Investing With Bernie Madoff: How It Happeneed, What Happened, And What Might Be Done. Part V.

 

A major reason FINRA will surely be sued is that, if I understand correctly -- and I think I do but would surely like to be told if I am wrong -- (i) FINRA is a membership organization whose members comprise pretty much the entire brokerage community in the United States, including, probably, at least several of the huge, now bailed out investment banking houses because they usually had brokerage arms (e.g., Merrill Lynch) or even were mainly brokerage houses, and (ii) FINRA may well have the capacity (as does the SIPC) to assess its membership for money.  If these assumptions are correct, virtually the entire brokerage industry in the United States, including vast bailed-out houses, all of whom could be assessed by FINRA, could be on the hook financially due to FINRA’s incredible negligence in inspecting Madoff.  FINRA would thus represent a very deep pocket capable of paying all the losses of investors in Madoff.  It would, of course, be only poetic justice for the losses to be paid by the brokerage/investment banking community, since that community is so fundamentally responsible in so many ways for the country’s entire financial meltdown -- which, by the way, is also thought to have triggered the redemption requests made to Madoff by funds, requests that are in turn thought to have triggered Madoff’s meltdown.

 

            There also will be litigation against huge funds and banks that gave Madoff billions of dollars without doing due diligence, which they surely did have the money and knowledge to do or to have done for them, and which other large funds and banks here and abroad did do (and therefore decided not to invest in Madoff).  These funds and banks had and failed in a duty of diligence owed to their investors, whose money they put in Madoff, and they will be sued by their investors.  It is commonly thought that they had no duty to, and therefore cannot be sued by, persons who invested directly in Madoff rather than through a fund.  I think there is a theory which such persons could use against the funds and banks, but I do not place a lot of stock in it. 

 

            (With regard to banks, there seem to be legitimate questions regarding Chase Bank.  I have read that Madoff’s sole account was with that bank.  Chase never had reason to question transactions in the account, did it, e.g., large checks being sent to Swiss banks or to Lichtenstein or the Cayman Islands?  I’ve also read that the wife of Frank DiPascali -- who is Madoff’s number two man and must certainly have been himself involved in the fraud -- was an officer of Chase.  She didn’t supervise Madoff’s account, did she?   I have no reason to think Chase has any fault, but these questions must at least be asked, especially since these days nothing seems impossible.)

 

            Then there is the question of suit against experts who ferreted out that something was rotten in the state of Madoff, who may even have advised clients or their companies not to put money in or deal with Madoff, and who did not bring to the SEC their suspicions and the well taken reasons for them.  Can these people be liable because, if they, in what appear to be their possibly significant numbers, had informed the SEC of their suspicions, as did Markopolos, perhaps there would have been enough complaints to move the SEC off the dime?  Well, I think it would be true in fact that complaints from all these people could have created a critical mass that would have had an impact, but for several reasons I would not bet my last farthing, or maybe even my first one, that suits against them would be successful.* 

 

TO BE CONTINUED.

  

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