Posts filed under “Legal”
Part of the story about the Madoff Ponzi scheme was that Madoff created this elusive, difficult-to-become-a-member club. The exclusivity and rejections made membership all the more desirable to greedy investors.
That actually is turning out to be somewhat of a myth.
There is much more to his canny trick of rejecting investors than initially meets the eye. In reality, he did not really turn away money from investors. What actually occurred was that he refused to take cash from people whose participation would have easily revealed the fraud.
Allow me to explain:
As we noted earlier this week (Why Might a Madoff Plea Deal Take Place?) there are lots of other parties who might get pulled into this story. But the one that intrigued me most came from Credit Suisse, when that firm and its analysts looked into Madoff’s investments, and came away skeptical or convinced there was a fraud occurring.
In particular, there was something the execs who had met with Madoff said to Bloomberg that got me thinking: They noted his little- known auditor who had just one client, his refusal to reveal AUM, his refusal to charge asset management fees. But what was especially noteworthy was the issue of why Madoff served as the custodian of his clients’ assets.
That turned out to be, IMO, the key to his “turning away investors.” This was the scam within the overall fraud, one that made his Ponzi scheme irresistible to gullible investors.
Why? Consider how Custodial accounts work: Your institutional firm, endowment or trust fund is held at a major bank (as the Prudent Man rule requires). That means outside managers use DVP trades (delivery versus payment), with the clients’ monies staying in their custodial account, and the outside firm trading it.
Here’s how that looks int he real world. Let’s say the XYZ Foundation –10 billion in assets, held (custodial agent) at Goldman Sachs. XYZ wants to give the Ima Scammer Fund 10 million in assets to trade. Ima Scammer trades the $10 million of the account, but the cash and shares all stay at GS on behalf of XYZ.
That’s how a custodial account works. The outside fund manager has control over the money only so far as handling that portion of it. But the assets stay with the custodian.
And all of those clients turned away by Madoff? How much do you want to bet me that the vast majority were custodial accounts? Given the alleged scam, Madoff couldn’t do that, because the ruse would have been revealed almost immediately. The custodial accounts could not have generated his alleged returns.
These monies weren’t turned away by Madoff; they were run away from — by him.
UPDATE: January 15, 2009, 11:47 am
Even more amazing, the Boston Globe is reporting Madoff might not have made any trades
Why Might a Madoff Plea Deal Take Place? (January 2009)
Credit Suisse Urged Clients to Dump Madoff Funds
Cynthia Cotts, Katherine Burton and Elena Logutenkova
Bloomberg, Jan. 7 2009
Fascinating conversation today over lunch today. It was held under Chatham House Rules, so I cannot reveal the identity of any of the parties or their firms. However, the conversation steered towards the Madoff affair, and one fellow proffered the thinking behind why Madoff remains out on bail, and could be working towards a plea…Read More
Client Total Source Access International $1.4 billion Company statement, Advisors Bloomberg Data Alicia Koplowitz, $14 million Bloomberg News One of Spain’s richest women Aozora Bank Ltd. 12.4 billion Company statement yen ($137 million) Bard College $3 million Bloomberg News Read More
Fascinating piece you may have overlooked this week in the Boston Globe on Harry Markopolos, the author of the detailed November 2005 memo to the SEC, identifying 29 red flags about Madoff and concluding he was a fraud. Excerpt: “A month ago, Harry Markopolos was an accountant unknown outside Boston’s financial community. Now the slight,…Read More
> Thank you for all the kind words and well wishes after my ordeal in Korea: South Korea said on Thursday it had arrested an elusive blogger accused of undermining the country’s financial markets with his doom-mongering, ending a case that has illustrated government unease with the growing influence of online gossip in the world’s…Read More
Earlier today, we looked at the NYT interactive graphic that calculates how long it will take to return to breakeven for typical portfolio losses. But what if you were one of 8000 Madoff investors, and your portfolio is now worth zero? For starters, you should get $500k from SIPIC. Then, there is the $830 million…Read More
Alternative Title: David Lereah: Even More Full of Shit Than Previously Believed > Of all the various parties who contributed to the boom and bust in housing and credit, none have escaped more unscathed than the National Association of Realtors, and their former Baghdad-Bob-in-Chief, David Lereah. The NAR turned a blind eye to fraud amongst…Read More
Here is another excerpt — part II — of the all consuming OpEd of the Sunday New York Times by Michael Lewis and David Einhorn: Excerpt: When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole…Read More