What Did JP Morgan Learn About Madoff From Bear Stearns?

The question of how widespread knowledge of Bernie Madoff’s scam might have been on Wall Street is one that isn’t going away. Whistleblower Harry Markopolos claimed that hundreds of people on Wall Street knew Bernie was a crook, which is one reason so many sophisticated investors and institutions avoided losing money with him. Now Robert Chew, a victim of Madoff who has been chronicling the case for Time magazine, conveys an even more pointed accusation involving Madoff, Bear Stearns and JP Morgan Chase.

The details are a bit murky and Chew doesn’t make the claim himself. Instead he reports the claims of an attorney named Howard Kleinhendler, of Wachtel & Masyr LLP, who is working for some Madoff victims. Here’s are the important points of the Kleinhendler thesis.

  • Madoff never used his asset-management money to trade securities. Instead, he largely kept it in his Chase account, which he used to shuffle money back and forth between London and New York for years. Chase says that this never raised any suspicions.
  • Despite claiming not to be suspicious of Madoff’s account, in August 2008 Chase reviewed its own investments in Fairfield Greenwich, the Madoff feeder funds, just months before he was arrested. It wound up pulling $250 million from FFG.
  • Chase acquired Bear Stearns in March of 2008. Kleinhendler thinks Chase learned from Bear that Madoff was a crook. “Bear Stearns had done deals with Madoff. They were on boards together,” Kleinhendler says. Perhaps executives at Bear knew Madoff’s business was fishy and tipped the bank off.

We don’t find anything about this theory implausible. What we find surprising is the willingness of Time’s editors to print this kind of accusation without any substantiation beyond the theory of a lawyer who is obviously interested in finding deep pockets to compensate his victim, perhaps through clawbacks of money withdrawn from the Madoff Ponzi scheme. The lawyer himself doesn’t seem to have much evidence.

And there is a far more innocent and simpler explanation for JP Morgan’s withdrawals. Hedge fund redemptions were on the rise, and JP Morgan was no doubt reviewing lots of its hedge fund investments. It wouldn’t have taken long before the complete lack of transparency at FFG would have set off red flags, once the investments came under serious scrutiny. And this, in fact, is exactly what JP Morgan claims happened.

It seems that bailout America will be rife with conspiracy theories. Investment banks brought down by Bear Raids. Secret deals between Goldman Sachs and the Treasury Department over AIG. Now this.

Why the conspiracy theories? Part of it is the secrecy of Wall Street. There is still so much that goes on that banks refuse to publicly disclose, despite taxpayer investments amount to hundreds and hundreds of billions. For instance, JP Morgan sped the deaths of Lehman Brothers and Merrill Lynch by demanding billions of dollars in extra collateral as each investment bank teetered on the edge of bankruptcy. As far as we can tell, this has never been publicly confirmed by the bank. The continued secrecy makes every story more plausible, especially ones that bear such a close resemblance to stories we know are true.

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