren-tec never got specific confirmation it was a ponzi... it simply suspected as much and, as a result, pulled the plug.

The article is much more damning of the SEC given Ren-tec's methods of determining the likelihood of a fraudulent investment, were purely from public sources and anecdotal evidence. In other words, if the SEC had even the most remote inkling to investigate, it would have uncovered the scheme. But we need more regulation, right?

Sat, 09/05/2009 - 08:45 | 59779 Gabriel Gray
Gabriel Gray's picture

Last week I witnessed a murder and can identify the assailant. The week before that I was witness to a large bank robbery and also can identify the perpetrators.

pffft. why should I bother contacting the authorities, not my problem.

Sat, 09/05/2009 - 10:01 | 59805 Bob
Bob's picture

Actually, in these cases as an ordinary citizen your responsibility to report is a moral but not a legally binding one. 

The fiduciary responsibilities of a formal fiduciary agent, on the other hand, such as a policeman who witnessed or had reason to believe that he had material information about such crimes would be a whole different matter.  This is where all of Wall Street, particularly all the licensed professionals working within every single agency (accountants, lawyers, etc.) is  squarely on the hook. 

This is the completely vulnerable underbelly of the entire mass criminal enterprise that is the financial industry. 

Make this one stick and you may see all the rats streaming from the concealed bowels of the Street to Fed and State authorities to save their asses and professional futures. 


Sat, 09/05/2009 - 09:34 | 59797 Kaiser Soze
Kaiser Soze's picture

You work for the SEC?

Sat, 09/05/2009 - 01:11 | 59676 Anonymous
Anonymous's picture

Tyler, how is it that you can connect the dots, in your typical elegant fashion, and every other media outlet get an epic fail on this (and so many other) issue (s)?

And when exactly do you sleep?

Sat, 09/05/2009 - 08:46 | 59781 Anonymous
Anonymous's picture

Zero Hedge is doing the INVESTIGATIVE REPORTING job that the mainstream financial media should be doing, but is not.

CNBC is losing viewers daily because it is beyond comical that they would continue to think Americans are ok with being continually LIED TO.

They are nothing more than a megaphone for complicit TARP-sucking corporations. (GE)

Sat, 09/05/2009 - 10:40 | 59832 Bob Dobbs
Bob Dobbs's picture

Like a Unix daemon, he has spawned multiple independent children.

Sat, 09/05/2009 - 11:18 | 59849 Miles Kendig
Miles Kendig's picture

Who had to wait a few days on the porch first before they could come along and play

Sat, 09/05/2009 - 02:38 | 59677 TumblingDice
TumblingDice's picture

Wow so this is how it all runs huh? Pretty sickening.

"It's high season on money managers, and Madoff's head would look pretty good above Eliott Spitzer's mantle." It looks like its all just a big fucking game. It's pretty obvious they knew shit was rotten yet the reason they gave for Madoff going down was not because he was a cheat, but because some NY attorney general had to "fill his mantle", fulfill his personal ego and construct another step in his political stepladder. They can't think of it from the perspective of breaking the law or being unfair because hell, if they thought of it that way then they're just as guilty as Madoff.

This is how our financial system works, ponzi upon ponzi built entirely on faith. Social Security pales in comparison IMO. The whole thing is a confidence game played by ethically bankrupt players. I am a part of it but I only play the short side (and I have been losing money recently but am up overall thank you very much). Thats the only way I can live with myself when I'm at the casino. Otherwise I'm just being herded and helping lure in more suckers into the next crash. And the crash will happen because like any Ponzi scheme, it relies on a continuous inflow of new suckers into the pyramid. When it is just new money from the Fed coming it, then it doesn't work, because sure they can sell to themselves, but someone has to be left holding the bag, and so far only performance chasing rich folk hedge funds are buying it.

The whole system is leveraged to such an extent that it is, for all intents and purposes, a ponzi scheme. We have even legalized the ponzi scheme by abandoning mark to market. Putting down wealth on the banks' books that we know doesn't exist. If you play along you're either a sucker or RenTec a willful criminal participant who "would love to figure out how to do it yourself" We need to re-haul the monetary system to such a degree that it places the incentive structure right side up again, instead of running a continuous moral hazard. Otherwise, there's nothing good that will come of this. If anything this is an opportunity to expose the fraudulent system that is the Federal Reserve and settle on something better.

Sat, 09/05/2009 - 10:06 | 59813 Bob
Bob's picture


Sat, 09/05/2009 - 11:19 | 59850 Miles Kendig
Miles Kendig's picture

The sun has risen

Sat, 09/05/2009 - 01:22 | 59685 Anonymous
Anonymous's picture

You gotta love it - the more these gov't agencies mess up - that is, the bigger their failure - the more taxpayer money they receive. Seems like everyone knew about madoff except the SEC.

Sat, 09/05/2009 - 01:40 | 59692 My cognitive di...
My cognitive dissonance's picture

Because they can.

Sat, 09/05/2009 - 01:57 | 59698 Anonymous
Anonymous's picture

Tyler: I saw what you saw on rentek and thought that was more of an error than markopolos. But something else struck me. It was an email exchange between regulators where they comment about Bernie's clout; that he was connected. These were words/emails of REGULATORS. It makes it seem as though it was commonplace for regulators to always understand if a target was "protected." Lets think of this another way, in the absence of language indicating that a target does NOT have clout, is that a signal at the SEC to pound the poor bastard into oblivion? It makes it seem as though the sec is a place where regulators always know if they're dealing with someone who has cover...unbelivatble really...

Sat, 09/05/2009 - 11:21 | 59853 Miles Kendig
Miles Kendig's picture

Just a key indicator of the what and how of the current landscape.

Sat, 09/05/2009 - 11:33 | 59860 Bob
Bob's picture

Perfectly analogous to NYPD adopting a hands-off policy wrt the Mafia. 

Sat, 09/05/2009 - 12:52 | 59920 Anonymous
Anonymous's picture

Yea but even the mafia did SOME good.

Sat, 09/05/2009 - 02:36 | 59714 arnoldsimage
arnoldsimage's picture

i have news for everyone... our entire FUCKING financial system in the united states is one HUGE fraud. there is corruption in every corner for crying out loud. i'm truly surprised our country isn't on fire as i speak. a total banana republic clothed in five thousand dollar suits. what a complete sham we are.

Sat, 09/05/2009 - 03:41 | 59724 Gordon_Gekko
Gordon_Gekko's picture

The flaw lies with out fiat money system. To quote Ayn Rand (again):

"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'

When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are".

BTW, for all you label-slapping people out there, I am not an "objectivist" or anything, but I know when I read something true and sensible.

Sat, 09/05/2009 - 08:49 | 59784 Anonymous
Anonymous's picture

YES. Ayn Rand is right on the money with that passage.
It is sickening how pacified the sheeple still are in this country. I can't believe their arent riots in the streets every day.

Sat, 09/05/2009 - 12:24 | 59895 TumblingDice
TumblingDice's picture

we still have our bread and circus.

Sat, 09/05/2009 - 09:35 | 59799 MinnesotaNice
MinnesotaNice's picture

It is really interesting how prophetic she was... and how applicable her words are now... and I have no political allegiance... but when you hear truth it resonates.

Sat, 09/05/2009 - 10:11 | 59800 MinnesotaNice
MinnesotaNice's picture


Sat, 09/05/2009 - 11:02 | 59818 Bob
Bob's picture

Too bad her implicit solution (at least as conjured in the minds of her disciples) only supports the evil.  Of course, so it is with every idiologically "pure" world perspective . . . religion should be a beautiful thing, but we all know how it falls so short. The problem is that puritanical idiologies are ripe for hijacking by sociopaths who use the systems to exploit the gullible.  Puritanical systems do not sanely account for the unmitigatable vagarity of human nature.  This is what makes checks and balances a necessity--no one can be trusted to police themselves under any system and everyone needs an opposing interest/agency that is equally strong to protect those in power (and those subject to that power) from the inevitable abuses that power will produce.

Especially when the power can make its holders Masters of the Universe. 

Sat, 09/05/2009 - 14:10 | 59977 ZerOhead
ZerOhead's picture

Time to audit the Fed perhaps?

Sat, 09/05/2009 - 16:06 | 60019 Hephasteus
Hephasteus's picture

It's the ONLY way it will work. Relationships with unequal power balances just do not work out well for anyone.

Sat, 09/05/2009 - 13:05 | 59930 Anonymous
Anonymous's picture

Well said.....bravo.

Sat, 09/05/2009 - 13:30 | 59949 Anonymous
Anonymous's picture

SEC is the syndicate's muscle in the extortion racket. Protection offered other criminal classes in the pay to play casino of America.

If we want a country as envisioned by founding fathers we have to amend the constitution to better regulate the banking system, bound in the fractional reserve which lends itself to much mischief, and put check/balances upon banks.

Lobbying and purchasing politicians has hardly been addressed too.

Hard to even consider a renaissance of freedom in the USA with so much systemic intrigue and state sponsored corruption. Maybe America the beatiful needs to fragment in order to create sectionalisms where one may arbitrage for freedom. A huge umbrella of oppression exists now and is enforced by the state's tentacles.

Sat, 09/05/2009 - 03:00 | 59719 Assetman
Assetman's picture

Rentech is endemic of the type of firm that-- if they could have figured out the details of the Madoff scam, they might have tried it.  Except that they may have found it too risky.

In this case, Rentech may be guilty of having its suspicions about Madoff's operations-- but it didn't have the time or inclination of follwing through to the regulator of choice.  Still, there were more than enough clues for the SEC to follow up from.  They just didn't do squat.

At some point soon, someone is going to need to press a massive reset button.  Our political and financial systems are in shambles-- and it's going to take some courageousness out of new leaders before we can hope for real change.  That may not happen any time soon... but I think events will dictate finding those leaders willing to serve.

Sat, 09/05/2009 - 10:23 | 59822 Anonymous
Anonymous's picture

Don't follow "leaders", unless you know them personally.

Sat, 09/05/2009 - 05:35 | 59721 Gordon_Gekko
Gordon_Gekko's picture

Is there ANY operation on Wall Street that is NOT a Ponzi scheme?


BTW, excellent work TD.

Sat, 09/05/2009 - 03:44 | 59729 Project Mayhem
Project Mayhem's picture

well done

Sat, 09/05/2009 - 04:50 | 59733 Pizza Delivery Man
Pizza Delivery Man's picture

Madoff is water under the bridge.

For every event there is an equal or opposite reaction.

What I want ZH and it's readers to understand is this...

You can sit and bitch about all the inequalities and corruption. That is great and all, the information is valuable.

But what are people doing about it? Nothing. Money controls the world so unless someone wants to confront the corruption in a court of law this conversation is fruitless and insulting.

ZH - You have the information...Why not bring it to the courts, I'm sure your readers would at least endorse you...I would.

The only thing more potent than money is the power of the (angry) collective body.

You have spent enough time defending your anonymity while comparing yourself to the likes of Thomas Jefferson and James Madison. The only difference is...they actually did something.

It comes down to freedom, what it means to you, and what you are willing to do to protect it. THIS BLOG IS IMPORTANT AND INFLUENTIAL!

Sat, 09/05/2009 - 04:57 | 59741 Gordon_Gekko
Gordon_Gekko's picture

You mean the courts that have already been bought and paid for by our oligarchs? No thank you. Nothing less than complete and total repudiation of the fradulent paper currency peddled by these criminals alongwith making an example out of those who are commiting these crimes will stop this looting. I mean if someone entered your house and started looting and pillaging, will you go complaining to a (bought and paid for) court or will try to defend yourself using any and all means possible right there and then? It is the same with these criminals; the only difference is that they are wearing government regalia. The founders didn't win freedom and independence by going hat in hand to the British courts - they got it by fighting for it.

Sat, 09/05/2009 - 05:20 | 59742 Pizza Delivery Man
Pizza Delivery Man's picture

It takes an influential body to rebel against a powerful entity.

ZH has the influence. ZH constantly reverts to the federalist papers...but those that wrote the federalist papers ended up physcally rebelling against the government of England.

I'd like to see a more public ZH.

Sat, 09/05/2009 - 08:18 | 59770 Anonymous
Anonymous's picture

First, I don't think you want to see granny with a pitchfork take the streets... I think we idealize the notion of a systemic change creating the world inside our brains... but what we fail to realize is that world is different for everyone and, ultimately, it takes men far greater than ourselves to settle our differences. I highly suspect that this scenario would lead to unimaginable atrocities... morality, for americans at least, is something long since abandoned.

The other issue we have is that it can take centuries to build a society only to have it crumble in a few years... It's the rule of wealth... eventually, old money falls upon a drug addicted, inept, unstable person and is gone to the casino, stripper, etc. in two shakes of a lamb's tail.

Second, you can bet your sweet ass this report is going to make it to the court of law, IMMEDIATELY. There is currently a money grab going on for the left over table scraps... you think they won't want ren-tec to pony up? You think a Judge won't add them as a party after a report from the SEC? They'll have plenty of explaining to do and documents to provide (shred).

Sat, 09/05/2009 - 11:32 | 59859 Miles Kendig
Miles Kendig's picture

but what we fail to realize is that world is different for everyone and, ultimately, it takes men far greater than ourselves to settle our differences.

Beg to differ.  The extraordinary is always accomplished by the ordinary.  The fact is that history remembers the brave willing to stand against tyranny and succeed, but few that do are successful since the tall blade of grass sees the blade first.  Here is where the courage borne of conviction and clear headed action is called for.  The greatest failure is the failure to try and stand.  And in so doing fade into history without positive effect consigning their heirs to subservience of the corrupt.

Sat, 09/05/2009 - 16:22 | 60024 deadhead
deadhead's picture

Layne....beautifully spoken!

Sat, 09/05/2009 - 10:55 | 59843 Bob
Bob's picture

That time may be at hand . . . see Hephasteus' post below.

Sat, 09/05/2009 - 12:55 | 59924 Ben_the_Bald
Ben_the_Bald's picture

Pizza guy: You are vastly overestimating ZH.

Sat, 09/05/2009 - 13:02 | 59927 MinnesotaNice
MinnesotaNice's picture

Maybe it will be someday... but right now I view ZH as a terrible itch that Wall Street can't quite reach to scratch... and every once in a while the itch flares up into full-fledged hives creating agony for Wall Street. 

Sat, 09/05/2009 - 06:16 | 59746 Larry Doyle
Larry Doyle's picture

Mr. Pizza Delivery Man, 

Great point. Are there any pending lawsuits to address points you raise? Yes. 

Amerivet Securities of MorenoValley, CA has filed a complaint against FINRA compelling FINRA to open its books and records. In the complaint, there is an allegation that FINRA had invested in Madoff. Do they have a smoking gun? 

For those interested in hearing from the attorney representing Amerivet, former SEC chair Harvey Pitt, the head of the Madoff Victims Coalition, and a Wall Street veteran who has written extensively about FINRA, you may care to read...

Sat, 09/05/2009 - 08:55 | 59786 Sqworl
Sqworl's picture

Mr. Doyle: Thank you for your continued coverage of this corrupt SRO.  Unfortunately, we all know that they will continue to operate and monitize themselves from their illegal operaton.  I hope Harvey goes the distance and exposes the corruption across the regulatory landscape.

Hopefully, we will see the payoffs via salary and bonus to the following individuals, Mary Shapiro, Rick Ketchum, Linda Feinberg and lastly, the board members payout!!!


Sat, 09/05/2009 - 10:42 | 59833 Anonymous
Anonymous's picture

On the individual level, start by withdrawing your cash from any and all bailed-out institutions and place it with a reputable, smaller institution. Don't buy any financial products, insurance products etc. from the crooks.

Vote with your assets.

Sat, 09/05/2009 - 04:35 | 59736 Anonymous
Anonymous's picture

Have you considered that the SEC is being set up? Madoff was a Reichstag fire for gutting the SEC of enforcement powers, concentrating more power in the Fed.

I was told by a Washington (ex-Fed) authority I trust last year that a plan was in operation to gut the SEC of its powers, empower the Fed with overall authority over both investment and commercial banks (because they pose "systemic risk"), and leave the rump SEC as toothless as the CFTC. Madoff is the engine for making this plan palatable and justifiable to the sceptical in Congress.

Think about it. You know it makes sense.

Sat, 09/05/2009 - 11:37 | 59861 Miles Kendig
Miles Kendig's picture

A what and how that fits the evidence.

Sat, 09/05/2009 - 12:49 | 59917 Ben_the_Bald
Ben_the_Bald's picture

There are lobbyists who are pushing for a plan such as the one you describe. But they don't use Madoff in any conversation because some politicians do believe that the solution to that Madoff problem is to make the SEC stronger, not the Fed.

Sat, 09/05/2009 - 05:30 | 59743 fiatmoney
fiatmoney's picture

Oh boy, and i thought they are just smarter then orthers. TCI, Rentec, and all the other brilliant guys..Nice..the pyramid works...FED (where federal is a joke, a cartell of wallstreet banks)-> Wallstreetbanks-> Madoff<- Fund of Funds<-TCI, RENTEC etc..<-wealthy people<-useless ponzi funds<-collecting from blue collar people<-........this whole fiatmoney system is a gigantic ponzi...stop accepting worthless paper (YEN, USD, GBP, EUR...) AND PRESS THE RESET BUTTON.....

Sat, 09/05/2009 - 05:59 | 59745 Hephasteus
Hephasteus's picture

More importantly who is going to die.

The Father (Deutsche Bank), The Son (JP Morgan), or the Holy ghost (Morgan Stanley).

My gut says Deutsche. Something very sinister and convoluted is going down. I can feel it. Here's one of Deutsche's home page stories.

"Basic Features of a New World Financial Order": Speech of Dr. Josef Ackermann at the ZEIT Conference "New Architecture for the Financial Industry"


Anyway here's another piece of the meltdown rumor.


Sat, 09/05/2009 - 10:35 | 59829 Bob
Bob's picture


Holy Fucking Shit.

This is the most compelling click-through I've ever made. 

American NewSpeak may fall like the Tower of Babel if China follows through on basic common sense.  How sad it is that we've reached such a state of collective corruption that only China can force us to clean up the mess we created and still perpetuate. 

Sat, 09/05/2009 - 11:56 | 59870 Hephasteus
Hephasteus's picture

It's a tiny tiny tiny portion of the derivatives market. But you screw it up and it undermines the massive derivitaves market that makes up the entire manipulation sequence of the US economy of getting people to pay more for something under every circumstance.


Sat, 09/05/2009 - 12:04 | 59877 Miles Kendig
Miles Kendig's picture

The avalanche is gaining momentum

Sat, 09/05/2009 - 12:58 | 59925 Bob
Bob's picture

I saw this coming (just from a common sense perspective) nearly two years ago--after all, why would the rest of the world just agree to eat our shit?

Of course, I did not appreciate the scale of the financial industry's capture of our government or the lengths the gov-finance complex would go to in covering up the crimes.

That said, I wish I could feel good about this whole thing for being so damn smart in predicting it.  But you've really fucked up my world, Hephasteus.  I'm shaking like a school girl. 

Sometimes it sucks to be right as much as it does to be wrong. 

Hope TD hammers this topic hard. 

Sat, 09/05/2009 - 12:41 | 59912 Ben_the_Bald
Ben_the_Bald's picture

You must be short Deutsche Bank, talking your book?

Sat, 09/05/2009 - 16:15 | 60021 Hephasteus
Hephasteus's picture

No. Let me talk my book. I'm long 5.56 nato, 7.62 nato. Long camping equipment. Long Gold and keep enough dollars that if people take them fine. If not they start fires. LOL Think i'll buy a mp3 player so i can play some tunes if they try the resonant frequency chill pill stuff.

Sat, 09/05/2009 - 06:24 | 59747 Anonymous
Sat, 09/05/2009 - 08:26 | 59772 Anonymous
Anonymous's picture

Smoking, top-of-your-game work. Compliments to all involved.

Sat, 09/05/2009 - 08:49 | 59782 RobotTrader
RobotTrader's picture

Wonder how Bernie is using his ill-gotten gains while in prison???

Sat, 09/05/2009 - 08:57 | 59787 Sqworl
Sqworl's picture

LOL..I read that he has a peanut for a penis!!  These days, he is being used a depository for the kosher thugs of club Fed..

Sat, 09/05/2009 - 10:24 | 59823 Sqworl
Sqworl's picture

His victim (mistress) wrote a book.  I guess Ruthie the Rat Madoff got the best payoff!

Sat, 09/05/2009 - 10:20 | 59821 3greenlights
3greenlights's picture

Ya know, if that outfit comes in red, she could moonlight at a hospital as a candy strip(p)er...

Sat, 09/05/2009 - 09:20 | 59792 Tax Man
Tax Man's picture

"Good to know what noble causes drive RenTec to figure out what makes a massive criminal enterprise tick."


You reduce the value of your opinions by taking such cheap shots. Either you did know that this was a cheap shot, or you are stupid. RenTec was of course trying to reverse engineer this in the belief that there was a lawfull strategy they could copy with a profit. Instead they ended up with the layout of a ponzi which they did not copy.

I like to get the facts, but cheap shots like this increase the energy I must use to filter BS from facts.

That said, leaving half of the investment there and keeping quiet is not what my mother told me to do.

Sat, 09/05/2009 - 10:47 | 59838 Bob
Bob's picture

So does that leave you to blame your father?

If so, I would hope that his disappointment is profound. Masculinity used to impose deeply moral affirmative obligations to act against wrongs. 

Sat, 09/05/2009 - 09:31 | 59796 Anonymous
Anonymous's picture

Incredible work that I have not seen or heardreported ONCE in the MSM.

I have said from the beginning that almost every hedge fund that dealt with Bernie was probably in on the fraud.

These are some of the so-called smartest guys in finance, and we are supposed to believe they were completely oblivious to Bernie's ponzi scheme? If you believe that, I've got a bridge to sell you.

Sat, 09/05/2009 - 09:51 | 59803 Anonymous
Anonymous's picture

They're all criminals. Anybody know the shortest period of time that it has taken any major indice to achieve new high's after a retracement in excess of 50% from the peak? Nasdaq and Nikkei have never recovered, but what's the fastest recorded recovery in terms of achieving new highs once the 50% retarcement barrier has been breached?

Sat, 09/05/2009 - 09:57 | 59804 Anonymous
Anonymous's picture

tyler: Just as Rentec conducted a quick risk/reward calculation on madoff and concluded that regardless of what was going on the risk wasn't worth it, you must do the same.

For those who think that investment interests can seek relief in the courts or through the sec, they are insane. Consider that in the wake of the settlement Spitzer told investors that he had set the table for them and they must now go to the courts. investors got nothing. Markopolos went to the SEC and got nothing. Courts don't understand the complexities of the issues debated here every day. I'm halfway through the Kotz report, (its a slow read,) I know one of the ocie examiners personally. She's an idiot. And she's a branch chief who is moving up the ladder at ocie because everyone else is leaving.

A former Head of Enforcement once told me something that I have never forgotten. Referring to the SEC, he said "they play for their own team."

Sat, 09/05/2009 - 12:54 | 59923 MinnesotaNice
MinnesotaNice's picture

Most regulatory bodies play for their own team... their first goal is survival just like that of any living, breathing person... and survival means don't make any huge misteps that will get you killed... and that leads to the slippery slope of avoiding all risk by being politically correct and connected... so then the public can only look forward to the occasional watered-down investigation that gets one day of 'atta boy' press coverage.

Sat, 09/05/2009 - 10:02 | 59810 Marco23
Marco23's picture

They're all criminals.  Does anybody know the fastest recored recovery in a widely followed stock indice, in a developed nation, after there has been a 50%+ retracement from the peak?  Nasdaq 2000 and the Nikkei have never recovered, but to put the value of the Dow in a historical perspective, what's been the fastest recovery?

Sat, 09/05/2009 - 12:26 | 59898 Ben_the_Bald
Ben_the_Bald's picture

I'm not sure what you are implying about the fastest recovery. But here, see for yourself:


Sat, 09/05/2009 - 10:14 | 59817 Anonymous
Anonymous's picture

"So once RenTec was made aware of Junior's views"


(File under "Fugly")

Sat, 09/05/2009 - 10:16 | 59819 TomJoad
TomJoad's picture

The entire financial system is rotten to the core. I wondered what the putrid smell was the last time I was in New York. It was the rotting corpse of our entire economic structure. I only wonder how much longer it will take before it (and the rest of the oblivious population) realizes that it is a dead and rotting animated zombie corpse. I think that people in the Government and the media who really have a clue what is going on are scared shitless, because they can't envision what is to come next. So instead of taking action they sell their souls to preserve the status quo just a little bit longer. The most important question is not "What happened?" It is: "What are we going to replace this with?" Once we realize that no matter how much money and effort we expend trying to reanimate a corpse, all we are doing is prolonging the stench. 

Sat, 09/05/2009 - 10:31 | 59825 KidDynamite
KidDynamite's picture

are we forgetting Harry Markopolis?  This should really just be another nail in the SEC's coffin - not RenTec's.  The SEC had Madoff presented to them on a silver platter, and still couldn't figure it out.

Sat, 09/05/2009 - 11:27 | 59858 Tyler Durden
Tyler Durden's picture

Zero Hedge has made its opinions of the SEC widely known previously. The buck, however, does not stop with the regulator, per the Wall Street - SEC Acquisition 8K.

Sat, 09/05/2009 - 12:22 | 59892 Ben_the_Bald
Ben_the_Bald's picture

Come on, complete your thought.

Sat, 09/05/2009 - 12:19 | 59886 Ruth
Ruth's picture

Speaking of Harry, before leaving the hill he said he was going to be giving the Congress or whoever the names of the other 12 or so feeder funds (in private) guess to ward off more death threats, wonder if those have been leaked or reported?

Sat, 09/05/2009 - 14:10 | 59976 Anonymous
Anonymous's picture

IF markopolos was so sure of his findings, he should have brought the issue to the attention of his congressman (stephen lynch, that he himself referenced @ 0:16 in the clip below). but then again, congress is so bad at what they do - they make the SEC look competent.


Mon, 09/07/2009 - 16:11 | 61679 Anonymous
Anonymous's picture

OMG he blatantly referenced Steve Lynch and one would think that if he was so positive after almost ten years of investigating maddoff that he would have reached out to his congressman, but its just more of the same, and now Lynch is said to be one of the front runners for the senate. It cannot get any worse.

Sat, 09/05/2009 - 10:31 | 59826 AN0NYM0US
AN0NYM0US's picture

Saudi Central Bank Won’t Buy Algosaibi, Saad Debt From Banks


"Units of the two have borrowed at least $15.7 billion from more than 80 regional and international banks, including Paris- based BNP Paribas SA, New York-based Citigroup Inc."

Sat, 09/05/2009 - 10:51 | 59842 Bob
Bob's picture

There may be an epidemic of common sense developing. 

Sat, 09/05/2009 - 10:39 | 59831 Anonymous
Anonymous's picture

Well done TD - work with both firms - based on their own buying patterns, BM was running a multibil HF on little more than yahoo finance. the east setauket crew are major consumers of every bit of information they can get their hands on - and they have an extremely disciplined process for introducing new data sets into their strategies. spending 100s of millions on salaries of PhDs, information, technology, etc. seems a little much to keep a charade going.

having said all that - is it so hard to envision the call between BM and JS?

JS - bern - my guys basically are telling me you are a complete fraud and we are pulling out.
BM - whoa whoa - you gotta give me some time on this type of a removal - this could bring the whole house down!
BM - dont make me go to spitzer and alert him to how you guys are funnelling rief and riff losses to medallion profits.
JS - fine half now, half at a point 12mos after
BM - done - nice knowing you a-hole

Sat, 09/05/2009 - 11:03 | 59844 Miles Kendig
Miles Kendig's picture

When one starts asking "why" someone is doing "the what"  then failure to appreciate how the "where" and "when" will almost always lead to a bloodletting.  What a bunch of fuckups.

Lots more juice left in this lemon.

Sat, 09/05/2009 - 11:20 | 59852 Anonymous
Anonymous's picture

Contrary to this post's title, I don't see any evidence here that Renaissance believed Madoff to be a Ponzi scheme. Rather, they had investigated his supposed trading results and found them likely to be fabricated. That Madoff ran a Ponzi scheme is not the only conclusion one could draw from that. This line:
"The point is that as we don’t know why he does what he does we have no idea if there are conflicts in his business that could come to some regulator’s attention."
from the memo quoted at the top seems to indicate they believed the same thing as many other Madoff investors: that he may have been faking his reported trades to hide the true, possibly illegal source of the profits.

Sat, 09/05/2009 - 12:01 | 59874 Printfaster
Printfaster's picture

There was a rumor going around that much of the money Madoff pulled out went to the eastern Mediterranean.  Sort of a tax contribution.

I don't have a problem with that.

Personally, I think of fraud as entertainment, or gambling.  When you go into a casino, you know that the casino will take your money, yet you still give them your money.  Is that stupid, or entertaining?


Sat, 09/05/2009 - 12:06 | 59878 Miles Kendig
Miles Kendig's picture

Like a $500.00 barely legal lap dance with your money clip in your pocket.  Stupid or entertaining?

Sat, 09/05/2009 - 13:04 | 59929 Bob
Bob's picture

Sounds just stupid to me.  I've had great $20 clearly illegal lap dances.  WTF is up in NY?

Sat, 09/05/2009 - 12:18 | 59885 Verbal Kint
Verbal Kint's picture

Hopefully one day we will all know when and why RenTec pulled their remaining investment. So far it looks like they've done the right thing. Could they have done a little more? Probably. But why would they have bother talking to the SEC knowing how useless they are? Also, if RenTec had been wrong they would have looked pretty stupid telling the SEC that Madoff is a scam...

Sat, 09/05/2009 - 12:30 | 59901 Ben_the_Bald
Ben_the_Bald's picture

Let me quote Simon Johnson today:

But the unfortunate side effects of finance lie much more in the future than in the past.  It’s not lowering recent growth by some fraction of a percentage point that should bother us, it’s the likely behavior of large-scale finance, now more powerful and with greater concentration of power.

Private sector capture of the state is bad enough, wherever it happens in the world.  But when the capturers have an unparalleled ability and willingness to “tax” the rest of us, we should really be afraid.

The business model of big finance is not to consolidate their position and live on comfortable annuities.  It’s to take as much as they can (”otherwise the competition will hire our best people”) while stuffing the risk (”which ordinary people don’t understand”) onto the taxpayer.  The technical details of this arrangement are loosely refered to as “financial innovation”.

Modern finance is more than quack medicine.  This is state capture, an old tradition for bankers – and in the modern American version their hands are in the deepest set of pockets ever.  Why would they ever let go?



Sat, 09/05/2009 - 13:35 | 59953 Anonymous
Anonymous's picture

Question whether reversing the Madoff investment or some related concerns drove RenTec's decision to return 95% of outside investors' capital in Medallion during the 2003-05 period. Other than a "thanks for the memories" Dear John letter, the investors never got a clear explanation as to why Rentec dumped them, and the reasoning behind the three year distribution. It was a great ride while it lasted.

Sat, 09/05/2009 - 14:54 | 59987 DaddyWarbucks
DaddyWarbucks's picture

I think that

"..(unless he gets a piece of that) .."


"Please keep this confidential"

pretty much sums up the nature of all the participants.

As to why they took part of their money off the table my guess is that they liked the "returns" from Bernie and did what they always do, they adjusted their perceived risk down into line with their expected return. You know they liked the money and considered how much longer the scheme might continue to operate and readjusted their exposure accordingly.

Really now, The response of indignantly pulling out of a profitable criminal venture on ethical grounds would be quite unprofessional for financial managers, perhaps even a violation of their fiduciary duty. Let's have legal chew on this angle and see what they can come up with.

No need to kill the goose laying the golden eggs, just take some of the eggs out of the nest in case she takes a sh!t.

Sat, 09/05/2009 - 17:18 | 60076 Anonymous
Anonymous's picture

Jesus Christ you're a fucking retard. Ooooo, Medallion is a ponzi scheme! You know who that would effect? Nobody, except RenTech employees, that's who. They've been closed to outside investors for *years.* They're also not really liquidity providers; that's another RenTech fund, which you failed to identify.

Sat, 09/05/2009 - 19:17 | 60211 Anonymous
Anonymous's picture

Any line on rumors floating around that high level SEC people were involved with Madoff and know where the money went. i.e. Israel and offshore accounts?

Sun, 09/06/2009 - 07:56 | 60749 Anonymous
Anonymous's picture

Khronos is a family office for a bunch of latam (uh, well, Bogata) chemical manufacturing folks - they went long commodities and other hard assets in the last couple of years, and really clamped on their HF holdings.

Sun, 09/06/2009 - 07:56 | 60750 Anonymous
Anonymous's picture

Oh - and Krhonos was a very early investor in rentec

Mon, 09/07/2009 - 14:21 | 61629 Anonymous
Anonymous's picture

So kid... you do good work digging up these things and writing up a witty blog. But easy on the Zietgeist and the broad generalizations about how its "all a game" or "some horrible thing"... this is fascism. Some statements you make show you have little experience with financial trading: "So just what exactly was Bernie doing managing a highly complex instrument such as a TRS?"

There could be nothing simpler that a TRS.

Then you go excite you readers, who know even less than you (about finance) and societal judgement. For example: I know my neighbors do drugs, should I rant rave and go crazy outside their door? (act, who cares?) I know there is sex slavery in the middle-east and 3rd world some really awful things. Does that mean all the rest of and society should stop to take all costs to prevent it? (Maybe, but ... its complicated).

Financial investments are always based on "calculated risks" the RTC dialogue shows a combination of high-intelligence mixed with common sense and game theory. They arrived at a risk/reward conclusion and reduced the investment. These conclusions are not absolute knowledge.

Mon, 09/07/2009 - 23:33 | 61965 Anonymous
Anonymous's picture

TD Super read.
NSimons ...First of all, we spoke to an ex-Madoff trader (who was applying for a position at Meritage) and he said that Madoff cherry-picks trades and “takes them for the hedge fund.” ...

"cherry-picks" seems only to make sense as faking trades via phony trade-slips. How else to cherry-pick and profit in this context? Front-running does not fit.

Thus both NS and HMarkopoulos already deduced with near-certainty that BM operates a type of Ponzi, just by viewing the general case of Prices/Volumes.

BTW, NS' use of "cherry-pick" points to phony trades, while HM suggested front-running or a no-trades scheme...but both had enough of certainty to act.

I read HM's long submission to the SEC. He wrote for not-quite-bright SEC staff...even I could follow his brilliant, in-sequence reasoning and elementary math in that letter.

Tue, 09/08/2009 - 15:29 | 62609 Anonymous
Anonymous's picture

BM's former employees spoke too much. To successfully operate a maffia or a Ponzi - no one must leave it alive.

Do NOT follow this link or you will be banned from the site!