February 24, 2011
Catching up on Madoff-Mania
Posted by Christine Hurt

Hardly a news cycle (if there is such a thing anymore) goes by without a news article about Bernie Madoff and the congoing SIPC liquidation proceeding.  In case you've been busy reading memoirs about unconventional (or ultra-conventional?) parenting styles like me, here's a quick catch-up:

Madoff and the Banks:  The Madoff Trustee, Irving Picard (the "accidental Pecora"), has filed clawback suits against several banks for fraudulent profits.  In addition, this month the complaint against Citigroup was unsealed.  Though Citigroup did not invest with Madoff, the bank was its banker.  The complaint speaks to a loan that Citi made to a feeder fund, then terminated, and swap agreements that Citi contemplated with another feeder fund.  During these transactions, Citi officers became very suspicious of Madoff and how Madoff's fund worked.  Harry Markopoulos even paid them a visit.  Because of these suspicions, the complaint asks for funds to be returned (fees, and repayment of a loan from funds disbursed by Madoff's fund.  A complaint against JP Morgan Chase was also unsealed, which asks for even more money to be clawed back from that bank.  Chase not only invested in Madoff funds (though it had reduced its investments considerably due to suspicions), it was also the holder of Madoff's bank accounts, which would not have held up to comparison with the financial statements that Madoff was sending to clients.  What does Madoff have to say?  Madoff gave his first interviews from prison this month, to the NYT's Diana Henriques, and responded tellingly "They [the banks] had to know."

Madoff and the Mets:  I love baseball, but I have not been following closely enough the Madoff/Wilpon mess that is taking shape in the Sports section.  Here's the highlight reel:  Fred Wilpon and his brother-in-law own Sterling Capital, which had almost 500 Madoff accounts.  Sterling Capital owns the Mets.  Picard wants to claw back $1 billion from Sterling Capital.  If Picard wins, someone else would almost have to purchase all or part of the Mets.  The nonsports issue is that Sterling is both a Ponzi winner and a Ponzi loser here.  Sterling withdrew $1 billion, which is probably $300 million phantom gain.  But, Sterling also had open accounts of $500 million ($160 million principal) with Madoff at the time of the fund's collapse.  So, Sterling's argument is "take my $300 million gain, minus my $160 principal loss, and I'll write you a check for $140 million."  So, the first response is there is no "wash" here.  Sterling should give back the $300, then get in line with everyone else for your $160 loss.  Furthermore, Picard wants the full $1 billion because he says that Wilpon and crew should have known they were in a Ponzi scheme sometime in the last three decades.  As to his friends, Madoff responds, "They knew nothing."

Madoff and the S.E.C.:  The latest clawback suit to get prime time attention is a suit against David Becker, general counsel of the SEC, as executor of his mother's estate.  Mary Becker had been an investor in BLMIS prior to her death in 2004.  At that time, her $2 million and change account was liquidated, representing $1.5 million in phantom profits.  The cookie-cutter complaint seems to indicate that all withdrawals in the six years prior to December 11, 2008 are being clawed back, but I had not thought that was going to be the strategy.  Anyway, if Picard is going to use any discretion, it cannot be to the benefit of the general counsel of the SEC. 

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