More on Madoff

Okay, maybe you’re sick of this, but revelations keep coming out that beg still more questions. It seems Madoff had not traded in at least 13 years. What I want to know is, what were the supposedly innocent folks on the broker/dealer side of his business making of this? They were the listed custodians of Madoff’s investment funds. Did they not wonder why there were no trades coming through, or why the amount of cash in the account seemed light? Or perhaps they saw nothing at all and just assumed Madoff was custodizing his $50 billion fund elsewhere. If that’s the case, didn’t they ask Madoff why they were the ones listed as custodians? My point is, someone on that side of the business must have pieced this together at some point.

Also, I have a new operating theory as to what the feeder funds knew and didn’t know. As you know, I’ve thought it unlikely that they had any direct knowledge of fraud. None of them seem the co-conspirator type, frankly. That’s still my view, but the key word is “direct.” Over the years, it is inconceivable that Fairfield Greenwich and others weren’t aware of the constant whispering about Madoff. But much of the whispering didn’t center around Madoff as a Ponzi, but rather Madoff as a front-runner. It was widely assumed that Madoff was using his brokerage to front-run client trades and then using these profits to bolster the returns of his “hedge fund.” If this was in fact the case, the returns might have been real, if illegally obtained. So the feeders figured that the worst case scenario was the Feds would come in one day and shut the operation down. Madoff would get in trouble, but they wouldn’t, and they would likely keep all their returns.

I believe this because it fits the facts. It would explain why there was no real due diligence, for one. The feeders adopted a “don’t ask, don’t tell” policy, less the party come to an abrupt end. It also explains why Fairfield had three auditors in three years. They were clearly looking for an auditor with the same elevated level of incuriosity as they.