Wednesday, January 07, 2009

Repentance and nonrepentance. 
Megan McArdle links to this story about Meaghan Cheung, the SEC investigator who missed the Bernie Madoff scheme, despite being tipped off to it in writing.

"Why are you taking a mid-level staff person and making me responsible for the failure of the American economy?" an upset Meaghan Cheung, with eyes tearing up, told The Post...

Megan feels bad for her. Well, not too bad:

No one's blaming Ms Cheung, I hope, for the collapse of the entire American economy, but it's hardly crazy to blame her for the failure of the Madoff investigation, given that she signed off on it.

Who's to say? Watch the video of the interview, and judge for yourself.

My take: One of Megan's commenters got it right: The SEC is made up of lawyers, not quants. They are simply not equipped to do deep due diligence on funds with complex trading strategies: It would take an advanced degree in statistics and a hellacious amount of number crunching to pull that off, and I haven't met the lawyer yet who is equipped to do that on his or her own... nor are the people who can do such things inclined to work for the SEC, or in journalism, for that matter, because the money isn't good enough.

On the other hand, I have met very few lawyers who truly understood the limitations of their field of expertise and circle of competence... an observation buttressed by the many stupid attempts to legislate from the bench. Or from the legislature, for that matter.

It is entirely within the realm of possibility that Cheung was a faithful and industrious public servant who did the level best she knew how, given the resources at her disposal and the fund of information she had, or reasonably could have had. The fault very properly lies with higher-ups who knew her expertise was in law, and not quant, and who failed to adequately supervise her, by providing her with the staff expertise or access to outside knowledge she needed to carry out an investigation of this nature.

I think she's being scapegoated. But on the other hand, it's not like the SEC has ever gone after anyone else for "failure to supervise," either.

Besides, regulators were far, FAR to busy trying to make sure competent insurance agents weren't suggesting people diversify out of home equity, stocks, or other ridiculously inflated assets and into safe, secure, fixed vehicles that would have saved their retirements and their family fortunes over the past several years.

Splash, out


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Thanks for helping keep track of all this. I was talking to a retired friend and she mentioned the drop in the stock market had hit her retirement fund hard. This woman is pushing 90 and has no reason to be in a high yield, high risk fund, but she was.

Your retired friend and her family should probably speak with an attorney with experience in securities law...specifically in arbitration.*

Depending on the circumstances involved, any licensed financial advisor has a duty to 1.) know his or her client, and 2.) adhere to a standard of suitability.

If your grandmother had held a significant amount of equities in her retirement fund into her late 80s, and had been working recently with a financial advisor, she may have some recourse. It smells like a classic suitability case.

(On the other hand, the bird-brains in the media with their obsession over mutual funds will write about annuity salesmen as if they were child molesters, because they don't understand the products, nor the clients for which they are suited. But an annuity could have come with a guaranteed lifetime income benefit, which would probably have been a MUCH BETTER PRODUCT for her!).

* (most brokerage contracts have a clause that requires arbitration rather than a suit in a court of law, and arbitration panels are notoriously broker-friendly, because it's mostly brokerage industry people who sit on those panels.)
P.S., I'm assuming she was relying on her retirement fund heavily for income. That may or may not be the case.
Thanks, I will mention that to her son. He takes good care of her and there is a strong possibility she was talking about a small part of her nestegg. He keeps trying to get her to move in him, but she is determined to live independently as long as she can.
Just for kicks, look up "mortality credits." ;-)

There's something the financial media doesn't understand, but professionals do.
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