Saturday, August 8, 2009

More on Madoff from "Too Good To Be True"

This story on Madoff is just too good not to post!! And Barron's or the author can't complain--It's also the tease for the new book on Bernie-- Especially since it involves JPM--and especially since they have now come up with this new beauty, that may even surpass Singapore's sovereign wealth fund, (that dumped BAC at 7!!!) with their terminology of "negative wealth added!"

Now JPM , after knowing about the Madoff fraud, at the same time, when they were still collecting money from investors to invest with Madoff, they sneakily sold their stake--because the rule of a panic or a ponzi is always the same--He who panics first, wins!

So what is JPM's story on Madoff? Their sorry excuse for screwing their clients was just this: "We did not have the right to disclose our concerns!"

So that "right" exceeded JPM's fidiciuary responsibility, because with the big boys, they don't have one.

JPM's fidicuiary is to fees!

MADOFF'S LONDON OFFICE PLAYED A LARGE role in helping hide his fraud. London may have started out legitimate, but over the decades it morphed into a financial outpost for the family, a place where they felt comfortable stashing what they considered their personal money -- which by 2008 amounted to some 113 million British pounds.

Madoff Securities International Limited, as the London operation was called, opened its doors in 1983. The business entity was owned by Madoff, his wife, their sons, and a longtime friend of Bernie's, Paul Konigsberg. Later, Konigsberg's accounting firm would show up hundreds of times on the list of victims, since Madoff often referred his investors to the firm -- as good accountants for handling securities.

The London office had electronic terminals that made it possible to log in directly to and trade on the Nasdaq exchange from overseas. As usual, the Madoffs were early adopters of technology, and they were among the first to use these market-making terminals outside the U.S. This meant the U.K. office could trade when traders in the United States could not: domestic U.S. trades were allowed only when the U.S. markets were actually open.

By 1989, however, the Nasdaq extended its hours and traded several hundred over-the-counter stocks during the predawn hours in the United States, thus allowing firms there to trade during London hours -- part of the gradual globalization that would one day overtake securities trading. This may have made the London office less essential to the daily operations of Madoff's broker-dealer and proprietary-trading businesses.

Over time, however, the London branch would become the family bank teller. It was offshore as well, so Madoff could wire money from his U.S. operations to London, in transactions of hundreds of millions of dollars that covered fake trades, or simply wash the funds out of his American accounts and then spend them on luxury items like the Leopard speedboat he purchased in France. (This is also known as money laundering.)

Although the sons, Mark and Andrew, were located in New York, they held ownership and titles as directors in the London operation. And Bernie's wife, Ruth, and his brother, Peter, also held shares, as did his old friend Sonny Cohn, at least originally. Paul Konigsberg was another director. Charles Stillman, an attorney for Konigsberg, said Konigsberg received nonvoting shares for work he did to help open the London operation, in the 1980s. Konigsberg, he added, didn't have any "meaningful business role" in the London operation, which suggests he didn't have any say in how the business was run.

Konigsberg, however, was a major fund-raiser for Madoff's New York hedge fund at least since 1998, according to Madoff investor Steven Leber. Leber filed a $4 million lawsuit in Florida against Konigsberg and his accounting firm, Konigsberg Wolf & Co., charging negligence and professional malpractice with respect to a Madoff account opened by Leber in 1998. In that suit, Leber alleged that Konigsberg offered to act as a conduit to Madoff for Leber's $4 million or so in family money -- but only if Leber started using Konigsberg's accounting firm as well. Konigsberg Wolf has offices in New York and is listed on the Madoff victims' trustee list. Konigsberg himself, as well as his firm and some of his family members, also appears on the victims' list more than three hundred times -- sometimes on his own behalf, other times on behalf of accounts set up for others, such as the Norman F. Levy Foundation.

It's possible the London operation was a way to repay Konigsberg for his fund-raising services without the commission money being traced. After all, through Madoff Securities International, Madoff was able to handsomely compensate other family members. In 1998, for example, directors of the London operation received emoluments, or payments, totaling £688,570 while the operation reported profits of £1.03 million, according to the Wall Street Journal. In 2007, Madoff directors altogether received £1.09 million, with the highest-paid director alone receiving £301,437.

Meanwhile, Madoff had two primary bank accounts set up for him in New York. One account was with the Bank of New York Mellon, account number 866-1126-621 (referred to as BONY 621). It was supposed to be the broker-dealer's primary cash account. He also had an account at JPMorgan Chase, numbered 140081703 (referred to as JPM 703), which was the account investors used to wire money or send checks to the fake advisory business. This was also the account used to pay investors when they withdrew funds. Many were able to get hold of their money within days; Madoff always had it ready, no matter how large the amount. It was one of his biggest selling points.

After his arrest, Madoff would claim in court that the legitimate brokerage firm and the criminal hedge fund, the advisory business, were completely separate. However, in 2001, money began to slosh back and forth between the two accounts, and this continued up until the day Madoff turned himself in. Money was regularly transferred from both the Bank of New York and the JPMorgan Chase accounts to the London office. Madoff personally wired roughly $500 million over to London and then back again between 2001 and 2008, according to copies of the documents filed by the Madoff trustee, Irving Picard. Over those seven years, Madoff also withdrew cash from the broker-dealer's account with Bank of New York, sometimes as much as $2 million in a single day.

Madoff Securities International in London also "traded for Bernard Madoff's personal accounts and members of his family," said Picard. And the trustee's revelations didn't stop there. In a filing with the U.S. Bankruptcy Court, Picard laid out how the London accounts had been used as Madoff's personal piggy bank. Madoff began regularly wiring money to the London office to pay for personal luxuries.

He purchased the $7 million Leopard yacht in the south of France by sending cash through his U.K. office. The yacht, named The Bull, just like his cruiser in Palm Beach, was built for Madoff in 2006. The boat was also registered in Ruth Madoff's name, as were many of the couple's high-priced trophies. The 27-meter (89-foot) Leopard, built by French luxury boat-builder Rodriguez Group, was moored at Port Gallice, France, between Cannes and Nice. The annual fee to keep a yacht of this size there is nearly $50,000. Madoff told employees in London to transfer money to the shipyard, reasoning that the builders already had euro-denominated bank accounts, which would make the transaction easier -- or at least, that was the explanation he gave. The employees sent the money after receiving an invoice from the boatyard, and Madoff later transferred cash to the London firm's accounts to cover the expense. At least $250 million was allegedly wired back and forth between Madoff's New York and London offices for such purchases.

In November 2008, Madoff phoned Chris Dale, the finance director of Madoff Securities International in London, and told him to sell an entire portfolio of British bonds. Madoff then instructed Dale to transfer the money -- $165 million -- to his New York business, so he could buy U.S. Treasuries on London's behalf. Madoff claimed he was worried about the return because of the pound sterling's fall against the U.S. dollar. "He was worried about the British economy and said he preferred his investments in U.S. Treasuries," Dale told The Independent on Sunday, a British newspaper. "This seemed perfectly realistic at the time, because of the banking crisis and the pound's weakness."

Madoff's London employees didn't think to question the wires, what they were for, or any other transactions. After all, he was the boss. One employee told the London Times: "He was the chairman of the company and it was his capital in the business. If he phoned up and told us to move money for him, we did it." Employees in London claimed they had no clue that Madoff was using his British outpost as a money launderette.

The Friday after Madoff was arrested, Stephen Raven, chief executive of Madoff Securities International, was still unwittingly defending the London office against Madoff's larger fraud, and issued an indignant statement: "We only became aware overnight of the news relating to our chairman, Bernard Madoff. His major shareholding in our firm is a personal investment. MSIL in London is a small proprietary trading firm -- we are not client-facing and we trade only with the firm's own money." That was true, but the ultimate purpose of the London outpost was very different from what Raven saw: It was where the Madoffs washed their investors' money and then spent it on expensive furnishings, yachts, automobiles, and other luxuries.

Julia Fenwick, another employee at Madoff's London office, was a good friend of Peter's daughter Shana. Because of their friendship, Fenwick sometimes vacationed with the extended family. She even attended Bernie's seventieth birthday party -- held just months before his arrest -- and became intimately familiar with his and Ruth's love of Fleet Street tailors, Boots-brand face cream, and the jet-set lifestyle.

When Madoff visited London, Fenwick said in an interview with The Mail on Sunday, he was often accompanied by a personal designer who was charged with polishing Bernie's appearance and selecting Ruth's clothes. Bernie collected watches through vintage dealers in London's Piccadilly shopping district and sported wedding bands that matched each watch. During his two or three visits a year to London, Madoff would patronize Savile Row and have his tailors from the upscale shop Kilgour pay visits to him at the firm's "Hedge Fund Alley" offices in tony Mayfair. While he was being fitted for high-priced suits in the boardroom, his wife would pass the time knitting.

While in London, Madoff stayed at the Lanesborough Hotel, among the most expensive in the world. Guests pay up to £8,000 per night and are provided with their own private on-call butler. Madoff would leave a trunk of clothes at the Lanesborough, which the hotel stored, cleaned, pressed, and hung in his suite for the next stay.

As her friendship with Shana grew, Fenwick spent more time with the Madoffs outside the office.

In 2007, Fenwick attended Shana Madoff's wedding to Eric Swanson, a lawyer with the SEC. Other SEC people also attended, including Swanson's boss, Lori Richards. (Because she attended this wedding, Richards, in front of Congress after the scandal broke, testified awkwardly that she was recusing herself from the SEC's Madoff investigation.) What struck Fenwick as odd was a joke Bernie Madoff privately made to her. At the wedding reception at the Bowery Hotel in New York City, Bernie leaned in and pointed to other SEC employees among the guests. "Look over there," he told her. "That's the enemy."

BY SEPTEMBER 2008, JPMORGAN CHASE may have had indications, or actually known, that Madoff was a fraud. How might they have found out before everyone else?

JPMorgan Chase is an enormous enterprise, which on one side -- JPMorgan -- operates as an investment bank, and on the other -- Chase -- runs as a typical commercial bank, with loans and deposits. On this commercial banking side, Chase was handling Madoff's billion-dollar advisory business bank account, JPM 703. Earlier in 2008, JPMorgan Chase had taken over Bear Stearns' operations in a government-orchestrated bailout.

Madoff was a close friend and business associate of longtime over-the-counter trader Aldo Parcesepe, a senior managing director and head of Nasdaq market-making at Bear Stearns. He regularly traded with Madoff's broker-dealer firm. Between 2005 and 2008, Parcesepe served on the board of the National Stock Exchange (NSX), the electronic exchange for equities and options that the Madoffs had subsidized in the late 1970s. Peter Madoff served on the NSX board with Parcesepe, who retired from the board in 2008. Madoff owned 10% of the NSX, and Bear Stearns regularly traded through the exchange.

The NSX was familiar ground for the Madoffs. It had once been known as the Cincinnati Stock Exchange, and the Madoffs had refurbished and reinvigorated the exchange with their own money. It was the same exchange that had helped the Madoffs attract orders from Wall Street customer firms all over the country, and the hub for payments made to Madoff for order flows.

Brokers who traded at Bear Stearns used the firm's automated equity order system to buy and sell stocks. A broker would enter the stock symbol and the number of shares he or she wanted to trade. The system was supposed to do the rest: work to find the best counterparty to trade with from among the many market makers that traded with Bear Stearns. However, for Nasdaq stocks, Bear Stearns had an unwritten code: the system automatically defaulted to trade with Madoff.

Madoff reportedly paid Bear Stearns substantial fees for this default setting on their equity order system, and he may have paid other customers to do the same as well. Between 2000 and 2008, Bear Stearns' 400 or so brokers all used this system, and all their Nasdaq trades defaulted to Madoff. It was a big source of revenue for Madoff, and it vaulted Bear Stearns to a position as the largest counterparty trading with Madoff. The arrangement was in place when Bear Stearns went under in early 2008, and it continued under JPMorgan Chase.

Since at least 1992, and separate from the Bear Stearns connection, Madoff had that other strong relationship with Chase Bank: the account named JPM 703, which Madoff used for his phony advisory business. The account had swelled over the years; by 2006 he had billions of dollars in cash on deposit. These were "demand" deposits, meaning Chase had full use of the funds until Madoff withdrew them. All the funds were commingled in a single account, and Madoff could withdraw the money as he saw fit, without any limitation.

Between 2006 and 2008, Chase Bank's accounts from Madoff averaged several billion dollars. However, in 2008, as the stock markets began dropping precipitously, so did Madoff's cash balance. Between September 2008 and December 11, 2008, it had to be pulled out of numerous nose-dives. In November alone, the balance dropped close to zero several times, forcing Madoff to transfer roughly $160 million from Madoff Securities International in London. He was juggling payouts to investors demanding their money back and moving money around from different offices and bank accounts around the world.

And all the while, he continued to take in new investors. In the month of November, investors deposited $300 million of new cash in the Chase account while Madoff withdrew $320 million. Meanwhile, he was hitting up his old friend Carl Shapiro, one of his earliest clients, for a new investment -- of $250 million.

Chase, meanwhile, was doing other business with Madoff besides banking. In 2006, JPMorgan Chase developed a derivative product for its wealthy clients. It was linked to the Fairfield Sentry Fund offered by the Madoff feeder Fairfield Greenwich. The bank offered investors -- mostly in Europe -- a note that paid three times the earnings, or returns, of the Sentry Fund. The note matured in five years. To hedge its risk on the derivative product, the bank invested in the Sentry Fund itself. This way, if the Sentry Fund did well, the bank's returns would offset its obligation on the notes.

By the summer of 2008, JPMorgan Chase had deposited $250 million with the Sentry Fund. With the financial meltdown on Wall Street and around the world in full swing, most of the markets were down 30% or more, and yet the Sentry Fund reported gains of 5%. JPMorgan Chase began to grow suspicious.

Chase representatives from the commercial banking side met with Madoff. They wanted to discuss his cash flows and to know what percentage of his portfolio was leveraged, or invested using borrowed money -- and with whom he traded options contracts. The simple math was just as many others had concluded: the options market was too small to handle the size and capacity Madoff was claiming to manage in his supposed options strategy. Moreover, it was implausible that Madoff could be generating substantial positive returns when the S&P 500 index was down 30%.

Madoff wouldn't provide Chase with any of the key information, so managers from Chase's London office, along with colleagues in New York, decided they would go through the back door.

PARCESEPE'S TRADING DESK HAD PEOPLE who regularly traded with Madoff, and they knew the number of trades executed through Madoff. On its trading side, JPMorgan learned that Madoff's trades with Bear Stearns -- by then a part of Chase, and now Madoff's largest counterparty -- could not possibly sustain a portfolio returning 10% to 12% a year on what the bank knew from the deposit side had to exceed at least $7 billion. The Chase team had access to Madoff's account records, which showed huge cash positions until the middle of 2008, when the stock market went into free fall. It was obvious: Madoff was a fraud.

In September 2008, JPMorgan Chase quietly liquidated its entire $250 million position in the Sentry Fund, even though it remained liable on the derivatives it had sold to the wealthy clients. At the time, the Fairfield Sentry investment notes were showing a 5% gain for the year. The bank had concluded Madoff was a phony, and the only way to protect itself was to liquidate anything connected with Madoff.

Not only that, but by September 2008 Chase may have known that if Madoff's hedge fund was a fraud, he was likely diverting his advisory-side funds. Still, Chase continued accepting wires and checks from Madoff's latest round of investors. Throughout the fall of 2008, according to one lawsuit filed against Chase (MLSMK Investments Co. v. JPMorgan Chase & Co. et al., SDNY 2009), the bank "continued to work in partnership with Madoff despite being privy to information that the fraud was collapsing and therefore consuming more and more of the victim proceeds."

A JPMorgan Chase spokeswoman, Kristin Lemkau, told the New York Times the bank withdrew from the Madoff-linked funds after "a wide-ranging review of our hedge-fund exposure." Lemkau acknowledged, however, that the bank also "became concerned about the lack of transparency to some questions we posed as part of our review." Investors weren't told because, under sales agreements, the issues did not meet the threshold necessary to permit the bank to restructure the notes, she said. Under those circumstances, she told the paper, "we did not have the right to disclose our concerns."