Fraud Files: Plenty of Blame to Go Around in the Madoff Case

Although it has been more than two years since Bernie Madoff's gigantic Ponzi scheme collapsed, the case is still making headlines. And it seems there's plenty of blame to go around. The only question is who will be left standing in this game of musical chairs? Many of the players are jockeying for position, hoping to recover some money from other parties who might be deemed partly responsible for the fraud.

One target is JPMorgan Chase. It had money invested in hedge funds that had ties to Madoff, and Madoff bankruptcy trustee Irving Picard has sued the bank for $6 billion. The lawsuit against Chase (JPM) says warning signs existed, but the executives just ignored them while earning hundreds of millions of dollars. Chase employees notified regulators of their concerns in late 2008, but it's thought that company personnel knew about issues much earlier than that. Madoff himself says banks and hedge funds were "complicit" in his fraud. I doubt anyone takes anything Madoff says seriously these days because the world knows him only as a conman.

Swiss bank UBS AG is being sued by the Madoff bankruptcy trustee for $2.5 billion. It is alleged UBS (UBS) "capitalized on the Ponzi scheme in the face of clear indications of fraud." The bank put $1 billion into Madoff's fraud, and allegedly received extraordinary returns on those funds. HSBC Holdings Plc is being sued for $6 billion, with Picard claiming HSBC knew about fraud concerns surrounding Madoff but did nothing to protect investors. The trustee adds that HSBC saw "warnings and other obvious badges of fraud" that should have caused them to act.

Estates and Individuals Sued, Too

The estate of Norman F. Levy settled with Picard for $220 million last year. Levy was reportedly a "surrogate father" to Madoff, and allegedly deposited and withdrew money from Madoff's funds in a much larger volume than anyone else. More than $83 billion allegedly went in and out of Levy's account with Madoff, and some say Madoff's access to this cash flow allowed the Ponzi scheme to flourish for so long. A settlement of $7.2 billion was secured from the estate of Jeffry Picower, representing the profits Picower received from his investments with Madoff. Of that amount, $5 billion will go to the bankruptcy trustee, while the remainder will go to the U.S. Attorney's Office in Manhattan.

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Sonja Kohn, head of Bank Medici in Austria, is accused of sending $9.1 billion of investors' money to the Madoff funds, participating in what a lawsuit calls a "criminal relationship" with Madoff. Carl Shapiro reached a $625 million settlement with the Madoff trustee, although it was alleged he profited more than $1 billion from his investments with Madoff.

The New York Mets and its owner Fred Wipon were drawn into the battle over the Madoff fraud. A lawsuits alleges the Mets Limited Partnership invested $523 million with Madoff, but later withdrew $571 million. That $48 million profit is now being targeted. In total over 100 lawsuits now seek recovery of funds from many Madoff investors.

Who Really Missed the Fraud?

What's the funniest part of all these allegations? Many of the victims are finger-pointing, saying each of these parties should have known Madoff was committing fraud. Meanwhile, the Securities and Exchange Commission -- the supposed watchdog for investors -- was ignoring all the evidence it had of the fraud. Harry Markopolous notified the SEC of his concerns about Madoff several times, providing detailed narratives that supported his allegations of fraud. He offered to help the SEC understand his allegations and verify what he was saying. The agency summarily rejected him -- either through incompetence, corruption or both.

I have a hard time accepting the idea that the SEC is going to "get tough" on swindling of investors. Its track record is poor, and it often seems like there's no rhyme or reason to who the SEC decides to pursue. The agency couldn't catch a fraud that was happening on a grand scale right in front of it, even when it had someone (Markopolous) who did all the hard work and analysis proving that Madoff couldn't possibly be legitimately generating the investment returns he claimed.

It has been said that government agencies are even considering criminal action against some of the Madoff investors. Apparently, they're being accused of knowing they were involved in a Ponzi scheme, such that their continued deposits of cash might make them criminally liable for the fraud.

Don't Hold Your Breath

I've got an idea: How about if the people at the SEC who rejected Markopolous's analysis and evidence are prosecuted criminally? They had at least as much information as the Madoff investors, and probably more. Let's hold them accountable for the failure to stop the fraud scheme years before it finally collapsed.

But something tells me the SEC won't be too keen to prosecute its own people and that other law-enforcement agencies won't want to take them on, either.

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