Them Auditors Saw What Madoff Was Doing..

Them auditors suspected something was amiss but what did the bankers do?

And it was not just ONCE but 25 cases were reported!!!!

• Bloomberg News,
  HSBC Was Told About Madoff ‘Fraud Risks’ in KPMG Reports
  
  March 18 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest lender, was warned twice by auditors that entrusting as much as $8 billion in client funds to Bernard Madoff opened it up to “fraud and operational risks.”
  
  KPMG LLP told the London-based bank about the risks in 2006 and 2008 reports. The firm was hired to review how Madoff invested and accounted for the funds, for which HSBC served as custodian. KPMG reported 25 such risks in 2006, and in 2008 found 28, according to copies of the reports obtained by Bloomberg News, which was allowed access to them on the condition they not be published.
  
  Twenty-five “fraud and related operational risks were identified throughout the process whereby Madoff LLC receive, check and account for client funds,” KPMG said in the 56-page report dated Feb. 16, 2006. The limited controls in place “may not prevent fraud or error occurring on client accounts if management or staff at Madoff LLC either override controls or undertake activities where appropriate controls are not in place,” according to the report.
  
  A 66-page KPMG report dated Sept. 8, 2008, cited 28 risks and described them in the same words as the 2006 document.
  
  Irving H. Picard, the trustee liquidating Bernard L. Madoff Investment Securities LLC, sued HSBC and a dozen feeder funds for $9 billion in December in U.S. Bankruptcy Court in Manhattan. The suit was partly based on the KPMG reports and alleges the bank knew of concerns Madoff’s business was a fraud and didn’t protect investors. KPMG’s reports haven’t been made public. Picard has filed more than $50 billion in so-called clawback suits to compensate victims.
  
  Reviews ‘Foiled’
  In the reports, KPMG didn’t present evidence the risks it identified had materialized or that it found signs of actual fraud, and said HSBC had told the firm “no allegations of fraud or misconduct have been raised.”
  
  HSBC confirmed hiring KPMG in 2005 and 2008 to review Madoff’s firm, adding it now believed Madoff had tricked the auditors. “It appears from U.S. government filings that Madoff and his employees foiled these reviews by, among other things, providing forged documentation to KPMG,” the bank said in an e- mailed statement.
  
  “KPMG did not conclude in either of its reports that a fraud was being committed by Madoff,” HSBC said. “HSBC did not know that a fraud was being committed and lost $1 billion of its own assets as a victim.”
  
  HSBC Spokesman Patrick Humphris, KPMG spokesman Mark Hamilton and Amanda Remus, a spokeswoman for Picard’s lawyers Baker & Hostetler LLP, all declined to confirm the authenticity of the reports obtained by Bloomberg.
  
  Custodian
  At the time of the first report, HSBC was custodian for eight funds that had invested $2 billion with Madoff, KPMG said. By 2008, the bank was custodian for 12 funds with as much as $8 billion invested.
  
  “We continue to believe that we have strong defenses to the claims made against us and we will defend ourselves,” the London-based bank added.
  
  Madoff, 72, pleaded guilty to using money from new investors to pay old ones and is serving a 150-year sentence in federal prison. Investors lost about $20 billion in principal.
  
  In the list of risks in KPMG’s report, number 2 was that “BLM embezzles client funds,” using the initials as shorthand for Bernard L. Madoff. To prevent it, KPMG recommended in both 2006 and 2008 that HSBC “establish a process to monitor monthly statements” and reconcile them with contributions from clients.
  KPMG didn’t perform tests to check that risk.
  
  ‘A Sham’
  The 2006 report listed fraud risk number 5 as “client cash is diverted for personal gain” and risk number 18 as “trade is a sham in order to divert client cash.” It went on to say there were concerns “Madoff LLC falsely reports buy/sell trades without actually executing in order to earn commissions” and “BLM falsifies accounting records which are provided to HSBC.”
  
  KPMG reviewed samples of trades and account statements for both its 2006 and 2008 reports to test the risks and detected no discrepancies, the reports said. Even so, the firm suggested HSBC “consider undertaking a periodic review which includes tracing a sample of client trades back to the bulk order.”
  
  HSBC declined to comment on individual risks cited in the reports, citing the pending lawsuit.
  
  In prefaces to the reports, KPMG said it wasn’t hired to audit Madoff LLC and based its reports on information Madoff and his staff provided, which wasn’t independently verified.
  
  HSBC units in Bermuda, Luxembourg and Dublin acted as custodian for 12 funds including: Pioneer Investment’s Primeo Select, Bank Medici’s Herald (Lux) and Thema International, as well as Herald USA, Alpha Prime, Lagoon Investment, Senator, Kingate Global, Defender and Global Investments.
  
  The bank was also sued in Ireland and Luxembourg by investors over Madoff investments.
  
  In its 2010 annual report, HSBC said that by Nov. 30, 2008, the aggregate value of those funds was $8.4 billion, including fictitious profits Madoff reported.
  
  HSBC said that it was impossible to estimate the range of potential liabilities that could arise from lawsuits including Picard’s, adding that “they could be significant.”

Alice Shroeder: Madoff May Have Been The Most Efficient Thief In History

Interesting writing from Alice Shroeder again.

• Madoff’s $200,000-an-Hour Beats Tiger Woods: Alice Schroeder
  
  March 27 (Bloomberg) -- “To the best of my recollection,” Bernard Madoff told the judge in his guilty plea on March 11, “my fraud began in the early 1990s.”
  
  He seemed detached, as if reading a statement about a stranger. Maybe that’s why his recollection was wrong.
  
  Prosecutors say Madoff was Ponzifying since the early 1980s, even the 1970s. By various estimates, Madoff netted $10 billion to $20 billion (the $65 billion cited in the guilty plea is adjusted for past distributions to clients). Yet the mind goes numb trying to grasp what the billions signify in these days of multitrillion-dollar bailouts and shareholder losses from Citigroup Inc.’s collapse into a penny stock.
  
  Let’s measure the numbers on a human scale. Even estimating conservatively, Madoff stole more than $1.6 million every workday of his criminal career. Based on my calculations, Madoff’s bilking rate topped $200,000 an hour, or almost 60 bucks a second. He may have been the most efficient thief in history.
  
  Compare that with the most expensive lawyer in the U.S., who, as of January billed at $1,260 an hour.
  
  Even Tiger Woods, the world’s priciest athlete, is a piker by comparison, earning in recent years about $60,000 an hour, based on 40-hour weeks. And Woods is no slacker, whereas Madoff was ripping off his clients while he did nothing.
  
  Money Is Gone
  
  True, concealing his sloth took bureaucratic skills and ingenuity. Keeping a straight face at the country club for decades while cheating his closest friends was an accomplishment in its own right. That no one knows what happened to most of his stash is beside the point. As far as his hapless victims are concerned, the money’s gone.
  
  Some are questioning whether it is fair to describe those swindled by Madoff as victims, saying that, in their naivety and blind ignorance, they failed to take precautions against fraud. But that only makes them all the more victimized. How much more vicious it is to prey on the clueless than on those who are equipped to defend themselves.
  
  In this cautionary fairy tale, Madoff’s unfortunate clients were the Hansels and Gretels of finance, enticed by the witch who lives inside a house covered with candy and sugarplums. Unlike Hansel and Gretel, though, they didn’t get out whole.
  
  One of the most persistent questions about Madoff has been why his clients weren’t more suspicious of why he managed their money outside the usual fee structure of a hedge fund. They should have been wary because his setup made him seem altruistic, as if he were passing on the chance to bilk them.
  
  Lower Fees
  
  He could have promised investors the same stable, low-risk, above-market returns from a multistrategy hedge fund, offering a little kicker: lower fees than a fund-of-funds.
  
  Ideally, he would have named this vehicle something more creative than Bernard L. Madoff Investment Securities LLC. Something appropriate, following the example of Amaranth Advisors LLC, the collapsed hedge fund (named after the herb also known as pigweed). Then, just lever that baby up to maximum size, rake in the fees and boom, done.
  
  True, as a real hedge-fund manager, Madoff would have had to invest his clients’ money. But having done so -- even with complete ineptitude -- think how smug he could feel after it all blew up, knowing that careful drafting of the offering document by his $1,260-an-hour lawyer had boilerplated the risk, thus keeping him out of prison.
  
  $5 Billion
  
  If only Madoff, 70, could work as a hedge-fund manager now. Under court-ordered supervision at his former $200,000-an-hour bilking rate over his actuarial life expectancy of 12.7 years, he could easily take more than $5 billion from the pockets of the rich, and give it to his formerly rich clients in partial recompense.
  
  Too bad, the era of 2-and-20-plus-expenses is over. The best we can do is find a more psychically satisfying punishment than watching Madoff rot in a prison cell or pick up trash along the highway.
  
  For his remaining 4,635 allotted days, therefore, I sentence Bernard Madoff as follows:
  
  He will work as a janitor at Yeshiva University and change bedpans at the North Shore-Long Island Jewish Health System hospitals. He will donate his bone marrow to the Gift of Life Foundation. He will swallow all the abuse his celebrity clients care to dish out, including slaps in the face from Zsa Zsa Gabor. He will work his little leg irons off doing whatever scut duties required of him. It’s the least he can do.
  
  So far, Madoff doesn’t seem to share any of the sorrow, remorse and shame exhibited by his prey. Maybe a stint on a window-cleaning platform will wring a little guilt out of his cold, hard, sociopathic heart. About once a month, he will spend a few hours washing windows on the 17th floor of the Lipstick Building. There, he can look inside at his former office, where he spun the sugar that enticed his investors into the trap.
  
  We should have no qualms about sending Bernard Madoff 17 stories up. Unlike his clients, it’s a safe bet he won’t jump.

ps: if you enjoy this piece, check out older postings.

• Interview On CNN: Alice Shroeder Talks About Warren Buffett
• Alice Shroeder Talks At University Of Virginia
• Jason Zweig Review Of Alice Shroeder's "The Snowball"
• Warren Buffett Buys Stocks, The Snowball Chapter 2 and J. Kyle Bass
• The Snowball: Chapter 1 - The Less Flattering Version

Madoff: Scandal Of A Centrury Ends With Whimper Of The Century?

The following article on UK Telegraph really sums it all for me.

• Scandal of a century ends with a whimper
  That’s it? The biggest alleged financial swindle in history wrapped up faster than you can say ‘bezzle’?
  
  By Rob Cox, breakingviews.com
  Last Updated: 5:56PM GMT 11 Mar 2009
  
  As hard as it may be for Bernard Madoff’s $65bn worth of victims from Israel to Colombia and Milan to New York’s Upper East Side to accept, the scandal appears to be a case closed.
  
  Madoff is expected to plead guilty this week in a Manhattan court to 11 felony charges, which come with a 150-year prison sentence.
  
  Madoff provided the exclamation point to the panic of 2008. The peaceful conclusion to the tale is almost a let-down. When Charles Ponzi’s eponymous scheme crashed in 1920, defrauded investors stormed the gates of his house. Madoff’s Park Avenue abode is quiet. His well-heeled clients will be caught in a mostly meaningless legal debate over “forfeiture calculations” – meaningless because the money has vanished.
  
  A long, hard-fought trial would have been welcome entertainment. But no, Madoff will not take off where Enron bad-boys Ken Lay and Jeff Skilling, or Tyco’s Dennis Kozlowski left off. No pleas of innocence or rationalising of shower curtain purchases. And there will be no crusading prosecutor to exploit the publicity. Of course, some New Yorkers may see that –no new Rudy Giuliani – as a blessing.
  
  Madoff’s tearful alleged confession was a private affair – no public drama. That’s a deviation from the standard con-man behaviour. Think of Samuel Israel. Not only did he defraud the clients of his Bayou hedge fund, he faked his own death and went on the lam for three weeks.
  
  It’s not quite over yet. Prosecutors might turn up some smoking-gun document. But it looks like the world will have to do without titillating tales of, say, crooked associates, unlikely accomplices, connections to the Mossad or vengeful Russian mobsters.
  
  Madoff’s alleged fraud set new standards for scale, duration and the reputation of the victims. But his drama is set to end with a whimper. A 70-year old man in a Barney’s overcoat will probably soon check in to a corrections facility, where he will quietly spend the rest of his life.

And do consider the issues raised by Jesse: Madoff is Pleading Guilty Without a Deal.

Why Hedge Funds Are Ponzi Schemes

Published on Times.Com: The Ponzi Scheme in Every Hedge Fund

• By Ari J. Officer Monday, Jan. 05, 2009
  
  Bernard Madoff's $50 billion Ponzi scheme continues to rock the financial world. But most hedge funds actually engage in similar — albeit legal — practices in the short run. In the past, these practices helped inflate their gains as well as hedge-fund managers' salaries and bonuses, but recently they helped bring about the failure of many major hedge funds
  
  At the heart of the difference is the distinction between realized and unrealized gains. Gains are realized when assets are liquidated to cash. For instance, if you buy a stock for $100 and it is currently trading at $200, you have made $100 in unrealized gains. If you sell it at $200, you have made $100 in realized gains. Most hedge funds do not regularly liquidate their entire portfolio, so they report unrealized gains to their investors and to the public. (See the top 10 scandals of 2008.)
  
  Now comes the murkier part: Many assets — particularly those that unregulated hedge funds can trade — are not as liquid as stocks, so they do not always have a definite price on the market. Since a fund reports unrealized gains, it could easily get away with inflating profits. More specifically, the fund could use the most optimistic models to price its illiquid assets, which include mortgage-backed securities and other swaps. After all, economists disagree about how to value these assets, so the fund is not necessarily being dishonest in its assessment.
  
  Madoff never even came close to realizing the gains he reported and paid out to some investors. Yet even funds with fairly accurate estimates of unrealized gains are guilty of engaging in similar Ponzi practices in the short term. Here's why:
  
  Suppose some investors decide to withdraw their money from a hedge fund. The fund must liquidate the appropriate amount of its assets to pay these investors. Say the fund holds large positions in illiquid assets. The fund cannot immediately sell these assets, except at a fatal loss, so it would sell its more liquid assets. Given that the fund is more likely to inflate its estimation of the illiquid assets, it would seem that investors who withdraw early get the better returns over that time period. Sounds a bit like a Ponzi scheme, right?
  
  Even in the most vanilla of trades, liquidation can impact the market price. With lightly traded securities, this can be magnified. For example, a fund might corner some asset by buying and buying and buying and then reporting a huge unrealized gain. But the moment the fund tries to sell and realize the gain (perhaps to pay off its last few investors), demand disappears, and the asset crashes. Again, investors withdrawing early got better returns over that time period than those who waited until later. (See the top 10 financial collapses of 2008.)
  
  Every year hedge funds do have to liquidate part of their profits in order to pay their managers, traders and other support staff. Fund managers typically keep 20% of (unrealized) trading profits. But first they must realize that 20% by selling the liquid assets. If a fund is overestimating the value of the illiquid assets, then its manager's profit is grossly overestimated. In most cases, the profit is at least slightly overestimated because of slippage in the liquid assets. In other words, if a fund liquidated all profits, the supposed 20% taken out first would actually be larger than 20% of the total realized profit.
  
  If hedge funds had to regularly liquidate assets, we would not see the spectacular returns reported in the past. One factor of the supposed success of hedge funds is their ability to report unrealized gains and to be flexible in liquidation, since investors who believe they are getting high returns are unlikely to withdraw their money. That was how Madoff was able to maintain his charade for so long.
  
  Wonder why Chicago-based hedge fund Citadel is not allowing investors to withdraw their money until at least March? Citadel has already reported about 50% losses for its two largest funds. Remember: these are unrealized losses. If Citadel liquidated assets to pay out to investors, losses would be even greater. Barring a miracle, the first investors out would lose less than those going out later. But even in good times, the withdrawal of money from a hedge fund impinges its performance.
  
  Hedge funds are designed to take in more and more investors' money. Then inefficiencies and performance distortions of withdrawing money for investors and profit-taking for managers are smoothed out. The recent failures in hedge funds, while rooted in the financial meltdown, have been further fueled by the lack of new investment as well as pressure from current investors to take their money and run. Regardless of a fund's investment strategy, liquidation tends to make unrealized gains smaller — and unrealized losses larger — when they are finally realized.
  
  By design, hedge funds benefit managers more than investors. Since the liquidation of assets always results in slippage — the more that is sold, the worse the price — managers for every hedge fund always get the "best" 20% of the profit.
  
  So you see, there could be a little Ponzi scheme in every hedge fund. It is inherent to the model of the modern hedge fund. The only way to avoid these schemes is to regularly liquidate all assets and allow all investors to decide what to do with their cash returns. In the past, this would have meant seemingly diminished returns. With returns seemingly high, investors did not complain about the status quo. Now, given that regular liquidation would mean more transparency and diminished losses, in recent days investors' opinions would likely differ.