Your Custodian Can’t Spell “Goldman Sacchs”
Blecch, right?
This morning, I was reading a great article from The New York Times: A Safety Net That Tangles Investors. Floyd Norris reported the SEC is separating money management from the custodial function, which made me think, The SEC gets it. They finally get it.
“Where an independent custodian holds client assets, the risk of client assets being misused is limited,” said Mary Schapiro, the commission chairwoman.
Separating money managers and custodians is one of my themes on Acrimoney. Here’s the link to Beating Bernie, an article that explains the concept in more detail. Today, I’m interested in the legal spaghetti surrounding one custodian, Westport National Bank:
Some of the people who lost money in the Madoff fraud had a custodian agreement with a bank. So far, they are worse off than they would have been if they had not had such an agreement.
As best as I can tell, Westport National Bank: 1) aggregated investor funds; and 2) never took possession of the securities Madoff claimed to be managing. Until the $65 billion Ponzi scheme blew up, the bank mailed statements with one line entries like “BLM1” and “BLM2.” Initially, they didn’t list individual securities. Customers now face a big problem:
Had Westport’s customers dealt directly with Madoff, each of them would be eligible for that amount, or for their total losses if that figure was lower. But SIPC views Westport as having one account, so $500,000 is the maximum for all Westport’s customers combined.
Something’s rotten in Westport. Custodians, like the Bank of New York Mellon or State Street, take possession of securities. When I worked for a registered investment adviser, our custodians reported portfolio positions on a line by line basis. Wesport National Bank didn’t. They didn’t even spell Goldman Sachs right.
Is Westport National Bank a custodian or just another feeder fund?
I haven’t seen Westport National’s documents. But I’m asking the question, because the SEC is on the right track. Separating money managers from custodians protects investors, and if done honestly, it won’t diminish the $500,000 support from SIPC.
What do you think?
Norb Vonnegut
The New York Times describes my novels as “money porn,” “a red-hot franchise,” and “glittery thrillers about fiscal malfeasance.” Through fiction I explore the dark side of money and the motivations of those who have it, want more, and will steamroll anybody who gets in their way.