Tuesday, August 2, 2011

The Latest on Bernie Madoff's Victims

An excellent NYT editorial discusses the latest in the Bernie Madoff saga.  For those of you who may not be following the story very closely, last Thursday the judge overseeing the civil suits brought against alleged beneficiaries and enablers of the Madoff fraud threw out a suit against HSBC, dealing a pretty substantial blow to the efforts to recover funds for Madoff's victims.  The entire editorial is worth reading, but here are a few tidbits that stood out to me:
And so it was on Thursday: in throwing out Picard’s suit against HSBC — and strongly implying that every other bank the trustee has sued is also likely off the hook — Rakoff may have used sharp language, but he was really just interpreting the law as most judges would. You can’t read his opinion without being impressed with his legal logic — and the difficulty of mounting a successful appeal. You also can’t read it without shaking your head in dismay: Even as innocent Madoff victims are being sued to pay back other innocent Madoff victims, the enabling banks get to walk away. Sounds familiar, doesn’t it?
Talk about what appears to be a legal double standard!  Especially in light of some of the evidence of complicity:
During the course of a lengthy investigation, Sheehan became horrified by the evidence of bank complicity. HSBC, for instance, funneled enormous sums of money into Madoff. It served as the custodian to a number of Madoff feeder funds. Yet whenever the bank did due diligence into Madoff’s hedge fund, it ignored numerous red flags suggesting that Madoff was operating a fraud. Various HSBC due-diligence reports actually described Madoff’s returns as “too good to be true.”

JPMorgan Chase, which is also being sued by the trustee — and has also argued that the case should be thrown out of court — was Madoff’s bank. Its bankers saw money coming into the Madoff account and going out again, without ever being invested in the market. They saw evidence of money-laundering. Yet they never uttered a peep. Madoff’s business was too important. 
 This definitely seems like something that should be addressed by lawmakers.  Banks and other enablers should not get off free and clear when they overlook evidence of wrongdoing, especially when they are enabling that wrongdoing.  While any change in the law would need to be carefully crafted to avoid imposing an extreme level of liability on banks and other intermediaries, I do think some change is needed.

Finally, a note regarding the relationship between Madoff's "net winners" and trustee Irving Picard: 
There’s one other aspect of Thursday’s decision that I couldn’t help noticing. The net winners, many of them, were nearly giddy over the fact that Picard got his comeuppance so publicly — even though Rakoff’s decision will surely hurt them. Of the $100 billion Picard has sought, at least three-quarters came from lawsuits like the one Rakoff just threw out. Had Picard won those suits, he would likely have had enough to compensate not just the net losers but the net winners. The fact that he lost means that he will continue to press hard for clawback money.

It is easy to understand the net winners’ anger at the trustee. To wake up one day and learn that you’ve been victimized by a financial fraud is painful enough. But to then realize that you are expected to return money that you thought was yours is infuriating. As their fury has grown, however, they have forgotten who the real bad guy is.

It’s not Irving Picard. It’s Bernie Madoff.
 I couldn't agree more.

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