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Bernie Madoff Targets Banks and Hedge Funds: “They Had to Know”

Posted by Larry Doyle on February 16, 2011 7:04 AM |

Bernie Madoff Bernie Madoff BiographyBernie Madoff deserves zero sympathy and less attention. On the other hand, those seriously impacted by his crimes deserve not only sympathy but also recompense. Irving Picard, the trustee pursuing that recompense on behalf of Madoff investors, is making some high profile claims and has generated substantial results. That said, selected Madoff investors have informed me that they give Picard very mixed reviews.

While Bernie rots away, he did speak out recently and slightly opened the window into his scheme. In the process, Madoff made an assertion that I think anybody with half a brain would have already assumed. The New York Times reports, From Prison, Madoff Says Banks ‘Had to Know’ of Fraud:

In his first interview for publication since his arrest in December 2008, Mr. Madoff — looking noticeably thinner and rumpled in khaki prison garb — maintained that family members knew nothing about his crimes.

But during a private two-hour interview in a visitor room here on Tuesday, and in earlier e-mail exchanges, he asserted that unidentified banks and hedge funds were somehow “complicit” in his elaborate fraud, an about-face from earlier claims that he was the only person involved.

In many ways, however, Mr. Madoff seemed unchanged. He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them.

“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

I have no doubt that the Wall Street banks and a variety of hedge funds knew, should have known, or did not want to know what was truly transpiring within Madoff’s operation.

But, let’s go deeper than that. Who is charged with keeping these banks honest? What about the regulators? Not that Bernie has any real credibility, but why isn’t he compelled to provide further testimony about those who regulated his enterprise, specifically the NASD, its offspring FINRA, and the SEC?

Why isn’t Bernie compelled to specifically address his relationship with ‘his good friend, Mary Schapiro’?

These are questions America not only wants addressed but deserves to have answered . . . completely!!

Perhaps, just perhaps, some light of day will shine on this corner of Bernie’s den if the Amerivet Securities suit vs FINRA continues to proceed through our judicial system. Recall that embedded in that suit is this very question of FINRA’s relationship with Madoff.

“They had to know.”

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. 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.

  • peter sivere

    Larry – It seems this type of thing happens all the time….

    SEC Probes J.P. Morgan Role
    In Canary’s Improper Trades

    Staff Reporter of THE WALL STREET JOURNAL
    December 30, 2004; Page C1

    NEW YORK — J.P. Morgan Chase & Co. is facing scrutiny for helping finance hedge fund Canary Capital Partners LLC’s improper trading in mutual-fund shares, raising questions about whether the bank should have pursued warning signs about what a big client was doing with its money.

    The Securities and Exchange Commission has taken testimony from a number of employees at J.P. Morgan, which extended as much as $150 million in credit to Canary, the hedge fund at the center of the year-old fund-trading scandal. And while J.P. Morgan’s attorneys at the law firm Davis Polk & Wardwell said in a memo to bank executives that they don’t believe the bank’s employees knew about improper trading, they warned that “regulators may” contend that J.P. Morgan “should have known” that Canary, along with its principal executive, Edward Stern, was “at least engaged” in short-term trading of funds in violation of the rules of many of the funds. The September memo was reviewed by The Wall Street Journal.

    “At the time that we were doing business, J.P. Morgan didn’t know and had no reason to believe that Canary, its related entities or Eddie Stern were engaged in any illegal activity,” a spokeswoman for J.P. Morgan Chase said. She declined to comment on specifics of the bank’s relationship with Canary, citing pending litigation. A Davis Polk spokesman declined to comment.

    J.P. Morgan’s name first surfaced in connection with the mutual-fund scandal in late September, when the giant commercial and investment bank was named as a defendant in lawsuits filed by fund shareholders in federal court in Baltimore for allegedly helping Canary trade improperly in funds run by Invesco Funds Group, PBHG Funds and Massachusetts Financial Services Co. Those firms have reached regulatory settlements, without admitting or denying that they allowed Canary to trade improperly in their funds at the expense of long-term investors. J.P. Morgan intends to fight the lawsuits “vigorously,” the spokeswoman said.

    After targeting mutual-fund companies and hedge funds, regulators turned their attention to Wall Street firms that helped Canary, including Bear Stearns Cos., Credit Suisse Group’s Credit Suisse First Boston, Canadian Imperial Bank of Commerce, as well as J.P. Morgan.

    Over the years, regulators have brought charges for failing to follow up on red flags of improper behavior. “If you see a red flag and you fail to act, you’re vulnerable,” says Harry Weiss, a securities lawyer with Wilmer Cutler Pickering Hale & Dorr LLP.

    J.P. Morgan had a long relationship with the Stern family, which turned a family pet-supply business into a massive fortune. After the business was sold, Mr. Stern began using a portion of the proceeds to market-time mutual funds.

    In June 2000, J.P. Morgan began lending money to Canary to boost the size of its trades. Canary’s line of credit started at $40 million and grew to $150 million by March 2003, according to internal bank documents reviewed by The Wall Street Journal. In the first five months of 2003 alone, Canary generated revenue of $3.4 million for J.P. Morgan’s private-banking business, the documents show.

    In their memo, the Davis Polk lawyers said interviews conducted with J.P. Morgan employees didn’t reveal “actual knowledge” of Canary’s improper activities. But internal bank documents show that bank employees were aware that Canary was rapidly trading in mutual funds, an activity known as market timing that regulators now say was improper when it violated the funds’ policies. In an October 2001 e-mail, one bank employee raised questions about what she described as Canary’s “day trading.” A June 2003 memo noted that Canary “will be trading daily.” J.P. Morgan executives also were able to see — on a daily basis — Canary’s trading activity, the documents show.

    Still other internal memos say company lawyers were supposed to review the agreements Canary had with brokers and mutual funds. Had the policies of the funds been examined, J.P. Morgan employees might have seen that the funds had rules barring the type of rapid-fire trading that Canary was practicing. The rules are intended to prevent investors like Canary from profiting from gaps between a fund’s share price and the value of the underlying holdings, hurting long-term investors. There was no indication in the documents that J.P. Morgan employees knew Canary also illegally placed mutual funds after the 4 p.m. Eastern-time close and received that day’s price.

    But the Davis Polk memo points out that J.P. Morgan’s own mutual-fund operation had turned down “two or three” requests from Canary in the summer and fall of 2001 to market-time its funds, in discussing the fund shareholder lawsuits’ allegations that J.P. Morgan should have known that market timing was taboo. In August 2001, Mr. Stern e-mailed the J.P. Morgan private banker then in charge of the relationship with Canary, saying he wanted to discuss the funds’ position. According to the e-mail, a representative of J.P. Morgan funds had said that the fund group “does not currently allow new market timers.” The J.P. Morgan spokeswoman said the firm is “not aware of any cases where we have knowingly permitted inappropriate market-timing arrangements.”

    The Davis Polk memo also says J.P. Morgan used information about the funds’ portfolio holdings that Canary may have improperly obtained to aid its trading strategy, though the lawyers say the bank was misled by Canary.

    The information was used by J.P. Morgan to create a series of “baskets” of stocks intended to mirror the portfolios of the funds that Canary traded. Canary then bet against the funds by selling the basket of stocks short to J.P. Morgan. Because that resulted in J.P. Morgan carrying the risk of owning the basket, the firm’s equity derivatives group also bet against the stocks, the documents say.

    According to Davis Polk, Canary told J.P. Morgan that the information was 30 days out of date. But some of the funds in question actually made that information public less frequently. For example, PBHG Funds, which Canary allegedly timed using the J.P. Morgan financing, made its portfolio holdings public only once a quarter.

    When Canary sought an additional credit line in June 2003, a meeting was arranged between Mr. Stern and the head of J.P. Morgan’s big wealth-management group, James “Jes” Staley, who declined to comment. The deal was never consummated. Soon after the scheduled meeting, Canary was subpoenaed by New York state’s attorney general, Eliot Spitzer, who had received a tip about the hedge fund’s improper trading. In early September 2003, Canary settled civil fraud charges brought by Mr. Spitzer, without admitting or denying wrongdoing.

  • kbdabear

    Matt Taibbi wrote this article in Rolling Stone titled “Why Isn’t Wall Street in Jail”

    If even half of it is true, they have a license to steal because the supposed watchdogs are their lookouts

  • Rob

    Of course they knew about it but the blame comes down to the operator of the Ponzi scheme. It’s funny that Madoff gets so much press for his Ponzi scheme yet few people realize that the National Social Security System is just that, a Ponzi operation…

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