Why would Madoff transfer money from his fund to his brokerage? One hypothesis is that some of the Ponzi’s feeders (i.e. the people whom I have just named and their clients) wanted Madoff’s brokerage to engage in manipulative naked short selling, generating phantom stock to drive down the markets.
Indeed, an off-shore businessman who has seen some of Madoff’s records says that Madoff’s investment fund (his Ponzi) would place orders for stock, and these orders would be filled by Madoff’s market making operation (his brokerage), which would sell the stock to the “buyer” without first purchasing or borrowing it, thereby creating phantom supply.
Such naked short selling, though, creates large liabilities in the form of “securities sold but not yet delivered.” The fraud that brought down the giant brokerage, Refco, in 2005, saw Refco CEO Santo Maggio hide precisely the same sorts of naked short selling liabilities with help from an Austrian Bank called BAWAG (another operation tied to Roman Abramovich, the Mogilevich organization, and other Milken cronies whom we will meet in an upcoming chapter).
Just as Refco tried to hide its naked short liabilities with help from the Austrian bank BAWAG, so too did Madoff, most likely with help from Bank Medici, which was receiving payments from Cohmad, a key component of the Madoff brokerage.
There are several other reasons to believe that the $1 billion or more that was transferred from the Madoff Ponzi to the Madoff brokerage was used to cover up naked short selling liabilities.
One reason is that Madoff’s “stock loan” department (as Madoff’s former secretary has testified) was housed on the same floor of the Lipstick building as his Ponzi fund. Multiple former employees of the Madoff operation have said that visitors were prohibited from visiting that floor, precisely because it was the center of Madoff’s criminal enterprise. And “stock loan” – i.e. the brokerage function that was responsible for borrowing (or, in the criminal scenario, not borrowing) stock for (naked) short sellers — would have been key to any phantom stock scheme perpetrated in league with the Ponzi.
As confirmation that Madoff’s brokerage was a criminal outfit dependent on the Ponzi, we need only know that Daniel Bonventre, the brokerage’s director of operations, was charged in February 2010 with helping to ensure that “more than $750 million of [the Ponzi] investor fund were used to support [Madoff’s] market making [i.e. brokerage] and proprietary trading operations, but were accounted…so as to conceal the true source of the funds.” And Bonventre’s chief function at Madoff’s operation was, according to his indictment, to supervise “settlement and clearing of trades executed by the market making and proprietary trading operations.”
In other words, the guy who secretly transferred a lot of the “Ponzi” cash to the brokerage seemed to be doing so specifically to cover “settlement and clearing” – i.e. to hide the fact that stock was not “settling and clearing” because it was stock that had been sold “naked.” That is, it was stock that had been sold even though Madoff and his clients had not purchased or borrowed any stock to sell. It was phantom supply, meant to manipulate (and perhaps even crash) the markets.
No doubt, it was not a coincidence that Madoff had long courted the SEC and had even managed to wangle himself into the position of actually writing some of the SEC’s most important rules governing short selling. Indeed, SEC officials named one of its short selling rules after the SEC’s favorite crony – Bernard Madoff. The rule was called “The Madoff Exemption” – and it permitted market makers, such as Madoff, to sell short on a downtick.
The SEC rule prohibiting others to short sell on a downtick (which was scrapped entirely, at the behest of Madoff and others in his network, right at the inopportune moment in 2007 when the markets had begun to weaken) was meant to prevent traders from inducing death spirals and crashing the markets. But thanks to “The Madoff Exemption”, the clients of Madoff could induce death spirals without a word from the SEC.
Madoff also helped write the SEC rule that allowed market makers, such as Madoff, to engage in naked short selling so long as the purpose was to maintain “liquidity” in the markets, and so long as real stock was eventually delivered. Given that Madoff was, after all, a criminal of monumental proportions, it boggles the mind that neither the SEC nor the media ask whether Madoff might have “rented out” his market making exemption to hedge funds wishing to use naked short selling to drive down the markets.
It is more than likely that Madoff not only rented out his exemption, but abused it, never “clearing”, or delivering the stock he had “temporarily” sold naked.
The fact that Madoff actually helped write the SEC rules governing short selling (rules that contained precisely the sort of loopholes that would allow miscreant traders to crash the markets) should give you a sense of just what sort of agency the SEC was in 2008. In fact, the utter failure of the SEC and the all-important Depository Trust and Clearing Corporation, or DTCC, to prevent naked short selling caught the attention of the people who were hired by the Defense Department Irregular Warfare Support program to analyze the causes of the 2008 financial crisis.
The report that was produced for the Defense Department (the same report I cited at the outset of this story) states that there is a possibility that the SEC and the DTCC (a self-regulating body responsible for ensuring settlement of short sales and other transactions) were compromised by organized crime or even foreign enemies of the state. The report concludes: “Implications that these parties [the SEC, the DTCC, and other Wall Street institutions] have been complicit [in acts of financial terrorism] or otherwise co-opted cannot be ruled out.”
That statement is not preposterous. Bernard Madoff was not the only suspect character roaming the halls of the nation’s regulatory bodies. We have seen that Sheikh DeLorenzo (he with the Al Qaeda partner linked to the military spy scandal) also received favorable treatment from the SEC, which allowed him to set up Al Safi Trust’s naked short selling machine in 2007. And as we will see, there were still other, equally dangerous people who “captured” officials at both the DTCC and the SEC.
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Given the people whom Bernard Madoff serviced, it is clear that he was not just a monumental criminal, he was also a threat to national security. Consider that he had just a few other key “feeders” who profited from his scam, one of whom was the Abu Dhabi royal family, another of whom was Al Qaeda Golden Chain member Sheikh Mahfouz. The Abu Dhabi royals and Sheikh Mahfouz, of course, came to be on close terms with Madoff and his network when they were perpetrating the BCCI criminal enterprise.
Sheikh Mahfouz is the man who set up Blessed Relief (an Al Qaeda front) with “Specially Designated Global Terrorist” Yasin al Qadi (Osama bin Laden’s favorite financier). Remember that he also had ties to the folks at Benevolence International (who tried to obtain nukes for Al Qaeda). Sheikh Mahfouz fed the Madoff Ponzi through EFG Bank in Dubai, an outfit with close ties to Dubai’s ruler, Sheikh Mo, who, in 2007, helped set up Al Safi Trust’s naked short machine with Sheikh DeLorenzo.
Some associates of the Milken network say that Sheikh Mahfouz had some ownership stake in EFG (which, like the other feeders, claims, improbably, to have been a “victim”), but I have been unable to confirm that. Whatever the case, in 2010, EFG’s affiliate, EFG Hermes, bought Credit Libonais, a bank that was majority-owned by Sheikh Mahfouz’s family. Given that the feeders to Madoff’s Ponzi were likely participating in this fraud in order to help cover up naked short selling, it seems probable that Sheikh Mahfouz and the Abu Dhabi royals were among Madoff’s short selling clients in 2008.
It is also likely that some of the naked short selling handled by Madoff’s brokerage originated from Tuco Trading (the little outfit tied to the jihadi Zuhair Karam, the Russians and others to be discussed). This is because Tuco Trading had a partnership with Man Financial, which was a unit of Man Group, a giant hedge fund that was (though it, too, claims to be a “victim”) one of the principal feeders to the Madoff Ponzi fund. Man Financial also had member accounts at Tuco and provided Tuco with one of its trading platforms.
The managing director of the Man Group, also known as MF Global, is Thomas Harte, and he (like Shiekh Mahfouz and the other Madoff feeders) is one of Michael Milken’s closest associates. Mr. Harte had been a vice president of Milken’s operation at Drexel Burnham. A number of MF Global’s other top executives, such as senior vice presidents Fred Demler and Fred Ulmann, are also Drexel alumnae. Further evidence that the Man Group is part of the Milken network emerged when the media published reports in 2010 that the Man Group was thinking about buying Steve Cohen’s SAC Capital.
Steve Cohen, we know, was investigated in the 1980s for trading on inside information given to him by Milken’s shop while Cohen was running Gruntal Securities with Felix Sater, Feinberg and others. Nowadays, the media is reporting that Cohen is the main target of the largest FBI insider trading investigation in history. Most likely Man Group’s stated plan to buy SAC Capital was designed to discourage the FBI from investigating the hedge fund and its role in a larger criminal enterprise.
This, we will see, is a familiar pattern – members of the Milken network purchasing or offering to purchase funds and companies run by other Milken cronies who are under federal investigation. The idea seems to be to keep investigators focused on individuals rather than the funds or companies. Once the funds or companies are purchased, investigators tend to assume the new owners will run them in a more honest fashion.
As for the Man Group’s credentials, it is worth noting that its subsidiary, Man Financial, not only had a partnership with Tuco Trading, but also had a similar partnership with BrokerKreditServis, the Russian outfit where Orange Diviner’s Mr. Ivin works as “head of international.” BrokerKreditServis, you will recall, is run by the former head of Alfa Bank (financier to Iran’s nuclear program), and Orange Diviner’s other traders were henchmen of Roman Abramovich and Mogilevich.
Meanwhile, Man Financial had other key clients. One key client was the Lucchese Mafia family. This has been well documented by lawyers representing a company called Eagletech, and it has been confirmed by others.
Another key Man Financial client in 2008 – Al Qaeda.
To be continued…. http://www.deepcapture.com/the-miscreants-global-bust-out-chapter-5-the-russians-their-friends-and-bernie-madoffs-bear-markets/