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Post Madoff Losses

Ownership fraud

Valuation fraud

Since the Madoff Ponzi Scheme was uncovered in 2008, the Securities and Exchange Commission has charged 174 funds with fraud with alleged losses of over $10 billion. At a high level, the SEC charges fall into two categories: the value of the securities were inflated or the securities themselves were not actually owned. Of the 174 funds charged by the SEC, roughly 1/5th allegedly misrepresented the securities they owned; however, these funds account for only 1% of the alleged losses. 99% of the alleged losses occurred in funds that the SEC charged with overvaluing securities.

How do funds overvalue securities (while using a "Big Four" accounting firm and a respected independent pricing vendor)?

Under Generally Accepted Accounting Principles (GAAP) rule ASC 820-10-35-54K, broker quotes are an acceptable source of security pricing. While GAAP does not dictate the required count of broker quotes needed to validate a security price, in practice three broker quotes are considered sufficient. With over 700,000 brokers registered with the SEC, it is easy to obtain three non-binding broker quotes at any desired price. The practice is called a "U Turn Quote" and it has been used to inflate security prices by as much as 1,600%. A U Turn Quote exists when a broker supplies a non-binding quote only for valuation purposes at a price requested by the asset manager. As the use of broker quotes is expressly permitted under GAAP ASC 820-10-35-54K and the asset manager is responsible for their accuracy, U Turn Quote have been used to allegedly conduct valuation fraud in funds that used "Big Four" accounting firms and hired respected independent pricing vendors. The independent vendors prices were simply not used.

SEC Allegation Show only alleged frauds that used a “Big Four“ accounting firm
Date Incident Overvalued No Ownership Allegation Summary SEC
News Alleged Losses Funds or