On Tuesday AG Cuomo brought a civil suit against Ivy Asset Management (a wholly owned company under Bank of New York Mellon) and two of its former top officers. The suit alleges that Ivy Management execs knew that there was something very wrong with the Madoff investment firm. Not only did they not tell the SEC but they kept giving advice to their clients to buy into this Ponzi scheme.
The indictment alleges that 11 year before the fraud collapsed, in 1997, Ivy found that there was only about half of the number of options available for trade than would be needed to support his supposed strategy and give the kind of returns Madoff was claiming.
Now why would they do that? Well, the fact is that they were making a good chunk of change recommending Madoff's fund. Over time they made more than $40 million in fees. These fees were paid to them for their supposedly objective advice. Which is where they run into the long arm of the law; there are lots of e-mails that seem to point to real trouble for Ivy Management. Take a look at this bit from the press release:
On December 16, 1998, the day after Madoff gave Ivy his third explanation about his option trades, Wohl recommended to Simon that Ivy withdraw all of the funds they personally managed from Madoff, including some of their own money, writing:
"I'm concerned that he [Madoff] now admits that he does not execute all of the index options on the exchange that there are 'unknown' counterparties that if these options are not paid off he'd lose less than 100%. It remains a matter of faith based on great performance - this doesn't justify any investment, let alone 3%."
In response, Simon argued that Ivy should not withdraw the investment it had placed with Madoff because that could lead Ivy's clients to withdraw their money from Madoff as well, which would significantly impact their total revenue, writing:
"Amount we now have with Bernie in Ivy's partnerships is probably less than $5 million. The bigger issue is the 190 mil or so that our relationships have with him which leads to two problems, we are on the legal hook in almost all of the relationships and the fees generated are estimated based on 17+% returns .... [to be] $1.275 Million... Are we prepared to take all the chips off the table, have assets decrease by over $300 million and our overall fees reduced by $1.6 million or more, and, one wonders if we ever "escape" the legal issue of being the asset allocator and introducer, even if we terminate all Madoff related relationships? "
As you can see from the above the two executives understand that what Madoff is doing is likely to be illegal, but they care more about the 1.6 million dollars in fees they are receiving are more important then that fact. They worry about being legally liable, but not enough to stop recommending that people invest their money in a fund they suspect to be a fraud.
Also from the press release:
In 1999, Ivy sent letters to clients falsely stating that, "we have no reason to believe there is anything improper in the Madoff operation."
Between 1998 and 2004, Ivy sent numerous letters to their heavily Madoff-invested clients falsely listing Ivy's only concern about Madoff to be an "ability to manage what must be an enormous pool of capital with such consistently outstanding results"
For more at least six years this company continued to tout an investment to their paying clients that they suspected was fraudulent. They didn't hedge or shy away, they actually promoted it to pension funds and retirement accounts as a good place to put their money.
This is not the only time we have seen the lure of money overcome the civic impulse to follow the law. It is not likely to be the last time either. Part of the problem is that the chance of spending some time in jail compared to millions of dollars is one that many people will take. This is due, somewhat, to the magical thinking that they can not or will not be caught, but even from a cost benefit point of view, living like a prince for decades balanced against going to jail for a few years is a trade many people would make.
In our criminal justice system, violent crimes are usually punished more severely than what is called "white collar" crime. This reflects the idea that a crime which physically harms someone or could have done so is more offensive to our society than a mere crime against property. This is true as far as it goes, but it is a concept left over from a time when 100 million dollars was an unimaginable amount of money. Perhaps it is time to start with some very harsh minimum sentences for large dollar white collar crime. If these bankers understood that their participation in a crime of over 5 million dollars would mean an automatic 15 years, without parole, it might make them more inclined to report instances of law breaking, instead of cashing in on them.
This, of course, assumes that they would not think it could not happen to them. Folks who feel that way are never going to be deterred. Still there would be a segment of the banking establishment who would make the calculation that while they might live like a prince for a while, dying in jail looks very harsh. Right now they see that with Bernie Madoff, but most of them understand that he received the sentence he did because of the record breaking size of his crime. That leads the thinking of keeping it smaller is the way to get away with it.
AG Cuomo has only filed a civil suit at this point, but that does not mean there will not be a criminal suit following. The Ivy Management group is unlikely to be the only group which had its doubts about Madoff's investments and still went ahead and recommended it to clients. It is possible that the AG is hoping to scare some of those folks into coming forward on their own and taking their medicine before he really brings the hammer down.
In any case this is going to be an ongoing example of the nature of greed and the fact that it can not be indulged to its full and destructive potential by individuals.
The floor is yours.
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