Who Warned Whom About Madoff?

As noted by FTAlphaville, a fascinating aspect to the Madoff Trustee's case against HSBC is that accountants KPMG were asked by the bank to investigate Madoff's operation twice, and issued a damning report on both occasions, in 2006 and 2008 respectively.

This adds to the evidence that suggests Madoff's Ponzi scheme was quite a poorly kept secret from about 2000. Harry Markopolos said it took him four hours to spot the Ponzi scheme in 2000, using publicly available documents. Michael Ocrant published an article after a series of interviews in 2001, as did Barrons (see paras 215-220 of the Trustee's Amended Complaint against HSBC). And according to the Telegraph, Goldman Sachs banned its asset management and brokering divisions from dealing with Madoff's funds about the same time, while "a raft of blue-chip financial institutions have suspected something was wrong for years."

As the Trustee's cases unfold, it will be interesting to discover how far and how fast word spread, and who warned whom.

But the big question is why supposedly sophisticated financial institutions appeared to ignore the warnings? The Trustee claims certain activity occurred with the "intent to hinder, delay, or defraud creditors". But why? He cites the desire for fee income (at para 16). Perhaps the banks and other intermediaries may also have thought that all was fine, so long as their more valued clients got their 'magic' returns paid or their principal out, regardless of the fact that the money came from other participants. They may also have concluded, however unwisely, that it was too late to let go of a balloon that had risen to such lofty heights, and their best chance of recovering their more valued clients' funds was to risk putting more in... If that's the case, then the business of working out where those new funds came from must have been very bloody indeed. Note the Trustee's allegations (at para's 146-148) that Madoff's involvement was deliberately kept out of the 'feeder fund' promotional documentation.

Ugly.

Yet, as is apparent from "Fooling Some of the People All of the Time", investors can remain in denial even in the face of the most dogged attempts to convince them they're being foolish.