Skip to content

FRM Part II · FRM Exam Part II · Madoff: A Riot of Red Flags

A risk manager lists the lessons for investors about interpreting regulator inaction in the Madoff case. Which conclusion is most appropriate?

Regulatory inaction should not outweigh red flags found in an investor's own due diligence. Those flags should be resolved satisfactorily or the investor should avoid the investment. Madoff passed regulatory scrutiny despite obvious warning signs, so silence from regulators is not evidence that a manager is clean.

  1. AAbsence of regulatory enforcement action is evidence that a manager is free of fraud
  2. BRegulatory silence should be given more weight than red flags found by the investor's own analysis
  3. CLack of regulatory findings should not offset red flags identified in investors' own due diligence, which should be resolved or lead to avoiding the investmentCorrect
  4. DRed flags matter only if a regulator confirms them publicly

Explanation

Regulators examined Madoff and found nothing, yet red flags such as implausibly smooth returns and opaque structure were visible. Investors must act on their own findings. Treating regulatory silence as clearance is the mistake the case warns against.

Did you get it right without looking?

One question tells you little. A timed set on Madoff: A Riot of Red Flags shows your real accuracy, how long you take and where you lose marks.

Practise Madoff: A Riot of Red FlagsFree diagnostic mock

More Madoff: A Riot of Red Flags questions