In hindsight, many have suggested that the purported huge returns racked up Bernie Madoff were simply too good to be true. That was the largest of the red flags.

The SEC has taken the lesson to heart with its fairly new Aberrational Performance Inquiry, a initiative of the enforcement division's asset management unit that uses "proprietary risk analytics" to evaluate hedge fund returns. Simply put, if the reported returns look fishy, the SEC will open an investigation.

"We're using risk analytics and unconventional methods to help achieve the holy grail of securities law enforcement--earlier detection and prevention," said Robert Khuzami, of the SEC's enforcement division, in a statement.

"This approach, especially in the absence of a tip or complaint, minimises both the number of victims and the amount of loss while increasing the chance of recovering funds and charging the perpetrators."

The effort has seen success as the SEC has charged six individuals and three fund firms with a variety of crimes that falsely pumped up performance. For a glimpse of the type of stuff it uncovered, consider the allegations against Millennium Global Investments. It was said to have fed false data to GlobeOps, which provides valuation services, and its auditor Deloitte & Touche in Bermuda. The GlobeOp valuations, based on  fake data, allowed the fund to tout  in newsletters, pitch-books and private meetings that it had achieved gain in 19 out of 21 months between December 2006 and August 2008--over 25 percent annualized returns. The false returns stemmed in part from dubious valuations of Nigerian and Uruguayan warrants that the SEC were virtually worthless.

For more:
- here's the complaint
- here's an article from Reuters

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