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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

Please subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

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.

  • john

    LD,
    In my opinion the guys on the top of the list are Christopher Cox and the SEC. No doubt they were the first safeguard. And they failed miserably. Where is the criminal liability for gross negligence?

  • Vero

    It has always killed me that Picard accuses every domsestic and foreign bank in the world of complicity and says that they “knew or should have known,” but nobody thinks that the SEC knew or should have known. And this, in the face of Markapolis TELLING THEM a half dozen times. SIPC is paying Picard. SIPC and the SEC are in bed together, proven by the SEC aiding SIPC in suing innocent victims, solely for the benefit of the SIPC (Wall St) coffers. This is corruption at the highest level and is being hushed by Wall Street’s campaign contributions to our politicians. This is the greatest disappointment of my lifetime and I no longer feel that I owe any allegence to our government. This country is as corrupt as Cuba or Venezuela.

  • norma

    The questions that you asked are very legitimate. However the trustee has limited time to fulfill his obligations. Granted he is going after the BIG FISH, however much of his time is spent quietly pursuing small investor who have lost everything they have worked for.The press has not paid much attention to this. Many of them had IRA’s with the Fiserv bank acting as the custodian. We have not heard a word about this bank. Why? I appreciate your objective reporting and like you have said the History books will eventually tell all. Unfortunately many of the victims will have died in poverty. Is this what our country has become? a haven for corrupt financial organizations and a trash can for the poor and middle class? Most of the victims have little or no money left to feed themselves let alone hire expensive lawyers. Banks and financial institutions have these individuals on staff and for them it is business as usual.

  • He funneled all the $ to Israel, so they should pay. But they will never be held accountable and the US suckers (taxpayers) will continue to support endless Wars for Israel, it all started nearly a decade ago under a false flag attack.
    9/11 and Israel, here:
    http://www.iuniverse.com/Bookstore/BookDetail.aspx?BookId=SKU-000190526

  • thad

    being that it went to israel they should pay it back with interests or just hold their 7 million dollars a day till its paid then blow their ass off for doing 911

  • Cheaper than that

    America sold for $1b in fines. Heck, the crooks don’t even pay the fine, the shareholders do.

    Our country is drowning in corruption. While I’m at this backwater of protest, I’ll throw in my two cents that “ponzi” is not the correct word regarding Madoff. This was money laundering at the highest levels.

  • Disgruntled BD

    Better still, shareholders who are also Madoff victims will have to contribute their fair share towards the penalty.

  • EDM

    Well, Larry, you are absolutely right.

    The real culprit is Nine Million Mary Schapiro whose incompetent governance of FINRA allowed Bernie Madoff to continue the operation of his giant Ponzi scheme. Of course she knew.

    I believe that an open accounting and disclosure of FINRA’s giant portfolio would reveal that this “agency” had invested with Bernie, and before they forced public disclosure, the “agency” redeemed all of its invested funds.

    Incidentally, how large is the portfolio of FINRA? Why does a government “agency” need all that money?

    We saw a similar lack of performance of Nine Million Mary as she and her subordinates who are running FINRA today within the oversight of the Securities & Exchange Commission as they ignored all the warning signs with regard to Kenneth Starr.

    An investment magazine recently published the names and details of 51 firms that have stolen many billions of dollars through Ponzi schemes and other frauds – all of which were supposedly being governed by FINRA or the SEC.

    There needs to be some extra room in Bernie’s cell for some government regulators!

  • Madoff

    great job!

  • PR

    God Bless You, Larry Doyle.

    I doubt Ralph Janvey has the skills to file the suits Irving Picard has filed or may file. Very good article but it has just awoken my disgust with both Madoff and Stanford.

    Stanford investors sit and wait ……….. for Congress, SEC, SIPA, FINRA, DOJ, State Department, IRS, State of Texas, Antigua etc. to do the right thing and give them relief.

    It has been almost two years. The arrogance of these bureaucrats. Their lives are untouched and they make no attempt to right this wrong.

    Assume this would have been resolved already if any of those who are currently sitting had been a Stanford investor.

    Stanford was in the process of opening 4 offices in the mid-Atlantic area, including Washington DC, and there is no telling who might have been ensnared. The favored members of Congress, Washington Group and their large lobby would have given them high credibility in DC.

    Mary Shapiro cannot win in this.

    Every day I read Sense on Cents and thoroughly enjoy it.

    Congratulations on such a fine voice for the people.

  • Morganxl

    Where will my children put their money? Truly corruption at its best. However, Picard is the one who’s benefiting all the way. Let’s hope he puts his money in a safe place and where the Sec has given it thumbs up! Good luck to the true Madoff victims…..

  • Whistleblower II

    Madoff victims are toast, with no clout, no power, as the SOLE pending exceptions are the wishful SIPC Net Equity appeal and SEC complaint. After it was revealed, last week, that the FED paid out $3.3 trillion of YOUR money to aid not only the U.S. banks, but myriad domestic & foreign corporations [incl. Ford, General Electric, Toyota, BMW] and foreign banks [e.g, UBS, Deutche, Barclay’s with free $ to buy Lehman], it’s enough to make many — this time tens of millions — to saddle their horses, grab their flintlocks, and head for Bunker Hill … again!

    The tree of liberty grows only when watered by the blood of tyrants.
    -Thomas Jefferson

    It’s not only this bad, it’s MUCH WORSE. Enjoy this expose’ movie:

  • Whistleblower II
  • disenchanted

    There is one issue that has irked me about all these restitution collections. Where is an accounting of where the money goes? How many harmed investors actually see any compensation from these “restitutions”? I have been reading about all the money the receiver is trying to get back from original investors of Bernie Madoff and these institutions as ill gotten gains. Supposedly that money is to go back to harmed investors. Many of those harmed investors already got paid by SIPC, tax losses, etc. Does the IRS and SIPC get paid back first, or does the receiver get paid his fees first? How much of that will actually go to the source that was harmed, and how much will be left to pay those people after all the fees are taken?

    I have dealt with receivers before. They are ruthless and scoundrels. They are entitled to get their fees before anyone gets paid, and that usually wipes out the pot. I think John Q Public should be entitled to an accounting of every dime the government collects for these fines, restitutions etc. Then we will find out who the real criminals are!!

    Why has Piccard not gone after Mary Shapiro for ill gotten gains from the money she got for leaving Finra. After all Madoff was her “Dear Bernie”.

    As for the comments about Israel, just bear in mind that most of the people that got wiped out by Bernie were his own kind. Lets keep decorum on this website and derogatory remarks in your own house. The rate our country is going, Israel may be the only friend we have left.

  • stephanie halio

    Dear Larry,
    Your article was spot on and you hit all of the salient points about this fraud. The innocent victims are still suffering while many of the guilty are just getting slaps on the wrist. Those who were criminally involved and made fortunes from this scam are getting away with murder. They will pay small fines relative to their total wealth and life will go on for them big time. There should be jail time for those who were complicit and not only “should have known” but Did Know. The so-called “regulatory agencies” should be subject to serious governmental scrutiny, not just “self examination”. The foxes guarding the hen houses contributed to this scam and its longevity. Please keep writing the truth about the Madoff fraud. There is so much more to this story than what has been discovered to date. Thank you so much for your intelligence and courage in speaking out about this.

  • ROB

    LD:

    With the news this morning about Madoff’s son I stumbled upon this old NYT article detailing the SEC’s failure to investigate Madoff in 1992 when his accounting firm was promising investors 13-20% returns. The path of destruction Madoff has left is unfortunately very real and sad but it could have been stopped if the SEC did its job. Also note that the two attorneys who worked on the 1992 investigation are no longer regulators but are now on the street working for those whom they once regulated. Yet another inherent part of the problem. Moreover, I believe the ineffectiveness of the SEC is why we are seeing the FBI and DOJ get more involved in detecting and prosecuting financial crimes.

    http://www.nytimes.com/2009/01/17/business/17ponzi.html?pagewanted=1&_r=1

  • justine

    latest markopoulos book states that he looked at the chart return of a feeder fund and after 5 minutes he realised that it was a fraud without even knowing what the fund was doing!!!??? somebody must ask Mr. Markopoulos how he really found out that madoff was a fraud!I think that this is important because without clarity on how he discovered the fraud there will always be too much confusion and to much tension. It is because this man that the world developed hatred against SEC and all possibile parties involved on the assumption that if a sigle man found out why not all these hundreds of people? I read the book and am not convinced! I am convinced that he got the information and built on it but the result is that today instead of developing a sense of cooperation between winners and loosers to make it right everybody is overexicted and looses perpective ….mark madoff is the ultimate result. This is a story were most people would like to put it right but there is too much hatred out there.

    it is important once and for ever to name one by one all the people that knew about this terrible scam and once the list is redacted it means that everybody else is innocent.

    what happened to mark madoff is terrible and deep in my heart I hope that Picard will show to the world that he was guilty beyond any reasonable doubt because otherwise we should all ask ourselves if this aggressive strategy is the right one instead of a more conciliatory.

    for sure we should assume the the 1 and 2 and 4 years old son’s on Mark madoff sue in a claim should be considered innocent!

  • disenchanted

    If you are a small BD, you can certainly relate to this email I received. If this is of interest to you, please comment as instructed below.

    12/9/10

    Good Day Fellow FINRA Members,

    We are writing as Members and on behalf of the Independent Broker Dealer Association to update you on our PCAOB activities.

    The PCAOB requirements have been disruptive and damaging to the Membership. In some cases the Annual Audit fees have increased five times. Just as FINRA expects a difficult year with finances next year that is but reflective of the poor state of the Members’ business as well…

    For some time, Stephen Kohn and I have been meeting with Congressmen, specifically several on the House Financial Services Committee regarding the burden that PCAOB is putting on the Membership.

    Despite our willingness and availability, we were not provided an opportunity to testify at the time of the original legislation. Had we been able to address the Committee, we would have requested a PCAOB exemption for the thousands of Member firms who introduce their accounts and trades to a clearing firm. As you know, the clearing firm keeps the accounts and records. The role of the introducing broker is little different than that of an agent.

    Due to these joint efforts, we have a Congressman willing to introduce legislation addressing this oversight. We have requested FINRA and their legislative expertise join us in drafting legislation to present to Congress on behalf of the Membership. It is our intent to seek relief from this onerous and disruptive financial penalty not fully considered previously. We believe the cooperation of FINRA in this issue will generate a new spirit of working together for a common goal. If they demur, we are prepared to proceed alone with greater difficulty.

    We need your assistance. Kindly send us a confidential email informing us of the difficulties arising from the PCAOB requirements. Your feedback/input is essential in helping us “make our case” before Congress.

    If you care to join us in IBDA, our dues are a modest $100.00 payable to IBDA mailed to the Hauppauge address below. Thank you.

    Alan & Stephen

    Alan Davidson
    Zeus Securities, Inc.
    PO Box 5335
    Hauppauge, NY 11788

    Email-alan.zeussecurities@gmail.com

    Phone-631-382-2663

    Stephen A. Kohn
    Stephen A. Kohn & Associates, Ltd.
    3232 South Vance Street, Suite 210
    Lakewood, CO 80227

    Email-stephen.kohn@sakohn.com

    Phone-303-996-5680

    This email was sent by Zeus Securities, P.O. Box 5335, Hauppauge, NY 11788, using Express Email Marketing. You were added to this list as kzfischer@aol.com on 12/11/2009.

    Express Email Marketing supports permission-based email marketing. You can change your preferences or unsubscribe from this mailing list at any time.

  • Sam

    The SEC was warned as far back as 1998 again, and again over the years yet they did nothing. If they had listened to the warnings the scam would have never grown from One Billion to 50 Billion. I have wondered why the media plays down their involvement and no one seems to care that they were warned numerous times and admitted they knew about the warnings but did nothing. They need to be accountable.






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