More Regulation Post-Madoff?

The only thing they are certain of is that his alleged Ponzi scheme–estimated at $50 billion–will prompt fresh calls for regulators to beef up enforcement and possibly adopt new rules for loosely supervised hedge funds. “If this fraud is even a fraction of the magnitude that is alleged, there will be calls for regulation that will mandate some level of auditing, compliance, and monitoring,” said Jacob Frenkel, a former Securities and Exchange Commission enforcement lawyer who is now in private practice.

Even before this debacle, lawmakers including Rep. Barney Frank (D-Massachusetts), hinted that hedge funds would face new rules in the next year. They might be asked to have bigger capital reserves and reveal certain positions to the Federal Reserve so central bankers can monitor risk.

Bernard Madoff, a pioneer on Wall Street and former chairman of the Nasdaq Stock Market, was famous for telling clients his name was on the door and that he worked hard to maintain an unblemished record of value, fair dealing, and high ethical standards, his firm’s hallmark.

But some people said increased oversight might include giving regulators the right to make spot checks at hedge funds to review auditing practices. If such regulation had been in place, it might have shed some light on Madoff’s years of steady returns that many investors said looked too good to be true.

“If you look at his performance, it was a straight line up. That’s silly,” said a Wall Street professional who at one point worked with a firm that did business with Madoff feeder funds. “He did not have a reputable auditor, which was another giant red flag. He wouldn’t talk to you about how he made money. He met with very, very few people, and if you did meet him, you got 20 minutes with him.” This Wall Street professional requested anonymity because he was not authorized to speak to the media.