Wall Street 'red light' on Madoff

Wall Street 'red light' on Madoff
By Henny Sender/Financial Times
Published: January 05, 2009, 23:35

New York: Large Wall Street firms privately harboured suspicions about Bernard Madoff's investment business - in some cases steering clients away from dealing with him - but were reluctant to share their concerns with regulators.

Banks were sceptical that Madoff could deliver the consistently high returns that he reported, and they were also put off by a lack of transparency at his investment firm.

For these reasons, big Wall Street firms are notably absent from the long list of victims of Madoff's alleged 'Ponzi' scheme.

Fabio Savoldelli, chief investment officer of Merrill Lynch Investment Management prior to its 2006 merger with BlackRock, sounded the warning internally years ago. One of Merrill's financial advisers, who deals with clients worth tens of millions of dollars, recalled that Savoldelli said eight years ago he was suspicious of Madoff's returns.

Two years ago, an internal Merrill report drawn up in connection with Merrill's European fund of funds group, concluded that that group should not deal with Madoff, the financial adviser said. "We had a red light on doing business with him. There was no transparency."

However, fear of alienating clients who had invested with Madoff kept many Merrill executives from voicing their concerns too loudly.

"You sell your product but you don'T bad-mouth others. You don't say bad things about Bernie Madoff. That is where you cross the line," one former Merrill staffer recalled being told by a senior executive.

The large surviving investment banks never put Madoff's funds on the recommended list of their investment arms and never dealt directly with him in their prime brokerage arms.

Goldman Sachs Asset Management "never felt comfortable with Madoff", Goldman said. GSAM "never understood the investment process or the returns. If clients wanted to invest with him, they did not do it through us."

Goldman's scepticism extended to Tremont Group Holdings, a fund of hedge funds, that gave more than $3 billion to Madoff. For example, in 2001, when Tremont was sold to Oppenheimer, the brokerage, Goldman represented another potential buyer.

But Tremont never let Goldman's team have a close enough look at the firm's operation. The client walked. Goldman never sounded the alarm with regulators. Investment banks have no obligation to report suspected wrongdoing, lawyers say.