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Where Are the Customers’ Yachts?

* "Once in the dear dead days beyond recall, an out-of-town visitor was being shown the
wonders of the New York financial district. When the party arrived at the Battery, one of his
guides indicated some handsome ships riding at anchor. "Look, those are the bankers' and
brokers' yachts.’ ‘Where are all the customers' yachts?' asked the naïve visitor." - From the book,
"Where Are The Customers' Yachts?" by Fred Swed, Jr. - originally published in 1940.

The Hedge Fund Regatta

Shortly after the news about the Madoff Ponzi Scheme broke and the U.S. Securities
and Exchange Commission began getting public abuse for never inspecting Madoff's
asset management firm, and for never having discovered his scheme, I concluded
that one good reason the SEC had not audited Madoff's asset management firm's
books and records was that Madoff undoubtedly claimed his asset management
firm was a "hedge fund" and thus was outside of the SEC's regulatory jurisdiction.
(Madoff's asset management firm's money gathering methods seem to have been
designed to fit the structure of a hedge fund).

As you may remember on December 10, 2004, under Chairman William Donaldson, the
SEC mandated that after February 1, 2006 hedge funds must register (see,
Compliance Dates at > also see, Chairman
Donaldson's July 24, 2004 Testimony Concerning Investor Protection and The
Regulation of Hedge Funds Advisors before the U.S. Senate Committee on Banking,
Housing and Urban Affairs - at> ).

The SEC mandate for hedge fund registration precipitated a long and turbulent
debate regarding the SEC's legal jurisdiction over hedge funds. And, the rumor is that
Chairman Donaldson's resignation from his chairmanship of the SEC was not voluntary,
but was requested by the executive branch of government, primarily because
of Chairman Donaldson's position on the advisability of hedge fund regulation (see,
June 1, 2005 New York Times article, Donaldson Announces Resignation as S.E.C.
Chairman at ) .

Where Are the Customers’ Yachts? May 30, 2009 Page 1 of 2

I've heard that Madoff did register his asset management operation, as required, in
early 2006. As you may know, on June 23, 2006 in the case Goldstein vs. SEC the
SEC's new hedge fund registration mandate was overturned by the U.S. Court of
Appeals D.C. District. Considering that, at that time, there were approximately 6,000
hedge funds (on-shore) in the U.S. and considering that the registration rule was only in
force for five months and twenty three days, and considering Bernard Madoff's
reputation as a well known and knowledgeable securities broker / dealer, it seems odd
to me that anybody would expect Madoff's asset management firm would be among the
first candidates for an SEC Office of Compliance, Inspections and Examinations
(OCIE) audit. For the media not to prominently and repeatedly mention the history of
the SEC's lack of jurisdiction over hedge funds, and to treat the Madoff scandal as a
failure of the SEC to investigate and audit an asset management firm (that was out of
the SEC’s jurisdiction) seems a significant lapse in reporting and a great disservice to
the public and to the SEC.

My questions: It seems the media is either unaware of the details above or they choose
not to include them in articles and TV reporting about the Madoff scandal. In your
experience have you heard, seen, or read any reports about Madoff's activities that
discuss the issues I've mentioned above? And, as you know, after the Goldstein vs.
SEC ruling many hedge funds stopped registering with the SEC, but some continued to
register. Have you seen any information which mentions whether Madoff's hedge fund
continued to register after the Court of Appeals ruling? If the history of the jurisdictional
battle was more broadly understood, would the public put pressure on its elected
representatives to change the jurisdictional limitations of the SEC? If the history of the
SEC’s limited jurisdiction was more broadly understood would the concept of "investor
protection" become more compelling (for Congress) than the interests' of the
hedge fund lobbyists and the special interests' of the brokerage and hedge fund
advisory industries?

Note: The 12 meter class racing yachts in the photo of the Hedge Fund Regatta on the first page are
racing yachts owned by hedge funds. Many of the principals of hedge fund organizations also own
pleasure yachts which are much more luxurious water craft.

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