Inside Job: The Rogues Who Pulled Off the Heist of the Century by Ferguson Charles H

Author:Ferguson, Charles H. [Ferguson, Charles H.]
Language: eng
Format: epub
Tags: History
ISBN: 9781851689156
Amazon: 185168915X
Goodreads: 14909508
Publisher: Oneworld
Published: 2012-05-24T07:00:00+00:00

These problems and many others—we’ll get to those in a minute—were repeatedly cited as warning signs by banks and hedge funds that either dealt with Madoff or were considering doing so. Goldman Sachs executives paid a visit to Madoff to see if they should recommend him to clients. A partner later recalled, “Madoff refused to let them do any due diligence on the funds and when they asked about the firm’s investment strategy they couldn’t understand it. Goldman not only blacklisted Madoff in the asset management division but banned its brokerage from trading with the firm too.”28 Risk managers at Merrill Lynch, Citigroup, UBS, JPMorgan Chase’s Private Banking, and other firms had done the same. The Merrill parent company, for example, had expressly forbidden dealings with Madoff from the 1990s.29 They all suspected fraud of some kind.

As a result, most of the major banks declined to invest their own money with Madoff. However, they did sometimes allow their clients to invest. A number of banks, including Merrill Lynch, Citigroup, ABN Amro, and Nomura, also created various tracking funds to replicate Madoff’s returns,7 even though all suspected fraud.

But UBS and JPMorgan Chase were even more deeply involved. UBS created a new family of “feeder funds” to send assets to Madoff. (Madoff generally did not accept direct investments, preferring to receive money via these “feeder funds”.) Most feeder funds acted as little more than drop boxes and made few, if any, investments except into Madoff’s fund. There is strong evidence that several of them suspected Madoff was a fraud. But Madoff paid them about 4 percent per year for doing virtually nothing, so they were happy to look the other way.

UBS created or worked with several Madoff feeder funds, even though UBS headquarters forbade investing any bank or client money in Madoff accounts. The feeder funds were required by law to conduct due diligence, and one of them hired a due diligence specialist named Chris Cutler. After four days, he wrote to the feeder fund: “If this were a new investment product, not only would it simply fail to meet due diligence standards: you would likely shove it out the door. EITHER extremely sloppy errors OR serious omissions in tickets.” Cutler found, for example, that Madoff’s claimed strategy implied trading a number of options that was far higher than the total number actually traded on the Chicago Board Options Exchange.30 The fund proceeded with its Madoff investments anyway.31

UBS explicitly instructed its employees to avoid Madoff. A memo to one of the feeder funds in 2005 contained a section entitled “Not To Do”. In this section was the following, in large boldface type: “ever enter into a direct contact with Bernard Madoff!!!” One of the UBS executives involved in creating the new funds received a headquarters inquiry on what he was doing. He replied, “Business is business. We cannot permit ourselves to lose 300 million,” referring to anticipated fund management revenues.32 UBS proceeded to issue fund prospectuses in which it represented that it

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