Just the other day there was popup ad on the internet by a law firm soliciting clients in the matter of Bernard Madoff. It seems that the law firm is alleging a failure to exercise due diligence by a number of banks which placed their clients’ trust money with what may turn out to have been the largest Ponzi scheme ever.

The number of smart people who put their money in a situation that was too good to be true, never exercised due diligence, and never questioned the results is astounding. The world will forgive the widows and orphans whose inheritances were placed with and lost by Madoff. The world will have its day with those who should have practiced due diligence in regard to Mr. Madoff.

It seems as through the news is mostly full of the criminal matter of Madoff and his associates, who knew, or who should have known. However, the lawyers are gearing up for civil actions and will have their day.

The ensuing civil actions will provide the astute day trader with an excellent set of opportunities as the world catches up with those caught sleeping by Madoff.

Whom to Trade

The problem with trading banks or other organizations involved in law suits like Madoff is getting information in a timely fashion. Factors involved will involve exposure, i.e. how many clients were hurt and how much money was lost, and size of the institution. If Citibank gets sued its sheer size will tend to dilute any losses in a law suit. Nevertheless watching the financial news for who is a law suit target for lack of due diligence regarding Madoff will tell you whom to follow.

What to trade. You will be trading news about lack of due diligence in using Madoff’s firm. Civil matters like the Madoff issue can take many years to settle but there will points along the way when stocks will rise and fall based upon news coming out of the various pre trial steps leading to trial itself. Usually the hype spewed by attorneys on both sides is useless except if it is particularly persuasive it could move the markets.

Static

Since banks and other financial institutions are going to be the ones sued for lack of due diligence there is a problem. Financial institutions are already in trouble and getting bailed out. There will be a background of worldwide and national financial news that will also drive stock prices beside the due diligence matter. The ideal trading day would be either the “perfect storm” of bad financial and bad pretrial due diligence news or good news for a bank on both fronts. This sort of trading opportunity is not so much daily trading as knowing which stock or stocks to follow and following the “due diligence” news as it unfolds.

Since the stocks involved will be from large companies the number of shares being traded will be large. Large volume on bad news, during the day with lots of liquidity could provide a great opportunity if you keep up with the news and are ready when things move.

Life could get boring, even if lucrative, if all one traded were the Bernard Madoff/due diligence news. The point of this article, perhaps, is not so much Mr. Madoff’s due diligence mess as the idea that a day trader can pick selected pieces of the financial world, follow stocks or sectors and be there when the action happens.

As always, practice simulation trading, develop and follow a trading plan, and don’t get sucked into group psychology.

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