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Friday, February 10, 2012

Mets owners knew about Maddoff

For just over a year now, the evidence facing Fred Wilpon, Saul Katz and the other Sterling Equities partners who own the New York Mets has been debated in court filings from Wilpon’s attorneys, as well as the filings of the trustee for the Bernie Madoff victims, Irving Picard.

And with the $386 million lawsuit brought by Picard against Wilpon and his partners—who are already under great financial strain and struggling to hold on to the Mets—speeding toward a March 19 trial, the latest court filings include testimony from a woman whose contention about what the partners knew and when they knew it could decide the whole ballgame.

The woman is Noreen Harrington, an accomplished financial executive who was last in the news for blowing the whistle on an unrelated scam, leading to the exposure of the mutual fund scandal of 2003.

SteveM. Posted: February 10, 2012 at 02:31 PM | 111 comment(s) Login to Bookmark
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   1. Shooty Is Disappointed With His Midstream Urine Posted: February 10, 2012 at 03:55 PM (#4058330)
Here's where it gets problematic for the Sterling partners. Harrington says she then met with Saul Katz, his son and fellow Sterling partner David Katz, and Peter Stamos. Harrington said she explained her recommendation and the reasons for it, and when Saul Katz asked her what the actual reason for the consistent, positive returns could be, Harrington told him they must be bogus.

“I made an accusation of front-running, which is profitable and non-correlated, but also illegal,” she testified. “And I said, if it wasn't that, I believed it was fiction. And to that he said, what do you mean by fiction? And I said, I don't believe the numbers are worth the paper they're printed on.”

According to Harrington, Katz grew angry in response, and ultimately rejected her arguments. She asked for a meeting with Madoff to address her concerns, but never received one. Once Peter Stamos informed her that Sterling Stamos would make the investment with Merkin, Harrington resigned. She did so, she says, directly in response to this decision: “If we forego the process, then we have lied to our investors and we haven't done the work we were hired to do and I will not do that,” she testified.


This is the heart of it.
   2. Famous Original Joe C Posted: February 10, 2012 at 03:55 PM (#4058331)
Interesting article, Howard.
   3. Matt Clement of Alexandria Posted: February 10, 2012 at 03:56 PM (#4058332)
Looks like Megdal's got the goods that Picard has got the goods.

Based on the section quoted by Shooty, Katz and the Wilpons cannot claim plausibly that they were unaware of possible fraud. According to Megdal, the defenses of Katz, the Wilpons, and the execs from Sterling are all of the "I don't recall at this time, Senator" variety. I guess that can be an effective legal defense, depending on the level of proof required in the case, but I'm convinced that by far the most likely narrative of events is that the Mets owners were aware that fraud was ongoing and turned a blind eye.

(This also explains why they stuck with him - they thought, as Harrington suggested, that Madoff was front-running, not providing wholly fraudulent returns.)
   4. Howie Menckel Posted: February 10, 2012 at 03:58 PM (#4058333)
fyi, Bob Klapisch ripped the Mets on Twitter yesterday for taking Megdal's credential away.

   5. RB in NYC (Now Semi-Retired from BBTF) Posted: February 10, 2012 at 04:16 PM (#4058354)
fyi, Bob Klapisch ripped the Mets on Twitter yesterday for taking Megdal's credential away.
Just like Chief Wiggum caught in the hot dog machine, it is going to get a lot worse for the Mets before it gets better
   6. Shooty Is Disappointed With His Midstream Urine Posted: February 10, 2012 at 04:17 PM (#4058358)
   7. RoyalsRetro (AG#1F) Posted: February 10, 2012 at 04:30 PM (#4058375)
From #6:

“When faced with cash crunches from week to week, the Mets routinely and confidently relied on future Madoff returns to bridge the gap,” and any excess cash went back into Madoff’s firm, Picard said in a filing yesterday in U.S. District Court in Manhattan. “The Mets relied on Madoff’s returns as a predictable source of income for a business -- professional baseball -- with an otherwise unpredictable revenue stream.”


Jesus, even when they were "earning" returns on Madoff's investments, they were still strapped for cash? How do you not make money hand-over-fist in the New York market?
   8. Kiko Sakata Posted: February 10, 2012 at 04:34 PM (#4058380)
for a business -- professional baseball -- with an otherwise unpredictable revenue stream.


They sell a huge chunk of their tickets months in advance, they negotiate television rights years in advance. I would have thought MLB would have a more predictable revenue stream than most businesses.
   9. Lassus Posted: February 10, 2012 at 04:35 PM (#4058381)
Egads.
   10. Matt Clement of Alexandria Posted: February 10, 2012 at 04:40 PM (#4058390)
In the immortal words of Frank Pembleton, crime makes you stupid.
   11. JJ1986 Posted: February 10, 2012 at 04:41 PM (#4058391)
I think I need to follow a different team for a year or two. The Blue Jays look intriguing.
   12. PreservedFish Posted: February 10, 2012 at 04:42 PM (#4058394)
When faced with cash crunches from week to week, the Mets routinely and confidently relied on future Madoff returns to bridge the gap,


My god.
   13. RJ in TO Posted: February 10, 2012 at 04:44 PM (#4058398)
I think I need to follow a different team for a year or two. The Blue Jays look intriguing.

Jose Bautista, Brett Lawrie, and Ricky Romero. They'll keep you entertained.
   14. PreservedFish Posted: February 10, 2012 at 04:46 PM (#4058401)
I think I'm going to follow the AL West. Anaheim and Texas have wonderful, fascinating teams. Oakland and Seattle are ungodly terrible. A little bit of everything!
   15. Don Geovany Soto (chris h.) Posted: February 10, 2012 at 04:51 PM (#4058409)
“When faced with cash crunches from week to week, the Mets routinely and confidently relied on future Madoff returns to bridge the gap,”

That's horrifying.
   16. Good cripple hitter Posted: February 10, 2012 at 04:51 PM (#4058412)
I think I need to follow a different team for a year or two. The Blue Jays look intriguing.


Speaking as a Jays fan, switching to the Jays because you're mad at a team's ownership is probably not the best of plans. There hasn't been any pyramid schemes that I know of, but I'd look into other teams before I threw my support behind a Rogers owned team.
   17. Lassus Posted: February 10, 2012 at 05:01 PM (#4058419)
I think I need to follow a different team for a year or two.
I think I'm going to follow the AL West. Anaheim and Texas have wonderful, fascinating teams. Oakland and Seattle are ungodly terrible. A little bit of everything!

Oh HELL no. When we make the playoffs out of pure surreality and weirdness you best not be crawling back around here with your tails between your legs. NOT ACCEPTABLE.


OK, that was more confrontational than I meant it. Really, I think it will be fun to root for a lost franchise. I mean, it's not like this is new. I'm simply looking forward to the season to start, even now.
   18. snapper (history's 42nd greatest monster) Posted: February 10, 2012 at 05:06 PM (#4058424)
(This also explains why they stuck with him - they thought, as Harrington suggested, that Madoff was front-running, not providing wholly fraudulent returns.)

Yup, I've been saying this from the beginning. The word among a lot of smart finance people has been this was the heart of the fraud. The big Madoff investors and funnelers thought they were in on the scam, as opposed to being its victims. That's why they were so eager to get their friends a piece of the action.
   19. Sam M. Posted: February 10, 2012 at 05:13 PM (#4058432)
Really, I think it will be fun to root for a lost franchise. I mean, it's not like this is new. I'm simply looking forward to the season to start, even now.


Rooting for a lost franchise is one thing.

Losing with a looted franchise is quite another.

I am rooting for the only victory that counts: the one by Irving Picard, against Fred Wilpon. He's got to overcome the nonsense that Judge Rakoff has put in his way, and once he's done that he's got to go up to the Second Circuit and win again to multiply the damages, and force the end of this.

That's the season to me. Game on.
   20. The Good Face Posted: February 10, 2012 at 05:20 PM (#4058436)
Yup, I've been saying this from the beginning. The word among a lot of smart finance people has been this was the heart of the fraud. The big Madoff investors and funnelers thought they were in on the scam, as opposed to being its victims. That's why they were so eager to get their friends a piece of the action.


Agreed and well stated... the very best scams are the ones where the victim thinks he's the guy pulling a fast one.
   21. Dan The Mediocre Posted: February 10, 2012 at 05:22 PM (#4058438)
Really, I think it will be fun to root for a lost franchise.


Go, Cubs, go
Go, Cubs, go
Hey, Chicago, what do you say
The Cubs are gonna win today
   22. The Non-Catching Molina (sjs1959) Posted: February 10, 2012 at 05:31 PM (#4058443)
Rooting for a lost franchise is one thing.

Losing with a looted franchise is quite another.

I am rooting for the only victory that counts: the one by Irving Picard, against Fred Wilpon. He's got to overcome the nonsense that Judge Rakoff has put in his way, and once he's done that he's got to go up to the Second Circuit and win again to multiply the damages, and force the end of this.

That's the season to me. Game on.

Sam, for your sake and that of the rest of the Mets' fans, I hope so too. Then Bud will have no choice but to strip them of the franchise.
   23. Mark S. is bored Posted: February 10, 2012 at 05:36 PM (#4058448)
From the Bloomberg article linked by Shooty in #6:

After Madoff’s arrest, when Sterling restructured a bank loan of more than $500 million, lenders stipulated that a judgment in the Madoff case of more than $100 million, or in some cases $50 million, would constitute “an event of default,” Picard said in his complaint.
   24. Ron J Posted: February 10, 2012 at 05:47 PM (#4058453)
#16 No pyramid scheme, but for a number of years the Jays/Rogers entity has operated exactly in the opposite manner from the Mets/Madoff. They've used cash from the Jays to fund expansion in Rogers (particularly during the credit crunch -- they found it difficult to secure needed loans). Mostly to smooth over cash flow issues.

I don't think they've been draining the team -- money comes back the other way when it's convenient -- but Rogers is very much the focus of the overall entity.
   25. PreservedFish Posted: February 10, 2012 at 05:52 PM (#4058456)
I meant it. Really, I think it will be fun to root for a lost franchise. I mean, it's not like this is new. I'm simply looking forward to the season to start, even now.


Oh, I'm always a Mets fan. And I still like most of the players we have.

Every year I emotionally give up on the team at some point, but I keep watching, and what that mostly means is that I get to immediately shrug off losses. Sometimes that doesn't happen until elimination. Sometimes it happens after Luis Castillo drops a pop up. And sometimes, like this year, it happens before opening day. But I still watch and have a pleasurable time doing so.
   26. yb125 Posted: February 10, 2012 at 06:36 PM (#4058483)
In the immortal words of Frank Pembleton, crime makes you stupid.


How I loved that show, at least for the first few seasons.
   27. Banta Posted: February 10, 2012 at 06:57 PM (#4058491)
Rooting for a lost franchise is one thing.

Losing with a looted franchise is quite another.

I am rooting for the only victory that counts: the one by Irving Picard, against Fred Wilpon. He's got to overcome the nonsense that Judge Rakoff has put in his way, and once he's done that he's got to go up to the Second Circuit and win again to multiply the damages, and force the end of this.

That's the season to me. Game on.


I'm signing this petition!
   28. bumpis hound Posted: February 10, 2012 at 07:44 PM (#4058503)
Shooty Katz and the Wilpons

This needs to be a band name.
   29. Depressoteric feels Royally blue these days Posted: February 10, 2012 at 07:49 PM (#4058505)
In the immortal words of Frank Pembleton, crime makes you stupid.
Wonderful citation, but I think snapper's got it nailed in #18. The Wilpons and all the others thought they were in on a scam, not the victims of one.
   30. bobm Posted: February 10, 2012 at 07:56 PM (#4058509)
[20]

Yup, I've been saying this from the beginning. The word among a lot of smart finance people has been this was the heart of the fraud. The big Madoff investors and funnelers thought they were in on the scam, as opposed to being its victims. That's why they were so eager to get their friends a piece of the action.

Agreed and well stated... the very best scams are the ones where the victim thinks he's the guy pulling a fast one


IOW, you can't con an honest man.
   31. JE (Jason) Posted: February 10, 2012 at 08:12 PM (#4058515)
Meanwhile, the New York Daily Lupica does its very best to defend the regime.

Irving Picard responds to NY Mets' owners move to dismiss case with same old arguments
   32. SouthSideRyan Posted: February 10, 2012 at 08:16 PM (#4058518)
Money in Madoff accounts was used as collateral for loans from Bank of America Corp., which financed more investments in Madoff, according to Picard. Sterling partners called those loans “double ups,” he said.
   33. PreservedFish Posted: February 10, 2012 at 08:39 PM (#4058532)
What was the Madoff myth that allowed people to believe that he could generate consistent ridiculous returns? Was he supposed to be a superdupergenius or something?
   34. JE (Jason) Posted: February 10, 2012 at 08:47 PM (#4058541)
What was the Madoff myth that allowed people to believe that he could generate consistent ridiculous returns? Was he supposed to be a superdupergenius or something?

IIRC the returns were not ridiculously high; that there were never losses was the superdupersilly part.
   35. Justin T steals bases with his bat Posted: February 10, 2012 at 08:56 PM (#4058550)
What was the Madoff myth that allowed people to believe that he could generate consistent ridiculous returns? Was he supposed to be a superdupergenius or something?

No, they knew it was bullshit. But they also felt that these kinds of setups were their right as super rich people. They get to play the funnest games.
   36. Matt Clement of Alexandria Posted: February 10, 2012 at 09:08 PM (#4058558)
Wonderful citation, but I think snapper's got it nailed in #18. The Wilpons and all the others thought they were in on a scam, not the victims of one.
I guess this doesn't really call for clarification, but I do agree with snapper. My point is that the Wilpons, being engaged in what they thought was their brilliant scam, organized their finances in the stupidest way imaginable.
   37. snapper (history's 42nd greatest monster) Posted: February 10, 2012 at 09:15 PM (#4058562)
What was the Madoff myth that allowed people to believe that he could generate consistent ridiculous returns? Was he supposed to be a superdupergenius or something?

He ran one of the largest NASDAQ market makers out there, and they thought he was front running his clients. That means, you see a lot of but orders coming in, you buy for yourself in front of them, you see a lot of sells, you sell in front.

A limited amt. of front running is allowed for market makers to maintain an orderly market. But, if you do a lot of it, you can make a mint.

With that "strategy" you'll always make money. You're not investing at all. It would be no surprise that your returns are consistent.
   38. snapper (history's 42nd greatest monster) Posted: February 10, 2012 at 09:20 PM (#4058566)
My point is that the Wilpons, being engaged in what they thought was their brilliant scam, organized their finances in the stupidest way imaginable.

Well, I think Justin is right in [35]. Rich and powerful people are entitled SOBs. The ancient Greeks nailed this syndrome; pure hubris.
   39. PreservedFish Posted: February 10, 2012 at 09:24 PM (#4058569)
Snapper, thank you.
   40. snapper (history's 42nd greatest monster) Posted: February 10, 2012 at 09:31 PM (#4058571)
Snapper, thank you.

You're welcome. No biggy.
   41. SouthSideRyan Posted: February 10, 2012 at 09:37 PM (#4058573)
They were getting 11% returns, they were way too high for way too long.
   42. cercopithecus aethiops Posted: February 10, 2012 at 10:07 PM (#4058582)
Why is any amount of front running allowed? Isn't it basically stealing from your clients?
   43. bobm Posted: February 10, 2012 at 10:23 PM (#4058593)
[42] The theory is that market makers, specialists, etc are providing liquidity in the market for a given stock.
   44. Arbitol Dijaler Posted: February 10, 2012 at 11:13 PM (#4058638)
Wonderful citation, but I think snapper's got it nailed in #18. The Wilpons and all the others thought they were in on a scam, not the victims of one.


I think you're being a little hard on the other victims. Part of the genius of Madoff was, for most of his "investors," the returns were relatively modest -- unrealistically consistent, especially in turbulent markets, but 10-11 percent, not Charles Ponzi double your money in 6 weeks. I can see how victims may have viewed themselves as taking a prudent, conservative investment -- especially in times like the dot com and real estate bubbles. Others are getting rich quick, but they are just plodding along making 11 percent a year.

The Wilpons, on the other hand, seem to have had more information.
   45. tshipman Posted: February 10, 2012 at 11:42 PM (#4058648)
[42] The theory is that market makers, specialists, etc are providing liquidity in the market for a given stock.


This argument seems a bit self-serving, given that it's made by people who stand to benefit from it. Front running seems to be unethical.
   46. Dr. Vaux Posted: February 11, 2012 at 12:13 AM (#4058656)
This argument legislation having to do with economic policy seems a bit self-serving, given that it's made by people who stand to benefit from it.


That's how capitalism operates.
   47. LionoftheSenate (Brewers v A's World Series) Posted: February 11, 2012 at 12:51 AM (#4058668)
This story sure has evolved a long way from when people (Mets fans I presume) denied the Mets had any financial problems, had nothing to worry about RE: Maddoff because the Mets came out ahead in the deal and few of "their" Maddoff dollars had gone missing.

   48. valuearbitrageur Posted: February 11, 2012 at 03:13 AM (#4058692)
According to Harrington, Katz grew angry in response, and ultimately rejected her arguments

The idea that the Wilpons thought Madoff was front-running other clients is plausible, but there is another explanation that is equally so. Bias.

When Bernie "made" clients money for years, it's a natural human response for those clients to admire him, and support him, even to the point of getting angry when he is attacked. After all, what did she ever do for them, while Bernie Madoff had done so much?

Clearly the Wilpons didn't believe Madoff was a fraud, or their money would have been withdrawn. I find it hard to believe they would leave that much money with him if they thought it was illegal. I doubt they really thought he was front-running, I think they just thought he was a wonderful genius. It seems idiotic, but we are all susceptible to the same biases, we tend to trust those who do well by us, and have difficulty separating out luck from skill and often lose the skepticism needed to sniff out frauds when they are producing extraordinary results for us.
   49. Something Other Posted: February 11, 2012 at 05:56 AM (#4058703)
@48: if they were twelve years old, or Bernie's distant aunts or his mom, sure, but these are high finance guys, rich guys, who know their way around a T-Bill and a mortgage. They knew 11%-12% a year was unsustainable. They had the means to know, easily enough, what was going on.

Choosing not to know isn't the same as not knowing. If my next door neighbor, a good friend, starts making unusual BBQ at the point that large numbers of neighborhood cats start disappearing, and refuses to tell me his recipe or even what kind of meat he's using, I have no complaint when I start coughing up hairballs.
   50. Bring Me the Head of Alfredo Griffin (Vlad) Posted: February 11, 2012 at 08:18 AM (#4058716)
Why is any amount of front running allowed?


Because everyone in that industry is a terrible person, lacking even a vestigial ability to feel shame?
   51. A Fatty Cow That Need Two Seats Posted: February 11, 2012 at 09:12 AM (#4058739)
This story sure has evolved a long way from when people (Mets fans I presume) denied the Mets had any financial problems, had nothing to worry about RE: Maddoff because the Mets came out ahead in the deal and few of "their" Maddoff dollars had gone missing.


jesus, you really are the worst
   52. cercopithecus aethiops Posted: February 11, 2012 at 09:37 AM (#4058747)
I have no complaint when I start coughing up hairballs


Of course you do. It isn't that hard to properly skin a cat. And I hear there are lots of different ways to do it.
   53. billh Posted: February 11, 2012 at 10:32 AM (#4058768)
Why is any amount of front running allowed?


I have not been actively employed in the industry for a few years, but in my former life I was involved in implementing compliance systems for brokerage, both as a vendor and in house.

Front running is not allowed. On the NY exchange it is strictly enforced and has been for years. NASDAQ is decentralized, and lacks the enforcement tools, so it's easy for an market maker to disguise front running since they are expected to take a "haircut" on the trade anyway (rather than charge a commission).
   54. Sam M. Posted: February 11, 2012 at 10:48 AM (#4058774)
That's a lovely theory, VA. Of course, applying it in this case requires us to believe that a seemingly credible witness, hired for her expertise who then quit when the advice and warnings she says she gave were ignored, is lying. Even though she has no incentive to lie and Saul Katz had hundreds of millions of reasons to do so.

Personally, I wouldn't allow that defense in any case. Giving someone a defense because he had a "natural" desire to believe something is OK just because it's been so good for him undermines the law in pernicious ways. Red flags that create a "should have known" situation are supposed to count in the prosecution's favor, and suspiciously consistent, unrealistic profits are such a red flag. You would turn them into a basis on which the client would have reason to think the "broker" is a genius rather than a crook. And the client especially doesn't get to cling to the stars-in-my-eyes defense when somebody told him it's a scam.

As for whether the Wilpons would have taken their money out if they thought he was a crook, that's a nice theory, as to which there's a pretty obvious answer: they were too deeply enmeshed to exit. They had steered friends and employees to Madoff. They were utterly dependent on those reliable returns, essentially to keep the team running. In short, it's just an example of how hard it is for a co-conspirator to withdraw.
   55. snapper (history's 42nd greatest monster) Posted: February 11, 2012 at 11:08 AM (#4058779)
As for whether the Wilpons would have taken their money out if they thought he was a crook, that's a nice theory, as to which there's a pretty obvious answer: they were too deeply enmeshed to exit. They had steered friends and employees to Madoff. They were utterly dependent on those reliable returns, essentially to keep the team running. In short, it's just an example of how hard it is for a co-conspirator to withdraw.

Exactly.

And, if you only think he is front-running, there is no need to. The profits may stop if he is found out, but the principal won't be lost.
   56. Arbitol Dijaler Posted: February 11, 2012 at 12:44 PM (#4058845)
Personally, I wouldn't allow that defense in any case. Giving someone a defense because he had a "natural" desire to believe something is OK just because it's been so good for him undermines the law in pernicious ways. Red flags that create a "should have known" situation are supposed to count in the prosecution's favor, and suspiciously consistent, unrealistic profits are such a red flag. You would turn them into a basis on which the client would have reason to think the "broker" is a genius rather than a crook. And the client especially doesn't get to cling to the stars-in-my-eyes defense when somebody told him it's a scam.


I think what you're really saying is that the standard should be recklessness, not intent. Because if it's intent, they're entitled to that defense, no matter how stupid that makes them.
   57. Sam M. Posted: February 11, 2012 at 01:26 PM (#4058870)
I think what you're really saying is that the standard should be recklessness, not intent. Because if it's intent, they're entitled to that defense, no matter how stupid that makes them.


Not exactly. You can have the stupidity defense all you want, but in making it, you can't use as evidence the very things (e.g., ridiculously and impossibly consistent profits without a single month of losses over years) that were going on, which actually constitute the red flags that should have alerted the investor that something was up, and that is actually evidence they were willfully blind (the legal standard) to what was going on.

If Wilpon and Katz are able to cite obviously suspicious profits as a reason to believe they could and did trust and stick with Madoff, it would be like allowing someone who is charged with complicity to arson say they trusted the arsonist because she smelled of kerosene every time they met. Au contraire. That's a reason the prosecution gets to argue the conspirator should have known she was an arsonist, and if she didn't, was instead willfully blind to what was going on.
   58. valuearbitrageur Posted: February 11, 2012 at 01:49 PM (#4058884)
@48: if they were twelve years old, or Bernie's distant aunts or his mom, sure, but these are high finance guys, rich guys, who know their way around a T-Bill and a mortgage. They knew 11%-12% a year was unsustainable. They had the means to know, easily enough, what was going on.


John Gutfreund was a smart guy, knew what Paul Mozer was doing was wrong, but lost his job and his career because he couldn't take the obvious actions, I think locked in by psychological bias created by the fact that Paul Mozer had made the firm a lot of money.

There is no one smarter than John Meriwether, yet he's blown up 3 huge funds in his career chasing unobtainable returns and using unrecognized levels of risk. And smart investors threw money at him because of how smart he was, and how good his returns were, until the inevitable implosion.

Choosing not to know isn't the same as not knowing. If my next door neighbor, a good friend, starts making unusual BBQ at the point that large numbers of neighborhood cats start disappearing, and refuses to tell me his recipe or even what kind of meat he's using, I have no complaint when I start coughing up hairballs.


Why would you think a good friend would do something so horrible? Of course you wouldn't, you would prefer to remain happy, enjoying the BBQ and your friends company guilt free, until the evidence is overwhelming. That in a nutshell, is a standard type of psychological bias.

That's a lovely theory, VA. Of course, applying it in this case requires us to believe that a seemingly credible witness, hired for her expertise who then quit when the advice and warnings she says she gave were ignored, is lying. Even though she has no incentive to lie and Saul Katz had hundreds of millions of reasons to do so.


Oh, her credibility is the foundation of my "theory". It's her testimony that Saul Katz reacted in anger that shows the strong psychological bias that was influencing his actions. She was working for them to reduce their risk, why would you ever get angry at any of her conclusions? You either believe them or don't, and you make a decision based on the balance of facts you've been presented. You only get angry if you've developed an emotional attachment to the firm/person she is criticizing. And a natural one if Madoff's "returns" were so stellar.

Few people, no matter how smart or how much money they've made in other businesses, have any ability or even idea on how to judge the skill of an investor or the reasonableness of his returns. To them, before Bernie was unmasked, there was no difference between him and Warren Buffett. Academics confidently judged Buffett's returns to be nothing but a statistical aberration for decades before his ongoing performance finally (mostly) muted them. The doctors and lawyers who invested with Warren in the 1950s and 60s had nothing to judge him by other than his character, and his claimed returns. If you read interviews with Bernie's investors on how they regarded his character, it's stunningly, and queasily, familiar to how Buffett's long time investors regarded him.

It's pretty easy for people to say, Buffett was good and those pointy headed academics were wrong, what do they know? Just as it would be easy for the Wilpons and Katz to say, what does this woman know about Bernie? Bernie is a genius who can do what Wall Streeters can't, and they are deeply jealous of him! How much money has she ever made? They would probably heed her excellent advice with most investments because they could admit she knew better than them, but with Bernie, they would be too committed to this "wonderful and brilliant guy" to ever accept negative opinions without a mountain of evidence. If she wasn't so honest, and just wanted to cash their paychecks, she'd do what every smart underling does, and do her job on the other investments, and never say a bad word to her bosses about the golden investment they were emotionally in love with.

And note, I'm not presenting this theory as a legal defense. I don't think being under the sway of a fraud just because you were biased to like him is any kind of legal defense. I'm just explaining how natural their behavior actually is in many respects, and how you don't need an assumption of front-running to support it.

And so everyone understands the Buffett point, I'm not criticizing him either. The key difference between Warren Buffett and Bernie Madoff was that Warren always disclosed his methods, and philosophy, and his actually reported investments matched up with those. The only dissonance was whether you believed in the Strong theory of efficient markets, which would preclude his approach from generating those results other than by luck. I think Warren realized that given how outsized his returns were, and the naiveté of most investors, even his, that constantly writing about and discussing his approach would give them confidence and tools to measure him by. Which is why his investor letters, dating back to 1977 on the Berkshire site, are probably the greatest treasure trove of free investment education in history. I personally credit reading those letters with adding significantly to my returns.

And in them, Buffett constantly talks about psychological bias. Value investing is simple really, in concept and execution. The hard part, and what separates the best from the rest, is the ability to deal with psychological bias, such anchoring to bad decisions. His partner Charley Munger has always recommended the book "Influence" by CIaldini as one of the greatest investment books ever written, and it doesn't discuss investing at all. It's an exploration of the emotional reasons we make bad decisions, I see it every day in mine and others decisions, and I think very clearly it can provide a reasonable framework for explaining how Katz/Wilpons did not react to important negative information about Madoff in the way they logically should.

And, if you only think he is front-running, there is no need to. The profits may stop if he is found out, but the principal won't be lost.


If you have hundreds of millions invested getting amazing returns that you are pretty sure are illegal in nature, you can't assume your principle is safe. First, by definition you have to be willing to leave all those funds with a guy who is cheating others, it's natural to wonder if and when he'll start cheating you. Secondly, when Elliot Spitzer or whoever is the current NY DA running for higher office) waltzes Bernie Madoff out of the building, he's not going allow you to slink in behind him and withdraw your principle. There will be "victims"! The DA is going to lock up your monies for a long time, and may need a big chunk for the "victims", and in a front running case will certainly contemplate pursuing the same legal strategies against participating investors as Picard is in the fraud case. Of course, the same sorts of bias that I'm talking about could easily lead the Wilpons and Katz to incorrectly lower their assessment of this risk. But I would believe this bias would be far less strong.

If they believe Bernie is a genius, they can love and defend the guy unconditionally. If they believed Bernie was a cheater, they would always have their guard up, and when bad news came over the transom they would be much less likely to discard it. Katz's reaction simply doesn't ring as true to me if he sincerely though Bernie was front-running (at the time of that meeting). If he knows Bernie is a cheater, he's not emotionally committed to him, so why should he get angry? Instead he should get concerned, if Noreen can so quickly and confidently deduce Bernie is front running, how soon will others know, and what risk does that put their funds at? It's possible he was angry because he realized they'd soon be losing the profits from Bernies front-running, but again, what steps did they take to mitigate that risk? My general understanding is that they kept their principle there for years upon years afterwards without taking out any significant amounts. So again, I'm skeptical they really believed it was likely Bernie front-running, though I'm sure they thought it was possible.
   59. Fancy Pants Handles lap changes with class Posted: February 11, 2012 at 01:56 PM (#4058888)
If you are involved in a scam, why on earth would you hire a consultant, who has a track-record of being a whistle-blower? Jesus F Christ on a popsicle!
   60. Ron J Posted: February 11, 2012 at 02:04 PM (#4058893)
#54 One simple indication of how they looked at the world is the Bonilla buyout. As I recall it was only a sane business decision to structure it as they did if they could get 8% return on the money.
   61. cercopithecus aethiops Posted: February 11, 2012 at 02:14 PM (#4058897)
As I recall it was only a sane business decision to structure it as they did if they could get 8% return on the money.


Well, the deal was to pay 8% on what they owed Bonilla, so you have to be thinking that you can get more than that for it to really make sense. OTOH, the prime rate was 8.5% in January of 2000. So it really isn't that much of a stretch to think that you could beat that.
   62. PreservedFish Posted: February 11, 2012 at 02:19 PM (#4058901)
OTOH, the prime rate was 8.5% in January of 2000. So it really isn't that much of a stretch to think that you could beat that.


Still a big stretch. Why did Bonilla accept the buyout?
   63. Sam M. Posted: February 11, 2012 at 02:29 PM (#4058907)
It's her testimony that Saul Katz reacted in anger that shows the strong psychological bias that was influencing his actions. She was working for them to reduce their risk, why would you ever get angry at any of her conclusions? You either believe them or don't, and you make a decision based on the balance of facts you've been presented. You only get angry if you've developed an emotional attachment to the firm/person she is criticizing. And a natural one if Madoff's "returns" were so stellar.


You'd only be angry if it was emotional attachment? Really? You wouldn't react in anger because this consultant they've brought in is threatening to blow up the whole thing in your face? I think if you know you have a scam going on (either fictitious profits or being the beneficiary of front-running), the last thing you want is to be in this meeting, in which your whole plausible deniability defense is being blown to bits. After the meeting, in the car on the way back to wherever, Saul Katz says, "What the hell are you people thinking??? I can't be told that stuff! The point of this was to create the illusion of diversification -- back-door Madoff, through Merkin. Who brought in Elliott F'ing Ness???" I think Scamming Saul is at least as angry as Saint Saul.

If you are involved in a scam, why on earth would you hire a consultant, who has a track-record of being a whistle-blower? Jesus F Christ on a popsicle!


First of all, she didn't yet have a reputation as a whistle-blower. That came later. Second, it's no coincidence that it was Katz who recommended Merkin who turned out to be just a front for Madoff, after a decision had supposedly been made to "diversify" Sterling holdings away from Madoff. There were some voices within Sterling who wanted to diversify away from Madoff, and Katz took steps to undermine that. So those same voices (presumably, the ones who set up Sterling Stamos in the first place), insisted on due diligence on Merkin -- bringing in Harrington. How does Katz react? He goes crazy. Because he doesn't want to diversify; he has a responsibility to Madoff (even if it has to be through this Merkin front) to keep funneling money into the pyramid and no "consultant" revealing the truth is going to get in his way.

Frankly, it doesn't matter whether I'm right that Katz -- and probably Wilpon, too, given their partnership -- knew very well what was going on before Harrington laid it out. Even if this came as a complete shock to Saul Katz, naif in the manger, once she raised the red flags, Katz couldn't any longer cling to his, "Oh, but I thought he was just a miracle worker!" nonsense. Having had warnings like that, he could only thereafter be willfully blind to what he'd been warned of. Unless she is totally destroyed on the witness stand, this goose is thoroughly roasted.
   64. cercopithecus aethiops Posted: February 11, 2012 at 02:33 PM (#4058908)
Why did Bonilla accept the buyout?


'Cause he knew he'd have just spent the $6M on hookers and blow?
   65. cercopithecus aethiops Posted: February 11, 2012 at 02:39 PM (#4058910)
After the meeting, in the car on the way back to wherever, Saul Katz says, "What the hell are you people thinking??? I can't be told that stuff! The point of this was to create the illusion of diversification -- back-door Madoff, through Merkin. Who brought in Elliott F'ing Ness???"


You really missed your calling Sam. You should have been a screenwriter.
   66. valuearbitrageur Posted: February 11, 2012 at 02:40 PM (#4058911)
Well, the deal was to pay 8% on what they owed Bonilla, so you have to be thinking that you can get more than that for it to really make sense. OTOH, the prime rate was 8.5% in January of 2000. So it really isn't that much of a stretch to think that you could beat that.


The prime rate is a short term rate, you can't use that to make a multi-decade commitment. I think 30 year treasuries were about 6.5% at that time, and that's the type of "risk free" rate you should use for decisions like this, since the risk free method to pay for it would be by investing in T Bills. Obviously Bobby wasn't going to settle for the "risk free" rate, and my guess is he (or his advisors) settled for something slightly higher than the long term AAA rates of the day.

This is supportive of their belief in Madoff, given they could have made a withdrawal from Bernie to pay off Bonilla, but chose this lengthy buyout instead. Bobby Bo was 2 years before Noreen warned them, and it took 6 years from her warning before his fraud was uncovered. If they really thought Madoff was doing anything risky they had a lot of time to gradually draw back on their principle, but as far as I understand didn't. This lends itself to the idea they believed Bernie was simply better and smarter than his critics could understand, and that they were smart guys for having found such a genius to invest for them.
   67. Ron J Posted: February 11, 2012 at 02:52 PM (#4058912)
#64 What I'd heard was that yes, he'd have spent it. Perhaps on shiny toys instead of hookers and blow, but it would still have gone pretty fast.
   68. Tripon Posted: February 11, 2012 at 02:52 PM (#4058913)

Still a big stretch. Why did Bonilla accept the buyout?


Because he knew $26 million was more than $6 million? Even if you think inflation would be that much higher over the next ten years, that deal still smells of arrogance from the Mets.
   69. valuearbitrageur Posted: February 11, 2012 at 03:00 PM (#4058916)
You'd only be angry if it was emotional attachment? Really? You wouldn't react in anger because this consultant they've brought in is threatening to blow up the whole thing in your face? I think if you know you have a scam going on (either fictitious profits or being the beneficiary of front-running), the last thing you want is to be in this meeting, in which your whole plausible deniability defense is being blown to bits. After the meeting, in the car on the way back to wherever, Saul Katz says, "What the hell are you people thinking??? I can't be told that stuff! The point of this was to create the illusion of diversification -- back-door Madoff, through Merkin. Who brought in Elliott F'ing Ness???" I think Scamming Saul is at least as angry as Saint Saul.


She wasn't a consultant. She was their Chief investment Officer at the firm they created to help diversify their investments. You don't hire someone like that to carefully vet an investment that you are pretty sure is performing illegal acts. You don't form Sterling Stamos at all if you feel you have something to hide. You don't involve outside investors, or hire professional managers if you are involved in a scam.

And according to this article they had multiple warnings from multiple investment officers, yet kept 95% of their portfolio with Bernie. It's really hard to imagine they actively believed Bernie was a fraud or was front-running, yet invited sophisticated investment analysts to review what he was doing, and risk exposing the fraud earlier. It's also very hard to imagine they would keep 95% of their liquid assets under his control if he could be raided at any moment and those assets frozen for years, stolen, or lost in fines/penalties from civil lawsuits.

It is believable that they felt genius Bernie was just misunderstood by lessor mortals, and would get angry when those idiots didn't understand or appreciate how wonderful he was.

Frankly, it doesn't matter whether I'm right that Katz -- and probably Wilpon, too, given their partnership -- knew very well what was going on before Harrington laid it out. Even if this came as a complete shock to Saul Katz, naif in the manger, once she raised the red flags, Katz couldn't any longer cling to his, "Oh, but I thought he was just a miracle worker!" nonsense. Having had warnings like that, he could only thereafter be willfully blind to what he'd been warned of. Unless she is totally destroyed on the witness stand, this goose is thoroughly roasted.


I don't think anyone is saying to give the Wilpons and Katz a pass in court. Clearly they had multiple warnings and the courts will rule according to the law, what they knew and their responsibilities based on what they knew. That's not my point at all, at least. The courts won't and shouldn't care how much the Wilpons and Katz loved Bernie and how it screwed up their judgment.

But you are missing how strong a role emotions play in decisions, and how someone like the Wilpons and Katz could easily want to believe in Bernie, and how it could easily have lead them to make these horribly dumb misjudgments.
   70. PreservedFish Posted: February 11, 2012 at 03:07 PM (#4058920)
I want to say thank you to both Sam and VA for this discussion. I love it.
   71. Sam M. Posted: February 11, 2012 at 03:14 PM (#4058924)
She was their Chief investment Officer at the firm they created to help diversify their investments. You don't hire someone like that to carefully vet an investment that you are pretty sure is performing illegal acts. You don't form Sterling Stamos at all if you feel you have something to hide. You don't involve outside investors, or hire professional managers if you are involved in a scam.


But VA, why do you credit the stated motivation in creating Sterling Stamos that it was "trying to diversify their investments" when what they actually did was simply funnel money back to Madoff, just as they were doing with their other companies? As I see it, there are only two explanations. One is that it was simply part of the scam -- helpful to their interests by giving them the ability to say they weren't all-in with Madoff if anyone asked ("See? Like any other responsible, prudent investor, we have a diverse portfolio. Just look at what Sterling Stamos is doing."), so long as they didn't look too closely at what Merkin was doing. But still actually serving the overall conspiracy by making sure every penny was poured into the Madoff pyramid.

The second possibility is that some voices inside Sterling genuinely wanted to diversify, either because that's just a good idea, or because they suspected the Madoff fraud and wanted to get out from under it. So that would make the creation of Sterling Stamos legit from the outset, but something that Saul Katz was in no position to allow to actually happen. Because his job was to make sure every dollar invested by Sterling went to Madoff, one way or another. That's why he was so determined that Merkin get the money, and so angry when Harrington checked it out and said, "No way. This doesn't pass the smell test."

So in the end, Sterling Stamos (even if some folks within Sterling wanted it to be something legit) just ended up becoming another prop in the scam. Katz saw to that, leading to Harrington's resignation. I hardly think it is evidence they had nothing to hide. What actually went on there is part of what they hid, and part of the scam.
   72. Arbitol Dijaler Posted: February 11, 2012 at 03:15 PM (#4058925)

Not exactly. You can have the stupidity defense all you want, but in making it, you can't use as evidence the very things (e.g., ridiculously and impossibly consistent profits without a single month of losses over years) that were going on, which actually constitute the red flags that should have alerted the investor that something was up, and that is actually evidence they were willfully blind (the legal standard) to what was going on.

If Wilpon and Katz are able to cite obviously suspicious profits as a reason to believe they could and did trust and stick with Madoff, it would be like allowing someone who is charged with complicity to arson say they trusted the arsonist because she smelled of kerosene every time they met. Au contraire. That's a reason the prosecution gets to argue the conspirator should have known she was an arsonist, and if she didn't, was instead willfully blind to what was going on.


Maybe I'm misunderstanding you, but this sounds to me like quintessentially the kind of thing you have to give to the jury to decide -- whose interpretation of the facts make the most sense. On what legal basis would you deny a defendant the right to argue for his (rather unbelievable, but not nonsensical) version of the facts?
   73. Arbitol Dijaler Posted: February 11, 2012 at 03:20 PM (#4058929)
Here is another noteworthy thread on the Madoff strategy.
   74. bobm Posted: February 11, 2012 at 04:13 PM (#4058960)
[58]
Few people, no matter how smart or how much money they've made in other businesses, have any ability or even idea on how to judge the skill of an investor or the reasonableness of his returns. To them, before Bernie was unmasked, there was no difference between him and Warren Buffett. Academics confidently judged Buffett's returns to be nothing but a statistical aberration for decades before his ongoing performance finally (mostly) muted them. The doctors and lawyers who invested with Warren in the 1950s and 60s had nothing to judge him by other than his character, and his claimed returns. If you read interviews with Bernie's investors on how they regarded his character, it's stunningly, and queasily, familiar to how Buffett's long time investors regarded him.


I won't disagree about the existence and influence of mental fallacies and denial as a defense against acknowledging unpleasant facts, but as real estate investors, Wilpon and Katz were not exactly naive about the management and performance investment assets. It's not as if they had a ton of earned income like a rock star, dentist or baseball player, and no idea how to invest it.

Regardless of other investors having large gains over long spans of time, there were many other red flags about Madoff, most notably IMO the absence of volatility. Madoff's returns were reported as unusually consistent: 10-12% paid to investors annually (with some additional percentage paid to feeder fund managers). By way of contrast, Buffett's returns were nowhere near as consistent over the time period we have "data" about Madoff's "returns."

Using Yahoo data, here are the annual returns--including dividends--for Berkshire Hathaway Inc. Common (BRK-A) from 1990-2007:

Year Annual Return
1990 -2%
1991 21%
1992 37%
1993 34%
1994 52%
1995 30%
1996 9%
1997 45%
1998 29%
1999 -21%
2000 34%
2001 8%
2002 -9%
2003 32%
2004 0%
2005 0%
2006 23%
2007 24%


Impressive returns by Buffett, but highly volatile nonetheless. The monthly volatility is also pronounced. IMO it's hard, if not impossible, to say one could plausibly rationalize Madoff's performance using Buffett's performance. That boils down to greed, plain and simple, bolstered by the notion mentioned above that Madoff's investors thought they were his accomplices when in fact they were his victims. That's what con men take advantage of.

More on Madoff red flags, from wikipedia:

Concerns were also raised that Madoff's auditor of record was Friehling & Horowitz, a two-person accounting firm based in suburban Rockland County that had only one active accountant, David G. Friehling. David Friehling was a close Madoff family friend and an investor in Madoff's fund, which is a blatant conflict of interest. In 2007, hedge fund consultant Aksia LLC advised its clients not to invest with Madoff, saying it was inconceivable that a tiny firm could adequately service such a massive operation.

Typically, hedge funds hold their portfolio at a securities firm (a major bank or brokerage) acting as the fund's prime broker, which allows an outside investigator to verify their holdings. Madoff's firm was its own broker-dealer and allegedly processed all of its trades.

Ironically, Madoff, a pioneer in electronic trading, refused to provide his clients online access to their accounts. He sent out account statements by mail, unlike most hedge funds which email statements to be downloaded for convenience and investor personal analysis.

Madoff operated as a broker-dealer who also ran an asset management division. In 2003, Joe Aaron, a hedge fund professional, also found the structure suspicious and warned a colleague to avoid investing in the fund, "Why would a good businessman work his magic for pennies on the dollar?" he concluded. Also in 2003, Renaissance Technologies, "arguably the most successful hedge fund in the world", reduced its exposure to Madoff's fund first by 50 percent and eventually completely because of suspicions about the consistency of returns, the fact that Madoff charged very little compared to other hedge funds and the impossibility of the strategy Madoff claimed to use because options volume had no relation to the amount of money Madoff was said to administer. The options volume implied that Madoff's fund had $ 750 million, while he was believed to be managing $ 15 billion. And only if Madoff was assumed to be responsible for all the options traded in the most liquid strike price.

Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff "only had five down months since 1996", and commented on Madoff's investment performance: "You can't go 10 or 15 years with only three or four down months. It's just impossible."

In 2001, Michael Ocrant, editor-in-chief of MARHedge wrote a story in which he interviewed traders who were incredulous that Madoff had 72 consecutive gaining months, an unlikely possibility.
(emphasis added)

From the 2001 MARHedge report:
Again, take the Fairfield Sentry fund as the example. It has reported losses of no more than 55 basis points in just four of the past 139 consecutive months, while generating highly consistent gross returns of slightly more than 1.5% a month and net annual returns roughly in the range of 15.0%.


From 1990 through February 2001, I figure Buffett had losses in 48 of 134 months, all but one greater than 55 basis points. For Buffett over that period, the longest streak of consecutive gaining months was 13, far smaller than Madoff's claimed 72.

Continuing from the 2001 MARHedge report:

Among all the funds on the database in that same period, the Madoff/Fairfield Sentry fund would place at number 16 if ranked by its absolute cumulative returns. ...

What is striking to most observers is not so much the annual returns—which, though considered somewhat high for the strategy, could be attributed to the firm’s market making and trade execution capabilities—but the ability to provide such smooth returns with so little volatility.

The best known entity using a similar strategy, a publicly traded mutual fund dating from 1978 called Gateway, has experienced far greater volatility and lower returns during the same period.

The capital overseen by Madoff through Fairfield Sentry has a cumulative compound net return of 397.5%. Compared with the 41 funds in the Zurich database that reported for the same historical period, from July 1989 to February 2001, it would rank as the best performing fund for the period on a risk adjusted basis, with a Sharpe ratio of 3.4 and a standard deviation of 3.0%. (Ranked strictly by standard deviation, the Fairfield Sentry funds would come in at number three, behind two other market neutral funds.) ...

The apparent lack of volatility in the performance of the fund, Madoff says, is an illusion based on a review of the monthly and annual returns. On an intraday, intraweek and intramonth basis, he says, “the volatility is all over the place,” with the fund down by as much as 1%.

But as whole, the split-strike conversion strategy is designed to work best in bull markets and, Madoff points out, until recently “we’ve really been in a bull market since ‘82, so this has been a good period to do this kind of stuff.”
(emphasis added)



   75. The District Attorney Posted: February 11, 2012 at 04:26 PM (#4058966)
The point of this was to create the illusion of diversification -- back-door Madoff, through Merkin.
If you're trying to go back-door through a merkin, you're doing it wrong.
   76. Swedish Chef Posted: February 11, 2012 at 04:32 PM (#4058972)
There is a classic strategy that gives supersmooth returns and that blows away the old measures of risk like the Sharpe ratio. Just sell a lot of sufficiently out-of-money options each month. That way, you'll either deliver a nice steady return or blow up completely. If you have a sufficiently small chance of blowup you can wring a couple of years of fees or bonuses until the inevitable blowup. Then lay low in your beach house for a couple of years, write a book, say that you understand now what went wrong and get back into the game.
   77. Joe Kehoskie Posted: February 11, 2012 at 05:01 PM (#4058993)
   78.     Hey Gurl Posted: February 11, 2012 at 06:09 PM (#4059015)
Saul Katz, in his own testimony, simply says he doesn't remember meeting with Harrington. This is also his defense for an array of other evidence against the Sterling partners, from Katz signing a fraudulent document concerning a $54 million loan from Madoff disguised as an investment from Madoff's wife, to a letter to the New York State attorney general that excluded Bernie Madoff from a mandatory filing on Katz's investments, and several other meetings and documents presented by the trustee as well.

It is fair to wonder how many times the jury is going to accept I don’t remember from Katz, particularly if Harrington, a celebrated whistleblower, is credible when she takes the stand.

And while Peter Stamos says he remembers the meeting, he says he doesn't remember any concerns about Madoff raised by Harrington in that meeting, according to the Sterling attorneys' brief asking for summary judgment filed last month.


I am going to start recording every conversation I have with everyone.

Based on the section quoted by Shooty, Katz and the Wilpons cannot claim plausibly that they were unaware of possible fraud. According to Megdal, the defenses of Katz, the Wilpons, and the execs from Sterling are all of the "I don't recall at this time, Senator" variety. I guess that can be an effective legal defense, depending on the level of proof required in the case, but I'm convinced that by far the most likely narrative of events is that the Mets owners were aware that fraud was ongoing and turned a blind eye.


This doesn't necessarily follow. It is also possible that those involved did not believe it was fraudulent, despite the evidence. This is a very common psychological phenomenon among those who have been duped...their brains simply won't allow them to believe that they have been fooled, so they form cognitive dissonance around it. We see this time and time again where, even long after the con artist has been caught and locked up, the people who he victimized refuse to believe that they have been conned. It's essentially "If he's scamming us, then I've fallen for a con. I am too smart to fall for a con, therefore he's not scamming us."

It's not necessary for these individuals to be complicit, they may have just been stupid.
   79. billyshears Posted: February 11, 2012 at 06:30 PM (#4059025)
That's a lovely theory, VA. Of course, applying it in this case requires us to believe that a seemingly credible witness, hired for her expertise who then quit when the advice and warnings she says she gave were ignored, is lying. Even though she has no incentive to lie and Saul Katz had hundreds of millions of reasons to do so.


Stamos, who is generally regarded as a clean player in this, also disputes that Harrington warned Katz that Madoff was a scam. Based on what I can discern from the reporting on the matter, the only other two people at the meeting in question deny that Harrington said what she claims she said. I think that places her testimony in serious question.
   80. David Nieporent (now, with children) Posted: February 11, 2012 at 06:43 PM (#4059034)
That's a lovely theory, VA. Of course, applying it in this case requires us to believe that a seemingly credible witness, hired for her expertise who then quit when the advice and warnings she says she gave were ignored, is lying. Even though she has no incentive to lie and Saul Katz had hundreds of millions of reasons to do so.
You can't discern whether she has an incentive to lie from listening to a secondhand account of her story. That's why we have cross-examination.
   81. Sam M. Posted: February 11, 2012 at 07:08 PM (#4059046)
Stamos, who is generally regarded as a clean player in this, also disputes that Harrington warned Katz that Madoff was a scam. Based on what I can discern from the reporting on the matter, the only other two people at the meeting in question deny that Harrington said what she claims she said. I think that places her testimony in serious question.


Well, one of them (Katz) simply says he doesn't remember the meeting at all. His testimony doesn't refute anything, and you could even argue that his credibility is harmed by the claim not to recall. As for Stamos, also has a pretty good incentive to minimize the strength, clarity, and specificity of the warnings Harrington gave -- since he basically ignored them (much to the detriment of everyone concerned).

I will be very curious to hear Stamos' explanation of how and why a fund that was supposedly set up to diversify Sterling's holdings away from Maddoff ended up investing its assets . . . in Madoff. Did Katz dictate that? Will Stamos say he didn't know it was really a Madoff front? If he says that, it creates real problems for his credibility. If he says he knew, it undermines the claim the whole point of Sterling Stamos was diversification. And if that wasn't the reason for its creation, what was the real reason -- to create the (false) impression that Sterling was invested more widely than it was? In whose eyes? For what reason? Why would they want the impression of a diverse investment strategy, but not actually pursue it?

We know Harrington did resign, in the wake of the decision to invest with Merkin. That is certainly consistent with her story. If I had to bet on who is going to get battered on the stand, it's going to be the guy who can't even remember, and the guy whose story about the reason for the existence of the fund when it was created simply makes no sense in light of what actually happened.
   82. Kyle S at work Posted: February 11, 2012 at 07:27 PM (#4059055)
I agree with VA, for what it's worth. If the harrington meeting happened, katz didn't want to believe what he heard. for those who have read anathem by neal stephenson, he uses the term "diax's rake" to criticize this type of thinking: never believe something just because you want it to be true. yet, people do it all the time.

the most interesting news to me is that the partners sought to increase their exposure to madoff by using their balances with him as collateral for loans and investing the proceeds of those loans with him. there's no way they would have done that if they believed his fund to be a ponzi scheme. so either they thought he was crooked and wanted in, or they thought he was magic and wanted in. either way, they were wrong.

edit: well, i suppose he was crooked, just not in the way (front-running) they might have thought.
   83. Something Other Posted: February 11, 2012 at 07:34 PM (#4059062)
As the truth is often in the middle, how about this? The Wilpons and Katz assumed Madoff was doing something unethical, but nothing serious, at least not serious according to the den of thieves that is high finance, and that something was frontrunning. What kind of regular returns could a canny frontrunner pull down? That strikes me as precisely the sort of scamming people who assumed Madoff was playing a rigged game would "approve", by keeping their money with him, and reinvesting profits with him. What kind of penalties would knowledge of another's frontrunning receive?

There is a classic strategy that gives supersmooth returns and that blows away the old measures of risk like the Sharpe ratio. Just sell a lot of sufficiently out-of-money options each month. That way, you'll either deliver a nice steady return or blow up completely. If you have a sufficiently small chance of blowup you can wring a couple of years of fees or bonuses until the inevitable blowup. Then lay low in your beach house for a couple of years, write a book, say that you understand now what went wrong and get back into the game.


[hastily scribbles new business plan on cocktail napkin]

edit: coke to Kyle
   84. Lassus Posted: February 11, 2012 at 07:37 PM (#4059063)
I rarely agree with VA, but in this case I'm pretty much with Kyle in his agreement of VA's original point of people believing what they want to believe, instead of the truth. Seems like I've heard non-millionaire people believing far stupider things in their lives every damned day.

Note - I don't think this is an adequate defense. But I do believe it could have happened that way.
   85. Joe Kehoskie Posted: February 11, 2012 at 07:46 PM (#4059065)
Note - I don't think this is an adequate defense. But I do believe it could have happened that way.

But isn't this a case where, legally, either both have to be true or neither? I thought the latest rulings in the case revolved around the idea that Picard could only recover the bigger damages if he could prove Wilpon & Co. knew it was a fraud, not merely that they should have known.
   86. Lassus Posted: February 11, 2012 at 08:13 PM (#4059071)
But isn't this a case where, legally, either both have to be true or neither?

I have absolutely no idea. I was simply commenting on the likelihood of someone being delusional about what someone who isn't them would consider obvious.
   87. Joe Kehoskie Posted: February 11, 2012 at 08:24 PM (#4059076)
86 — Understood. I wasn't disagreeing with you personally so much as using your comment as a jumping-off point for my own. Unless I've misread the reporting, it seems like a claim of naivete remains a valid defense for Wilpon & Co. unless Picard can prove they knew it was a fraud.
   88. Dan The Mediocre Posted: February 11, 2012 at 08:31 PM (#4059077)
86 — Understood. I wasn't disagreeing with you personally so much as using your comment as a jumping-off point for my own. Unless I've misread the reporting, it seems like a claim of naivete remains a valid defense for Wilpon & Co. unless Picard can prove they knew it was a fraud.


No, all that needs to be shown is that they should have known for Picard to get a greater judgement.
   89. Joe Kehoskie Posted: February 11, 2012 at 09:01 PM (#4059082)
No, all that needs to be shown is that they should have known for Picard to get a greater judgement.

Interesting. I thought the Wilpons scored a victory last year by having the standard raised to "knew" instead of "should have known."
   90. Kyle S at work Posted: February 11, 2012 at 09:13 PM (#4059086)
One other point, mostly addressing posts such as 74: as much as people like to say that Madoff's fraud was obvious in retrospect, other than Harry Markopolous, there isn't much documented evidence of anyone saying this before he was arrested.
   91. bobm Posted: February 11, 2012 at 09:55 PM (#4059104)
[90] The lack of interest in investigating Madoff pre 2008 is IMO largely explained by:

[37]
  
What was the Madoff myth that allowed people to believe that he could generate consistent ridiculous returns? Was he supposed to be a superdupergenius or something?


He ran one of the largest NASDAQ market makers out there


The relevant fallacy is "appeal to authority."
   92. Dan The Mediocre Posted: February 11, 2012 at 10:04 PM (#4059108)

Interesting. I thought the Wilpons scored a victory last year by having the standard raised to "knew" instead of "should have known."


It's a victory, but a very short term one. It'll be overturned on appeal. The Wilpons are trying to buy time in the hope that they can do something to save the Mets, but they'll probably fail to do so.
   93. Tripon Posted: February 11, 2012 at 10:10 PM (#4059109)


It's a victory, but a very short term one. It'll be overturned on appeal. The Wilpons are trying to buy time in the hope that they can do something to save the Mets, but they'll probably fail to do so.


You mean their fortune? Because it seems to me that they don't really care about the Mets.
   94. Sam M. Posted: February 11, 2012 at 10:11 PM (#4059111)
Interesting. I thought the Wilpons scored a victory last year by having the standard raised to "knew" instead of "should have known."


Somewhere in between. Picard doesn't have to show they knew, but he has to know more than that they were merely negligent in not knowing (which is what a "should have known" standard entails). He will have to show that the signs/indications/circumstances were such that they were willfully blind to the knowledge of what was going on -- essentially, that they endeavored NOT to know. When I teach that standard in criminal law, I use a case involving a drug courier, where the facts were that there was a big load of drugs in the trunk of the car he was driving back from Mexico into the U.S. -- but he didn't actually know what was in the trunk, or technically that there was anything in the trunk. They made sure that the drivers didn't actually know. So the issue in the case is what to the tell the jury about the required state of his "knowledge," and what the prosecution must show. It's not enough under a willful blindness test that he "should have known." For willful blindness, the prosecution has to show some consciousness on the part of the defendant that there was something amiss, which they were endeavoring to blind themselves to -- otherwise there would be nothing "willful" about the ignorance. It's not the same as knowledge of the actual fraud (or drug running), since if it were, that would pretty much destroy the "blindness" part. But it does require "knowledge" or awareness of something (that's what the red flags are for) that allows the jury to conclude there was a conscious effort to avoid acquiring the ultimate knowledge.
   95. Misirlou was a Buddhist prodigy Posted: February 11, 2012 at 10:23 PM (#4059119)
But it does require "knowledge" or awareness of something (that's what the red flags are for) that allows the jury to conclude there was a conscious effort to avoid acquiring the ultimate knowledge.


Is it kind of like the counterpart to "plausible deny-ability", or at least how it is used in pop culture? "Solve the Jimmy problem. No, I don't want to know the details, just make sure he doesn't talk to the Feds." Then Jimmy turns up in the east river.
   96.     Hey Gurl Posted: February 11, 2012 at 11:18 PM (#4059137)
But it does require "knowledge" or awareness of something (that's what the red flags are for) that allows the jury to conclude there was a conscious effort to avoid acquiring the ultimate knowledge.


IF anything, could it not be shown that hiring this woman as their CIO was their attempt to acquire the knowledge? They didn't listen to her of course, but they attempted to have a meeting with Madoff and their CIO continued to investigate until she resigned. That's at least something of a sign that they didn't just bury their heads in the sand.
   97. billyshears Posted: February 11, 2012 at 11:23 PM (#4059138)
As for Stamos, also has a pretty good incentive to minimize the strength, clarity, and specificity of the warnings Harrington gave -- since he basically ignored them (much to the detriment of everyone concerned).

I will be very curious to hear Stamos' explanation of how and why a fund that was supposedly set up to diversify Sterling's holdings away from Maddoff ended up investing its assets . . . in Madoff. Did Katz dictate that? Will Stamos say he didn't know it was really a Madoff front? If he says that, it creates real problems for his credibility. If he says he knew, it undermines the claim the whole point of Sterling Stamos was diversification. And if that wasn't the reason for its creation, what was the real reason -- to create the (false) impression that Sterling was invested more widely than it was? In whose eyes? For what reason? Why would they want the impression of a diverse investment strategy, but not actually pursue it?


Based on what I have read, I think you're off on Stamos. My impression of the reporting was that he had a small portion of his personal investments in a Madoff feeder fund, but I don't think his fund was invested. In any case, Sterling Stamos had very little, if not no, exposure to Madoff. The fund is still alive and thriving. They don't really have any explaining to do to anybody. The notion that the fund was some kind of front is just not accurate.
   98. Sam M. Posted: February 11, 2012 at 11:53 PM (#4059144)
They didn't listen to her of course, but they attempted to have a meeting with Madoff and their CIO continued to investigate until she resigned. That's at least something of a sign that they didn't just bury their heads in the sand.


Who's the "they" in those sentences? If I'm Picard, what I try to prove is that the "they" who hired Harrington ended up not being the "they" who ended up being the important decision-makers responsible for investing in -- and continuing to invest with -- Madoff. In other words, that if Stamos wanted to do due diligence (let's say billyshears' take on this in # 97 is right) and keep Sterling Stamos (relatively) clean, minimizing even if not eliminating Madoff ties, that worked at cross-purposes with what Katz and Wilpon wanted for the rest of Sterling. That would be why Katz was so angry to hear not only that she had objections to Merkin (bad enough), but that they were Madoff-based (much worse), because that would have constituted a basis not only for the advice she was giving on Sterling Stamos, but a basis on which Katz could no longer either:

1) cling to his delusion that Madoff was a genius (for those of you who think this psychological denial mechanism was at play), or
2) have plausible deniability about the fraud that was being perpetrated.

Even if Sterling Stamos wasn't a front for Madoff (I'd certainly like to know what percentage of its investments, at least at the start, were with Merkin), that ultimately isn't important. What is important is what the jury believes about what Harrington said. If she is credible, it really won't matter whether, prior to that meeting, Katz and Wilpon were living in a dream world or not. (I happen to think that theory is ludicrous, but that's just me -- obviously several of you guys buy it, so it's quite possible a jury might, too, and Picard better realize that.) After that, if the jury believes Katz heard what Harrington said, he'll have had enough "knowledge" to trigger willful blindness if he kept living in that dream world in which he kept denying the truth. After all, you can live in a dream world by being willfully blind to the truth, you know.

   99. bobm Posted: February 12, 2012 at 12:19 AM (#4059159)
[98] Even if Sterling Stamos wasn't a front for Madoff (I'd certainly like to know what percentage of its investments, at least at the start, were with Merkin),


The New York Times
For Mets Owners, a Costly Precursor
By ALISON LEIGH COWAN
Published: January 30, 2011 ...

The firm Wilpon and Katz started, Sterling Stamos, was accused of having withdrawn money from a fund run by Bayou after detecting evidence of possible fraudulent activity. The firm took out nearly all of its $30 million from the fund months before it collapsed.

Lawyers for other investors in the fund went after not only what are known as fictitious profits ...

Katz and Wilpon had become full owners of the Mets in 2002.

Stamos ran Sterling Stamos as the chief executive, and according to court records, the firm made its first foray into Bayou in the spring of 2003. Over the next year and a half, four funds run by Sterling Stamos plowed a total of $15.7 million into Bayou, which was based in Connecticut.

But in November 2004, records show, Sterling Stamos managers got wind of a lawsuit that had been brought against Bayou the year before by one of its employees. The suit accused Israel and Bayou of various financial improprieties. Israel dismissed the suit as the work of a disgruntled employee.

Sterling Stamos nonetheless obtained two investigative reports on Bayou. However, the Sterling Stamos managers were apparently reassured enough to invest another $14 million in Bayou in the next few weeks. That brought the firm’s stake to $29.7 million.

On Feb. 7, 2005, Jeremy Glaser, Stamos’s roommate at Harvard Law School, took over as the general counsel of Sterling Stamos. One of his first acts was to review the Bayou file and recommend that the firm confront Israel.

They met, and it did not go well. Israel would not provide basic answers, records show, and Glaser told Stamos that he thought their firm might want to rethink its association with Bayou.

On Feb. 11, Sterling Stamos asked Bayou for its money back. In the end, all but some $740,000 of the initial $29.7 million investment was refunded. ...

In 2008, the judge in the bankruptcy case offered Sterling Stamos the chance to present its case to a jury, but they opted not to. The burden of proof in such cases is on the defendants to prove their good faith.

Ultimately, Sterling Stamos settled the case in May 2009 without admitting wrongdoing and agreed to turn over $12.9 million.

Despite the black eye from Bayou, Sterling Stamos has done well. Ever more controlled by Stamos, it now manages some $9.5 billion in investments. It was one of the rare investment funds affiliated with Wilpon not to have put any money into Madoff’s firm.
(emphasis added)
   100. Sam M. Posted: February 12, 2012 at 12:25 AM (#4059160)
It was one of the rare investment funds affiliated with Wilpon not to have put any money into Madoff’s firm.


Well, OK, but the allegation seems to be that they invested with Merkin, which is alleged to have been just a funnel for Madoff. Of course, both of those things have to be proved: how much (if any) did Sterling Stamos invest with Merkin, and was Merkin really just funnel everything (or nearly everything) to Madoff?
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