Bernard Madoff, the Mafia, and Naked Short Selling

[Jan Klimkowski]

"Deliberately blind" = Eyes Wide Open

HSBC was 'deliberately blind' to Bernie Madoff fraud, alleges $9bn lawsuit

Bernard Madoff trustee is suing British banking group HSBC for allegedly ignoring warnings about fraudulent investment scheme

Dominic Rushe in New York guardian.co.uk, Monday 6 December 2010 17.56 GMT

The British banking group HSBC was "wilfully and deliberately blind" to Bernard Madoff's multibillion-pound fraud, according to a law suit filed late yesterday.

Irving Picard, the trustee charged with recovering billions for the victims of Madoff's Ponzi scheme, has sued HSBC and others for $9bn (£6bn) in New York, accusing the bank of ignoring warnings from accountants KPMG that Madoff's phenomenal investment record was too good to be true.

"Had HSBC and [its executives] reacted appropriately to such warnings and other obvious badges of fraud outlined in the complaint, the Madoff Ponzi scheme would have collapsed years, billions of dollars, and countless victims sooner," Picard said in a statement. "The defendants were wilfully and deliberately blind to the fraud, even after learning about numerous red flags surrounding Madoff."

The suit alleges HSBC was instrumental in "engineering a labyrinth" of international sources of funding for the fraudster. "At the core of this architecture was a remarkably small group of individuals and the bank on which they all relied to help project an air of credibility: HSBC," said Oren Warshavsky, a partner at Baker Hostetler, the court-appointed lawyers for Picard.

The bank has so far declined to comment but is expected to contest the claim vigorously.

Madoff was enabled in his multibillion-dollar scam by an international network of "feeder funds" based in Europe, the Caribbean and Central America, which brought in new investors. The suit also names the heads of some of those funds including Sonja Kohn, once known as "Austria's woman on Wall Street", who was one of Madoff's biggest sources of international clients and reportedly introduced Russian oligarchs to the fraudster.

All of the defendants "possessed a strong financial incentive to participate in, perpetuate and stay silent about Madoff's fraudulent scheme", said David Sheehan, a partner at Baker Hostetler. The complaint alleges that the defendants directed more than $8.9bn into Bernard L Madoff Investment Securities (BLMIS). The defendants also earned "hundreds of millions of dollars" backing financial instruments the suit alleges were "designed to substantially assist Madoff by pumping money into BLMIS and prolonging the Ponzi scheme".

The HSBC suit is just the latest from Picard, who last week filed a $6.4bn suit against JP Morgan and in November sued the Swiss bank UBS for $2bn. Both banks are similarly accused of aiding Madoff in his scam. Picard has until this Saturday to file claims for recovery, two years from the initial bankruptcy filing. Picard has so far recovered $1.5bn.

John Coffee, a professor at Columbia Law School, said these latest suits would be hard fought. "I don't expect anyone to settle quietly while there is so much interest in the case and settling would entail an admission of wrongdoing," he said.

http://www.guardian.co.uk/business/2010/...ff-lawsuit