Horlick's memory hole
One of the most embarassing spectacles of the Madoff scandal has been watching British fund manager Nicola Horlick, who lost a bundle, complain about American regulatory laxity. This is not a defense of the SEC, which should be forced to sit in a corner and wear a "dunce" cap for the next twenty years. But Horlick's home, London, made quite a business out of competing for American business by regulating its financial firms much more laxly than their American counterparts. For a British fund manager who thrived in that environment to get her knickers in a twist now is more than a bit rich--it's like two sugar-coated sticks of butter strapped together, doused in egg yolk, and frosted with lard.
What takes this from self-serving to embarassing, however, is that the red flags the SEC should have picked up on were right there for Ms. Horlick to see, had she bothered to actually do any of the due diligence she promised her investors. The audit firm was a three-person shell, one of the three being a secretary, another being a retired senior partner, and the third, a shadowy figure who dropped in a few evenings a week to check that their office space hadn't actually burned down. The value of Madoff's claimed options trades far exceeded the volume of options actually traded in the fairly thin markets he allegedly exploited. And he never had a down month.
I am willing to extend some sympathy to fund managers who are properly embarassed at having been rooked. Not any money, to be sure, but some sympathy. Once you know there is a fraud, it is easy to find the evidence, but the human brain is systematically bad at disconfirming what it expects to find.
But the fund managers who bluster that it's all someone else's fault, that no one could have reasonably expected them to call up the bloody auditors and make sure they were, y'know, auditing? Such willful and spectacular blindness deserves exactly what I expect it will get: a stampede of investors out of the indignant manager's funds. Ms. Horlick is now editing her website to erase the claim that she did good due diligence. If the rest of us were as willing as Ms. Horlick to trust their money to any old moron on their say so, this might actually work.