Why was the fraud undertaken? We dont know that either. Madoff hinted at his sentencing hearing that it was undertaken because of some failed investment. He indicated that he thought he could work his way out of the problem but instead got into a deeper and deeper hole. (He had, I think, made similar comments about how frauds develop before his own fraud was discovered.) If his Ponzi scheme began because of some investment failure, what was the failure and when did it happen? Most of us probably think Madoffs hint was a smokescreen meant to hide the fact that he was a crooked greed merchant in one way or another for decades. But the truth of why the fraud started is not known, at least not publicly.
It also is not yet known precisely who knew of the fraud and, of those, who knew that the nature of the fraud was that it was a Ponzi scheme. Unless and until the prosecutors affirmatively give clean bills of health to Ruth Madoff, Peter Madoff, Shana Madoff, and Madoffs two sons, Mark and Andrew, an awful lot of people are going to think they had to know something was wrong. If I remember correctly, Ruth had seen or even kept the companys books for awhile. Peter Madoff had, if I remember correctly, set up the companys computer systems -- and an old computer on the 17th floor (which was not connected to the outside world, so there could be no slip ups and no hacking into it and it couldnt make trades) was central to the fraudulent scheme. Shana Madoff must have known that Cohmad and BLMIS were paraded as being separate but really werent; as was said in a complaint, she was the compliance officer for both Cohmad and BLMIS. The sons -- and Peter and Shana too, I would think -- must have known (i) that Madoff told those who asked that he was content to make his money by the commissions from having his trading arm execute the trades for the investment management arm, but (ii) that in fact the trading arm made no trades for the investment arm. Some of these individuals must have known, or even participated in, lies told to the SEC, the NASD and FINRA when these organizations conducted inspections. So family members had to have known something was wrong. But the precise knowledge of each, and the degree of participation (if any) by each, is currently unknown.
Who on the 17th floor knew something was wrong and, possibly, that a Ponzi scheme was going on? One is tempted to say that DiPascale, people who researched stock prices, people who entered numbers in the computer and printed out numbers and statements, and Bongiorno, Buccellato and Jones must or at least were likely to have known everything, and that it is impossible for anyone on the 17th floor to have known nothing. These people all worked in the same place. They must have talked to each other every day. Aside from everything else, did nobody ever notice or mention that no actual trades were taking place? That anyone on that floor was wholly innocent is not believable. It is more believable that several of them knew everything. But, right now, who knows?
Then there is also the question of what was known by the major feeders. The complaints filed by Picard and the SEC against such as Chais, Cohmad, Fairfield and Picower make it clear that all of these knew something illegal was going on, but whether they specifically knew there was a Ponzi scheme is left unsaid. Instead, Picard and the SEC use the lawyers weasel language of saying that the defendants knew or should have known of illegality. This makes clear, of course, (or at minimum implies) that Madoff hasnt told the government the relevant facts (and neither, of course, have the defendants in the various cases (some of whom have taken the 5th)), just as Picard told Judge Chin that Madoff had not cooperated and Judge Chin expressed the same view. Yet the SEC and Picard know enough to set forth facts showing that these various defendants knew very well that something was drastically wrong. Variously, some of them would tell Madoff what they wanted their accounts to earn, and he would by fiat do as they wished. Some had accounts that would earn 100 or 500 or even 950 percent. Some would order up backdated losses for their own purposes (one would think the purpose was to evade taxes), and Madoff would then create backdated securities transactions with the required losses. At least Cohmad, and perhaps others, was paid commission strictly on the basis of a customers cash in minus his cash out (the same way, I gather, that SIPC is calculating net equity), not on the basis of the total amount in the customers account, including profits, which is the customary basis on which mutual funds and hedge funds are paid. Cohmad (and others?) could not help but suspect, if it did not actually know -- which one suspects it surely did -- that the reason it was paid commission strictly on a cash in minus cash out basis, and not on profits too, as is customary, is that there were no profits -- that the whole deal was a Ponzi scheme. In this vein, two people from Cohmad, Marcia Cohn (who is Sonny Cohns daughter) and a guy I never heard of until recently named John Joseph Kelly, had keys to the 17th floor -- which, generally speaking, was off limits to everyone except those working on the fraud scheme. Marcia Cohn used her key a fair amount apparently, including on December 11, 2008.
The various players being discussed here took out hundreds of millions and billions of dollars more than they put in. Picower took out over five billion dollars more than he put in -- and it is not even clear, I think, that Picower, like others, was a feeder of anything but his own money. If all he fed was his own money (which at least seems to be the case), not money from other investors, why did Madoff give about 6 � billion dollars to this guy who put in only about 1 � billion?
All of these people had to know something was very, very wrong, and it seems to me likely that some of them, maybe even all of them, even knew that the whole deal was a Ponzi scheme. But is their level of knowledge and participation publicly known for a fact? Nope.
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