Madoff to FBN: Maintain Scrutiny on Banks and Feeder Funds

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Published February 22, 2013

| FOXBusiness

Bernard Madoff on Friday in an ongoing correspondence with FOX Business Network continued to insist that major banks where he held accounts had to know that his investment firm was in fact a giant Ponzi scheme.

Madoff said in an e-mail sent from prison that the U.S. attorney investigating his fraud and the bankruptcy trustee seeking to recoup funds for burned investors should continue their efforts to go after banks like J.P. Morgan Chase (JPM) at which Madoff had an account that he used to transfer funds between his New York and London offices.

“During the two visits with (the Trustee) and his six associates down here, I said that the Banks had to know what I was doing regarding the fraud,” Madoff wrote.

Scroll down to read the full e-mail

A J.P. Morgan spokesman didn’t immediately respond to a request for comment, but the bank in the past has denied any knowledge of Madoff’s fraud.

Elsewhere in the e-mail, Madoff implicated the feeder funds that raised billions of dollars for Madoff’s scheme by recruiting unwitting clients who had no idea their money was going to Madoff.

Madoff said investigators should determine whether those feeder funds used profits gleaned from Madoff’s scheme to make loans to family members, just as Madoff used his ill-gotten gains to make loans to his family – notably his two sons, Mark and Andrew.

Mark committed suicide in December 2010, two years after his father was arrested.

The bankruptcy trustee has sought to clawback those loans from Madoff’s family, and Madoff believes the feeder funds should face the same scrutiny.    

“I told them (investigators) that it was crucial for them to trace the source of the original investment principal, including accounting for any inter-family money transfers to related accounts like Trusts and gifts…” he wrote.

Madoff added, “There was a similar issue with the Feeder Funs who withdrew profits in the form of amounts greater than their original investment and reinvested those funds thru other feeder funds which then showed up as an original investment…”

Madoff’s message to FOX Business arrived on the same day two federal appeals courts ruled against indirect investors in Madoff’s scheme. Both groups of investors were trying to recoup funds but separate judges ruled against them.

In the first, a federal appeals court ruled that investors who lost money after their investments were placed into Madoff’s care by feeder funds cannot recoup their losses.

It was a major ruling in favor of the bankruptcy trustee Irving Picard who has argued that only those investors who invested directly with Madoff and who can prove as much through records held by Madoff when he was arrested in 2008 should be eligible for repayment.

“Indirect investors,” or those whose money was invested with Madoff by others without their knowledge, are not eligible, Picard has argued.

In the second case handed down Friday,  Bloomberg News reported an appeals court in Manhattan ruled that the pension health-care and benefit funds for bricklayers, construction workers, electrical workers and others weren’t actual Madoff customers under the Securities and Investor Protection Act and therefore aren’t eligible to recoup funds lost in the fraud.

The plaintiff’s money was initially invested in funds that later put the money into feeder funds that then invested with Madoff, according to the ruling, a full two-steps away from Madoff and thus “appellants had no direct financial dealings with” Madoff’s investment firm.

Picard had originally sought to deny the worker funds from recouping funds and that claim was upheld by an earlier judge.

Picard has so far recovered $9.3 billion from the massive fraud and returned $4.93 billion to qualified direct investors.

Madoff, 74, is serving a 150-year sentence at a federal prison in North Carolina.

Full text of Madoff's e-mail:

As some of you might recall, I made the following information available during their visit here at Butner. I inquired how they came up with their NET customer loss figure of 17.3 billion. a figure that seemed grossly larger than both Frank DiPascali and I had calculated. After Sheehan and his associates explained their process. I asked how they verified the clients claim process. I told them that it was crucial for them to trace the source of the original investment principal, including  accounting for any inter family money transfers to related accounts like Trusts and gifts, to name a few. This practice of transfers and gifts using the  PROFIT withdrawals were a common practice among my customers. There was a similar issue with the Feeder Funds who withdrew profits in the form of amounts greater than their original investment and reinvested those funds thru other feeder funds which then showed up as an original investment principal in the new account and would be declared as such in determining their claim. My explanation was met with a blank stare of dismay, confirming that they had never thought of this problem. After  recovering from my explanation, Their only response was that They assume the auditors will look into this. I can assure you this was never accounted for. The problem is that without accounting for these transfers etc. money that should be distributed to net winners after the net losers are made whole will be left out of what is rightfully theirs. You might want to ask Picard about this.

 

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http://www.foxbusiness.com/business-leaders/2013/02/22/madoff-to-fbn-maintain-scrutiny-on-banks-and-feeder-funds/