Bernard Madoff

Wikipedia, Google

No One Would Listen


Bernard L. Madoff
Wikipedia, Google, a long (5200 word) 2008-12-20 NYT article about his clients/associates/victims
Harry Markopolos,
Chartered Financial Analyst and Certified Fraud Examiner
Wikipedia, Google

SEC hierarchy relevant to
Section V.A.4 of the full SEC IG Report

(Titles from Section VII of “Scope of the Investigation”
of the full SEC IG Report.
This SEC office list
shows a “New York Regional Office” but not a “Northeast Regional Office”.
What gives?)
Doria Bachenheimer,
Assistant Director, Division of Enforcement,
Northeast Regional Office, Securities and Exchange Commission
Andrew Calamari,
Branch Chief (now Associate Regional Director),
Division of Enforcement,
New York Regional Office, Securities and Exchange Commission
Meaghan Cheung,
Branch Chief, Division of Enforcement,
Northeast Regional Office, Securities and Exchange Commission
Google Cheung’s involvement in the Madoff affair is discussed in the full SEC IG Report: especially in section V.A.4, “NERO was Skeptical About the 2005 Submission”, pages 244 ff.; Cheung earlier gave some of her point of view in 2009-01-07 NY Post: “Don’t Blame Me: Cheung”
Simona Suh,
Staff Attorney (now Branch Chief),
Division of Enforcement,
New York Regional Office,
Securities and Exchange Commission

More on Harry Markopolos

There has, it seems to me, been a fairly consistent effort in the media
to portray Mr. Markopolos
as, to say the least, eccentric, if not somewhat unbalanced.
For example,
see the coverage of Markopolos’s February 2009 testimony before Congress,
2009-02-05-NYT-Markopolos and 2009-02-05-Milbank-Markopolos.

One of the chief tools used against him is his self-described fear
that he, Markopolos, might be in physical danger
due to his efforts to expose Bernard Madoff and his fund as a fraud.
The assumption seems to be that for Markopolos to feel that way
is irrational and a sign of some sort of mental illness.

But is it?
Let’s take a look at two excerpts from a book published in 1992,
James B. Stewart’s Den of Thieves
(emphasis is added).

On page 335:

[Ivan] Boesky was still terrified of [Michael] Milken,
who had close friends in the casino industry.
Boesky feared that someone might try to rub him out.

On page 422:

Perhaps it was inevitable,
even within the confines of a white-collar scandal,
that violence would erupt.
The money and power at stake were immense;
many have killed, and been killed, for less.

[Martin] Siegel had feared [Ivan] Boesky would have him killed;
Boesky feared [Michael] Milken would have him killed;
now [John] Mulheren had actually set out to kill Boesky.

If that was true for the scandals involving Boesky and Milken,
was it not equally true of that involving Madoff?
If it was rational for Siegel to fear Boesky,
and Boesky to fear Milken,
why was it not equally rational that Markopolos feared what Madoff might do,
if Madoff ever got wind of Markopolos’s efforts to expose him as a fraud?
Was it at all fair for members of congress and our chattering class
to portray Markopolos as eccentric, or worse?

No One Would Listen

Here is an excerpt from Harry Markopolos’ 2010 book No One Would Listen
describing Markopolos’ March 2009 meeting with, among others,
SEC General Counsel David M. Becker.

[pages 246-250]
In early March [2009] I was invited to meet with
the new head of the SEC, Mary Schapiro.
Actually, [Gaytri Kachroo, Markopolos’s attorney] had set up this meeting.
She had contacted Schapiro’s office to see if
the SEC wanted to participate and support
the ideas of the Global Financial Alliance [which was] being formed to discuss
how markets could better be regulated through international cooperation.
During that conversation she asked Schapiro’s assistant
if she wanted to meet with me.
I think we would have understood
if that meeting was not exactly a priority for her,
but in fact she responded enthusiastically.


We met in [Schapiro’s] new office.
It was large, comfortably decorated, and brightly lit.
Rather than sitting at her desk or around a conference table, we joined
Chairman Schapiro,
her newly appointed general counsel David Becker,
and another attorney, Steve Cohen,
in a casual seating area.
It was sort of like a living room.
It was a nice setting, but the atmosphere in the room was very tense.
It wasn’t exactly like signing a treaty of surrender on the deck of the Missori,
but there was an uncomfortable feeling in that office.

[One might wonder “Why?”.
After all, Markopolos had tried to achieve a major objective of the SEC,
preventing financial fraud.
So why the tension?]


Until that point the meeting had been going very well.
She [Schapiro] had agreed that
the SEC needed to develop a whistleblower program
and needed to offer an incentive for people to take the risks.
But then I told her that
I had developed several whistleblower cases involving securities,
and given my history with the SEC
I had decided to file them with the Department of Justice, the IRS,
or other government agencies.

David Becker interrupted,
“You’re telling me you know about securities law violations
and you’re withholding evidence from a government agency?”

“No,” I responded.
“I’m just withholding them from the SEC.
I’m a citizen and I turn in my cases to the agency I think can best handle them,
and at this point that’s not the SEC.
The government has the information, but it’s just with another agency.
If they’re not bringing you into the case they have their reasons.
Maybe they’ve lost confidence in you, too.”

Becker was visibly angry.
Until that moment he hadn’t said a word.
I began to discuss the specific reason I hadn’t brought a case to the SEC,
and I used another case as an example.
When I mentioned a key player in that case, Becker put up his hands.
“I have to stop you,” he said.
“I can’t talk about this because I may have a conflict here.”

I heard him, but it didn’t really register.
This was a case I had nothing to do with.
It had been reported on extensively.
I though maybe the problem was the way I had described it, so I tried again.

Becker stopped me again.
“I’ve already told you, you really need to stop
because I may have a conflict here.”

Mary Schapiro didn’t say a word.
At that moment,
and it turned out that Gaytri [Markopolos’ attorney] felt the same way,
it appeared to me that
David Becker was really the person in charge of this meeting.
Gaytri spoke up, saying,
“I’m not sure what the problem is.
I think he’s just giving you an example.
This isn’t anything we need to get involved in.”
She looked at me.
“Harry, I think you should just go on to something else.

So I did—for at least a few minutes.
The one thing on my mind was avoiding that topic,
so naturally I stumbled onto it again.
It certainly was not my intention,
but I mentioned the key player’s name again.

David Becker stood up.
Until that moment I didn’t realize how large he was.
We were about five or six feet apart, separated by a coffee table,
and Gaytri’s first thought was that he was about to come right over that table
and go for my throat.
I didn’t quite feel that way, but I did understand he was challenging me….

Gaytri stood up, too.
“I don’t know what’s going on here.
But this is completely uncalled for.
It’s certainly not productive for anybody.
We don’t have to talk about this.”

He ignored her.
“I don’t know where you get off,” he said.
“I told you I had a conflict.
This is a case I’ve been involved in.
You can’t come in here and tell us about ongoing cases
and not give us enough details so we can get involved.”

I didn’t know precisely what had triggered Becker’s response….
[W]hatever the reason, he was furious….
I tried to calm down the situation.
“Listen, I’d love for the SEC to get involved.
But you guys don’t have a very good track record.
So until you guys prove you’re serious about prosecuting these cases,
I’ll take them to the DOJ, the IRS,
and other competent government agencies.
And when you prove you can do it, I’ll bring them to you.”

David Becker said evenly,
“I’m general counsel.
I can’t hear this information and be put in this position
where I can’t do anything about it.
And I’ve told you, I have a conflict.”

Gaytri was still trying to bring peace and harmony to this meeting.
“This was supposed to be an informational meeting,” she said to Becker.
“We didn’t know you were going to be here.
Truthfully, I don’t even know what you’re doing here,
but I’m not going to let you attack my client.
We were asked to come and speak with Mary Schapiro,”

I don’t remember Mary Schapiro saying a word.
It was never my intention or my desire to cause any problems.
But maybe David Becker should have left the room for a few minutes
while we discussed that particular case.
He didn’t budge, and he gave no indication that he was going to move,
so there really was no alternative.
Gaytri said,
“I think we should adjourn at this point.
Come on, Harry, we’re leaving.”

We shook hands with Chairman Schapiro and Steve Cohen,
but not with David Becker.
He made it pretty obvious he didn’t want anything to do with us.
I left that meeting not really confident that
the changes in the SEC that I believed necessary actually
were going to be made.

[End of excerpt from Markopolos’s book.]

Some comments on the above situation by me, KHarbaugh,
written on 2011-02-25:

To be fair to Mr. Becker, we must admit the possibility that
he had a conflict entirely separate from
the one known to him that followed from his mother’s profits from Madoff.
But it seems to me that Becker should be asked by the IG
exactly what that conflict was.

But whether that second conflict exists, the first, known, one surely did:
the fact that his mother’s estate had been swollen by Madoff’s illegal schemes.
Given that it can be absolutely certain that
Becker knew that his family had profited from Madoff’s fraud,
I would ask the question:
What the hell was Becker doing in that meeting?

COMMENT ADDED 2011-02-27:
The above was written on 2011-02-25,
as a quick reaction to the reports that
Becker’s family had profited from Madoff’s fraud,
before I had time to read Markopolos’ account of
the stated rationale for the meeting.
Given that that rationale had nothing explicit about Madoff,
I now weaken the comment to just raising a potential issue,
not a confirmed one.



SEC Ignored Credible Tips About Madoff, Chief Says
By Binyamin Appelbaum and David S. Hilzenrath
Washington Post, 2008-12-17

[An excerpt, emphasis is added.]

The nation’s chief securities regulator said yesterday
it was “deeply troubling” that
his agency had failed to catch perhaps the largest Ponzi scheme in history
“credible and specific allegations . . .
repeatedly brought to the attention of SEC staff”
regarding the activities of Bernard L. Madoff.

In making this unusually frank statement,
Securities and Exchange Commission Chairman Christopher Cox announced
he had ordered an internal investigation.

His remarks followed a day of growing demands for the agency to explain
how it missed Madoff’s alleged $50 billion fraud,
including the apparent failure of regulators to spot
numerous and massive inconsistencies
during an investigation of his company that ended quietly in 2007.


Among the issues investigators will consider is
the extent of relationships between Madoff’s family and regulators.

Madoff’s niece, Shana Madoff,
who worked as a compliance lawyer for his company,
is married to Eric Swanson,
a former SEC official who had been involved in
the agency’s examinations of Madoff’s operations.
Swanson’s current employer, Bats Trading,
said the relationship began in 2006.
Swanson left the SEC shortly after and the couple was married in 2007,
Bats said.

Bernard Madoff mentioned the marriage last year
as he boasted about his close ties with regulators
while speaking at a conference in New York.
The Washington Post reviewed a digital video of the speech.

“I’m very close with the regulators,
so I’m not trying to say that they can’t, you know, that what they do is bad.
As a matter of fact, my niece just married one,”
Madoff said,
adding in an apparent reference to Swanson,
“Very nice attorney.”


A Boston investment professional, Harry Markopolos
[chief investment officer at Rampart Investment Management Co. [!]],
started writing letters to regulators in 1999
alleging that Madoff was conducting a Ponzi scheme.
Markopolos continued to send letters, including most recently in April.
Markopolos said that his charges were detailed and specific,
and he said he was still angry that the SEC ignored him.

“They have a lot to answer for,” Markopolos said.
“They refuse to enforce rules against this industry.”

The extent of the alleged fraud has also
raised questions about the possible involvement of other people.
Cox’s statement yesterday mentioned “others who may be involved.”

Simply generating monthly account statements for all of his clients
would have required an extensive effort on Madoff’s part,
said Laurie S. Holtz,
a forensic accountant who has investigated similar schemes.

“That isn’t going to be done by Mr. Madoff sitting at home with a PC,”
Holtz said.
“There’s got to be a whole retinue of support to make this happen.”

Madoff's Lessons For the Market
By Steven Pearlstein
Washington Post Column, 2008-12-17

[Pearlstein explicitly addresses
how the Madoff scandal might be viewed by the Jewish community.
It’s beginning:]

Yes, but is it good for the Jews?

That’s the punch line of a long-running joke
among those of us who grew up among Jewish parents and grandparents
whose first reaction to almost any event would be
to calculate how it would affect the tribe.

Unlikely Player Pulled Into Madoff Swirl
New York Times, 2008-12-19

Madoff Case 'Failures' Put SEC in Spotlight
By Binyamin Appelbaum
Washington Post, 2008-12-19

Agency Looked for, Didn't Find Fraud


The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN [Lewis is the author of Liar’s Poker.]
New York Times Op-Ed, 2009-01-04

[This is the NYT article cited by Meaghan Cheung
in the NY Post article below.]

“Don’t Blame Me: Cheung”
New York Post, 2009-01-07

Bernie Madoff's Jewishness
by Kevin MacDonald
The Occidental Observer, 2009-01-18

[I have corrected the year of publication,
which surely is a typo in the original.]

Madoff Witness Talks of Other Possible Ponzi Cases
New York Times, 2009-02-05

[Emphasis is added.]


The private fraud investigator who tried for years to ignite a federal investigation of Bernard L. Madoff told lawmakers on Wednesday that he had discovered another possible fraud that he would report to regulators on Thursday.

The witness, Harry Markopolos of Boston, said at a House subcommittee hearing that he would alert the Securities and Exchange Commission to the fraud, a $1 billion Ponzi scheme he has uncovered. Neither he nor his lawyers would provide any additional details.

Mr. Markopolos also said he would tell regulators about a dozen private foreign funds — which he said were “hiding in the weeds” in Europe — that raised money for Mr. Madoff and have sustained major losses.

These funds have not yet been publicly identified, he said. And their silent victims most likely include investors of “dirty money,” including Russian mobsters and Latin American drug cartels, he said.

A lawyer for Mr. Markopolos said later that his client would meet with the agency’s inspector general and detail his concerns at that meeting and “through other channels.”

But the revelations were almost lost amid
the torrent of criticism that Mr. Markopolos and lawmakers
heaped on the S.E.C. and its senior staff members

— several of whom were seated several rows behind the star witness.

Some complaints were serious —
that the agency
lacked the expertise to tackle major frauds by big players
had no systemic way of dealing with whistle-blowers.
Others were sarcastic,
with Mr. Markopolos saying
regulators seated in Fenway Park in Boston
would have trouble finding first base.

[That may be sarcasm,
but sarcasm can be used to express very serious points,
as I think is clearly happening here.]

Wednesday’s session
was the second held by a House Financial Services subcommittee,
led by Representative Paul E. Kanjorski, Democrat of Pennsylvania,
aimed at exploring the lessons that the Madoff scandal offers
for the redesign of the nation’s financial regulatory system.

Mr. Madoff was arrested Dec. 11 at his New York apartment
and charged with operating a Ponzi scheme
whose losses could be as high as $50 billion.
The case is still under investigation by federal prosecutors and the S.E.C.,
which the agency witnesses said
restricted what they could say about the case at the hearing.

Mr. Kanjorski, the hearing chairman,
condemned that argument as an expression of arrogance
that was at the root of the agency’s regulatory failures.

Congress is in the midst of creating regulatory changes
that could change the agency’s fate,
the congressman warned the panel of official witnesses.
Lawmakers want immediate candor about the handling of the Madoff matter,
not an “oatmeal” of generalities, he said.

“We didn’t call you up here to hear a traveler’s guide of the S.E.C.,”
Mr. Kanjorski added.


Linda Chatman Thomsen,
the S.E.C. enforcement director
[at right, with S.E.C. director of inspections Lori Richards],
told lawmakers that
the agency staff had demonstrated
its willingness and ability
to pursue major fraud cases,
including 70 Ponzi schemes.

[But not Madoff, even when it was repeatedly brought to their attention.]

Ms. Thomsen said the agency, under its new chairwoman, Mary L. Schapiro,
would work hard to improve
its receptiveness and responsiveness to whistle-blowers like Mr. Markopolos.

Her responses did not satisfy
any of the half-dozen lawmakers who stayed at the hearing
after Mr. Markopolos left.
Their attacks were fierce and strident,
with Representative Gary L. Ackerman saying at one point:
“We thought the enemy was Mr. Madoff. I think it is you.”

The hearing at times seemed to enter
verbal territory more often explored at organized crime hearings.

Mr. Markopolos repeatedly referred to
his fear that he would be killed
if Mr. Madoff learned of his investigation.

[Given what was at risk, and the criminal state of mind Madoff had already demonstrated,
I don’t blame him in the slightest.]

At one point, noting his experience in military intelligence,
he described an offer he made to “go undercover” for the S.E.C. —
a proposal that was rebuffed.

And he recalled wearing gloves
as he assembled a package of information he planned to slip to Eliot Spitzer,
when he was New York’s attorney general,
so he would leave no fingerprints.

While one lawmaker asked whether this all wasn’t “a little paranoid,”
others agreed that Mr. Markopolos was wise to be cautious
given the scale of the fraud he was trying to bring to light.

Madoff Private Eye Has the Action --
Now All He Needs Are the Lights and the Camera

By Dana Milbank
Washington Post, 2009-02-05

[This article featured the following picture of Harry Markopolos,
with the caption as shown.]

"Dirty Harry" Markopolos
may soon be telling his story on the big screen.

Harry Markopolos,
the derivatives whiz and private investigator
who uncovered the Bernie Madoff scandal,
came straight from central casting:
geeky, with too-big glasses and a prominent comb-over.
When he spoke,
it was in the vocabulary of a man who had watched a lot of detective movies.


Thus did Harry Markopolos of Boston establish himself as
a next-generation Dirty Harry --
a derivatives industry vigilante,
part Lt. Columbo,
part Adrian Monk,
with a dash of "Dragnet" and "Lethal Weapon" sprinkled throughout his testimony.

[I had no idea who Adrian Monk is or was
until I Googled the name.]

Markopolos’s demeanor could make it easy to dismiss him as an eccentric,
and the SEC apparently did,
paying him no attention
as he presented evidence to them for years of Madoff’s Ponzi scheme.
But Markopolos was right, and now he’s telling his story --
yesterday, to Congress,
and soon, you can bet, at a theater near you.

[Thus does Milbank read Markopolos’s mind
and divine his motivations and future ambitions.]

Financial Fraud Is Focus of Attack by Prosecutors
New York Times, 2009-03-12

Spurred by rising public anger, federal and state investigators are preparing for a surge of prosecutions of financial fraud.

Across the country, attorneys general have already begun indicting dozens of loan processors, mortgage brokers and bank officers. Last week alone, there were guilty pleas in Minnesota, Delaware, North Carolina and Connecticut and sentences in Florida and Vermont — all stemming from home loan scams.


Madoff’s Accountant Is Charged With Fraud
New York Times, 2009-03-19

Cuomo Sues Financier Over Madoff Investments
New York Times, 2009-04-07

[From the preliminary, 04-06, version of the article.]

J. Ezra Merkin, a prominent New York financier whose private clients lost more than $2 billion in the collapse of Bernard L. Madoff’s Ponzi scheme, has been accused of fraud and deception in a civil lawsuit filed Monday by the New York attorney general, Andrew M. Cuomo.

The lawsuit, filed under state charity and securities laws, claims that Mr. Merkin improperly collected more than $470 million in fees from his clients, who included more than a dozen nonprofit organizations, by “falsely claiming he actively managed their funds” when in fact he simply handed their money over to Mr. Madoff, without adequate investigation or oversight.

The complaint did not accuse Mr. Merkin of knowing about Mr. Madoff’s vast fraud. But it charged that he had failed to carry out the diligent research and investigation he had promised, and in some cases had deliberately deceived clients about investing with Mr. Madoff.

Mr. Merkin’s “deceit, recklessness, and breaches of fiduciary duty have resulted in the loss of approximately $2.4 billion,” according to the complaint filed by Mr. Cuomo’s office, which opened an investigation of Mr. Merkin soon after the Madoff scheme collapsed in mid-December.

Report Details How Madoff’s Web Ensnared S.E.C.
New York Times, 2009-09-03


Unseasoned investigators from the Securities and Exchange Commission
were alternately intimidated and enthralled by
a name-dropping, yarn-spinning Bernard L. Madoff
as he dodged questions about his financial house of cards,
according to a scathing new report on
the agency’s repeated failure to uncover the huge investment fraud.

“Madoff carefully controlled to whom they spoke at the firm,”
the S.E.C.’s independent watchdog said in the report released on Wednesday.

When one of Mr. Madoff’s employees was talking to investigators in 2005,
an aide to Mr. Madoff broke up the conversation,
explaining that it was time for lunch — at 3 in the afternoon.

The incident was one of several
recounted by the agency’s inspector general, H. David Kotz,
in a report that concludes
numerous “red flags” were missed by the agency from at least 1992,
not just because of inexperience and incompetence,
but because investigators failed to follow incriminating evidence in plain sight
and were cowed by Mr. Madoff, who had an inflated reputation on Wall Street.

The report details
six substantive complaints against Mr. Madoff received by the agency,
which were followed by three investigations and two examinations.
Yet the agency never verified Mr. Madoff’s trading through a third party.
Time and again, it was noted that
the volume of his purported options trades were implausible.
When the enforcement staff received a report showing that
Mr. Madoff indeed had no options positions on a certain date,
the agency simply did not take any further steps.

In fact, the string of lapses was capped by
a staff lawyer receiving the highest performance rating from the agency,
in part for her
“ability to understand and analyze the complex issues of the Madoff investigation.”

Perversely, Mr. Madoff used the S.E.C.’s inquiries as a selling point
to reassure investors that
the government had looked over his operations and found no problem.

It was not Mr. Madoff’s cleverness that enabled him
to fleece thousands of investors out of billions of dollars for years,
Mr. Kotz said.
It was the fact that,
“despite numerous credible and detailed complaints,”
the S.E.C. never took “the necessary, but basic, steps
to determine if Madoff was operating a Ponzi scheme.”

Perhaps the most egregious lapse was
the repeated failure of investigators to verify the trades
that Mr. Madoff claimed to be making over the years,

bringing in steady profits
that turned out to be, quite literally, too good to be true,
the inspector general found.

“A simple inquiry to one of several third parties
could have immediately revealed the fact that
Madoff was not trading in the volume he was claiming,”

the report said.

The chairwoman of the S.E.C., Mary L. Schapiro, called the Madoff episode
“a failure that we continue to regret”
in a statement issued on Wednesday.
She said better training,
more attention to outside tips and
the recruitment of “new skill sets”
since she was appointed by President Obama in January
would help to prevent future frauds.

“The executive summary makes abundantly clear that
the agency bungled numerous investigations
and failed to heed numerous warnings about Madoff’s dubious activities,”
said Jacob H. Zamansky, a white-collar criminal defense lawyer.

The S.E.C.’s failures have been widely discussed since Mr. Madoff’s scheme collapsed last December, prompting then-Chairman Christopher Cox to say he was “gravely concerned” over the regulatory ineptitude.

Mr. Madoff pleaded guilty in March to securities fraud
and was sentenced in June to 150 years in federal prison,
leaving in his wake thousands of ruined investors,
as well as many charities whose officials had thought
their investments with Mr. Madoff were steady and safe.

Although Mr. Kotz’s report did not lay bare
any startling new early warnings about the business of Mr. Madoff,
it did add embarrassing new details to
what may be
the S.E.C.’s biggest failure since it was created 75 years ago.

Mr. Kotz recounted incidents in which investigators seemed
hopelessly out of their depth,
far too credulous and
perhaps just plain lazy.

One investigator described Mr. Madoff as
“a wonderful storyteller” and “a captivating speaker”
after the 2005 encounter in which Mr. Madoff, a former Nasdaq chairman,
boasted of his ties to people high up in the S.E.C.
and said he was on the short list to be the next agency chairman —
the post that went to Mr. Cox.

But Mr. Madoff turned angry — “veins were popping out of his neck,”
an investigator said —
when asked to produce certain documents,
and he tried to dictate what paperwork he would yield.
When the investigators reported back
to their superior [No names, please.]
in the S.E.C.’s Northeast regional office,
“they received no support and were actively discouraged from forcing the issue.”

The inspector general revisited the failure of the S.E.C.’s Boston office
to take seriously the warnings of Harry Markopolos, a private fraud investigator
who had been trying since 1999 to get the agency to investigate Mr. Madoff.
The failure to heed Mr. Markopolos was almost inexplicable,
except that some agency officials did not like him personally,
Mr. Kotz said.

From 1992 until the Madoff empire imploded,
one inquiry after another went nowhere,
the inspector general said.
Some investigators “weren’t familiar with securities laws,”
and some seemingly refused to believe their own ears
even when Mr. Madoff contradicted himself
or offered illogical answers to questions.

At one point,
investigators drafted a letter to NASD seeking independent trade data,
“but they never sent the letter, claiming that
it would have been too time-consuming
to review the data they would have obtained,”
the inspector general wrote.

There were also simple bureaucratic foul-ups,
like the one in which different branch offices of the S.E.C.
were both looking into the operations of Mr. Madoff.
“Astoundingly, both examinations were open at the same time in different offices
without either knowing the other one was conducting an identical examination,”
Mr. Kotz noted.

“In fact, it was Madoff himself who informed one of the examination teams
that the other examination team had already received
the information they were seeking from him.”

Jack Hewitt, a former S.E.C. prosecutor
who is now a partner at the McCarter & English law firm, said,
“There seems to have been a lack of competent coordination
between various offices of the commission.”

Mr. Hewitt observed, as have many others, that Mr. Madoff
“was remarkable in his ability to conceal his conduct
and to communicate an image of integrity to the public.”

A small consolation for the S.E.C. was Mr. Kotz’s conclusion that
there had been no improper influence by Mr. Madoff
on agency investigators or officials.
(One investigative team that examined the Madoff firm
was headed by Eric Swanson,
who left the commission in 2006
and married Shana Madoff, Mr. Madoff’s niece, in 2007.)

The inspector general’s report could rekindle more outrage
at the S.E.C. in particular and Wall Street in general.
And there may be more embarrassing details to trickle out:
the document released on Wednesday
was a 22-page executive summary by Mr. Kotz.
The full report runs to some 450 pages.

The Madoff Files: A Chronicle of SEC Failure
Over and Over, Agency Skipped 'Basic' Steps to Find Fraud, Report Says
By Zachary A. Goldfarb
Washington Post, 2009-09-03

Washington’s top cop for Wall Street,
hamstrung by bureaucracy and inexperienced investigators,
failed to thoroughly pursue multiple warnings
about Bernard L. Madoff’s multibillion-dollar Ponzi scheme,
according to a scathing new critique of the Securities and Exchange Commission
by its internal watchdog.

The report, issued Wednesday by the commission’s inspector general,
offers the first detailed examination of
one of the agency’s most public embarrassments.

It says the SEC received repeated allegations
that Madoff was probably cheating investors,
including detailed road maps provided by outside businessmen,
only to fail to discover the fraud.

The SEC opened inquiries five times in a 16-year period.
But in each instance, inexperienced officials,
at times ignorant of other agency probes into Madoff,
took his explanations at face value and did little to verify them.

Madoff himself told the inspector general that he was “astonished”
that the SEC did not verify whether he was carrying out
the billions of dollars of trades he claimed to be making
after he supplied the agency with account details.

“The SEC never properly examined or investigated Madoff’s trading
and never took the necessary, but basic, steps
to determine if Madoff was operating a Ponzi scheme,”
the inspector general, H. David Kotz, concludes in the report.

The extensive number of contacts between the SEC and Madoff
raises questions about whether the agency is capable of
spotting and stopping other financial frauds.
The SEC has said it doesn’t have the resources necessary
to oversee the exploding number of financial firms
and can review many of them only once every few years.
It became aware of Madoff’s fraud only when he confessed to it in December.

The financial crisis has exposed many breakdowns in regulation,
but none has involved such a large fraud by a single person.
The inspector general’s report “makes clear that
the agency missed numerous opportunities to discover the fraud,”
SEC Chairman Mary L. Schapiro said.
“It is a failure that we continue to regret,
and one that has led us to reform in many ways
how we regulate markets and protect investors.”

Federal prosecutors say
Madoff may have stolen up to $65 billion from his clients.
He claimed that he engaged in
a highly specialized trading strategy that persistently beat the market,
but in fact, he did little trading
and instead used proceeds from some investors to pay others.

His fraud left thousands of clients,
including charities, retirees and celebrities, devastated.
Madoff is serving a 150-year sentence in a federal prison in North Carolina.

The inspector general’s report concludes that
the agency’s failings were the result of misjudgments but not improprieties.
It says that no SEC officials who worked on the review of Madoff’s firm
had “any financial or other inappropriate connection
with Bernard Madoff or the Madoff family
that influenced the conduct of their examination or investigative work.”

The report, in particular, exonerates Eric Swanson,
a former SEC official who worked on a Madoff probe
and later married Madoff’s niece Shana,
who was a compliance officer at his firm.

The report issued Wednesday is a 22-page executive summary
of a 450-page investigation likely to be released later this week.
It contains a number of startling anecdotes recounting
how the SEC bungled its Madoff probes since the first review in 1992.

The inspector general found that SEC officials received detailed warnings
but were generally not equipped to capitalize on them.

In May 2003, for instance,
the Office of Compliance Inspections and Examinations in Washington
received a letter from a well-known hedge-fund manager
identifying red flags at Madoff’s firm.
An SEC supervisor involved in the review called these
“indicia of a Ponzi scheme.”

But it took seven months to launch the probe.
One OCIE staffer said that “there was no training” and that
“this was a trial by fire kind of job.”

Agency officials
ignored several of the questions in the hedge-fund manager’s letter
that went to the heart of the fraud

and focused on others, because,
according to the associate director in charge of the review,
“that was the area of expertise for my crew.”

The team prepared to ask Madoff for detailed information about trades
but decided against it.
Officials said such information
“can be tremendously voluminous and difficult to deal with”
and can take “a ton of time” to review.

The Washington office stopped its probe
as it shifted resources
while public pressure mounted to review the mutual fund industry.

At the same time, however,
the SEC’s New York office, unaware of the Washington probe,
began its own review.
It uncovered detailed concerns about Madoff’s firm
in the internal documents of another financial services company
that had come under review.

SEC officials arrived at Madoff’s firm in Midtown Manhattan
and learned that he would be their primary contact.
He provided them with contradictory information.
But when they sought to confront him about it,
he said he had already given the information they wanted
to investigators in Washington --
which was news to the SEC officials in New York.

Shortly thereafter, they concluded their investigation
without answering the questions that had spurred the review.

In 2005, fraud analyst and onetime Madoff rival Harry Markopolos
wrote a detailed letter to the SEC’s Boston office warning,
“The world’s largest hedge fund is a fraud.”
The Boston office had worked with Markopolos before and found him credible.

Boston sent the letter to the SEC’s New York office, where
officials viewed Markopolos skeptically
and did not understand his reasoning,
which was based largely on statistics.
The team assigned to look into Madoff
had little experience reviewing potential Ponzi schemes.

In May 2006, SEC investigators interviewed Madoff,
who didn’t bring along a lawyer.
When asked how he consistently beat the market, he told the investigators,
“Some people feel the market,”
the report recounts.

Madoff told the inspector general that he expected to be exposed
when he told the investigators that
his trading was processed through the Depository Trust Co.,
an important financial intermediary.
He gave the SEC his DTC account number,
which they could have used to verify the trades he claimed to have made.

“I thought it was the end, game over.
Monday morning they’ll call DTC, and this will be over,”
Madoff told the watchdog earlier this year.
“And it never happened.”

The report calls the agency’s decision to never verify Madoff’s trading
“the most egregious failure in the Enforcement investigation.”
That investigation was closed in August 2006.
It took a single phone call to DTC
after the Ponzi scheme was exposed in December 2008
to find out that he had not placed any trades with his investors’ funds.

Concerns about Madoff’s firm continued to arrive.
In March 2008, the office of then-SEC Chairman Christopher Cox
received an e-mail from a source who had contacted the agency several times,
urging investigators to look into secret files Madoff maintained
on a computer he carried.
Cox’s aides sent the e-mail to the enforcement division.

An enforcement staffer who had worked on the Madoff case replied:
“[W]e will not be pursuing the allegations.”

SEC IG Madoff Report Executive Summary (PDF, 22 pages)
Securities and Exchange Commission Inspector General, 2009-08-31

[An excerpt; emphasis is added.]

[from page 16]

Only a month after NERO [Northeast Regional Office]
closed its examination of Madoff,
in October 2005,
Markopolos provided the SEC’s BDO [Boston District Office]
with a third version of his complaint entitled
“The World’s Largest Hedge Fund is a Fraud.”
Markopolos’ 2005 complaint detailed
approximately 30 red flags indicating Madoff was operating a Ponzi scheme,
a scenario Markopolos described as “highly likely.”
Markopolos’ 2005 complaint discussed an alternative possibility-
that Madoff was front-running ~
but characterized that scenario as “unlikely.”
The red flags identified by Markopolos were similar to
the ones previously raised in the Hedge Fund Manager’s complaint
and the internal e-mails that led to the two cause examinations of Madoff,
although somewhat more detailed.
They generally fell into one of three categories:
(1) Madoff’s obsessive secrecy;
(2) the impossibility of Madoff’s returns,
particularly the consistency of those returns; and
(3) the unrealistic volume of options Madoff was supposedly trading.

The BDO found Markopolos credible,
having worked with him previously and took his 2005 complaint seriously.
While senior officials with the BDO considered Markopolos’ allegation
that Madoff was operating a Ponzi scheme worthy of serious investigation,
they felt it made more sense for NERO to conduct the investigation
because Madoff was in New York
and NERO had already conducted an examination of Madoff.
The BDO made special efforts to ensure that NERO would
“recognize the potential urgency of the situation”
which was evidenced by the Director of the BDO
emailing the complaint to the Director of NERO personally,
and by following up to ensure the matter was assigned within NERO.

While the Madoff investigation was assigned within NERO Enforcement,
it was assigned to a team
with little to no experience conducting Ponzi scheme investigations.


The majority of the investigatory work was conducted by a staff attorney
who recently graduated from law school
and only joined the SEC
nineteen months before she was given the Madoff investigation.
She had never previously been the lead staff attorney on any investigation,
and had been involved in very few investigations overall.
The Madoff assignment was also her first real exposure to broker-dealer issues.

[Who made the decision
to assign the investigation of such a senior figure on Wall Street
to such a junior investigator,
and what was the reason for such a bizarre decision?]

The NERO Enforcement staff, unlike the BDO,
failed to appreciate
the significance of the evidence in the 2005 Markopolos complaint
and almost immediately expressed skepticism and disbelief about
the information contained in the complaint.
The Enforcement staff
claimed that Markopolos was not an insider or an investor,
and thus, immediately discounted his evidence.
The Enforcement staff also questioned Markopolos’ motives,
indicating concerns that
“he was a competitor of Madoff’s” who “was looking for a bounty.”
These concerns were particularly misplaced because in Markopolos’ complaint,
he described that
it was “highly likely” that Madoff was operating a “Ponzi scheme,”
and acknowledged that if he were correct,
he would not be eligible for a bounty.
even after the branch chief [Meaghan Cheung]
assigned to the Madoff Enforcement investigation
spoke with a senior official at the BDO, who vouched for Markopolos’ credibility,
she remained skeptical of him throughout the investigation.

The OIG investigation also found
the Enforcement staff was skeptical about Markopolos’ complaint
because Madoff did not fit the “profile” of a Ponzi scheme operator,
with the branch chief on the Madoff investigation noting that
there was “an inherent bias towards
[the] sort of people who are seen as reputable members of society.”

The NERO Enforcement staff
also received a skeptical response to Markopolos’ complaint
from the NERO examination team who had just concluded their examination.
Even though the NERO examination had focused solely on front-running,
NERO examination team downplayed
the possibility that Madoff was conducting a Ponzi scheme, saying,
“these are basically some of the same issues we investigated” and that
Markopolos “doesn’t have
the detailed understanding of Madoff’s operations that we do
which refutes most of his allegations.”
In testimony before the OIG,
the examiners acknowledged that
their examination “did not refute
Markopolos’ allegations regarding a Ponzi scheme”
and that the examiners’ reaction may have given the impression
their examination had a greater focus than it did.
Indeed, since the NERO examination had ruled out front-running,
the NERO examiners should have encouraged the Enforcement staff
to analyze Markopolos’ more likely scenario, the Ponzi scheme.
Yet, that scenario was never truly analyzed.

The Enforcement staff delayed opening
a matter under inquiry (MUI) for the Madoff investigation for two months,
which was a necessary step at the beginning of an Enforcement investigation
for the staff to be informed of other relevant information
that the SEC received about the subject of the investigation.
As a result ofthe delay in opening a MUI,
the Enforcement staff never learned of
another complaint sent to the SEC in October 2005
from an anonymous informant stating,
“I know that Madoff [sic] company
is very secretive about their operations
and they refuse to disclose anything.
If my suspicions are true, then
they are running a highly sophisticated scheme on a massive scale.
And they have been doing it for a long time.”
The informant also stated,
“After a short period of time,
I decided to withdraw all my money (over $5 million).”
As a result, there was no review or analysis of this complaint.

In addition, as was the case with the SEC examinations of Madoff,
the focus of the Enforcement staff’s investigation was much too limited.
Markopolos’ 2005 complaint
primarily presented evidence that Madoff was operating a Ponzi scheme,
calling that scenario “highly likely.”
However, most of the Enforcement staffs efforts during their investigation
were directed at
determining whether Madoff should register as an investment adviser
or whether Madoff’s hedge fund investors’ disclosures were adequate.
In fact, the Enforcement staff’s investigative plan primarily involved
comparing documents and information
that Madoff had provided to the examination staff (which he fabricated)
with documents that Madoff had sent his investors (which he also fabricated).

Yet, the Enforcement staff almost immediately
caught Madoff in lies and misrepresentations.
An initial production of documents
the Enforcement staff obtained from a Madoff feeder fund
demonstrated Madoff had lied to the examiners in the NERO examination
about a fundamental component of his claimed trading activity.
Specifically, while Madoff told the examiners
he had stopped using options as part of his strategy
after they scrutinized his purported options trading,
the Enforcement staff found evidence from the feeder funds that
Madoff was telling his investors that he was still trading options
during that same time period.
Yet, the Enforcement staff never pressed Madoff on this inconsistency.
After an interview with an executive from a Madoff feeder fund,
the Enforcement staff noted several additional “discrepancies” between
what Madoff told the examiners in the NERO examination
and information they received in the interview.
The Enforcement staff also discovered that
the feeder fund executive’s testimony had been scripted
and he had been prepped by Madoff.

As the investigation progressed;
in December 2005, Markopolos approached the Enforcement staff
to provide them additional contacts and information.
However, the branch chief assigned to the Madoff Enforcement investigation
took an instant dislike to Markopolos
and declined to even pick up
the “several inch thick file folder on Madoff” that Markopolos offered.
One of the Enforcement staff
described the relationship between Markopolos and the Branch Chief
as “adversarial.”

[“Took an instant dislike to Markopolos”: Why?
The branch chief is a professional,
supposed to be making decision based on facts,
not on whom the manager likes and dislikes.

For the testimony on which these statements are based,
see pages 249-51 of the full report.]

In February 2006,
the Enforcement staff contacted the SEC’s Office of Economic Analysis (OEA)
seeking assistance in analyzing Madoffs trading.
OEA failed to respond to the request for two and a half months.
In April 2006, the Enforcement staff went back to OEA,
but failed to provide OEA with a copy of Markopolos’ 2005 complaint.
An expert on options trading in OEA
did review certain documents that OEA received from the Enforcement staff
and, based upon a 20 minute review,
concluded Madoffs split-strike conversion strategy
“was not a strategy that would be expected
to earn significant returns in excess of the market.”
However, this analysis was not conveyed to the Enforcement staff.
[Why not?]
In addition, the OEA options trading expert told the OIG that
if he had been made aware of the amount of assets
that Madoff had been claiming to manage,
he would have ruled out “front-running”
as a possible explanation for Madoffs returns.
In the end, the Enforcement staff
never obtained any useful information or analysis from OEA.

Throughout the Enforcement staff’s investigation,
the Enforcement staff was confused about
certain critical and fundamental aspects of Madoff’s operations.
They had trouble understanding Madoff’s purported trading strategy,
basic custody of assets issues,
and, generally, how Madoff’s operation worked.
Despite the Enforcement staffs confusion,
after their unsuccessful attempt to seek assistance from OEA,
they never consulted the SEC’s own experts on broker-dealer operations,
the SEC’s Division of Trading and Markets
(formerly the Division of Market Regulation),
who could have facilitated inquiries with independent third-parties
such as the NASD and DTC.
after Madoff claimed his purported trading activity took place in Europe,
the Enforcement staff did not seek help from
the SEC’s Office of International Affairs (OIA).
Had they simply sought assistance from OIA
on matters within its area of expertise,
the Enforcement staff should have discovered
that Madoff was not purchasing equities from foreign broker dealers
and that
he did not have Over-the-Counter (OTC) options with European counterparties.

At a crucial point in their investigation,
the Enforcement staff was informed by a senior-level official from the NASD
that they were not sufficiently prepared to take Madoff’s testimony,
but they ignored his advice.
On May 17, 2006,
two days before they were scheduled to take Madoff’s testimony,
the Enforcement staff attorney
contacted the Vice President and Deputy Director
of the NASD Amex Regulation Division
to discuss Madoff’s options trading.
The NASD official told the OIG that
he answered “extremely basic questions” from the Enforcement staff
about options trading.
He also testified that, by the end of the call,
he felt the Enforcement staff
did not understand enough about the subject matter
to take Madoff’s testimony.
The NASD official also recalled telling the Enforcement staff that
they “needed to do a little bit more homework
before they were ready to talk to [Madoff],”
but that they were intent on taking Madoff’s testimony as scheduled.
He testified that when he and a colleague who was also on the call hung up,
“we were both, sort of, shaking our heads, saying that, you know,
it really seemed like some of these [options trading] strategies
were over their heads.”
Notwithstanding the advice,
the Enforcement staff did not postpone Madoff’s testimony.

On May 19, 2006,
Madoff testified voluntarily and without counsel in the SEC investigation.
During Madoff’s testimony, he
provided evasive answers to important questions,
provided some answers that contradicted his previous representations, and
provided some information that could have been used to discover
that he was operating a Ponzi scheme.
However, the Enforcement staff did not follow-up with respect
to the critical information
that was relevant to uncovering Madoff’s Ponzi scheme.

For example, when Enforcement staff asked the critical question of
how he was able to achieve his consistently high returns,
Madoff never really answered the question but, instead,
attacked those who questioned his returns,
particularly the author of the Barron’s article.
Essentially, Madoff claimed
his remarkable returns were due to
his personal “feel” for when to get in and out of the market,
“Some people feel the market.
Some people just understand
how to analyze the numbers that they’re looking at.”
Because of the Enforcement staffs inexperience
and lack of understanding of equity and options trading,
they did not appreciate that
Madoff was unable to provide a logical explanation
for his incredibly consistent returns.
Each member of the Enforcement staff
accepted as plausible Madoff’s claim that
his returns were due to his perfect “gut feel”
for when the market would go up or down.

[Remember, this is the professional staff of
the Securities and Exchange Commission of the United States.
If anyone in government should have
a thorough understanding of equity and options trading,
surely it is they.

During his testimony, Madoff also told the Enforcement investigators that
the trades for all of his advisory accounts
were cleared through his account at DTC.
He testified further that his advisory account positions were segregated at DTC
and gave the Enforcement staff his DTC account number.
During an interview with the OIG,
Madoff stated that he had thought he was caught
after his testimony about the DTC account,
noting that when they asked for the DTC account number,
“I thought it was the end game, over.
Monday morning they’ll call DTC and this will be over ...
and it never happened.”
Madoff further said that when Enforcement did not follow up with DTC,
he “was astonished.”

This was perhaps the most egregious failure
in the Enforcement investigation of Madoff;
that they never verified Madoff’s purported trading
with any independent third parties.
As a senior-level SEC examiner noted,
“clearly if someone ... has a Ponzi and, they’re stealing money,
they’re not going to hesitate to lie or create records”
and, consequently, the “only way to verify”
whether the alleged Ponzi operator is actually trading
would be to obtain “some independent third-party verification” like “DTC.”

A simple inquiry to one of several third parties
could have immediately revealed the fact that
Madoff was not trading in the volume he was claiming.
The OIG made inquiries with DTC as part of our investigation.
We reviewed a January 2005 statement for one Madoff feeder fund account,
which alone indicated that it held
approximately $2.5 billion of S&P 100 equities as of January 31, 2005.
On the contrary, on January 31, 2005, DTC records show that
Madoff held less than $18 million worth of S&P 100 equities in his DTC account.
Similarly, on May 19, 2006,
the day of Madoff’s testimony with the Enforcement staff,
DTC records show that Madoff held
less than $24 million worth of S&P 100 equities in his DTC account
and on August 10, 2006,
the day Madoff agreed to register as an investment adviser
and the Enforcement staff effectively ended the Madoff investigation,
DTC records showed the Madoff account held
less than $28 million worth of S&P 100 equities in his DTC account.
Had the Enforcement staff learned this information
during the course of their investigation,
they would have immediately realized that
Madoff was not trading in anywhere near the volume
that he was showing on the customer statements.
When Madoff’s Ponzi scheme finally collapsed in 2008,
an SEC Enforcement attorney testified that
it took only “a few days” and “a phone call ... to DTC”
to confirm that Madoff had not placed any trades with his investors’ funds.

Our investigation did find that
the Enforcement staff made attempts
to seek information from independent third-parties;
however, they failed to follow up on these requests.
On May 16, 2006, three days before Madoff’s testimony,
the Enforcement staff reached out to
the Director of the Market Regulation Department at the NASD
and asked her to check a certain date on which Madoff
had purportedly held S&P 100 index option positions.
She reported back that
they had found no reports of such option positions for that day.
the Enforcement staff failed to make any further inquiry
regarding this remarkable finding.

The Enforcement staff also failed
to scrutinize information obtained in the NERO cause examination
when the examination staff had attempted to verify Madoff’s claims
of trading OTC options with a financial institution
and found that
“no relevant transaction activity occurred during the period” requested.
Finally, although the Enforcement staff attorney
attempted to obtain documentation from U.S. affiliates of European counterparties
and one of Madoff’s purported counterparties was in the process of
drafting a consent letter asking Madoff’s permission
to send the Enforcement staff the documents from its European account,
the inexplicable decision was made not to send the letter
and to abandon this effort.
Had any of these efforts been pursued by the Enforcement staff,
they would have uncovered Madoff’s Ponzi scheme.

The Enforcement staff effectively closed the Madoff investigation in August 2006 after Madoff agreed to register as an investment adviser.
They believed that this was a “beneficial result” as once he registered,
“he would have to have a compliance program,
and he would be subject to an examination by our [Investment Advisor] team.”
However, no examination was ever conducted of Madoff
after he registered as an investment adviser.

A few months later, in December 2006,
the Enforcement staff received another complaint from a “concerned citizen,” advising the SEC to look into Madoff and his firm:
Your attention is directed to a scandal of major proportion
which was executed by the investment firm Bernard L. Madoff ....
Assets well in excess of $1 0 Billion owned by the late [investor],
an ultra-wealthy long time client of the Madoff firm
have been “co-mingled” with funds controlled by the Madoff company
with gains thereon retained by Madoff.

In investigating this complaint,
the Enforcement staff simply asked Madoff’s counsel about it,
and accepted the response
that Madoff had never managed money for this investor.
This turned out to be false.
When news of Madoff’s Ponzi scheme broke,
it became evident not only that Madoff managed this investor’s money,
but also that he was actually one of Madoff’s largest individual investors.

Shortly after the Madoff Enforcement investigation was effectively concluded,
the staff attorney on the investigation
received the highest performance rating available at the SEC,
in part, for
her “ability to understand and analyze
the complex issues of the Madoff investigation.”

Markopolos also tried again in June 2007,
sending an e-mail to the Enforcement branch chief on the Madoff investigation attaching “some very troubling documents
that show the Madoff fraud scheme is getting even more brazen”
and noting ominously,
“When Madoff finally does blow up,
it’s going to be spectacular,
and lead to massive selling by hedge fund, fund of funds
as they face investor redemptions.”
His e-mail was ignored.
After Madoff was forced to register as an investment adviser,
the Enforcement investigation was inactive for 18 months
before being officially closed in January 2008.
A couple of months later, in March 2008,
the Chairman’s office received additional information
regarding Madoff’s involvement with the investor’s money from the same source.
The previous complaint was re-sent, and included the following information:
It may be of interest to you to that
Mr. Bernard Madoff keeps two (2) sets of records.
The most interesting of which is on his computer
which is always on his person.

This updated complaint was forwarded to
the Enforcement staff who had worked on the Madoff investigation,
but immediately sent back, with a note stating, in pertinent part,
“[W]e will not be pursuing the allegations in it.”

As the foregoing demonstrates,
despite numerous credible and detailed complaints,
the SEC never properly examined or investigated Madoff’s trading
and never took the necessary, but basic, steps
to determine if Madoff was operating a Ponzi scheme.
Had these efforts been made with appropriate follow-up
at any time beginning in June of 1992 until December 2008,
the SEC could have uncovered the Ponzi scheme well before Madoff confessed.

Submitted: H. David Kotz, Inspector General
Date: 31 August 2009

SEC IG Madoff Report (PDF, 477 pages)
Securities and Exchange Commission Inspector General, 2009-08-31

Madoff Report Reveals Extent of Bungling
SEC Watchdog Details How Many Chances Existed
for Stock Examiners to Uncover the Fraud

Wall Street Journal, 2009-09-09

The Securities and Exchange Commission’s tips on Bernard Madoff
included a May 2003 email from a hedge-fund manager
citing “indicia of a Ponzi scheme,”
but the agency months later decided to pursue a different allegation
because that’s where its expertise lay,
according to a report by the agency’s internal watchdog.

The SEC’s inspector general released the full 477-page version
of his report on how the SEC missed red flags on Mr. Madoff
on Friday.
The release came after 5 p.m. EDT, just ahead of the Labor Day weekend.
While themes of the report became known earlier in the week
when an executive summary was released,
the full version makes clear in painstaking detail
just how many opportunities there were for examiners to find the fraud
and how bungled their efforts were.

The report contains detailed accounts of SEC actions going back to 1992,
when it looked into two Florida accountants
who were funneling money to Mr. Madoff.
That probe concluded with action against the accountants
but no steps against Mr. Madoff.

The report says 25 people,
including some who reinvested directly with Mr. Madoff
after the SEC action against the accountants,
“knew of and relied upon
the SEC’s 1992 public statement that there was nothing to indicate fraud”
in deciding to invest with Mr. Madoff.

The report also offers a rare look into
the inner workings of a government agency and
how turf battles and poor communication hampered investigative efforts.
It reveals how the SEC’s various divisions didn’t always work together
and how staff often looked into tips with blinders on,
failing to see the big picture or take extra steps.

On May 21, 2003,
an unnamed hedge-fund manager sent an email to an SEC examiner
laying out concerns that Mr. Madoff’s self-described trading strategy
didn’t add up.
The manager said
the strategy wasn’t duplicated by anyone else in the market,
Mr. Madoff’s accounts were in cash at month end, and
there was “always replacement capital.”
These could be “indicia of a Ponzi scheme,” he wrote.

However, the SEC didn’t open an examination until December 2003,
and an agency memo said the focus would be on front-running,
a potentially abusive trading practice.
The memo didn’t raise questions cited by the hedge-fund manager, such as
why there was an apparent lack of volume in the market
to reflect Mr. Madoff’s supposed trading strategy.

Senior examiner John McCarthy told the inspector general that
it wasn’t a mistake to focus solely on front-running
“because that’s where my area, my team’s area of expertise led,”
according to the report.


The examiners sought trading records from Mr. Madoff,
but not from third parties who could verify the supposed trades.
The staff was redirected to another issue in March 2004,
with many questions on Mr. Madoff unanswered,
according to the report.

Eleven months later, SEC examiner Eric Swanson,
who had also been involved in the examination,
saw Mr. Madoff’s niece, Shana Madoff,
at a securities-law conference in St. Louis.
After meeting her at a hotel to travel to the event site,
Mr. Swanson emailed a colleague to ask about the status of the examination.
He was told it was “Deady [sic]. We never found any real problems.”

Mr. Swanson, who later married Ms. Madoff,
told the inspector general, David Kotz, that
he never discussed the examination with her.
The inspector general concluded that Mr. Swanson didn’t do anything wrong.
Eric Starkman, a spokesman for Mr. Swanson and Ms. Madoff, said:
“I don’t need to comment. The report speaks for itself.”

An attorney for Mr. Madoff wasn’t reached for comment.

SEC Chairman Mary Schapiro said,
“In the coming weeks, we will continue to closely review the full report
and learn every lesson we can to help build upon
the many reforms we have already put into place since January.”

The report makes clear that
a 2005 examination of Mr. Madoff’s operations was triggered by
emails seen in a routine examination in 2004
of Renaissance Technologies, a giant hedge-fund firm run by James Simons.

The emails revealed concerns among Renaissance executives
about whether the Madoff operation was a fraud.
Mr. Simons’s son, Nat Simons, who the report said
runs a unit of Renaissance called Meritage
that doles out money to external investment managers,
wrote in a November 2003 email that
Meritage employees had been told by an investment consultant that
“Madoff will have a serious problem within a year.”
Several emails among Renaissance employees
questioned the validity of Madoff’s business,
according to the inspector general’s report.

Renaissance officials told regulators that
while they were worried enough to pull money out of Madoff investments,
they didn’t directly report their concerns to the SEC
because they believed regulators had vetted Mr. Madoff
and had access to options-trading records that could verify or discredit Mr. Madoff.

Nat Simons sent an email to his father and others
referring to New York’s then-attorney general, Eliot Spitzer.
“It’s high season on money managers,
and Madoff’s head would look pretty good above Elliot[sic] Spitzer’s mantle,”
he wrote.
“The risk-reward on this bet is not in our favor.”

One anonymous complaint directed the SEC to
a “scandal of major proportion” by the Madoff firm
and said assets of a specific investor
“have been ‘co-mingled’ with funds controlled by the Madoff firm.
The SEC called Mr. Madoff’s lawyer and had him ask Mr. Madoff
if he managed money for that investor.
When the lawyer said Madoff didn’t, the complaint wasn’t pursued further.
The IG report concludes that
“accepting the word of a registrant
who is alleged to be engaged in a specific instance of fraud
is an inadequate investigation.”

S.E.C. Vows to Reorganize Unit to Head Off Fraud
New York Times, 2009-09-11


Harry Markopolos,
the fraud investigator who brought his allegations to the S.E.C.
about improprieties in Mr. Madoff’s business starting in 2000,
testified that
the agency’s staff
“was not capable of finding ice cream in a Dairy Queen.”

The system of conducting inspections at the agency
rewards attention to detail
rather than investigative energy and motivation to catch misconduct,
he said.

Mr. Markopolos, who determined
there was no way
Mr. Madoff could have been making the consistent returns he had claimed,

repeatedly and specifically raised warnings
to S.E.C. staff members in Boston, New York and Washington
about Mr. Madoff’s operations.

Suit Accuses S.E.C. of Failing to Detect Madoff Scheme
New York Times, 2009-10-15 [the above link is to the 10-14 draft]

[An excerpt, from the 10-14 draft; emphasis is added:]

Mary L. Schapiro,
who became chairwoman of the S.E.C. about six weeks after Mr. Madoff’s arrest,
acknowledged those shortcomings last month
but promised to undertake broad structural reforms
aimed at preventing such failures in the future.

[What bullahit.
Anyone who intelligently read the executive summary
can see that the primary problems were due to
faulty judgment on the part of individual staff members.
It had nothing to do with structure, just the people involved.
A case in point:
The SEC branch chief who kept ignoring Markopolos because
she "took an instant dislike to [him]."
What does structure have to do with that?

Whatever structure Congress, etc. adapts,
if the people filling the slots in the structure want to protect a Madoff,
they will find a way to do just that.
It's total bullshit that Schapiro points the figure at structure,
not the people involved.]

Lapses Helped Scheme, Madoff Told Investigators
New York Times, 2009-10-31

Nobody was more surprised that the Securities and Exchange Commission did not discover Bernard L. Madoff’s enormous Ponzi scheme years ago than Mr. Madoff himself.

After all, it would have been pretty simple,
he said in a transcript of a jailhouse interview that is part of a trove of official exhibits released on Friday by the S.E.C.’s inspector general, H. David Kotz.

In the interview, Mr. Madoff said that the young investigators who pestered him over incidentals like e-mail messages should have just checked basics like his account with Wall Street’s central clearinghouse and his dealings with the firms that were supposedly handling his trades.

“If you’re looking at a Ponzi scheme,
it’s the first thing you do,”

he said.

Those simple steps, he added, could have revealed years earlier that he was running the largest Ponzi scheme ever, a crime that has now dragged the S.E.C. into the worst scandal in its 75-year history. “It would have been easy for them to see,” he added.

The new exhibits consist of 6,157 pages of interviews, letters, e-mail messages, telephone records and other background material gathered during Mr. Kotz’s 10-month investigation of how the commission handled, and mishandled, numerous tips and warnings it received about Mr. Madoff over the years. His full report,released last month, found the agency had received six substantive complaints since 1992 — and botched the investigation of every one of them. He found no evidence of any bribery, collusion or deliberate sabotage of those investigations.

In fact, Mr. Madoff said in the jailhouse interview that, on two occasions, he was certain it was only a matter of days or even hours before he would be caught. The first time, in 2004, he assumed the investigators would check his clearinghouse account. He said he was “astonished” that they did not, and theorized that they might have decided against doing so because of his stature in the industry.

“I’m very proud of the role I played in the industry,” he said. “Of course I destroyed that now.”

In Mr. Madoff’s second close call in 2006, investigators actually asked for his clearinghouse account number on a Friday afternoon, but then never followed up. He said he firmly expected the following Monday would bring the curtain down on his crime. Again, nothing happened. He recalled thinking at the time: “After all this, I got away lucky.”

His investors did not. According to estimates by a court-appointed trustee who is liquidating his estate, Mr. Madoff’s crime cost thousands of victims at least $21 billion in cash losses, part of the $64.8 billion in paper wealth that vanished when his scheme collapsed.



Shadowing a Swindler
Early on, he figured out what Bernard Madoff was up to.
Wall Street Journal, 2010-03-08

Review of
No One Would Listen
By Harry Markopolos

Wiley, 354 pages, $27.95

A crusading legislator who had made a considerable reputation following up on whistleblower charges once told me that nearly all the whistleblowers she had met shared two qualities. First, they were onto something—that is, there was at least some truth to what they were saying. Second, they were “a little bit nuts.” The jacket of “No One Would Listen” identifies Harry Markopolos as “the Madoff Whistleblower.” He would seem to fit the pattern.

First, the truth part. As early as 1999, Mr. Markopolos, a derivatives analyst in Boston, suspected that Bernard Madoff’s investment business—revealed to be a multibillion-dollar Ponzi scheme in December 2008—was a fraud. Through common sense at first, but ultimately through brilliant analytical detective work, Mr. Markopolos figured out precisely what Mr. Madoff was up to—and showed why Mr. Madoff could not be earning the amazingly consistent returns that he claimed for his investors. Mr. Markopolos reported his discoveries several times to the Securities and Exchange Commission.

The response of the SEC’s enforcement staff was nothing less than appalling—a complete dereliction of duty. Mr. Markopolos made detailed submissions to the SEC in 2000, 2001 and 2005, each time showing why Mr. Madoff’s investment “system” was fraudulent. A range of SEC staffers in Boston and New York ignored the documents that Mr. Markopolos submitted or studied them only briefly, eventually letting the whole matter drop.

The crook simply outmatched the watchdog. As Mr. Markopolos observes: “The quants who create these financial products understand differential equations and nonnormal statistics; they program in languages the SEC doesn’t speak; they run statistical packages the SEC doesn’t even know exist. The quants are busy data mining with supercomputers while the SEC is still panning by hand.”

The press also did not cover itself in glory.
Forbes magazine ignored a tip in 2001.
Barron’s ran a skeptical story a few months later,
but no one seemed to be listening, and no one followed up.
From late 2005 to early 2007,
a reporter for this newspaper
actively engaged in a dialogue with Mr. Markopolos,
who had told him that Mr. Madoff’s exposure, as a financial event,
would be the equal of the collapse of General Electric.

But the reporter—the highly regarded John R. Wilke,
who broke many corruption stories
before he died of pancreatic cancer last year—
repeatedly concluded that other strong stories on which he was working
offered greater potential.
A New York Times reporter made a similar decision in 2007.

Mr. Markopolos writes: “In my mind, at least, I was convinced that
someone high up at the Journal had decided
it was too dangerous to go after Bernie Madoff.”

No evidence for this charge is offered or even suggested.
For the record,
The Wall Street Journal’s managing editor in those years, Paul Steiger,
was my boss at the Journal in the mid-1990s
and is my boss again, at a nonprofit news organization.
Of Mr. Markopolos’s claim, he says: “It is a fantasy.”

Now we come to the second quality that whistleblowers often show.
The author of “No One Would Listen”
is fond of describing himself as “slightly eccentric,”
but he is not exactly self-aware.
By his account,
the fault for his having been ignored throughout eight years of warnings
is everyone else’s.
But that conclusion requires ignoring much of his story.

Mr. Markopolos’s first Madoff-charging submission to the SEC
came at a time when his own firm was competing against Mr. Madoff’s.
He was clearly not trying to be selfless:
“If there is a reward for uncovering fraud,” he wrote to the SEC staffers,
“I certainly deserve to be compensated.”
Mr. Markopolos later became a full-time fraud investigator.
Thus he always seemed to stand to profit
from the collapse of Mr. Madoff’s business.
The possibility of self-interest
probably heightened the skepticism of those he sought to persuade.

Mr. Markopolos also limited his outreach.
He developed an instant disrespect for staff members
of the Massachusetts Securities Division, for instance,
so he never said a word about Mr. Madoff in a meeting with them.
Later he decided that he couldn’t warn the director of risk management at Oppenheimer Funds, whom he calls a friend,
because Oppenheimer owned a fund that was Mr. Madoff’s second largest investor.
Arguably, Oppenheimer’s exposure was all the more reason to warn any “friend.”

Mr. Markopolos tells us that for years,
fearing for his own and his family’s safety,
he checked for bombs under his car;
he also carried a loaded gun and slept with it at his bedside.
He did so because he believed—though he offers no evidence—
that Mr. Madoff’s clients included Russian mobsters and Latin drug cartels.

[Would one really expect
that Markopolos would offer evidence in his book for those accusations?
If he had, he would have, without the slightest doubt,
only put himself and his family at greater risk.
That the sophisticated former Wall Street Journal reporter reviewer
does not note this
suggests an underlying bias and malice towards Mr. Markopolos.]

Even after Mr. Madoff had been jailed,
Mr. Markopolos, a longtime Army reservist,
feared that the SEC would invade his home,
eager to capture and suppress evidence of the agency’s failings:
“I loaded a 12-gauge pump shotgun with double-ought buckshot,
attached six more rounds to the stock,
and draped a bandolier of 20 more rounds on top of my locked gun cabinet.
Next I got out an old army gas mask in case they used tear gas.”

None of this behavior makes Mr. Markopolos’s case against Mr. Madoff
any less convincing.
Nor does it excuse the SEC.
But it does provide a fuller picture of the author
than the cardboard cut-out of the lonely hero
we’ve been hearing about for the past 15 months.
With his book, Mr. Markopolos sheds more light than he intends
on just why no one would listen.

Mr. Tofel, general manager of ProPublica, a nonprofit, investigative-journalism newsroom, worked 15 years at the Journal and was its assistant publisher in 2002-04.

Calling out Bernard Madoff but falling on deaf ears
By Steven Pearlstein
Washington Post, 2010-06-04

How can a guy like Bernie Madoff
snooker so many wealthy, sophisticated people
out of so much money over such a long time?

The following local tale offers at least a partial answer.

[Pearlstein talks about
some Jewish families that have dominated Washington real estate,
and how elements of the families warned of Madoff, but without success.]

Is the Madoff Scandal Paradigmatic?
Reviews by John Graham and Kevin MacDonald
The Occidental Observer, 2010-07-20

Is the Madoff Scandal Paradigmatic?
by Kevin MacDonald
The Occidental Observer Blog, 2010-07-20


Initially Bernard Madoff’s record-breaking $65 billion Ponzi scheme
was reported in terms of
how much harm he had done fellow Jews.
Subsequently discussion focused on
the ineptitude of the Securities and Exchange Commission
in not detecting and shutting down this fraud much earlier.

We contend here that the now extensive literature reveals that
the Madoff phenomenon was in fact
a massive shift of resources from non-Jews to Jews.
Prime beneficiaries extended beyond the Madoff family
to a number of other members of the Jewish elite.
The scam utilized familiar Jewish social traits to reach the size it did.
Far from being protected by SEC ineptitude,
it was Madoff’s perceived position as part of the Jewish Establishment
that put him beyond the law —

by intimidating the SEC.
[Again -- surprise!]
This was accentuated by traditional Jewish inhibitions on
reporting Jewish criminality.
We suggest that
Madoff’s self-destructive as well as socially damaging behavior
stemmed ultimately from
the conditionality inherent in the Jewish attitude to society at large
and is not unique to him.

[Some excerpts from the body of Graham and MacDonald’s paper:]

[In the initial reporting:]
The news channels were choked with pitiful and chilling stories of
elderly Jews discovering they had been flung into destitution by Madoff,
and of Jewish Charities reeling from the blows he had struck them.
The well-known among the victims —
such as Stephen Spielberg, Mort Zuckerman,
and New Jersey Senator Frank Lautenberg’s family —
seemed invariably Jewish.
Initially the presence of non-Jewish victims was not very apparent.
The obvious question was:
How could someone do this to his own people?


Subsequently, much fascinating detail has come to light,
including the seven books cited above.
We suggest here that the Madoff affair
does in fact offer important lessons as to
the nature of the Jewish community,
its relationship with the non-Jewish community,
and its influence on Public Policy.


*** As soon as he was able,
Madoff began taking in “discretionary” accounts from the public.
These are accounts where the broker is authorized to act
without first consulting the client.
Initially, funds were attracted by promising high returns,
but in the later years the pitch was fairly modest returns
with a very high degree of confidence (“low volatility” — the “Jewish T Bill”).
From raising money among New York-area relatives and friends,
he moved on to using agents to tap the wealthy across the country.
Ultimately, over the last two decades,
Madoff was able to use some of the professional fund-allocating operations
which have developed with the hedge fund boom (“Funds of Funds”).
Unlike the previous contributors,
many of the owners of this money were not American and not Jewish.


*** Madoff’s claimed returns were intrinsically implausible,
and in later years numerous investment professionals believed that
his activities were fraudulent.
This point of view was repeatedly and forcefully
brought to the attention of the SEC,
in particular by a Boston-based analyst, Harry Markopolos.
In a fascinating response,
in 2006 the agency finally launched an investigation
which scrupulously ignored the investment operation
and in November 2007 “found no evidence of fraud” (Arvedlund, 217).
Why this absurdity happened
is the Public Policy question addressed in this essay.

Transferring Wealth from Non-Jews to Jews

From a sociobiological point of view,
the first thing to grasp about the Madoff phenomenon is that
it was a large scale transfer of wealth from non-Jews to Jews.
This is because of the shift in the Ponzi scheme funding basis
at the beginning of the 1990s.
The big professional fund raisers (and consequently the biggest creditors)
entered then or later:
Fairfield-Greenwich ($7.9B), Banco Santander ($3B), Banco Medici ($2.1B),
Access International ($1.4B), Tremont/Rye/Kingate ($5.8B) and others.
Arvedlund (142) reports these outfits in aggregate
were owed some $20 Billion;
because of their comparatively late entry and accelerating contributions,
a much higher proportion of this loss would represent real cash invested....

Fairfield-Greenwich and Access International
were focused on the ultra wealthy jet-set/titled European crowd,
but most of the other European conduits accessed the general European public.
Some Jewish money may have been added via Bank Medici,
the Vienna-based vehicle established by
one-time US resident and Orthodox Jewess Sonja Kohn,
who is rumored to have brought in some Russian Oligarchs
(as a result of which she is now in hiding).
But even here, via complex arrangements with various banks,
the main contributions came from the general public in Europe.


This has effectively put the early investors with Madoff
in a strange position.
Over the past 20 years, as Kirtzman (140) notes:
“Hundreds of Bernie Madoff’s investors were retiring early,
moving into bigger houses, on the money they made”.
Whatever else Madoff may have thought about
his large entourage of elderly early small investors and their descendents,
as Kirtzman says, he could take the view that
“he was taking care of all of them in their old age” (251).

It is simply a fact that many people lived very well for many years
from the proceeds of Madoff’s depredations.


The Jewish Ethnic Nexus That Enabled Madoff’s Fraud

[The contents of this section are strong and controversial stuff.
I’ve hesitated over reproducing it here,
but have decided to go ahead, at least with the start of it.
I find these ideas fascinating, very, very plausible,
very consistent with my knowledge of the extent and basis of Jewish achievement,
yet surely controversial and considered anti-Semitic within the Jewish community.
I will leave it to you to read the rest in the original, as you choose.]

Several writers have discussed the arresting idea that
the genetic mutations which supply Ashkenazi Jews with their high intelligence
are also those which cause the ravaging of this group
with cruel and lethal ailments such as Tay-Sachs and Gaucher’s disease
(see here, here, and here).
[Evolution both giveth and taketh away.]
Bernard Madoff was like a Tay-Sachs occurrence within the Jewish community:
The characteristics which make them
such formidable competitors for resources
also rendered them pathetically vulnerable to a Madoff.

Most salient of these was
the practice among this otherwise skeptical and independent community
to coalesce around rabbinical/guru figures,
who are treated virtually as gods, revered, unquestioned, and fiercely defended.
Obvious examples are found to this day among the Hasidim.
Kevin MacDonald has demonstrated in The Culture of Critique
how this pattern imposed itself on Western intellectual life,
as seen in the rise of
Freudianism, Boasian Anthropology, and the Frankfort School, among others,
all equipped with their prophet.

“Flying wedge” tactics and conscious intra-group loyalty
has made this characteristic exceptionally valuable
in seizing control of professional entities
such as university departments
from the disorganized and atomistic non-Jews.

To many, Madoff was such a deity.
“He was like a God”
Kirtzman quotes professional Holocaust victim Elie Wiesel saying of Madoff (96).
(Wiesel lost most of his savings and his foundation’s endowment to Madoff.)
“There was a myth that he created around him.
That everything was so special, so unique” (Kirtzman, 96).
Oppenheimer reports a member of an extended family long involved with
and heavily damaged by Madoff saying that
they “regarded Bernie like a messiah.
He was spoken of as if godlike” (93).
The accounts of the stir he created attending Jewish gatherings
are almost comic:
“He was received like visiting royalty, mysterious and unapproachable”
(Kirtzman, 89).

The consequence was an extremely useful suspension of disbelief.

Infatuations of this type are rare among whites generally,
and usually mild and fleeting.
This makes them more difficult to organize —
but less vulnerable to a Madoff.

A consequence of this ethnocentric infatuation was that
would-be whistle-blowers were subject to savage attack,
if they were not simply tuned out.
Laura Goldman, an investment advisor now resident in Israel,
had come to negative conclusions about Madoff
and liquidated her own exposure to him.
The Strobers relate how
when in 2001 both Barrons and the trade publication MAR/Hedge
published stories (here and here)
insinuating Madoff’s returns were incredible,
she mailed copies to contacts in Palm Beach
(where the ultra-wealthy Jewish community
had become a major funding source for Madoff):
“They said that the publications were anti-Semitic —
that Jews have more faith in Bernie Madoff than they do in God” (81).

In her own book,
the author of the Barrons article (Arvedlund) reports that
as a result of her efforts
Goldman “was promptly accused of being anti-Semitic by Palm Beach residents…
“And I live in Israel!” she noted” (252).
This response is a factor to remember when we consider the behavior of the SEC.
(The author of the MAR/Hedge article, Michael Ocrant, is Jewish.)

Until quite late in the history of his fraud,
Madoff relied on drawing in funds from (wealthier and wealthier) individuals.
Mechanically, this was a remarkable achievement.
A value in the Madoff literature is the documentation it supplies on
the characteristic group loyalty from which Madoff benefitted.
Kirtzman notes:
He was a member of the tribe.
Jews of his generation were brought up
to think of other Jews as extended family members,
with a shared responsibility to look out for one another.
They felt more comfortable going to Jewish doctors, Jewish lawyers,
Jewish accountants.
Madoff became known as “the Jewish T-bill.” (73–74)
Kirtzman quotes from a contemporary from Laurelton, Madoff’s home district of Queens:
The Jewish world was very tight and highly networked. …
Everything was done through “the phone call”.
My brother wanted to go into retailing,
so a call was made to Mr. Temona on the board of Lerners.
I wanted to transfer to NYU and live in one dorm:
a call was made to Professor Levine. (74)
Of course, from the point of view of a non-Jew,
this kind of cohesive efficiency
makes the Jews lethal competitors in the zero-sum struggle for resources.
In the case of Madoff, however, the efficiency turned out
to enable the fraud to spread more widely
and to be more damaging to the Jewish community itself.


Fairfield-Greenwich Group,
the biggest funds allocator caught by the implosion,
is generally presented as haute WASP
because of founder Walter Noel’s social image:
but FGG was brought to Madoff
by Noel’s partner Jeffrey Tucker, who is Jewish.


On October 25, 2009 Jeffrey Picower drowned in his Florida swimming pool
after a heart attack.
This is eerily similar to the 1991 drowning death of Robert Maxwell,
the Ruthenian-born Jew and UK publishing entrepreneur,
who was shortly afterwards discovered
to have looted the pension funds of his public companies
of hundreds of millions of pounds.2
As the result of his death,
the investigation into Picower’s activities is likely to be crippled.
(Recent reports suggest
the Picower estate is getting ready to pay the Madoff trustee
$2 billion or more to settle.)

Whether Ezra Merkin,
the long-time President of the socially elite Fifth Avenue Synagogue,
was a member of this small circle of massive Madoff beneficiaries
is no doubt a question of considerable interest to his fellow congregants.
They are reported to have $2B of exposure to Madoff,
much of it through Merkin’s hedge funds.
Kirtzman reports that Merkin had $2.4B of his client’s money with Madoff —
including that of 30 Jewish charities —
but “Of the $470 million in fees he earned from Madoff,
Merkin allegedly invested just $9 million back” (Kirtzman, 98).

If not an “insider,” Merkin would belong to a group
that immediately came under fire in the aftermath of the collapse —
the fundraisers.
Besides the professional operations mentioned previously,
these included a number of individuals like Robert Jaffe of Palm Beach
and the late “Mike” Engler of Minneapolis-St Paul who in Kirtzman’s words
were usually prominent members of the Jewish community,
working out of exclusive country clubs.
While investors thought they were just friends…
they were actually getting a percentage of the business. (89)
Because the apparent inside beneficiaries
generally controlled substantial charities
which reported large losses to Madoff,
they initially escaped much of the opprobrium directed at the money raisers.
Possibly the concept of a rogue being a large charitable donor
is counterintuitive.
But in principle there is no reason why a rogue would not fund charities.
Being a philanthropist is in a sense a luxury good and a status symbol —
a public marker of having arrived, particularly within the Jewish community.

Jewish Ethnic Networking Props Up Madoff’s Fraud

A remarkable fact that emerges from surveying the literature on Madoff was
how widespread the belief was within the professional investment community
that the Madoff operation was crooked.
This opinion was spread far beyond
the saga’s whistle-blowing hero, Harry Markopolos who noted,
“The industry knew, there’s no question about that” (176)
and his friends, about whom more later.


[T]he Strobers report
the above-mentioned David Harris of the American Jewish Committee
saying after the arrest
the Madoff name had come up here
in the AJC’s investment committee some months ago
when someone suggested we ought to explore investing …
with Madoff.
And the chairman of our investment committee actually said,
“No, I think it’s a Ponzi scheme.”
He actually used those words
to the ten or fifteen people in the meeting. (42)

Arvedlund reports an account by Harry Markopolos
of a meeting with Leon Gross, Citigroup’s global head of equity derivatives.
Gross told him that
“Bernie is a fraud and there’s no way his purported stock and options strategy
can possibly beat Treasury bill returns.
[Gross] also can’t believe the guy hasn’t been exposed yet” (218).

The famed Jewish co-founder of the Odyssey Partners hedge fund,
the late Jack Nash, and his son, Joshua,
seem to have had a hobby of denouncing Madoff.
Jack Nash liquidated a less-than-two-year investment with Madoff in the early 90s
after his son reviewed the Madoff statements and smelled a rat.
Arvedlund reports they repeatedly told Ezra Merkin this over several years,
to no avail (258–259).

Wall Street, of course, is an environment which encourages
intense and exclusive concentration on one’s immediate financial activity.
Furthermore, challenging Madoff was predictably dangerous.
Arvedlund reports a meeting between
the head of Lehman Brother’s alternative investment division and Merkin:
The Lehman guy fired first.

“C’mon, Ezra.
You know what’s behind Madoff’s operation, don’t you?
Don’t act like you don’t” he said.

Merkin and the man nearly got into a fistfight …
and Merkin left Lehman Brothers in a huff.
Not long after…the man at Lehman Brothers lost his job. (98)


With so many prominent Jewish investment industry figures
apparently aware that something was wrong with Madoff, the question arises:
Why did they not turn him in?
After all, a big scandal raising doubts about
the integrity of independent investment advisors
would be bad for everyone’s business, Jew or non-Jew
(as it indeed proved to be).
Because of Madoff’s high-level social-networking fund-raising techniques,
many must have been aware that
a great many fellow Jews were likely to be vulnerable
(one third of the elite Jewish Palm Beach Country Club
are reported to have been Madoff investors (Kirtzman, 245).
Some might even have thought such a scandal
would best be headed off by the Jews themselves
for the sake of their community.
(David Harris and the Investment Committee of the American Jewish Committee
could also have taken this line — but they did not.)
Furthermore, the standing of some of these men was such that
action by them would have necessitated a serious response by the authorities.

MacDonald has demonstrated that
group strategies forged in the stressful climate of Medieval Europe
continue to be highly influential
in determining modern Jewish social behavior.
For centuries,
it was absolutely forbidden to tell the Civil Authorities
about law-breaking by a fellow Jew,
an offence known as Mesirah (informing).
Some took the view that informing should be punishable by death.
The concept of mesirah is alive and well
amongst strongly traditional Jewish communities to this day —
for example recently,
in the community of Syrian Jews centered in Brooklyn
where a prominent rabbi renounced his son
after the son had informed on illegal financial activities within the community.
A perusal of their web sites suggests that
while there is some thought that, in the modern environment,
informing about crimes of violence might be permissible,
for other “lesser” offences (such as financial wrongdoing)
it is still forbidden.
There seems to be no concept that
it might actually be a citizen’s duty to report criminal behavior.

Harry Markopolos Exposes Corruption in High Places

Deeply ingrained traditions fade slowly.
The clear message of the facts of the Madoff scandal is that
Americans generally
cannot rely on American Jews
to halt financial fraud by someone who is Jewish.

There was, however, a group who simply could not have tried harder
to secure action by the authorities on Madoff.
The fate of their efforts opens
the most important public policy matter pertaining to the Madoff story.

Professional competiveness was what drove Harry Markopolos,
a Boston-based options expert, to challenge Madoff.
In 1999, he was asked by his employer,
which managed options strategies similar to those claimed by Madoff,
to figure out how Madoff was getting consistently superior returns.
Within hours he decided that the Madoff claims were fraudulent.

Gathering around him an informal group of like-minded professionals,
Markopolos spent most of the next decade
trying to get the Securities and Exchange Commission to act.
Numerous meetings with different officials as well as providing extensive documentation and apparently scores of phone calls and emails
produced almost no response.
Finally in November 2005 Markopolos submitted a report titled
“The World’s Largest Hedge Fund is a Fraud” (on line here [PDF]).

This 19-page document is a nuclear bomb.
No one even slightly used to reviewing serious discussions of complex matters
could fail to see that
it is written by an expert, very carefully thought out, and devastatingly cogent.
(Kirtzman — who appears to dislike Markopolos —
is quite wrong to describe it as “a dense, rambling thicket …
of mathematical formulas, and Wall Street jargon” [197].)
One would have thought
anyone in the line of responsibility for regulating Madoff
would have been absolutely terrified.

The SEC did act. As noted above, in 2006 an investigation was launched.
Markopolos was not consulted in any way
and Arvedlund quotes a former SEC staff member:
When you look at the closing documents,
it seems clear that
the Markopolos allegations of Madoff being a Ponzi scheme
were never even investigated.

In the end the SEC paid itself a kind of fee
by demanding that Madoff register as an investment advisor,
and in November 2007 terminated the probe —
barely a year before the collapse.

What happened?


[T]he Madoff case was obviously enormous and
the SEC had been presented with
a very concrete and serious accusation —
which was not difficult to test.
And this was only the last and most elaborate of
a series of investigations which inexplicably stopped (Ross, 34).


[T]he SEC
had almost ten years of presentations from Harry Markopolos to consider —
and, Markopolos reveals, tips from others too.
The scale of the matter was of the first magnitude.
Why was there no effective action?

We submit that the answer to this question is the same as to
why America is engaged in an unpopular war with the Muslim world
with no Congressional dissidence,
and why nation-breaking immigration continues —
in the midst of recession — with only a little more dissent —
and that after the topic had been
virtually driven out of public debate for several years.
The Bernard Madoff matter was one about which
a significant segment of Jewish America cared very much —
some for financial reasons,
others, perhaps, because of community pride and loyalty.
Challenging this group was well known to be extremely dangerous.
As in other matters, they awarded themselves a veto,
and they used it — as it happened in this case, to their cost.
All in all,
the Madoff affair and the cover-up
is another indication of
Jewish power in America.


Markopolos (who continued to have a working relationship with Wilke on other stories) says
In my mind, at least,
I was convinced that someone high up at the Journal
had decided it was too dangerous to go after Bernie Madoff. …
I was finally beginning to consider the possibility that
Bernie Madoff was untouchable —
that he was simply too powerful to be brought down.”
(Markopolos, 166–167)

This analysis — as a practical matter effectively true in our opinion —
is very different than the cover story generally presented
that Madoff survived because of SEC incompetence.

And it is not plausible that
the Wall Street Journal’s management did not know
what was absorbing so much one of their best reporter’s time.

A remarkable insight into how this power works
appears in Markopolos’ No One Would Listen.
When, in the aftermath, Markopolos was interviewed by David Kotz,
the new Inspector general of the SEC,
he was surprised to be told that
the meeting was part of a criminal investigation and told to take an oath.
He was then asked what he knew about
Senator Charles Schumer (D-NY) calling the SEC
about their Madoff investigation (243).

Markopolos knew nothing, but as he points out
“for a middle level SEC employee with ambitions,
any case in which an important politician is involved
is a case he or she wants to stay far away from” (141).

Bernie Madoff and his sons Andrew and Mark generally maxed out
contributing to Schumer’s campaigns.

In more recent years Bernard had also contributed significantly
to the Democratic Senatorial Campaign Committee
and some other Democratic candidates,
mainly, like Schumer, Jewish.

But it gets stranger — and more ominous.
In September, 2009,
Markopolos appeared before the Senate Banking Committee,
scheduled to follow H. David Kotz, SEC Inspector General,
who was there to discuss his recently-published investigation (PDF)
of the SEC’s Madoff failure.
There was a recess between the two testimonies and then:
Only Senators Chuck Schumer, who had made a phone call to the SEC,
and Jeff Merkley, a Democrat from Washington, returned.
Schumer took over the questioning ....
The entire room was filled with SEC staffers ....
The victims had been shunted to a hearing room ...
to watch the proceedings on closed circuit television.
We couldn’t have picked a more adverse audience.
(Markopolos, 261)

Schumer (who apparently felt no need to recuse himself
or even disclose that he had intervened on Madoff’s behalf)
ran the session so that
Markopolos would be able to speak as little as possible.

This became so extreme that the lawyer Markopolos had brought
“started handing me cards urging me, ‘Jump in whenever you can’”
(Markopolos, 262).

There is nothing to suggest
Schumer was actually involved with or even knew Madoff:
yet No One Would Listen makes it clear
he treated Markopolos with rudely dismissive curtness.
Why deprive this genuine public hero of his moment in the sun?

Similarly strange things had happened
when Markopolos went (voluntarily) in March 2009
to brief the newly appointed chief of the SEC, Mary Schapiro.
David Becker, the career Wall Street lawyer
imported the previous month as SEC General Counsel,
picked a quarrel over extraneous trivia
and threw a tantrum so violent that Markopolos’ lawyer
“thought that he was about to come right over that table and go for my throat”
(Markopolos, 249).
Consequently, the meeting was terminated.

[I remember reading about this meeting in Markopolos’ book.
I had no idea at the time that the general counsel, Becker,
had family profits from the Madoff scam,
profits of which Becker was well aware
at the time of the meeting with Markopolos.
The question is:
Did he divulge those ties to the SEC chairman Mary Schapario?

Let's fact it: the coverup the "elite" executed,
to look the other way all the while Madoff was committing his fraud,
was very close to being one big but tacit conspiracy to defraud.
Many of those who participated were making profits off Madoff's scam.]

In 1977 the actor Cliff Robertson,
seeking to correct an erroneous report to the IRS
of income from Columbia Pictures,
inadvertently triggered the discovery that
the (inevitably Jewish) head of the studio, David Begelman,
was a large scale embezzler.
As a result, Robertson, then at the height of his career,
was blacklisted and got no major movie roles for several years.
Evaluating Andrew Kirtzman’s Madoff book Betrayal purely subjectively,
one would think Harry Markopolos was the villain.
The Schumer and Becker performances are in the same tradition:
unrestrained rage against someone
deemed to have caused damage to a community member —
quite regardless of the ethical facts.



Our prediction is that nothing significant will ever emerge
on these questions.
Observation of a long list of scandals,
from 1967 Israeli attack on the USS Liberty
to the dropping of the espionage prosecutions against the American Israel Public Affairs Committee last year,
leads inevitably to this conclusion.
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.

an article that appeared too late to include in the print version questioned
“whether anyone will be charged with being an accomplice to the fraud....
Given the slow pace of the investigation,
it is questionable whether the government will ever be able to show that
there was anything more than a few willing enablers.”

If Bernard Madoff has a redeeming quality,
it must be the unflinching courage he has shown
in refusing to implicate his family in any way.


Madoff Victim Says Mets Owners Ignored Signs
New York Times, 2011-02-04

It is one of the enduring puzzles of the Madoff scandal: how so many sophisticated, even brilliant, investors were duped for so long.

For the owners of the Mets, Fred Wilpon and Saul Katz, that question has in recent weeks become a very personal, even urgent, one. The trustee for the victims of Bernard L. Madoff’s Ponzi scheme, Irving H. Picard, has sued the owners, seeking hundreds of millions of dollars — in part, Picard contends, because the owners either knew or should have known that Madoff’s investment operation was a potential fraud.

The lawsuit has been filed under seal in federal bankruptcy court, so any evidence Picard has to support his contention is not publicly known. On Thursday, however, Picard and lawyers for Wilpon and Katz agreed to unseal the court filing, which is expected to happen Friday morning.

According to two lawyers involved in the case, the lawsuit cites at least two instances in which third parties — in one case the investment bank Merrill Lynch — made clear their concerns to Wilpon and Katz about investing with Madoff. The men continued investing with Madoff for years.

To date, Wilpon and Katz have refused to talk about the lawsuit. On Wednesday, though, their lawyers said in interviews with two newspapers, The Daily News and The Wall Street Journal, that the trustee’s allegation was “absurd.”

“There was nothing about his brokerage operation that appeared anything other than normal,” one of the lawyers, Karen Wagner, said of Madoff in The Journal.

But the trustee’s lawsuit, it turns out, is not the only one to accuse the Mets’ owners of failing to meaningfully investigate Madoff.

Elyse S. Goldweber, the widow of a former employee of Wilpon’s and Katz’s corporate holding company, Sterling Equities Associates, has charged in a federal lawsuit in New York that the company, Wilpon and two other officers breached their fiduciary duties by offering employees the chance to invest their 401(k) plan with Madoff. By the time Madoff’s scam had been uncovered, about 92 percent of the 401(k) plan had been invested with his fraudulent firm, all of it lost. Goldweber had $280,420 invested in her husband’s 401(k), and it was wiped out, the lawsuit says.

The lawsuit says that Sterling officers, as overseers of the retirement plan, were required to use “care, skill, prudence and diligence” in administering it, and to diversify investments “to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.” But Goldweber’s lawsuit contends that the officers — two of whom, the suit noted, were certified public accountants — fell far short of honoring that obligation.


Madoff victims' trustee
seeks payouts from family of David Becker, SEC general counsel

By David S. Hilzenrath
Washington Post, 2011-02-24

The trustee trying to recover money for victims of Bernard L. Madoff’s infamous Ponzi scheme
is trying to recoup more than $1.5 million of Madoff payouts
from the family of David M. Becker,
the general counsel of the Securities and Exchange Commission.

The trustee sued Becker and his two brothers
as executors and beneficiaries of their mother’s estate.
When their mother, Dorothy G. Becker, died in 2004,
she held a Madoff account with a reported balance of more than $2 million,

according to a court filing.
The Becker brothers liquidated the account in 2005.
more money was withdrawn than their mother had deposited with Madoff,
the lawsuit said.

“I was not involved with my parents’ financial affairs,
and don’t remember knowing about any investment with Madoff
until after my mother’s death in 2004
and the subsequent liquidation of her account,”
Becker said in a statement.

Becker worked at the SEC from 1998 to 2002
as deputy general counsel and then general counsel.
He rejoined the agency in February 2009
as general counsel and senior adviser to Chairman Mary L. Schapiro.

S.E.C. Chairwoman Under Fire Over Ethics Issues
New York Times, 2011-03-09


Perhaps the most significant Madoff matter involving Mr. Becker
is a proposed reversal of the agency’s recommendation
on how to compensate victims of the scheme,
according to two people briefed on the S.E.C.’s discussions
who asked not to be identified
because they were not authorized to discuss the matter.
While the agency had agreed on a deal that would return to investors
only the money they had put into their Madoff accounts,
Mr. Becker argued that the commission should change its stance
to allow victims to keep some of the gains their investments had generated,
since the investment would have grown somewhat over time
even in a low-interest account.
The Becker family would benefit from this approach.

[To all those commentators who will try to soften this
by calling it a "potential" conflict of interest,
let us be clear:
There is nothing "potential" about this conflict,
it is an actual conflict of interest that Becker had,
between his personal interest in the matter as a beneficiary of the scheme
versus the interest of the victims of the scheme.
And he argued for the approach that would benefit him personally.]

S.E.C. Hid Its Lawyer’s Madoff Ties
New York Times, 2011-09-20

S.E.C. Punishes 8 Workers in Errors Tied to Madoff
New York Times, 2011-11-12

[Evidently the NYT could not be bothered to write its own story on this matter.]

Eight SEC employees disciplined over failures in Madoff fraud case; none are fired
By David S. Hilzenrath
Washington Post, 2011-11-12

The Securities and Exchange Commission,
which failed to stop Bernard Madoff’s long-running investment fraud
despite repeated warnings,
has disciplined eight agency employees over their handling of the matter
but did not fire anyone.

The SEC’s head of human resources and a law firm hired to advise the agency
had recommended that SEC Chairman Mary L. Schapiro fire one person,
whom the SEC described as a manager in the office that inspects investment firms.

the chairman decided not to fire the employee,
because doing so “would harm the agency’s work,”

SEC spokesman John Nester said.

The disclosure that no one was terminated comes at a time when street protesters and other critics who blame Wall Street for the country’s economic plight are questioning whether the government is serious about holding powerful wrongdoers accountable. This week, a federal judge excoriated the SEC for letting firms such as Citigroup settle fraud charges without admitting or denying wrongdoing.

Madoff’s fraud cost investors billions of dollars, shattered lives and became perhaps the biggest embarrassment in the SEC’s history. Many clients who had entrusted Madoff with their savings were left struggling to make ends meet.

“After all the talk about ethics and cleaning up the SEC, the entire Madoff scandal continues to place serious doubt on claims of meaningful progress,” Rep. Darrell Issa (R-Calif.), chairman of the House Committee on Oversight and Government Reform, said in a statement.

The Washington Post reported on its Web site Friday that seven SEC employees had been disciplined, based on details provided by a person familiar with the actions. A second source, an official involved in the process, told The Post that Schapiro had received recommendations to fire an employee over the mishandling of the Madoff case.

Later Friday, Nester confirmed details and added that an eighth employee also received disciplinary action. A ninth employee, who was facing a potential seven-day suspension, resigned before disciplinary action was taken, Nester said.

The punishments given the SEC employees varied and included suspensions, pay cuts and demotions.

The employee recommended for termination received one of the more severe penalties, a 30-day suspension along with a reduction in pay and grade. Another was given a pay cut of 5.7 percent. At the low end, one employee was suspended for seven days, another for three days and two others were issued counseling memos, a step below a reprimand.


Madoff victims enraged at SEC’s decision to keep employees who failed to stop fraud
By David S. Hilzenrath
Washington Post, 2011-11-16


A Standoff of Lawyers Veils Madoff’s Ties to JPMorgan Chase
New York Times, 2014-03-04

It remains one of Wall Street’s most puzzling mysteries:
What exactly did JPMorgan Chase bankers know
about Bernard L. Madoff’s Ponzi scheme?

A newly obtained government document explains why —
five years after Mr. Madoff’s arrest spotlighted his ties to JPMorgan
and later led the bank to reach a $2 billion settlement with federal authorities —
the picture is still so clouded.

The document, obtained through a Freedom of Information Act request,
reveals a behind-the-scenes dispute
that tested the limits of JPMorgan’s legal rights
and raised alarming yet unsubstantiated accusations of perjury at the bank.
More broadly, the document highlights
the legal hurdles federal authorities can face
when investigating a Wall Street giant.

That dispute, which positioned JPMorgan against the government
and ultimately one government agency against another,
traced to the point after Mr. Madoff’s arrest in December 2008.
Around that time, JPMorgan’s lawyers interviewed dozens of bank employees
who potentially crossed paths with Mr. Madoff’s company.

Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, the government document and other records show, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, according to the records, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.”

Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers.

But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.

Even after the comptroller’s office referred the issue to the Treasury Department’s inspector general, which sided with the regulator, the fight dragged on for months. Invoking a rare exception to attorney-client privilege, the inspector general argued that the lawyers’ interviews were essentially “made for the purpose of getting advice for the commission of a fraud or crime.”

In other words, if the accusations were true, JPMorgan employees either duped lawyers into covering up wrongdoing, or, worse, the lawyers themselves helped obstruct the investigation.

The accusation, the government document showed, led to a debate in Washington over how far to press JPMorgan when the bank was sure to fight and a judge would be free to set a harmful precedent for future cases.

Those concerns, and skepticism about the Treasury inspector general’s accusations, drove the Justice Department to reject the move to revoke attorney-client privilege. In the government document — a letter to the Treasury inspector general, or O.I.G., dated Sept. 12, 2013 — the civil division ruled that “unfortunately, O.I.G. has provided no basis — and we have not independently uncovered any basis — for suggesting that” the interview notes were “made for the purpose of facilitating a crime or a fraud.”

While the ruling applied to the Madoff case alone, it could have broader implications as regulators weigh the costs of future fights and the likelihood of passing muster with the Justice Department. And despite being an exceptional case — banks and their regulators typically settle disputes over attorney-client privilege without the Justice Department getting involved — the ruling illustrated a persistent tension over the privilege that continues to shape the government’s pursuit of financial fraud.

Even though the Justice Department is loath to undermine the privilege between a bank and its lawyers, a move that could prompt a reprimand from Congress and the courts, it also wants to appear tough on crime after the financial crisis. In the letter to the Treasury Department’s inspector general, the civil division’s leader declared that “I share your commitment to using all available tools to combat financial fraud,” noting that the division had sued Standard & Poor’s and Bank of America over their roles in the crisis.

And federal authorities worry that Wall Street might take the privilege too far — particularly in an era when banks facing a torrent of federal scrutiny are hiring dozens of law firms to conduct internal investigations alongside the government. As those investigations proceed, banks have invoked a number of protective firewalls, including attorney-client privilege and the work product doctrine, which shields interview notes and other documents that bank lawyers drafted in anticipation of litigation.

“Why hire a lawyer to do an internal investigation? It’s because you get the privileges,” said Bruce A. Green, a former federal prosecutor who is now a professor at Fordham Law School, where he directs the Louis Stein Center for Law and Ethics. “Otherwise, you’d save a little money and hire a consultant or accountant.”

In a statement, a spokesman for the Treasury Department’s inspector general said the office was “still considering if additional steps are warranted.”

The Justice Department’s civil division, which last year helped reach a record $13 billion settlement over JPMorgan’s sale of questionable mortgage securities, said in the Madoff letter that it stood “ready to work with you to develop an alternative that might better address the relevant regulatory concerns.”

JPMorgan, which served as the primary bank for Mr. Madoff’s company, declined to comment for this article.

In the past, a JPMorgan spokesman, Joe Evangelisti, has noted that the bank poured significant resources into bolstering its controls since Mr. Madoff’s arrest. He also remarked that “we do not believe that any JPMorgan Chase employee knowingly assisted Madoff’s Ponzi scheme,” which was an “unprecedented and widespread fraud that deceived thousands, including us, and caused many people to suffer substantial losses.”

The Madoff case is not the only one on Wall Street to raise questions about attorney-client privilege. Bank of America and Citigroup have had their own run-ins with authorities over whether to waive the privilege in a limited way during litigation, though those matters were resolved without the Justice Department intervening. And in an investigation into JPMorgan’s potential manipulation of energy markets, the Federal Energy Regulatory Commission challenged the bank’s assertion that attorney-client privilege protected certain emails.

Regulators also have pushed for access to handwritten interview notes and other findings that arose from an internal investigation conducted by a bank’s lawyers. While that push raises concerns about undermining the work product doctrine — and some bank lawyers have already reported a growing reluctance to be candid in private correspondence with bank employees — regulators say they are often unsatisfied with only a summary of the lawyers’ findings.

“We remind the banks that we’re your supervisor, you’re not our supervisor,” Thomas C. Baxter Jr., general counsel of the Federal Reserve Bank of New York, said at a recent panel discussion on attorney-client privilege held by Fordham Law School and the Cardozo School of Law.

Mr. Baxter added, however, that “we’re reasonable people.”

There are limits on what regulators can do if a bank balks at a demand for documents. If a fight ensues, the decision to challenge the privilege rests with the Justice Department.

In organized crime and terrorism cases, legal experts say, the Justice Department often exercises the so-called crime-fraud exception to the privilege. To do so, the Justice Department must show facts at the outset “to support a good faith belief by a reasonable person” that a judge’s review of the communications in question might establish that the crime-fraud exception would apply.

The JPMorgan case was not so clear cut. When the inspector general argued for the crime-fraud exception to invalidate the privilege, the Justice Department concluded that the evidence did “not suffice to justify” pursuing that claim.

In the letter outlining its decision, the Justice Department noted that memory lapses among JPMorgan employees “occurred in only a handful of the dozens of interviews conducted” by the comptroller’s office. The interviews, according to the letter, were conducted three-plus years after the events in question occurred. It is unclear why it took the comptroller’s office so long to interview bank employees.

The letter further says that the inspector general “has not identified any evidence affirmatively suggesting that the lapses in memory resulted from perjury,” adding that the “accusation of criminal collaboration depends entirely on speculation.” If the Justice Department were to pursue the subpoena, the letter said, the action would “risk developing negative precedent that could result in harm to the long-term institutional interests of the United States.”

Although the decision limited the view inside JPMorgan, the comptroller’s office and federal prosecutors in Manhattan still penalized the bank for its failure to sound the alarms about Mr. Madoff. The settlements, announced in January, amounted to roughly $2 billion.

5 Former Madoff Aides Found Guilty of Fraud
New York Times, 2014-03-24

A federal jury on Monday found five associates of the convicted swindler Bernard L. Madoff guilty on 31 counts of aiding one of the largest Ponzi schemes in history.

The case centered around whether or not the employees had committed securities fraud and other deceptive acts to knowingly mislead auditors and investors in Madoff Securities.

The trial in the United States District Court in Manhattan went on for more than five months, making it one of the longest white-collar trials in recent memory.

The five aides could face up to 30 years in prison, according to Samuel Buell, a professor of law at Duke University.

“I’d be very surprised if a federal judge thought it was appropriate to sentence somebody like this to several decades in prison,” Mr. Buell added.

Federal prosecutors made a case that two computer engineers, Jerome O’Hara and George Perez, helped Mr. Madoff pull off an enormous Ponzi scheme by knowingly creating computer programs that could create fake trades and records.

Prosecutors also alleged that Mr. Madoff’s portfolio managers Joann Crupi and Annette Bongiorno as well as the firm’s operations director, Daniel Bonventre, conspired in various ways to lie to customers, cheat on taxes and falsify records at Madoff Securities.

“These convictions, along with the prior guilty pleas of nine other defendants, demonstrate what we have believed from the earliest stages of the investigation: this largest-ever Ponzi scheme could not have been the work of one person,” said Preet Bharara, the United States attorney in Manhattan, whose office brought the case.

“The trial established that the Madoff fraud began at least as far back as the early 1970s, decades before it came to light,” he said. “These defendants each played an important role in carrying out the charade, propping it up, and concealing it from regulators, auditors, taxing authorities, lenders, and investors.”

While lawyers for the defense claimed that their clients did not knowingly participate in any of the deception, prosecutors made the case that the defendants were well aware of the fraud taking place at Mr. Madoff’s firm. That included the knowledge, for example, that Mr. Madoff’s firm was providing a “second set of books and records” to the Securities and Exchange Commission.

Mr. Madoff’s brother, Peter Madoff, and a handfull of other associates had previously pleaded guilty to charges relating to the fraud. The trial of Mr. O’Hara and the others gave the government its first opportunity to lay out all of the evidence it had collected in the years following the collapse of Madoff Securities.

Peter Madoff, who worked alongside his brother for nearly four decades, was sentenced to 10 years in prison in 2012.

The prosecution’s case centered around the testimony of Frank DiPascali, Mr. Madoff’s right-hand man who pleaded guilty in 2009. Mr. DiPascali has been cooperating with federal prosecutors in a bid for a more lenient sentence. He is currently facing up to 125 years in prison.

Lawyers for the five former employees had argued that Mr. DiPascali’s self-interest undermined his credibility. In his closing remarks, Larry Krantz, one of the defense attorneys, said that Mr. DiPascali lied to Mr. Perez and Mr. O’Hara “over and over again in order to trick them into working on the projects that he needed them to work on,” according to court records.


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