Madoff Fund was Bust NOT a Fraud, but Fraud Entitles Investors to Compensation

by Arno Fri Jan 02, 2009 04:17

I completely agree. The real victims of the Madoff scandal are the U.S. taxpayers, and not the cry babies who lost their money, including as you say, HSBC bank. Anyone with an account at HSBC should close it now if they get one penny in taxpayer compensation for their stupidity with regards to Madoff investments. There is a good but slightly cynical article on the Madoff victims at the following link definitely worth reading:
http://www.geldpress.com/2008/12/who-are-these-alleged-...tims/

by anonymous Fri Jan 02, 2009 22:55

"But by claiming it is a fraud and Madoff has pleaded guilty, and the state accepts it, it means all the so called defrauded investors are entitled to be fully compensated under the US government's financial fraud protection scheme."

The victims are NOT entitled to be fully compensated for their losses. Many of them may be eligible for compensation of up to $100,000 and recovery of up to three years of back taxes. Small comfort to an individual who may have lost millions.

It's a totally ridiculous theory.

by Joe Sat Jan 03, 2009 15:44

I agree with the post above. The article states... "US government's financial fraud protection scheme." What protection scheme are you talking about? SIPC? That only covers $100k in losses. Even if a court approves "compensation" for the investors, there's no money to compensate them with.

by mickeyc Sun Jan 04, 2009 02:06

Your source is extremely ignorant.
Risk controls have been non existent for years. Fraud protection does not cover investment funds - only brokerage assets. The money lost was in a fund. There has been no suggestion of fraud in the brokerage side of the business which is legally separate.
Your story demonstrates the cluelessness of the a large number of "professionals". He/she doesn't understand the most basic features of US law and has been advising US firms according to you.

by Tumbleweed Sun Jan 04, 2009 04:06

"Rafeeq suggests that Madoff fund simply went bust in which case the investors would not be entitled to get any money back. "

Yep, it went bust, all right. Even Madoff admits it was insolvent for years.

"There is no way that so many people and so many institutes, banks and pension funds would have invested billions with Madoff with absolutely zero oversight or prior investigation."

The fact is, many did. Go figure.

"The more likely scenario is that is hedge fund went bust as are up to 30% of hedge funds are expected to do so. But by pleading guilty, the entire corrupt and criminal system has gone along with his deceit and accepted. It means that the tax payer will ultimately be bailing out these losses. Expect more "frauds" like Madoff to be come to light and the CEOs to strangely plead guilty because they now all want to get on the bailout gravy train."

Huh? And serve the rest of their lives in jail simple to appease angry investors? That's a new one.

"So a truly heartwarming confession. And it was apparently made to his 2 sons, both of whom who worked for the fund and who had absolutely no idea that this fraud was being perpetrated, until such time as this astounding confession."

The investigators will sort out what his sons did and didn't know.

"But then I started to look more closely at the mix of investors who have lost money. About half of them are professional investing institutions."

So? That's because they branded the fund and thus Madoff could keep a low profile.

"I have acted as a professional consultant to major EC and US financial institutions on corporate and institutional credit risk and the idea that anyone in HSBC or Santander could authorise large investment without the internal checks and controls being employed is almost impossible. To try and believe that EVERY institution that invested in Madoff circumvented their internal control procedures IS impossible."

What ISN'T impossible is that Madoff, the swindler, forged documents, including trading records and audit reports.

"Look on the net and you will see that because this case is being labelled a fraud, it would appear that investors are going to be able to claim their investment back under the US government's financial fraud protection scheme."

What fraud protection "scheme"?

However, since the guy has pleaded guilty we do not need to demonstrate the fraud, because he says he is guilty.

Tell that to the Madoff trustee, which is seeking subpoena powers, and the U.S. House of Representatives Financial Services Committee, which is holding hearings on the subject, for starters. Is this Rafeeq person an American or at all familiar with the U.S. justice system?

And look further on the net and you will see that these "victims" have also been told by the US tax authorities that they will probably also be entitled to claim back some taxes on these defrauded sums.

All defrauded victims are entitled to such.

"If the CEO admits to fraud they get their money back as compensation from the US tax payer, just as they are also drawing money back from the tax payers with the other hand."

Does this person have any clue exactly how much the victims are entitled to get back? Pennies on the dollar. For someone having just been ripped off for millions of dollars, $100,000 is a small consolation prize, indeed.

The lesson to learn from this article and relatively simple logical reasoning about the facts of the case is how shallow all the other coverage has been and how easily the public even in a huge swindle like this is distracted from the key kernel of truth that common sense thinking about the facts demonstrate."

The lesson to learn from this article is that there's a quack born every minute.

by salk1 Mon Jan 05, 2009 14:26 hairdoc01 at yahoo dot com

Excellent! I myself never believed the MAdoff story. these are routine market losses. Thye are attempting to heap the losses on the general US taxpayor. the media believes the story. Journalism is dead in the US. I predict billions of TARP money will be used to bailout these criminals.

by Mike D - Banking Thu Jan 08, 2009 00:15 mike at tuxedowines dot com 347-247-9736

The Sipc covers up to 500,000 per customer of securities and 100,000 of cash, with the bungled SEC investigations, their is a good chance thru litigation that these people will recover a substantial amount. I bet Madoff is terminally ill and this is the way it is planned out, he will never see a jail cell....I have worked at banks in high level jobs, their is no way that they were all duped. The high level banks knew something was up, (because of the high returns, that no one in the history of the world ever returned on a consistent basis over that period of time)...

by RobNYNY Sat Jan 10, 2009 16:09

There are some other pretty good replies to this, but I think I can amplify a bit.

The article is a pretty unsophisticated bit of reasoning, weak on facts as well as law.

First, there does not have to be a finding of fraud for an investor to receive SIPC payments. The payments are the same whether there is a bust or a fraud.

http://www.sipc.org/how/brochure.cfm

"That is why SIPC does not bail out investors when the value of their stocks, bonds and other investments falls for any reason. Instead, SIPC replaces missing stocks and other securities where it is possible to do so ... even when the investments have increased in value."
"SIPC does not cover individuals who are sold worthless stocks and other securities. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons."

Second, some of the arguments that are supposed to point to a simple bust point equally to fraud. For example, saying that some of the investors investors will get tax deductions would be true whether it is a bust or a fraud. Furthermore a tax deduction is worthless unless you have income to offset it against, and many will not, either because investors don't have income equal to the entire amount of their portfolio, or becauses some of the investors are tax exempt.

Third, fraud does not give the investors access to taxpayer money. SIPC is paid for by dues of its members, and it has rather limited funds. In fact, SIPC has a reserve fund of about $1 billion, not nearly enough to satisfy all of the Madoff claims. Most of the recoveries made through SIPC are carried out by it finding missing investments and returning them to the investors. Even though fraud runs to $10-40 billion a year in normal years, SIPC has only paid out about $15 billion in recoveries in its history, and only $500 million of it was its own money (which is to day dues of its members). As other commentators have pointed out, SIPC payments from its own frunds are limited to $500 K and $100 K for cash per investor. Any investor relying on SIPC should expect to get back only a tiny fraction of their investment.

http://www.sipc.org/how/brochure.cfm
http://www.sipc.org/who/who.cfm
http://www.sipc.org/who/notfdic.cfm

Fourth, the largest source of funds to pay defrauded investors will probably be the earnings paid out to lucky investors early in the scheme (but not returns of capita), under various state and federal theories of preference, constructive fraud and actual fraud. In a Ponzi scheme, the amount of profit paid out to lucky investors is roughtly the same as the amount of capital paid in by unlucky investors. Much of that profit should be subject to clawback by the bankruptcy receiver. Now, actual fraud does require a finding of fraud, but preference and constructive fraud do not -- they apply equally to completely innocent investors. And a showing of actual fraud by investors is a largely separate issue from Madoff's admission of fraud on his own part. Negligence and wishful thinking on the part of an investor are not fraud. Nor does "should have suspected something" constitute fraud, and Madoff's admissions do not change that. The best chance the unlucky have is going after the lucky, and no one is going to get 100 cents on the dollar doing that. At best you could say that an admission of fraud by Madoff makes it somewhat easier for an unlucky investor to accuse a lucky investor of actual fraud, but that's very, very tenuous.

Fifth, I'm not sure what you mean by hinting that these were sophisticated investors and something must have been fishy in the approval process. Is that evidence of bust or fraud? Were the investment committees getting kickbacks from Madoff? Or did they intentionally invest millions and billions of dollars that they knew they would lose, just so that they could get rich off $500 K payments from SIPC?

Sixth, I am involved in investment fraud litigation, and you would not believe the lack of sophistication that many big institutions exhibit. If you put consistent historical profits with low volatility into a model, then the model says to invest. Consistent historical profits are exactly the way to fool a lot of risk modeling software, committees and managers. And that's what Madoff produced.

Seventh, Madoff has not pleaded guilty. In any case, a guilty plea is irrelevant, since the triggering event for SIPC remedies is the failure of the fund, not a plea or conviction.

Eighth, what exactly is the "gravy train" that Madoff is getting on, and why would other CEO's plead guilty to get on it? Madoff should probably expect to spend the rest of his life in jail and lose everything he owns. He sons, however innocent, should also expect to lose everything they ever earned. I just don't see the appeal.

by Kevin T. Walsh - Social Justice and Ethics Sun Jan 11, 2009 18:06

I have read the article above but probably 20% is factual and really I suppose that is all articles to a degree.

The point I am making is Madoff and the 50 billion is complex but unlike Ireland the law will be applied.

Madoff has stung people with power in high places and he will pay a high price.

I have read from Time magazine to the Economist to the Financial Times that he was also a Bully

In the English Mail last week it printed at board meetings - one of his favorite sayings was -"Holding a bat and a ball in his hand - this is my company and when the bat hits the ball you will all run.

He is now under house arrest and has pleaded guilty as we all know yet there is nobody in Ireland, in high office, millions gone missing, under house arrest.

Away from the article - I would like to know Terences views on how globally this will all pan out

K. T Walsh