Bloggers Will Catch the Next Madoff

by Mick Weinstein
Posted on Friday, February 13, 2009, 12:00AM

Independent investigator Harry Markopolos knew something fishy was going on with Bernie Madoff years before the fund manager confessed to his massive Ponzi scheme. But Markopolos couldn’t get the SEC or ‘The Wall Street Journal’ to properly investigate the matter, so his information failed to reach the public — while dozens of new and existing victims poured their life savings into Madoff’s black hole.

Ray Pellecchia, vice president of Corporate Communications at NYSE Euronext, asked an interesting question on his blog last week: “What would have happened if Mr. Markopolos had blogged his analysis? That is, what if he had posted the entire piece on a blog, under his name or a pseudonym?… I believe that blogging’s fast, viral distribution would have been highly effective in this case, and brought down the alleged Ponzi scheme in a hurry. I wonder if future whistle blowers will use blogs if they believe their information is not getting through on official channels.”

Ray made a great point, and I think the answer is clear: Blogs, microblogs (such as Twitter), and other social media tools are simultaneously pulling down communication barriers and establishing quality/truth filters in ways that will enable far more effective early recognition of financial fraud than the limited channels we previously relied upon.

We may — repeat, MAY — have a case in point already.

Financial analyst Alex Dalmady started asking pointed questions about Houston-based Stanford Financial and its affiliate Stanford International Bank of Antigua — which claims over $6 billion in depositors’ assets — when a friend of his asked him to review his portfolio, heavily weighted in remarkably high-yield Stanford CDs.

As Dalmady dug deeper, he found lots of problems with Stanford’s products, documented them in a report called “Duck Tales” (if it looks like a duck, walks like a duck, and quacks like a duck…), then uploaded that report to the ‘net for public consumption. Dalmady published the report in a Venezuelan econo-mag, but noticed that his work on Stanford only “really exploded once it hit the blogs. Miguel Octavio’s The Devil’s Excrement [at Salon.com] took up the story on Monday the 9th, as did Caracas Gringo.”

Salon’s Octavio noted at the time: “For many years, I have been hearing stories about SIB. When most banks paid 3% in deposits, SIB paid 6-8%. No amount of digging or understanding would clarify what it was they were doing, much like Madoff did in the US, where he managed to trap some very smart people.”

Latin American blog Inca Kola News carried the torch further on Tuesday: “I really stopped what I was doing and pulled the Stanford filings…and looked again. The fact that the bank has missed two relatively small recent payments while supposedly boasting a large liquid asset base is rather strange…”

Then Felix Salmon, blogging at Portfolio.com, pulled together more salient details in a post on Tuesday called, “What’s Going on at Stanford International Bank?” Salmon noted that “the SEC started issuing subpoenas to Stanford Group in July, after two employees quit, saying ‘that the company gave clients false historical performance data for its securities.'” A commenter on Salmon’s blog, who claims he worked at Stanford as an analyst, chimed in later: “I was always skeptical about how the ‘Bank’ generated its returns…I did mention my concerns to several [superiors] but was told by my principal to in no uncertain terms to STFU and stop interfering with his bonuses…This does sound awfully like what was going on at Madoff, no?”

It’s Tuesday night. So far we have a dogged independent analyst, three relatively obscure Latin American bloggers, and one broadly read New York blogger on the Stanford story. Wednesday morning, blog Caracas Gringo has Dalmady more convinced than ever that Stanford is “a scam…the $8 billion portfolio? It doesn’t exist. Show me the money. Where is it?”

At this point only, mainstream media begin to release stories.

‘BusinessWeek’s’ Matthew Goldstein moved a detailed piece Wednesday called “Is Stanford Financial’s Offer Too Good To Be True?” which revealed for the first time that “the SEC, FINRA and the Florida Office of Financial Regulation were investigating Stanford” in a new action. Curiously, Goldstein did not reference Dalmady or his report on Stanford in any way (though at least one reporter from ‘BusinessWeek’ had called Dalmady earlier in the week, according to Dalmady).

Bloomberg and Reuters followed suit with items on Stanford, and the company is now in full-blown defense mode.

Let me be clear: We do not yet know if anything illegal or fraudulent is going on at Stanford International. But we do know this: Blogs gave Dalmady’s work the attention it deserved, and investors in Stanford International would have done well to have read Octavio, Inca Kola and Salmon early this week.

The proliferation of smart, critical bloggers (critical of institutions and, importantly, each other), coupled with large news outlets slashing payrolls due to the economics of online journalism, means we can count on many more important market-oriented stories to reach the public via blogs. Remember this story the next time you hear that bloggers are ‘snarky parasites’ who ‘freeload’ off of mainstream media.

Begin reading blogs on the sectors and stocks you invest in, and you may find the next investment account an intrepid econoblogger saves is yours.

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