Madoff Litigation Victims: The Citibank Case

Chidem Kurdas

There is one key interested party that is missing from the case filed against Citibank by Irving Picard, the government-appointed trustee of the Madoff estate. I went through the136-page complaint and nowhere did I see mentioned this group—hundreds of thousands of hidden and mostly nameless victims of the lawsuit. To declare a personal interest, I’m probably among them.

As has been widely reported, the trustee is suing Citibank for $425 million. The case rests on arguments that “The funds used to make these transfers to Citi originated from” Bernard L. Madoff Investment Securities and “Citi knew or should have known of possible fraud” at said firm. What was the nature of the transfers?

The largest sum in question is a $300 million loan Citi made to a feeder fund that invested with Madoff. Then the bank got the money back. This is the “transfer” the suit lays claim to in the name of the Madoff investors—-who, however, never owned the $300 million. It was a loan and the money originally belonged to the bank.

There is no allegation that Citi got any of Madoff’s phantom returns. Neither did the bank  advise anyone to invest with him. The complaint indicates no connection between the Madoff investors and Citibank. The loan was not to investors but to a feeder fund. In fact, there is no evidence that people at Citi even knew who Madoff’s clients were. Basic logic indicates that Citi owed no duty to Madoff’s clients.

Instead, Citi has a duty toward its own shareholders, including the large number of people like me who are indirect shareholders as investors in equity mutual funds that often hold Citibank stock. Its responsibility as a bank was to make sure the money was repaid by the feeder fund. This it did, thereby discharging its duty to us.

The Picard lawsuit adds to the bank’s liabilities and may act as a drag on its shares. So it takes value away from shareholders. You could argue that the bank should have figured out it was running the risk of being sued and because of this legal risk should have refrained from providing credit to feeder funds that fed Madoff.

But that supposes a level of prescience nobody had. Certainly not Madoff’s regulator, the SEC, whose main (theoretical) reason for existence is to protect investors. By the time Citi made the loan, the SEC already had been given information and warnings galore regarding Madoff.

Each Citi shareholder will lose a tiny amount from this lawsuit. There are many of us. This is a classic case of government-mediated income redistribution: from the many who will each lose a little to the few who will gain a lot, and from the unorganized to the highly connected and organized.  Bank shareholders are the out-of-sight victims of a deeply unjust system of litigation.

The complaint elaborately argues that Citi should have known of the fraud without saying why a bank should have known what regulators, with immense authority to ask questions, never figured out. Citi executives who wanted to talk with Madoff got rebuffed—-only a few were allowed a limited one-hour conversation.

In any event, the Madoff investors have no real claim to money once given as loans to feeder funds, regardless of suspicions bank managers had of Madoff. Those managers’ responsibility was to manage the bank’s credit risk, which they did reasonably well judging from this lawsuit. Perversely, had they been oblivious and lost the loan, there’d be no case against them.

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Tags: Bankruptcy, Irving Picard