Mathematically impossible profits are often an indicator of questionable business practices

[Emphasis added throughout.]

Jamie Powell at FT Alphaville had interesting reflections on the legacy of Bernie Madoff. In particular, this caught my eye.

Markopolos approached the Securities and Exchange Commission with evidence that Madoff was running a fraud three times between 2001 and 2005. Three times the regulator ignored him. The evidence he presented wasn’t even particularly complicated — one of his findings was that there was simply not enough option volume at the CBOE for Madoff to execute his straddle strategy.

The link leads us to a more detailed account.

After analysing Madoff's vague, broad-brush statements to clients, Markopolos concluded that it was impossible – not only was it mathematically inconceivable to smooth out all the ups and downs in the S&P index's performance, Madoff would need to use more options than existed on the entire Chicago Board Options Exchange, where nobody owned up to seeing any volume from Madoff's firm at all.

This struck a familiar note.

On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi's money machine. The paper contacted Clarence Barron, the financial journalist who headed Dow Jones & Company, to examine Ponzi's scheme. Barron observed that though Ponzi was offering fantastic returns on investments, Ponzi himself was not investing with his own company.

Barron then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 actually were in circulation. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each IRC was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit. Barron noted that if Ponzi really was doing what he claimed to do, he would effectively be profiting at the expense of a government—either the governments where he bought the coupons or the U.S. government. For this reason, Barron argued that even if Ponzi's operation was legitimate, it was immoral to take advantage of a government in this manner.

 Perhaps there's a lesson to be learned here.