10 Years Later: Reflections on the Madoff Meltdown

10 Years Later: Reflections on the Madoff Meltdown

It was just about 10 years ago (Dec. 10, 2008) that Bernie Madoff acknowledged to his sons, Mark and Andrew, that he had “absolutely nothing left” of the funds that had been entrusted to him; that the investment fund that bore his name was “just one big lie.”

There is some relatively new “news” about the giant Madoff fraud, as the work of clean-up continues a decade later. Just last month, the US Department of Justice announced that it was sending out another round of checks for the victims, $695.3 million.

Most of the money for such payouts has come from government settlements with the estate of Jeffry Picower, who was once on Forbes’ list of the 400 wealthiest Americans, and from JPMorgan Chase & Co., which was Madoff’s main bank back “in the day.”

It is worth one’s while to recall some of the particulars of these two settlements, because human nature is constant, because there will be future cons of the Ponzi/Madoff sort, there will be future suckers, and there will be future such unwindings.

What Picower Must Have Known

Picower, perhaps both a conman and a sucker, was always a critical piece in the picture. Picower made billions investing with Madoff. He had several accounts with the firm, but one of them has drawn particular attention. Picower opened an account with Madoff’s fund on April 18, 2006, by writing it a check for $125 million. Only two weeks later, Madoff informed him that the $125 million had grown into $164 million because of supposed windfall gains on certain securities. There were of course no securities or windfalls—Madoff was making all this stuff up.

Five months later, Mr. Picower withdrew the $125 million. In reality, he took $125 million from other duped investors. There was now $81 million in the account, all of it pure (purported) profit on the now-withdrawn principal. The profit was roughly 65% of the principal in five months, which annualizes to a rate of 156%. The investing strategy that Madoff claimed to be following could not have produced that return. The bankruptcy trustee for Madoff’s assets, Irving Picard, later charged that there was “no legitimate explanation for these events nor any possibility that they escaped Picower’s notice.”

In 2009, Picower died in a swimming pool accident at his home in Palm Beach, Fla., only a few days after Picard had filed documents alleging that Picower was “the biggest beneficiary of Madoff’s scheme, having withdrawn either directly or through the entities he controlled more than $7.2 billion of other investors’ money.”

In 2010, Picower’s estate settled the lawsuit filed by Picard for $7.2 billion. Thus, there has even since been a pool of funds for reimbursement of victims, although the particulars of who gets what have proven endlessly complicated.

The other big contributor to reimbursements, as noted above, has been JPMorgan. In 2013 and into the early days of 2014 the US Attorney for Manhattan, Preet Bharara, was considering bringing criminal charges against this giant bank for the role it played in Madoff’s Ponzi scheme. In January 2014, Bharara announced a settlement: the bank would pay $1.7 million for two violations of the Bank Secrecy Act, a 1970 law that lays out the circumstances in which banks are required to file Suspicious Activity Reports with regulators.

Like a Drunk Driving Arrest?

The bank also agreed to pay $350,000 to the Office of the Comptroller of the Currency, which brings the total of JPMorgan’s payment up to (and past) the $2 million mark.

In the end the bank was not required to plead guilty to violations of the Bank Secrecy Act. It paid the money under what is known as a deferred prosecution agreement, akin to the sort of deal that drunk drivers can get on a first offense, if they promise to attend AA meetings, pay the necessary fines, take state-arranged classes, and in general keep their noses squeaky clean for a year.

One lesson from the decade of litigation spawned by the Madoff meltdown is simply that there is no truth to the adage that “what you don’t know can’t hurt you.” If you have chosen not to know that which you don’t want to know, then the fact can hurt, even if “you” are a venerable and, by many metrics, a powerful institution. Much more so if you are merely a high net worth individual eager to avoid rocking the boat that has brought much of that net worth into your harbor.

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