The Madoff Trustee’s Bad Day
By JOE NOCERA
He did so on Thursday, in the matter of Irving H. Picard v. HSBC. Picard, of course, is the bankruptcy trustee in charge of recovering money that he can distribute to the victims of Bernie Madoff’s heinous Ponzi scheme. To this end, Picard has filed something like 1,000 lawsuits, seeking more than $100 billion.
He has sued the feeder funds that funneled money into Madoff’s firm. He has sued people who were close to Madoff and likely knew he was a crook. And he has sued many innocent Madoff investors, who had the misfortune of taking more money out of their accounts than they put in. Although these latter lawsuits have been extremely controversial, “clawing back” money from net winners to create a pot of money for the net losers is something bankruptcy trustees do all the time after a Ponzi scheme is exposed. After all, the gains reaped by the net winners came from money the net losers put in. That’s how Ponzi schemes work.
What trustees don’t generally do, however, is sue big financial institutions like HSBC or JPMorgan Chase on the grounds that they either looked the other way or helped enable the Ponzi schemer. As we discovered during the Enron scandal, the courts frown on “aiding and abetting” suits, even though to a nonlawyer, they can seem more than justified.
And so it was on Thursday
In fact, the reason Picard and his top lieutenant, David Sheehan, decided to sue the banks is precisely that the pattern was so familiar. “This is the largest financial fraud ever perpetrated,” Sheehan told me not long ago. “It didn’t happen without enabling. Bernie needed a bank to facilitate what he was doing. When you see what the banks were doing, you realize that Bernie was as much a part of the financial fabric of Wall Street as any collateralized debt obligation.”
During the course of a lengthy investigation, Sheehan became horrified by the evidence of bank complicity. HSBC, for instance, funneled enormous sums of money into Madoff. It served as the custodian to a number of Madoff feeder funds. Yet whenever the bank did due diligence into Madoff’s hedge fund, it ignored numerous red flags suggesting that Madoff was operating a fraud. Various HSBC due-diligence reports actually described Madoff’s returns as “too good to be true.”
JPMorgan Chase, which is also being sued by the trustee — and has also argued that the case should be thrown out of court — was Madoff’s bank. Its bankers saw money coming into the Madoff account and going out again, without ever being invested in the market. They saw evidence of money-laundering. Yet they never uttered a peep. Madoff’s business was too important.
Ultimately, Picard and Sheehan were trying to do something that has been sorely lacking in the aftermath of the financial crisis. They were trying to bring about some justice, using the only weapon at their disposal
There’s one other aspect of Thursday’s decision that I couldn’t help noticing. The net winners, many of them, were nearly giddy over the fact that Picard got his comeuppance so publicly — even though Rakoff’s decision will surely hurt them. Of the $100 billion Picard has sought, at least three-quarters came from lawsuits like the one Rakoff just threw out. Had Picard won those suits, he would likely have had enough to compensate not just the net losers but the net winners. The fact that he lost means that he will continue to press hard for clawback money.
It is easy to understand the net winners’ anger at the trustee. To wake up one day and learn that you’ve been victimized by a financial fraud is painful enough. But to then realize that you are expected to return money that you thought was yours is infuriating. As their fury has grown, however, they have forgotten who the real bad guy is.
It’s not Irving Picard. It’s Bernie Madoff.
Donations can be sent to the
"The master class has always declared the wars; the subject class has always fought the battles. The master class has had all to gain and nothing to lose, while the subject class has had nothing to gain and everything to lose--especially their lives." Eugene Victor Debs