Dec. 8 (Bloomberg) -- A firm handling billions of dollars of your clients’ money sometimes said it settled trades on weekends, when markets were closed. For three years, it had the wrong name of a fund on statements sent to clients. And its principal insisted on being the sole custodian of the assets, in violation of standard practices. What could it all mean?
Who cares? You’re making unbelievable money through this firm, and so are your clients, so why look behind the curtain? OK, the kind of returns this firm produces can’t be replicated by anyone else using the same formula. The due diligence folks say they are “baffled” by what they see and disturbed by what they aren’t allowed to see.
Then there are reports from a major accounting firm warning of possible “sham trades” and a very real potential for fraud.
These are signs that hinted -- no, screamed -- for years that something wasn’t right at Bernard L. Madoff Investment Securities LLC.
And yet to London-based bank HSBC and affiliates, these signals worked not as an alarm but as a come-hither, according to a lawsuit filed this week.
Bernard Madoff’s Ponzi scheme -- which ended with $65 billion of nonexistent investments in 4,900 accounts -- came crashing down two years ago, costing investors $20 billion in lost principal and sending him into the care of the federal Bureau of Prisons for the rest of his life.
The story still has the power to amaze and to warn others tempted to overlook the obvious. It did so again this week when lawyers appointed to hunt Madoff’s assets filed their biggest lawsuit to date. It seeks at least $8.9 billion from HSBC, affiliates and related funds, managers and others on claims they directed billions into funds that were obviously phony.
“Because of their institutional avarice, what was already a terrible crime was transformed into one of the largest thefts in history,” according to the lawsuit.
In an e-mailed statement, HSBC called the allegations of wrongdoing “unfounded” and pledged to “defend itself vigorously against these claims.”
It will take a vigorous defense to refute these claims. For financial firms, funds and managers, the lawsuit serves as a cautionary tale, one that shouldn’t have to be told.
The complaint describes warning signals even a financial newbie would have recognized, assuming he knows the meaning of the word “sham.”
But instead of running in the opposite direction, HSBC and its codefendants created, promoted, managed and supported an international network of feeder funds. They poured billions into Madoff’s Ponzi scheme, collecting hundreds of millions of dollars or more in fees.
So say lawyers at Baker Hostetler working with Irving Picard, the trustee who is liquidating Madoff’s business and gathering assets to distribute to victims.
The HSBC case is the latest of the suits Picard has filed against financial institutions. Last week it was New York-based JPMorgan Chase & Co. for $6.4 billion.
As Madoff’s primary banker for two decades, JPMorgan “was at the very center of that fraud, and thoroughly complicit in it,” David J. Sheehan, counsel for Picard, said in a statement.
(I’d quote from the suit, except that it’s under seal, thanks to JPMorgan.)
Last month the same lawyers for Picard sued Zurich-based UBS AG for $2 billion. UBS and JPMorgan also say these cases are bogus.
This week Union Bancaire Privee, a private Swiss bank based in Geneva, sidestepped a suit when it agreed to pay as much as $500 million to resolve the trustee’s claims.
These are cases Picard is right to pursue. It’s impossible to imagine Madoff could have stolen so much from so many without banks turning a blind eye.
And while they stand or fall on their own merits, these cases may take some of the sting out of less popular litigation, which tries to recover money from so-called “net winners.”
Those are small and large investors who, during the last six years of the scheme, withdrew more money from Madoff funds than they put in. Their profits came from some other sucker’s losses and should go into the pot to help the net losers, Picard claims. Investors who can show hardship can get out from under these claims.
The owners of the New York Mets -- including the baseball team’s chief executive, Fred Wilpon -- are among those Picard is suing, as they allegedly pulled out almost $48 million in profit on an investment of less than $522 million.
Whether the cases against Madoff investors are cruel or worthy, it’s clear that the fraud would have hurt far fewer people if Madoff hadn’t gotten the imprimatur of banks willing to lend him their credibility and the help of feeder funds fueling his scheme.
As early as 2001, HSBC found reasons to be skeptical that Madoff was earning his astounding returns legitimately, the suit says.
By giving him “unchecked control” over funds supposedly in HSBC custody, the defendants played an essential “role in allowing Madoff’s scheme to grow and function for as long as it did,” according to the 165-page complaint.
The suit is packed with sarcasm to show just how obvious was the rot in Madoff’s firm. It mentions “Madoff’s supernatural trading ability” and the “magic of Madoff.”
That these international financial sophisticates could have been taken in by sloppy sleight of hand tricks is hard to imagine. If you believe that, you could have also believed in what the lawsuit calls Madoff’s “logic-defying returns.”
(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)
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