For those interested in trading the fallout of the massive Madoff ponzi scheme we recommend a new book, “Too Good to Be True.” The author was a staff reporter for Barrons when, in 2001, she interviewed Bernie Madoff and questioned the validity of his whole operation. “Too Good to Be True” recounts the use of the Madoff London operation to launder money and names the individuals and business entities involved.

Although we have twice before recommended following the Madoff ponzi scheme fallout for trading opportunities, primarily shorting stocks, we are newcomers to following the Madoff ponzi scheme. The author of “Too Good to Be True” has followed the Madoff exploits for at least a decade.

According to “Too Good to Be True,” the Madoff London operation may have begun as a legitimate business whose purpose was to allow the firm to trade outside of US market hours but appears to have taken on the role of a money laundering operation. The question for authorities is how much of the Madoff ponzi scheme was known to his wife, children, and friend/accountant Paul Konigberg who were all owners of the Madoff London operation?

Monies wired to London in the Madoff ponzi scheme were out of sight of US authorities and regulators and were used to pay salaries and buy gifts for family members. So long as the markets kept going up and no one asked to take their money out, the Madoff ponzi scheme worked, for Madoff.

The matter of “who knew what” in the Madoff inner circle is for the authorities. The issue for traders is who was not practicing due diligence among those who invested their clients’ monies with Madoff. There were a number of people who complained to the FTC about Madoff and nothing was done. A reporter for Barrons interviewed Madoff and questioned the legitimacy of his results and no one blinked.

If a reporter asked questions about Madoff’s operation he did not need to give an honest answer. However, if even one of the large pooled account managers had exhibited the same diligence as the reporter they would have found lots of red flags and, hopefully, would have pulled their money. The fact is that even ten years ago a run on Madoff’s accounts would probably have revealed the Madoff ponzi scheme. As there were no real profits, only fluff and bluff.

We invite you to read “Too Good to Be True” and take notes. The Madoff ponzi scheme involved lots of banks and brokerage houses. Your list of entities that should have exhibited due diligence and did not is a list of those that will likely be sued. Following their stocks, shorting when news is coming up, may turn out to be a good strategy for trading the Madoff ponzi scheme fallout. Alternatively you can wait for news to break and scalp as the stock involved plummets as the depth in ineptitude involved is made known. Either way, trading the Madoff ponzi scheme fallout may be profitable.

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