Is Recooperation Possible from Bernie Madoff Ponzi Scheme?

“Madoff did not pass due diligence for many European hedge fund companies,” Mr. Indjic said. “Experienced people know there are many ways to provide the kind of return stream offered by Madoff, almost like a bank account, and one of them is a Ponzi scheme.”  Source: NY Times December 16, 2008.

By now, anyone with even passing knowledge of the stock market has shaken their head in disbelief that Bernard Madoff, the former chairman of the NASDAQ, could have pulled off the largest Ponzi scheme of all time.

While many of his private investors will likely never recover anything, some “lucky” investors that invested through a financial institution or mutual fund may be able to seek recovery from the broker dealer or investment house that placed them in the investment.  That’s because it appears that anyone doing any “due diligence” would have learned that Madoff’s numbers simply didn’t add up.  According to the Times,  “In early 2003, as word of Bernard L. Madoff’s apparent Midas touch spread among affluent Europeans and money managers, a team from Société Générale’s investment bank here was sent to New York to perform some routine due diligence.  BNP Paribas has nearly $500 million in exposure to the Madoff firm. Its banking unit posted a $1.4 billion loss on Tuesday.

What it found that March was hardly routine: Mr. Madoff’s numbers simply did not add up. Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments.The red flags at Mr. Madoff’s firm were so obvious, said one banker with direct knowledge of the case, that Société Générale “didn’t hesitate. It was very strange.”
(earlier this year, Societe Generale lost $7.1 billion due to a rouge employee investing in derivatives. I majored in finance and still don’t understand derivatives…ever hear of the Black Scholes pricing model?  It’s more complicated, and about as useful, as Latin.)
Anyway, the investors that bought through a fund or private client group, bank or other financial institution may be able to recover from those instutions for their failure to do the type of investigation that Societe Generale did back in 2003.  

I predict a bumpy ride for Wall Street.

Hans