If even the SEC couldn’t detect Madoff’s Ponzi scheme…
…when it was pointed out to them and outlined and described by Harry Markopolus, and they launched an official investigation, why should investors and banks have been expected to discover Madoff’s fraudulent dealings all on their own?
But the Madoff trustee, Irving Picard, is claiming that some large Madoff investors (including brokerage customers) and banks had a duty to figure it all out, and he’s suing them under racketeering and fraud laws:
Many of the suits are based on the theory that banks and investors had a duty to investigate what Madoff was doing. Instead, Picard says, they ignored signs of possible fraud such as the con man’s “three-person accounting firm” in a “strip mall” and unusually steady results. While Picard’s strategy could lead to big payouts, the danger is that if judges reject his approach, he will get less from banks and investors in court and may be left with less leverage in any future negotiations…
JPMorgan, Madoff’s primary banker, could have stopped the fraud if it had passed on its suspicions to regulators, Picard said in his suit against the bank. On June 24 he revised the suit to triple his damage demands to $19 billion, an amount equal to all of the money investors lost in the Madoff fraud. JPMorgan should be responsible for the total because it “knew” that billions of dollars flowing through the Madoff account “could not have been linked to a legitimate business purpose,” Picard wrote.
Banks have no duty to investigate customers, JPMorgan says. Picard’s interpretation of bank law “would impose broad investigative duties on banks that do not exist,” it said in February, when it asked a district judge to pull the case out of bankruptcy court, where Picard filed it. The judge granted the request.
Madoff compiled a triple threat Ponzi scheme.
1. Glib and Smooth Salesman (required of all Ponzi’s)
2. Guaranteed returns that are too good to be true
3. A trust within the group (in this case wealthy Jews)
Items one and two are the usual, item 3 got him really going. The group could be Baptists or Mormons instead of Jews, and it has happened in both.
In any case anyone with an ounce of common sense should have smelled trouble. My accountant once told me she had any number of clients who asked here about a similar scheme here in CT (Colonial Realty) wanting to get in. She told them to run away as fast as possible, but some still couldn’t resist.
Bottom line is that you don’t have to be a fancy bank or financial expert to be wary.
“only the paranoid survive”
book written by the man who started Intel
JP Morgan is busy trying to short silver, they have no time or attention for acting responsibly.
Picard must be a lawyer. A lawyer will always tell you, with 20-20 hindsite, what you should have done and how it was so obvious and therefore you are incompetent. Lawyers are professional prigs.
Just another example of the Law being about debates. Best debater wins. Nada to do with justice.
DirtyJobsGuys’ “guaranteed returns, too good to be” is key to not touching the idea of investing with him — or anyone else making similar claims. Someone at the smart enough “there” (SEC, banks) failed to realize that such “consistent success, ain’t even near the norm. Madoff was held in high regard at SEC as an industry statesman who couldn’t have done what Markopolus said was he did. After all he was an industry leader as chairman of Nasdaq. I heard a story of a woman who was encouraged to put her investments with Madoff. She met him, spoke with him, and walked away. She was reported to have said “I didn’t understand a word he said.”
The SEC used their most inexperienced employees to investigate because Madoff had many friends at the SEC with many at the SEC who owed him favors. They performed what is known as a “candy-ass” review with inexperienced investigators.
There were a number of banks and professionals who easily saw through Madoff’s scheme and refused to recommend his fund to their clients. Any competant financial professional who reviewed Madoff could see he was no good and they have a professional ethical obligation, and perhaps a legal one as well to report him. They chose to look the other way which is a common reaction. Most people don’t want to take the time to make waves. Those financial groups that invested their clients’ money with Madoff clearly violated their fiduciary responsibilities. Some didn’t even analyze Madoff’s financial statements or perform other very normal prefunctory due diligence work. This is preposterous.
Markopolos is a brave man and Picard is doing a good job in recovering the victims’ money. I read that he has already recovered most of the losses with more to come. Bravo!
Madoff made off with a lot of money.
These suits are mostly because lawyers get 75% or so of the damages. It’s like teacher’s unions and public workers unions and police unions. A good way to get the gravy train rolling.
As for whether this case is in line with that, that all depends on who is getting the money. If the lawyers are getting the money… well
Harry Truman on lawyers: