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Madoff Whistleblower' Harry Markopolos Has Uncovered A New Fraud. Authored by Robert Huebscher via Advisor Perspectives,Harry Markopolos, the investigator who exposed the Bernie Madoff Ponzi scheme, has uncovered a new fraud.

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The unfunded status of the pension fund of the Boston Transit Authority (the “MBTA”) is $5. Markopolos. This will have a significant impact on the municipal bond market, especially if it turns out that the MBTA’s problems are endemic among similar pension funds. The unfunded status of a pension fund is the market value of the assets minus the present value of the liabilities, discounted at an actuarially determined interest rate. For most public pension plans, this number is negative; the liabilities exceed the assets and it is underfunded. Although the full details are not yet known, Markopolos said the $5.

Markopolos spoke on June 9 at Northfield Information Service’s 2. Newport, RI. Northfield is a provider of advanced analytics to institutional investment managers and wealth managers. Its CEO, Dan di. Bartolomeo, worked with Markopolos in the Madoff investigation and is helping with the MBTA case. Markopolos called what is left of the MBTA’s pension a “Tender Vittles retirement plan,” meaning (sarcastically) that its participants would be eating cat food. The underlying cause of the MBTA’s problems was poor management and oversight. No good outcomes result when you mix politics and money,” Markopolos said. The problems began with failed investments in two hedge funds and culminated in the more widespread problems that Markopolos uncovered.

Buddy Fletcher. The troubles at the MBTA began in 2. Fletcher Asset Management, a hedge fund run by Alphonse “Buddy” Fletcher. The MBTA had been hiding this loss until it was exposed by an investigative reporter from The Boston Globe. Fletcher had promised guaranteed returns of 1. Madoff’s sales pitch.

It was nothing more than a Ponzi scheme. In addition to the MBTA, three Louisiana pension funds lost $1. What made the Fletcher loss so galling, according to Markopolos, was that its chief investment officer, Karl White, had been the executive director of the MBTA pension fund. One year after leaving the MBTA, he convinced it to fund Fletcher.“There are a lot of Ponzis,” Markopolos said, “and they are stealing customers from legitimate managers.”Fletcher used the money it raised to invest in a movie, Violet and Daisy, which his brother was making and in a “penny stock” called ANTS, on which it booked a 1,0. At one point, Fletcher reported 1. The Fletcher irregularities went unnoticed by the MBTA’s board, which Markopolos said consisted of mostly non- college graduates – union members who worked on or operated the city’s busses and subways.

The board had one person with an MBA and a couple of lawyers, who Markopolos said were not experts in investing. Neither the MBTA’s auditor, KPMG, nor Marco Consulting, its pension consultant, reported any problems with the Fletcher investment. Weston Capital. In 2.

MBTA invested approximately $1. Weston Capital, a hedge fund run by Jason Galanis, whose father had run a big Ponzi scheme in the 1. Hollywood investors. Markopolos said in 2. Galanis bought shares in Penthouse magazine, filed a false 1. Q with forged signature, and had caused its auditor, Deloitte, to resign.

All this happened before the MBTA made its investment in 2. How much due diligence do you have to do to invest with Weston Capital?” Markopolos asked, rhetorically. By the end of 2. 01.

MBTA had written off the value of its Weston investment. Galanis, Markopolos said, would look for struggling RIAs. He would overpay for an ownership interest in firm, with the stipulation that its minority interest not be disclosed on its form ADV (which is illegal). He would then arrange to invest all or a portion of the RIA’s fixed- income portfolio with a promise of 8- 9% returns. He would then raid those funds to pay Ponzi- style interest, Markopolos said.

Markopolos warned that fraudulent schemes to buy struggling RIAs are ongoing. RIAs should be aware that the damage goes beyond the firm’s assets, he said. A good criminal defense starts at $1 million, according to Markopolos, and even if you beat the charge anyone will be able to Google the result. The larger problem. After recounting the Fletcher and Weston debacles, Markopolos described the larger problem facing the MBTA. Based on audited financials, he said that the MBTA plan’s assets are only 2. But Markopolos claims the actual number is closer to $1 billion.

The gap is due to overstating of asset values and returns, underestimating employee’s life expectancies and using an unrealistic discount rate for its liabilities. The MBTA is “one bear market away from disaster,” Markopolos said. Markopolos presented data from the MBTA’s 2. The most alarming aspect in those years was the outperformance of its public equity (large- cap, small- cap and emerging markets) and fixed- income holdings. Spinout Full Movie Online Free more.

Equities outperformed their benchmark by 6. Similar returns were reported for the MBTA’s real estate holdings.

That degree of outperformance is highly unusual, since the MBTA was using multiple asset managers in both its equity and fixed- income allocations. Across all asset classes, it used 7. According to di. Bartolomeo, a single manager might achieve such outstanding results, but the chances of a team of managers performing that well was “essentially zero.”The investigation is ongoing as to how the MBTA was able to report such spectacular results. Most likely, it was due to accounting manipulations. The MBTA may have switched the accounting standard it used (such as GAAP or GASB) in order to report the most favorable result. It may also have used provisions which allows pension plans to report performance smoothed over a five- year period to inflate its numbers.

By contrast, the MBTA reported dismal results for the 2. Each of those fund categories underperformed their benchmarks in 2. Markopolos questioned the due diligence procedures that led to such poor investments and why those managers had not been fired after achieving such poor results.“Why did it keep investing in alternatives?” he asked, rhetorically. The MBTA used actuarial tables from 1.

This resulted in shorter lifetimes than the rest of the pension industry, which was using tables from 2. By assuming its employees would have shorter lifetimes, it was able to artificially reduce its projected liabilities and underfunded status. This represents approximately $1. Long- term implications. Of the roughly $5. Markopolos calculated that $1. The MBTA used an 8% discount rate and had increased its rate in 2.

The use of unreasonable discount rates is well- known and its impact widely estimated. The plans justify the use of an unreasonably high rate by claiming adherence to an actuarial standard; in reality, the economically appropriate discount rate – one which reflects the riskiness of the liabilities – is much lower. Markopolos said it should be about 4.

The more troubling problems uncovered by Markopolos are driven by other factors, such as poor due diligence on its investments, overstating of returns, overstating of asset values and faulty life- expectancy estimates. These problems appear to be driven by a pension board that, at best, was unable or unwilling to scrutinize its investments or, at worst, willingly investing its assets with known criminals and past employees. Nobody knows how widespread problems like these are.