Above is a picture of Harry Markopolos testifying before a House committee investigating the Madoff scam. But before I get to his story, I first want to talk about another Madoff related story.
The Israeli bank connection
With all the members of the Jewish community that have been involved in the Madoff scandal, it is not surprising that there should be an Israeli connection. There have been rumors circulating around the internet that some of the money "lost" by Madoff has been transferred to Israel. Well here's what I have been able to verify. I thought it was significant enough that I should post it because I haven't seen this specific information anywhere else.
The trail started with a short financial piece titled, "Israeli Bank Ends Hedge Fund Joint-Venture"
One of Israel’s largest banks is ending its joint-venture with a hedge fund that lost millions in the Bernard Madoff scandal.Sounds innocent enough; another Madoff victim; another hedge fund that was a feeder for Madoff's fund. What's interesting in this article is that J. (Jacob) Ezra Merkin was a major investor in Bank Leumi, a major Israeli bank.
Bank Leumi has taken full control of Leumi Alternative Investment, which it set up with Spring Mountain Capital in July 2007, Globes reports. Spring Mountain, founded by former Merill Lynch executive John Steffens, lost about US$40 million, which it had invested in three Madoff feeder funds run by J. Ezra Merkin, the former GMAC Financial chairman.
Merkin also served as a consultant to LSAI, and his Gabriel Capital Management Corp. is a major Bank Leumi investor. Steffens ran LSAI, in which Leumi originally had a 75% stake. LSAI managed alternative investments for Leumi’s private clients.
Merkin you may recall was a recruiter for Madoff among the New York Jewish elite. He was president of the Fifth Avenue Synagogue, on the wealthy Upper East Side of Manhattan. Collectively members of the synagogue are said to have lost about $2 billion, and Jacob (or should we call him Ezra?) was Madoff's bagman at that location.
Now I don't think you should feel too sorry for this class of victims. These were very rich people who thought they were getting into a very exclusive investment. They were getting returns of 10% per year. They probably thought that Bernie had some sort of sophisticated insider trading scheme going on that took advantage of the rest of us poor suckers. So I figure they got what they deserved.
Hedge funds are by definition shady organizations that don't reveal the details of their investments and keep their funds in offshore accounts. Personally I think they should be illegal, but oh what fun when the rich get caught up in a scam run by one of their own. The people that invested directly in hedge funds should not be compensated by the government for their losses. These are not like FDIC insured bank accounts. These are investments that are expected to show high rates of return, but also are known to have an associated higher risk.
So alright Merkin is associated with Bank Leumi and he also is associated with Madoff. But the association with Bank Leumi is more than just through a hedge fund. Merkin heads the Gabriel Capital Group, a $5 billion money-management firm which in 2006 purchased a controlling interest in Israel's Bank Leumi for about half a billion dollars.
In a festive ceremony held at Prime Minister Ariel Sharon's office Wednesday, representatives of the Cerberus-Gabriel hedge fund group presented the PM with a NIS 2.474 billion (about USD 500 million) check in exchange for 9.99 percent of Bank Leumi's controlling shares.So does that represent a half billion dollars of funds laundered and transfered to an Israeli bank from the Madoff scam? It sure looks that way to me but what do I know? And anyway money is fungible. How do you prove that the money that ended up in an Israeli bank started out life as part of the Madoff scam?
The investors have reserved the option to purchase another 10.01 percent of the shares held by the State within a year-and-a-half, and to reach a total holding of 20 percent of the bank's shares.
Ezra Merkin, who represented Cerberus-Gabriel at the event, said his company's investment is an indication of the trust foreign investors have in the local economy. Merkin stated that his firm intends to continue investing in Israel.
The Russian mob connection
In case that's not enough to wet your appetite, I do have a few more interesting tidbits involving the Russian mob and Madoff. It seems that the term "Russian mob" is often used to refer to Jewish Russians involved in organized crime. In this case because of Madoff's extensive connections to the Jewish community it seems likely that this is the case.
The first article is with regards to Sonja Kohn, the founder of Bank Medici.
Mrs. Kohn has dropped out of sight, leaving the firm she founded, Bank Medici, in the hands of Austrian regulators, who took it over last week.Leave it to the New York Times to describe mobsters as "oligarchs". The insinuation is clearly there. Why else should she be "afraid" of these particular "investors"?
Embarrassment from investing heavily with Mr. Madoff could explain wanting to disappear from public view. But another theory widely repeated by those who know Mrs. Kohn is that she may be afraid of some particularly displeased investors: Russian oligarchs whose money made up a chunk of the $2.1 billion that Bank Medici invested with Mr. Madoff.
“With Russian oligarchs as clients,” said a Viennese banker who knew Mrs. Kohn and her husband socially, “she might have reason to be afraid.”
Here's a related exchange that took place during the House of Representatives hearings on the Madoff scandal which featured the heroic whistle blower Harry Markopolos.
ACKERMAN: I'm talking about, when you talk about the Russian mob and organized crime, these are people who invested through European investors or European feeder funds?"European feeder funds" sounds like a perfect description of Kohn's Bank Medici. Still there might be a closer connection to some of those Russian mobsters. And it happens to be in New York City where congressman Gary Ackerman is from. I'm referring to the Bank of New York or BoNY. In 1998 British authorities uncovered a huge money laundering operation that involved as much as $15 billion which was operated by the Russian mob.
MARKOPOLOS: Correct. And I didn't fear of them, and I didn't think they were going to come after me, I want to make this perfectly clear to all those Russian mobsters and Latin American drug cartels out there. . .
ACKERMAN: You're talking directly to them.
MARKOPOLOS: I was acting on your behalf trying to stop him from zeroing out your accounts. I'm the good guy here. Just like to make that clear.
The brains behind the operation was Semyon Yukovich Mogilevich who was considered to be the top mobster in Russian organized crime. Mogilevich is currently behind bars in Russia for tax evasion. He was arrested in 2008. And, oh by the way, he is Jewish and has spent time in Israel where he enjoys citizenship. Like so many of the Russian mob, he is originally from Ukraine.
But why do I bring all this up? Well the Bank of New York happens to be connected to Bernie Madoff as well. Even though Madoff told investigators he had nothing left, it turned out he had a personal account at BoNY with $301.4 million. He also had an account at JP Morgan Chase with about $233.5 million. That's over $500 million. Not bad for a guy who lost everything. Of course that money has now been handed over to the courts and presumably will be used to pay off Madoff's victims - after the lawyers take their cut.
So the BoNY thing is probably just a coincidence. But after it came up in my Google searches as I was investigating the possible connections between Madoff and the Russian mob, I just couldn't help but put it in this article. Mogilevich is certainly an interesting character - kind of like a modern day Meyer Lansky.
Some have compared Madoff to Lansky, but at least Madoff wasn't in the business of offing people. But then why was Markopolos so fearful for his life?
Markopolos, a former securities industry executive and fraud investigator, said the SEC's failure to bust Madoff left him fearful of retaliation.
Madoff was "one of the most powerful men on Wall Street, and in a position to easily end our careers or worse," Markopolos testified.