"It's the Wall Street Culture" .... could it also be part of the Broad Street Culture?

From John Curry, February 1, 2009

I wonder if there's such a thing as pushing the "ethical envelope?" In my mind, STRS management pushed the "ethical envelope" by continuing to approve the payment of bonuses to STRS investment associates in light of STRS's loss of 30 Billion dollars. But then....that's an ethical call, isn't it? Can't blame the investment associates...after all, they didn't make the decision to approve the bonuses, did they? John

P.S. Thank God..... more cooler (and rational) heads on the STRS Board prevailed, didn't they? Well...at least 6 cooler (and rational) heads....3 just didn't get it and one couldn't make up her mind!

“It’s the Wall Street culture,” says Peter Henning, who teaches criminal and securities law at Wayne State University in Detroit. “You make money by pushing the envelope.”

Madoff Victims Suspected a Crime, Just Didn’t Care: Ann Woolner

Commentary by Ann Woolner
Bloomberg.com
January 30, 2009

It turns out that some of the hedge fund and money managers who guided investors into the care of Bernard Madoff came to suspect that Madoff was breaking the law.

How else to explain his returns?

They pressed for answers, got none and told their clients, some of whom hightailed it out of the funds connected to Madoff.

But plenty of others didn’t care how Madoff was making them richer as long as he did so and as long as they couldn’t get into trouble themselves.

Here’s the funny part, if you like sick humor: The law that some so-called feeder fund managers thought Madoff might be breaking wasn’t the right one.

They figured he was “front-running,” or using orders placed through his brokerage, which once was huge, to plan trades for his money management business, Swiss banker Werner Wolfer told Bloomberg.

Front-running is illegal, not to mention unethical. Normally applied to situations where the broker trades ahead of the client, it means you put your interests above those of customers.

Forbidden Information

But if that is what he was doing, it was no skin off his investors’ teeth. They believed they were benefiting from the forbidden use of the information. And, if caught, Madoff would pay the price with regulators, not them, Wolfer and others told Bloomberg.

So the investors averted their eyes from the gift horse’s mouth.

“It’s the Wall Street culture,” says Peter Henning, who teaches criminal and securities law at Wayne State University in Detroit. “You make money by pushing the envelope.”

You run up to the edge of legality, he says, and sometimes, like Wile E. Coyote of the Road Runner cartoons, you look down to see nothing but thin air between you and the valley floor far, far below.

Madoff last month admitted not to front-running but to something more primitive and more dangerous for the investors who shut their eyes. He allegedly said he had been running a Ponzi scheme that ate up some $50 billion.

The Wrong Crime

It’s hard to feel sorry for those who assumed they were benefiting from someone else’s crime and got burned because they had the wrong crime.

That said, they no doubt represent a tiny portion of the thousands who lost huge sums to Madoff. Retirees and charities, hospitals and universities relied on advisers who failed to conduct the due diligence they should have, or who put money into other funds that invested in Madoff funds without looking too deeply into them.

And then there were those who suspected something fishy and didn’t warn others.

JPMorgan Chase & Co., which had $250 million in two Madoff- related funds, pulled out last fall because of its overexposure to hedge funds and because it was “concerned about the lack of transparency to some questions we posed,” a spokeswoman told the New York Times.

But JPMorgan never told its customers who had invested along with the company in a complicated arrangement it packaged, according to the Times.

Unwitting Customers

Unwitting customers were still paying fees to JPMorgan to manage their own investments in the funds, months after the company was too unsure of the funds to stay in it.

The bank couldn’t disclose its pullout under the terms of its contracts, the spokeswoman said. That is a claim that some of its customers may wind up challenging in court.

Others, such as Swiss money manager Notz, Stucki & Cie, wrote its clients it had investigated concerns about Madoff investments and found “a legitimate, profitable business.”

The firm described substantial vetting. It’s hard to fathom how it could have done all that and still find “no evidence to suggest improper practice,” as its letter to clients said.

What is clear is that lots of money managers, lots of feeder funds were drawing in substantial fees for hooking up with Madoff.

The permutations of clients, funds, advisers and advice seem endless at this point. And so do the lawsuits, which aim at getting money back.

Something in Common

But they all have in common this much.

“Bernie Madoff sold a black box to everyone,” says Henning. “His whole investment scheme was based on discouraging questions -- you don’t want to know, just take the result.”

The seductive notion that a few Wall Street gurus use secret strategies to beat the market isn’t limited to the Madoff scam. It’s the whole principle behind hedge funds.

They operate on trust. You hand over your money and don’t ask a lot of questions about what happens to it. Just enjoy watching it grow. Fortunately, legislation is afoot that would make them more accountable.

Whether it’s hedge funds or any other kind of investment, perhaps the Madoff scandal will make it clear that there is no black box. What Madoff had was a deep, black hole which swallowed believers, even doubters, who didn’t look too closely.

(Ann Woolner is a Bloomberg news columnist. The opinions expressed are her own.)

To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net.

Last Updated: January 30, 2009