Madoff Hindsight: What They Knew

Chidem Kurdas

A central claim of the lawsuits brought by Irving Picard, the Madoff bankruptcy trustee, is that his various targets knew of the fraud, should have known or in some cases could have known. You start noticing how murky these allegations are when you talk with people who had dealings with Mr. Madoff. 

For one thing, it sounds like he was exceptionally good at parrying questions. “You speak to him and he always has ready answers,” says someone who spoke with him over the years. You could not prove that Madoff was honest, but neither could you prove that he was a con man. You might have suspicions—but it can be a long way from suspicion to knowledge.

Various players had different levels of doubt or different attitudes toward it. Take the case against Tremont, which channeled more than $4 billion into the Madoff black hole and earned as much as $240 million in fees for doing so. The contention is that Tremont, its founders Sandra Manzke and Bob Schulman, and its owner, MassMutual, could have known on the basis of available evidence had they paid proper attentions. Not did know or should have known, but could have.

Mr. Picard’s lawyers point out that other managers and consultants did their homework and kept their money and clients away from Madoff. Thus Renaissance Technologies and its founder Jim Simons in 2003 decided that Madoff was a possible fraud.  Similar conclusions were reached by Cambridge Associates, Société Génerale’s investment bank, Albourne Partners, Acorn Partners and Aksia.

Ms. Manzke and Mr. Schulman did not conduct the due diligence they owed to their clients, they disregarded signs of fraud and relied on Madoff’s reputation and track record of steady returns, say the trustee’s team.

In contrast to the could-have-known allegation against the Tremont founders, Lawrence Simon and Howard Wohl of Ivy face the stronger claim that they knew or should have known—they’re being sued not only by the trustee but also by the New York Attorney General for fraud.

It seems Mr. Wohl developed strong doubts about Madoff and expressed his doubts on occasion in writing. He asked about the S&P 100 options Madoff said he traded. He reduced Ivy’s Madoff allocation to a minimum. Very different from Mr. Schulman, who met Madoff many times but expressed no suspicion.

Madoff found ways to avoid those who asked him tough questions. He was known for throwing people out of his office if they asked about troublesome issues. After Ivy was acquired by Bank of New York in 2000, it appears that Madoff returned Ivy’s remining small investment and no longer had to deal with bothersome queries from Mr. Wohl.  By comparison, Madoff must have been comfortable with Mr. Schulman, who did not ask. It is possible that Mr. Schulman had the same doubts as Mr. Wohl but did nothing about them.

Mr. Wohl did well by Ivy’s own investors in the matter of Madoff; they did not lose money. But he is accused of knowingly leaving non-Ivy feeder funds in the lurch, having expressed his concerns. Lawyers, of course, go after people who put things on record and treat lightly those who leave no trail.

On the basis of Ivy’s relationship with outside feeder fund managers, I argued that nobody should pay fees to outside advisers for getting them access to a certain manager.  I think this is a valid point. On the other hand, there is no evidence that Mr. Wohl knew there was fraud while Mr. Schulman was ignorant, though willfully so. The latter heard the same rumors and saw the same published articles, even if he kept Madoff due diligence gentle. Perhaps he worked on not leaving a trail. Tremont investors were the losers.

Anyway, all the information available to the advisers – and much more – was also available to the Securities and Exchange Commission, which did not detect the scheme after repeatedly examining Madoff and receiving detailed analysis from whistleblower Harry Markopolos showing that the reported returns could not be.

Government investigators could have put the hard questions to Madoff—he never threw them out of his office, given they can come back in force with an arrest warrant. That they did not ask those questions suggests the step from suspicion to confirmation is a big, tricky step. Some, like Simons of Renaissance, decided there was a high likelihood of fraud. It was a judgment call that with 20/20 hindsight is obviously correct. At the time, it  was less obvious.

What is more, regulators in effect discouraged people from being more suspicious—after all, Madoff was vetted by the SEC many times over. You would think they’d have discovered any Ponzi scheme. As for your doubts, well maybe you’re being paranoid. It would have been easy to have that thought.

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Tags: Acorn Partners, Aksia, Albourne Partners, Bob Schulman, Cambridge Associates, Harry Markopolos, Howard Wohl, Irving Picard, Ivy Asset Management, Jim Simons, Lawrence Simon, Sandra Manzke, Société Génerale, Tremont