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Who Really Deserves to ‘Pay’ for Bernie Madoff’s Fraud?

Posted by Larry Doyle on December 9, 2010 8:04 AM |

Bernie Madoff is back.

While news of deficits, tax packages, currency devaluation, and the like capture the business headlines, is there any doubt that far more people in our nation are interested and intrigued by what is going on with the Madoff scam? I have no doubt.

I have very mixed feelings about Irving Picard, the trustee assigned to recover funds for those victimized by Madoff’s Ponzi scam, going after Wall Street institutions and foreign banks who knew or should have known of Madoff’s operation. Mixed feelings? Am I going soft? Shouldn’t these institutions be held to account? Let’s navigate.

Having recently announced that he was going after JP Morgan and HSBC, Picard announced yesterday that he was targeting Citibank, Natixis, Fortis, ABN AMRO, Banco Bilbao Vizcaya Argentaria, Merrill Lynch, and Nomura. What is the premise Picard is using for pursuing these institutions? Let’s review the very release put forth by the trustee:

NEW YORK, NEW YORK – December 8, 2010 – Irving H. Picard, the Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”) today announced the filing of complaints under seal in the United States Bankruptcy Court for the Southern District of New York against seven global banking institutions – Citibank, Natixis, Fortis, ABN AMRO, Banco Bilbao Vizcaya Argentaria, Merrill Lynch, and Nomura. Through these suits, the Trustee seeks to recover more than $1 billion in total for equitable distribution to BLMIS customers with valid claims. According to the seven complaints, these banks received transfers of money from BLMIS through numerous Madoff feeder funds at times when they either knew or should have known of Madoff’s fraud.

Is the $1 billion figure a legitimate form of justice? Is it a fair and equitable form of retribution? Or is it actually more a form of ‘hush money’ to keep this investigation from backing up to where it really belongs? Let’s navigate further.

The complaints allege that the banks enabled the Madoff Ponzi scheme by opening a spigot of new money into the Madoff feeder fund network, by creating and offering derivative investment products linked to various Madoff feeder funds, including the Fairfield Greenwich, Kingate and Tremont families of funds. Often, the derivative products were developed in conjunction with the Madoff feeder funds. With the derivative products promising returns based on the performance of the feeder funds, the financial institutions hedged their exposure to the derivative investors by purchasing shares of the feeder funds.

In layman’s terms, doesn’t that sound like ‘aiding and abetting’ a fraud? Wouldn’t some sort of criminal prosecution be more in order rather than a mere slap on the wrist in the form of a fine? Hush money, perhaps? Let’s continue.

“Armed with considerable non-public information about Madoff, Citi either knew or should have known that Madoff’s investment advisory business was a fake, and that the funds Citi received from these two Madoff feeder funds came from Madoff’s fraudulent activities,” said Mr. Picard. Warning signs to Citi included an email from and a meeting with early Madoff whistleblower, Harry Markopoulos, alerting a Citi managing director to the fact that the Madoff operation was a Ponzi scheme.”

“Evidence of awareness of the fraud is clear.” (LD’s highlight)

Come to Papa!!

With this statement, Picard legitimizes the work of Harry Markopolos–not that Harry needed it–and uses it as the basis for pursuing retribution. If, in fact, Harry’s work is helpful in pursuing Citi and others, then why isn’t the same premise being used to pursue the SEC and the Wall Street SRO FINRA? Harry legitimately drew the road map into, through, and around Madoff’s scam for the SEC. They willingly chose to ignore him. Accidental oversight? Really? Bulls#&*!!

Could Picard sue the SEC, as well? Why not? As a press release from the Madoff Victims Coalition highlights:

A lawsuit filed in Colorado states that the SEC is liable under the Federal Tort Claims Act, 28 U.S.C. § 2671, to compensate victims because the agency failed to catch Madoff’s  Ponzi scheme despite a “litany of red flags.”

Why hasn’t Picard filed suit utilizing the same statute?

America knows the SEC and FINRA (NASD) both failed in their charge to protect investors from the Madoff scam. In my opinion, that failure was not mere incompetence. I firmly believe there were  individuals inside each of these regulatory organizations who also “knew or should have known” (Picard’s words!!) of Bernie Madoff’s ongoing fraud. If that premise is good enough to pursue these aformentioned financial institutions, it is certainly good enough to pursue the regulators.

The history books will grade this trustee, our financial regulators, our justice system, and our government very harshly if both the SEC and FINRA are allowed to skate by the Madoff fraud with mere internal self-review but no real justice.

Let’s have a grand jury hearing. Subpoena all the books and records of the SEC and FINRA. Who knew what and when did they know it? What was the real relationship between Bernie Madoff and Mary Schapiro?

So many questions yet unanswered.

$1 billion in fines? Is that real retribution? I don’t think so. America should not be bought off so cheaply.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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