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The Madoff Victims Who Came Out Ahead
Merkin denies any wrongdoing. In the court papers filed on July 1, 2009, he asserts that his dealings with Madoff were known to his investors and there was no deceit or breach of his duty. Perhaps so, but if Cuomo’s assessment of Merkin’s financial records is accurate, Merkin raked in nearly $450 million in fees by giving Madoff the lion’s share of his investors’ money.
Madoff may have provided even more extraordinary emoluments to some other of his feeders. Consider, for example, what the trustee describes as “The Curious Case of Sonja Kohn.” Kohn met Madoff in the mid-1980s, when she had her own brokerage company in New York. She then founded the Bank Medici AG in Vienna and used it as a feeder fund for Madoff.
Raising money from the newly rich oligarchs of Russia and Eastern Europe, she eventually placed (on paper, at least) an estimated $3.5 billion with Madoff. After the collapse, the trustee sorted through the records of one of Madoff’s front companies and found that sizable transfers had been made to Kohn, even though she did not work for that company.
Next, as The Wall Street Journal reported, prosecutors in the U.S., Britain, and Austria launched their own investigations of alleged payments she received from Madoff. According to the affidavit filed by U.S. prosecutors in Vienna, some $32 million was paid by Madoff over a course of 10 years to a New York company that was “owned by Sonja Kohn personally,” while, according to a similar British affidavit, $11.5 million was paid by Madoff’s London subsidiary to another company she allegedly controlled.
If such payments were indeed made by Madoff, they provide an additional inducement for money-raisers to feed Madoff’s insatiable Ponzi scheme. Kohn states through her spokeswoman that neither she nor the Bank Medici received any kickbacks from Madoff and describes herself as “the greatest Madoff victim.”
Even excluding such alleged side payments, Madoff’s feeders extracted more than $1 billion in performance and net asset fees from his phantom profits. While there is no evidence in any of the litigation that indicates that any of these feeders were privy to Madoff’s grand Ponzi scheme, they had intriguing clues that might have cast their golden goose in a different light, such as Madoff’s inexplicable generosity in relinquishing his entire performance fee just to get his hands on their money, his curious practice of exiting the market entirely at the very end of each quarter so that his quarterly statements to the feeder funds would list nothing but Treasury bills and cash, and, even curiouser, his employment of an unknown two-man accounting firm in New York's Rockland County—operating out of a 13-by-18 office, no less—to audit all his multibillion-dollar operations.
Missing such flashing signs that something was amiss while they harvested their rich bounty of fees may be understandable on Wall Street but, in my book, it hardly qualifies them for victimhood.
Edward Jay Epstein studied government at Cornell and Harvard, and received a Ph.D. from Harvard in 1973. The Big Picture: The New Logic of Money and Power in Hollywood is his 13th book. The sequel, The Hollywood Economist will be published in January 2010.
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Lloyd Grove is editor at large for The Daily Beast. He is also a frequent contributor to New York magazine and was a contributing editor for Condé Nast Portfolio. He wrote a gossip column for the New York Daily News from 2003 to 2006. Prior to that, he wrote the Reliable Source column for the Washington Post, where he spent 23 years covering politics, the media, and other subjects.
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Edward Jay Epstein studied government at Cornell and Harvard, and received a PhD from Harvard in 1973. The Big Picture: The New Logic of Money and Power in Hollywood is his 13th book. The sequel, The Hollywood Economist will be published in January 2010.
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Edward Jay Epstein studied government at Cornell and Harvard, and received a PhD from Harvard in 1973. The Big Picture: The New Logic of Money and Power in Hollywood is his 13th book. The sequel, The Hollywood Economist will be published in January 2010.
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Edward Jay Epstein studied government at Cornell and Harvard, and received a PhD from Harvard in 1973. The Big Picture: The New Logic of Money and Power in Hollywood is his 13th book. The sequel, The Hollywood Economist will be published in January 2010.
This is an interesting article but old news.
The feeder funds were depending on Madoff's accountant for certifying authenticity, existence etc, and then those documents were used by the feeder funds, so the clients assumed the bigger and better known accountants were doing the auditing.
SEC should have known something was up. Considering the well known 8 flags were all waving frantically for recognition.
[RED FLAG #1
Madoff Investment Securities was both the broker dealer and investment advisor:
madoff broker dealer SEC investment adviser public disclosure red flag madoff broker dealer 2 SEC investment adviser public disclosure red flag
RED FLAG #2
Madoff traded in the same securities that he recommended to advisory clients:
madoff conflict of interest SEC investment adviser public disclosure red flag
RED FLAG #3
Madoff not only was the broker dealer, creating a conflict of interest where his firm was trading in the same securities as he was trading for clients, but he actually had custody of the assets!
madoff custody of client assets SEC investment adviser public disclosure red flag
RED FLAG #4
They got into some hot water over some small compliance issues. Madoff's firm was censured and fined a small amount $7,000. This meant they did have a blot on their records:
madoff violation 2 SEC investment adviser public disclosure red flag madoff violation SEC investment adviser public disclosure red flag
RED FLAG #5
Jim Vos, head of Aksia - a hedge fund advisory firm, noticed that although Madoff's firm was supposedly highly advanced and automated, they sent paper copies of their trading records to clients instead of providing electronic access to the firm's trading platform.
RED FLAG #6
Madoff Investment Securities' auditors were Friehling & Horowitz, a 3 person team which consisted of one lone CPA with a small 13%u2032 by 18%u2032 office in New York. Hardly adequate to monitor a firm that traded a good chunk of NYSE and NASDAQ volume.
RED FLAG #7
Shockingly enough, Madoff didn't take the usual 2/20 fees most hedge funds do. Instead he only profited from the trades that his firm was doing for the "investment fund", claiming that this was enough. Given this form of compensation, it is very possible most "sophisticated investors" assumed that Madoff was involved in some sort of shenanigans but turned a blind eye for those stable returns.
Here's an excerpt from a 2001 Barron's article on Madoff Investment Securities secrecy:
Curiously, he charges no fees for his money-management
services. Nor does he take a cut of the 1.5% fees marketers like
Fairfield Greenwich charge investors each year. Why not? "We're
perfectly happy to just earn commissions on the trades," he says.
Perhaps so. But consider the sheer scope of the money Madoff would
appear to be leaving on the table. A typical hedge fund charges 1% of
assets annually, plus 20% of profits. On a $6 billion fund generating
15% annual returns, that adds up to $240 million a year.
The lessons of Long-Term Capital Management's collapse are that
investors need, or should want, transparency in their money manager's
investment strategy. But Madoff's investors rave about his performance
- even though they don't understand how he does it.
RED FLAG #8
Madoff Investment Securities was a family business, with Madoff's brother, sons and daughter as well as his niece (married to a previous SEC compliance officer) all worked at the firm.
mark madoff and bernard madoff investment securities] excerpted from http://www.tradersnarrative.com/the-madoff-red-flags-lets-count-them-2154.h tml.
amazing story,madoff is pure evil!
Madoff's scandal had a huge impact on the real estate market all over the world. Here is another blog with some more information on the effect Madoff had on the Palm Beach Real Estate. David Fite, the owner of a Palm Beach real estate agency, talks about Madoff's scandal here: http://www.fiteshavell.com/blog
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