The Picower settlement: Racketeering Rewarded

At The Daily Beast Allan Dodds Frank has supplied a valuable perspective on the Picower settlement – although you need to be alert to see it.

“Payday for Madoff Victims” (December 18 2010) first of all refutes Barbara Picower’s tendentious assertion:

“I want to underscore the fact that neither the Trustee nor the U.S. Attorney has charged him with any illegal conduct.”

Picower could not be charged for a simple reason — he conveniently died.

Asked about Picower’s role in Madoff’s scheme and whether the settlement cleared Picower’s name, U.S. Attorney Bharara said, “Mr. Picower passed away a year ago and so the question of whether he had a role—as a criminal matter—is now moot.” Bharara refused to say more…

But Frank got the message:

What Bharara left to be said in court papers is this: The U.S. government can only force forfeiture in cases where they can tie the money to “specified unlawful activity or a conspiracy to commit such an offense.”

Of the $7.2 Billion surrendered, $2.2 billion is forfeit to the Fed.

Bharara said it…is the largest single forfeiture in U.S. history.

Any idea that Picower was just an innocent passer-by as $7.2 billion fell off the back of a truck was utterly shredded by the Trustee’s law suit against him, as recounted by Erin Arvedlund (pp. 236-7)

Finally, Picower even went so far as to ask for fake trades to be made in one of his accounts – dated back to before the account was even open… In April 2006, Picower opened a sixth account, Decision Inc #6, with a wire transfer of $125 million…

By the end of April…Picower’s account showed a value of $164 million – a gain of $39 million, or a return of more than 30 percent, in less than two weeks trading. The reason for this massive gain [was] fifty-seven purported purchases of securities between January 10 and January 24, 2006, almost three months before the account was opened or funded.

As the Trustee’s suit drily said (P21)

Defendants knew or should have known that the account that they opened in April could not legitimately have purchased securities in January

There is much more of this sort of thing in the complaint.

(Note: I have updated The Picower Madoff settlement: A $7.2 Billion Whitewash with the back-dating information.)

While Barbara Picowar’s misrepresentations and posturing are irritating, what is really outrageous are the claims by the Prosecutor and the Trustee that their settlement agreement is appropriate. As laid out in “Deal Recovers $7.2 Billion for Madoff Fraud Victims” by Diana B. Henriques (Dealbook/nytimes.com December 17, 2010),

In the late 1990s, Mr. Picower’s personal brokerage accounts at Goldman were worth about $10 billion, according to two people with direct knowledge of the account…

An aggressive investor with an appetite for risk, Mr. Picower also borrowed heavily at Goldman to trade stocks, amplifying his profits. At one point, his Goldman accounts had more than $5 billion in margin loans against them, according to the people familiar with his account history.

Liquid risk capital is extremely precious on Wall Street. That is why investors in Hedge funds typically get 80% of the profits the manager generates. This settlement reportedly leaves the Picower interests with well over $3 Billion. Resources drawn from the Madoff accounts must have been an integral part in the process of accumulating this wealth. Yet not even any interest – let alone a reasonable share of the profit – is being collected. To add insult to injury, the Prosecutor and the Trustee are actually praising the Picowers – see the nauseating “Picower Madoff settlement a practical $7 billion deal” by Rhonda Swan (The Palm Beach Post, Monday Dec 20, 2010).

I agree with the astute analysis posted by LondoninNY on The Daily Beast comment thread

Jeffry Picower was an International Financial Racketeer and Barbara was his mob moll wife who simply cut the best deal she could to maintain her lifestyle…Ms. Picower insults the intelligence of any and all reasonable people in her effort to embellish the legacy of a man who absent his convenient death belongs alongside Bernie Madoff and his entire family in a federal penitentiary.

Madoff victims had better hope the Bankruptcy Judge, who next month has to approve this sweetheart deal, has some integrity.

I advise them not to hold their breath. As Kevin MacDonald and I said in “Is the Madoff Scandal Paradigmatic?“:

Thoroughly investigated, the Madoff scandal has the potential to illuminate the economic and political prerogatives usurped in late 20th-century America by what can only be described as the new ruling class. That will not be allowed to happen.