The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Fred Wilpon

The Madoff trustee, Irving Picard, filed suit some time ago against renowned nice guy and Mets owner Fred Wilpon, seeking what are often called “claw back” profits.  According to Picard and other trustees (who try to unscramble Ponzi schemes) profits “earned” by winners of the scheme must be returned to those who are “losers.”  The problem often is that those “winners” don’t have the money anymore.  For Wilpon and his partner Irving Katz the “profits” were substantial—we are talking big money folks: $386 million big.

Our repeat person of the week, the Honorable Jed Rakoff, presiding over the case, threw much of it out.  But a portion remains and both sides are lining up hired guns (oops: “experts”) to support their positions.

Although I’m a friend of investors and have specifically represented thousands of them in connection with Ponzi schemes, I’ve never liked these “clawback “ cases.  Yes, I see the logic.  At some level, they make perfect sense.  Winners of illegal profits pay back losers and the Trustee tries to “minimize” the gap.  But Fred Wilpon was duped too.

Of course there were whispers on Wall Street for years about Madoff’s legitimacy.  Someone besides Harry Markopolos smelled a rat.  But those rumors were just that and no one, from the SEC or DOJ, was putting together a case.  So why should Wilpon take the hit.  I say no “clawbacks” unless the trustee can establish the net winner (someone like Wilpon) had actual knowledge of the scheme and provided the bad guy (in this case Madoff) with substantial assistance.

Jury Decides Mr. Perelman Is Not Entitled to A Nickel or “That Explains How He got all His Money.”

Five time divorcee Ronald Perelman, is an icon of American Business.  With a net worth in excess of $2 billion he has had some huge successes.  But his decision to sue his deputy Donald Drapkin for $16 million for Mr. Drapkin’s failure to secure some records of the company he had built with Perelman is just plain over the top.  Of course something else might be at play, but the jury wasn’t buying it.  To reach a verdict in less than one hour means they hardly got through their lunch.  In my experience, it takes more than an hour to just pick a foreperson. 

Mr. Perelman needs another $16 million like I need a new caviar spoon.  Just because you can sue someone doesn’t mean you must.  How can people that rich be so stupid?

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Last night the New York Mets lost their third straight on the diamond, dropping them to 25 games back of rival Philadelphia.  This afternoon their ignominious season comes to a merciful end; it will be the third straight season they’ve failed to win half of their games and the fifth straight in which they’ve missed the playoffs.  Nevertheless, the Mets higher-ups are no doubt rejoicing.

Why?  Yesterday, Judge Jed Rakoff hit a three run homer for the Mets.  Not quite a walk off grand slam, but close.  Mets owners Fred Wilpon and Saul Katz, all-around nice guys, were facing a lawsuit filed by Madoff trustee Irving Picard.  This suit alleges... a string of bad free agent signings.  Okay, not really.  Rather, the suit claimed they willfully ignored the fraudulent source of “dividends” coming from their investments with Bernie Madoff.  Rakoff would have none of it and dismissed nine counts; with the remaining two claims, he imposed a standard of “actual fraud”, making it virtually impossible for Picard to prevail.

“The Bankruptcy Code precludes the Trustee from bringing any action to recover from any of Madoff's customers any of the monies paid by Madoff Securities to those customers except in the case of actual fraud," concluded Judge Rakoff.

Rakoff decided to allow the case to proceed on the two remaining counts of actual fraud.  But instead of being on the hook for almost $300 million, the ruling limits Wilpon and Katz’s potential exposure to $83 million.  That’s a $200 million plus decision.  And that remaining "exposure"?  That's potential exposure.  They haven’t paid a nickel yet and likely will not.  The fraud claims will be nearly impossible to establish absent an insider.  Picard must prove Wilpon and Katz had knowledge of the fraudulent activity, and decided to capitalize on the Ponzi scheme at the expense of other investors.  Good luck.  Judge Rakoff has already called Picard’s evidence “less than convincing in this regard.”  After all, Wilpon invested with Madoff because their sons played baseball together, and because he heard of the lucrative returns Madoff promised and, for all appearances, achieved…

They may not be popping champagne in the Mets’ clubhouse this afternoon, another non-playoff season (five in a row??), but they almost certainly are in the owner’s box.

Assisted by David Martin

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Pull a Madoff -- in that the Commission will miss the shenanigans that are right underneath their noses, just as they did with Bernie years ago.

Yesterday the SEC announced a proposed set of regulations that would curb some of the abuses of the rating agencies (Moody's Corp. (MCO), Standard & Poor's, a McGraw-Hill Cos. (MHP) subsidiary, and Fitch Ratings).

First, let’s talk about the basic problem.  The issuer of debt pays for the rating.  It’s a naked conflict of interest.  Here’s an oversimplified example.  Bank of America has a bunch of sub-prime mortgages it securitizes in a bond offering it wants to offer for sale to pension funds, university endowments, charitable trusts and the like.  They need an Aaa rating or something close to it; it is called investment grade, since many institutions cannot invest in anything lower.

They go to Moody’s where they’ve had some luck before (wink, nod).  Moody’s, being a bit “moody” after all the bad publicity post-2008 disaster, says: “You know BofA there is a lot of risk in these underlying bonds (“really”).  Sorry, best we can do is Ba1.”

Bank of America, undaunted, and knowing how to play the game, comes back with: “Come on guys, how ‘bout if we sweeten the deal a little and increase your fee... and we’ll throw in some Legend Seats at Yankee stadium.”

“Against the Red Sox?”

“Fine, against the Red Sox.”

“You know those bonds are looking more Aaa every day,” says the Moody analyst, as he pulls his favorite Red Sox cap off the shelf.  It’s a conflict of interest at its simplest.  And guess what, if a BofA bondholder wants to sue the rating agencies after the bonds default, good luck.  The rating agencies have a “get out of jail card” at the ready.  “We were merely exercising our First Amendment right to render an opinion.”  Wins every time in court.

Second major problem: the Revolving Door.  That same Moody’s analyst who loves the Red Sox and will see them up close on BofA’s dime has already sent her resume to Bank of America and hopes to enjoy a 100% salary increase when she takes a job as a newly minted Vice President in the debt securities division.

Dodd-Frank provides the SEC with new authority to fix these conflicts.  What is the Commission doing?  A little window-dressing is all, nothing more.  For instance, the SEC has suggested rules that would have rating agencies clearly define and disclose the meaning of any symbols used by the rating agency.  The proposed rules attempt to directly address conflict of interest issues, but half of the section is devoted to exemptions and exceptions.  It is also seeking to set up qualification standards for credit analysts, to make sure they meet new training and experience standards.  Ho hum.  And indeed, the rating agencies are fighting even these minor reforms.

What the SEC must put on the front burner instead is the organization of a government-mandated clearinghouse intermediary through which credit raters would be assigned blindly to work on various bond offerings.  (No more Legend Seats.)  This intermediary was called for in Dodd-Frank and is being pushed for by Senator Franken.  Alas, in the way of Washington, the SEC will study the issue and issue a report, next—yes next—summer.

I can see the headlines a year in advance: SEC Misses Trillion Dollar Losses Caused by Continued Rating Agency Conflicts.

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And if you think that the SEC can be influenced by a $1.5 million dollar investment, you might want to check your backyard for Martian tracks.

Mr. Picard’s latest effort at headline grabbing is a lawsuit against David Becker, the SEC’s General Counsel (yes that SEC) for “profits” Mr. Becker’s parents made in connection with investments from Madoff funds.  According to various news reports, Mr. Becker made approximately $1.5 million as an executor of his parents' estate with his brother.  First, it is hokum, complete nonsense, to believe the SEC was somehow diverted from the Madoff trail because Mr. Becker influenced the process to protect his family’s investments.  Mr. Becker is a longstanding public servant who has served his country with great distinction and honesty.  And if you think that the SEC can be influenced by a $1.5 million dollar investment, you might want to check your backyard for Martian tracks.

Second, the importance of this story is Mr. Picard’s continued assault on what I would characterize as innocent investors.  These are folks who were not in the Madoff inner circle and had no basis to believe there was a fraud.  In my humble opinion they should be able to keep their money.  To claw back funds years later, Mr. Picard must show some level of fraudulent conduct or knowledge.  I applaud Mr. Picard’s suit against JPMorgan Chase because if he is right, they “knew” of the fraud and drove the getaway car; or in this case, a fleet of armored cars.  A predicate to every suit brought by the trustee must be knowledge and fraudulent intent.

Indeed, if we adopt Mr. Picard’s definition of profit (taking out more than you put in), we might as well try to clawback his firm’s fee, which now stands at a cool $128 million.  Hasn’t he “profited” from the Madoff fraud?  You bet; maybe its time for Mr. Picard to look in the mirror.

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Despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this subject - fraud - must be given some weight.

I’ve been mulling what Bernard Madoff said the other day in a prison interview with the New York Times.  He has been mostly silent for over two years since his incarceration, so at a certain level it’s interesting to just hear what is important to the world’s most notorious thief.  Would his first utterances be devoted to sympathy for his son Mark who tragically committed suicide earlier this year; surely a desperate act linked to the legal and emotional turmoil resulting from the crimes of the father?  Or would his short time on the bully pulpit be devoted to an apology to his many victims, including all those charitable foundations that are now either penniless or (at best) have been forced to cut back dramatically on the services they provided to the poor, disabled and others in need?  Nope.  Instead his words, as reported in the Times, focused on JPMorgan Chase, and his contention that “they had to know” about his fraud and Ponzi scheme.

In some ways, I want to shake his hand and buy him a carton of cigarettes (or whatever the currency de jour is of the North Carolina Federal Prison where he will spend the rest of his life).  But this is Bernie Madoff, the Hanibal Lecter of financial criminals.  Turn your eyes for a second, and he has stolen your wallet; turn your back and he has control over your IRA; try to walk away and he’s now gotten your kids' college fund and the proceeds of your life insurance policy.

Nevertheless, despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this issue - fraud - must be given some weight.  He is by any estimation an expert on the subject.  Wouldn’t it be wonderful to see Mr. Madoff put on the stand by Mr. Picard at a trial of JPMorgan Chase?  Both the direct and cross examination would be fascinating.  I’m confident though that in the end, Madoff’s testimony would be credible.  There is no way he could have been moving billions in cash without raising some suspicions.  But he was a “good” customer and no questions were asked.

Sadly for Madoff’s victims, JPMorgan Chase’s phalanx of high-powered lawyers will likely keep Madoff off the stand and the case will never reach a jury.  (But that, friends, is a story for another day.)

(Full Disclosure and Disclaimer: My firm is counsel to victims of several Ponzi schemes where it is being alleged that a bank, including JPMorgan Chase, is liable for all or some of their losses).

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As stated in these pages weeks ago, Madoff’s scheme, like all Ponzi Schemes, depended on the creation of an artifice of legitimacy and success.

This past Sunday Frank Rich wrote - in his elegant and insightful manner - about the lawsuit brought by Madoff receiver Irving Picard against JPMorgan Chase for its role as Madoff’s central banker.  He highlighted that Chase bankers way back in 2007, eighteen months before Madoff’s arrest, were discussing “a well-known cloud” over Madoff, including speculation that he was “part of a Ponzi scheme.”  Despite these concerns, Madoff continued to funnel billions of dollars of his clients’ money through Chase accounts while the bank carefully divested itself of $241 million of its $276 million in Madoff investments.  Nice guys.

As stated in these pages weeks ago, Madoff’s scheme, like all Ponzi Schemes, depended on the creation of an artifice of legitimacy and success.  Hence, the fancy Wall Street and London addresses, and key to the creation of that fiction, the participation of a first rate bank.  JPMorgan Chase was happy to play that role.  Without asking questions and despite the growing risk to investors, large and small, Madoff’s accounts remained open and under little to no scrutiny.

And it’s just going to happen again.  We need stronger self regulation (“Excuse me Mr. Madoff, wondering if you could answer a few questions from Larry in our compliance department.  Ok.  Why haven’t you bought a security, a stock, a bond, nothing in, oh, 12 years and instead just pass the new cash received to an older investor”).  Alternatively, we need more and tougher financial cops.  That ain’t happening.  The JPMorgan Chases of the world, with their phalanx of lawyers, will continue to be untouched by their often reckless conduct (or at a minimum turning a blind eye) in connection with the shenanigans of one future Ponzi scheme after another.  And with Congress under the spell of the Tea Party and its "cut government spending" mantra blaring from K Street and supported by the latest polling data, money for enforcement will not be forthcoming no matter the risks.  I can hear Fed Chairman Bernanke somewhere in the future, like a déjà vu moment, saying “we need a trillion dollars to save the financial system and I can’t tell you if that will even be enough.”

Who then is left to protect the small investors?  Well there is Mr. Markopolos, of course, and Mr. Picard is doing his share, to be sure, but they merely represent fingers in the dike.  Sadly, we are not better prepared for the next inevitable run up of greed and manipulation of say: “sub-prime mortgage backed securities 2.0” or some new “synthetic derivative” that is being concocted at some white shoe Wall Street law firm charging $900/hour that will become the latest rage for hedge fund managers from coast to coast.

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Let’s take a short ride back in time, not to the renaissance in Europe or even our own civil war.  No, just 5 years ago, February of 2006 in New York City.  All you need to bring is your common sense. 

February 2006

Chase (later to become part of JPMorgan Chase) does its first risk analysis on Bernard Madoff’s account.  The report expresses concern because returns were recorded as much higher than those of the actual contents of the portfolio.

June 15, 2007

A high-ranking Chase officer emails numerous colleagues stating his distress over client Bernard Madoff.  In it, he refers to the “cloud” over Madoff’s head and speculation that the account is “part of a Ponzi scheme.”

December 11, 2008

Mr. Madoff is arrested for allegedly operating a $50 billion Ponzi scheme.

March 12, 2009

Bernard Madoff admits in court that he ran a decades-long Ponzi scheme stretching back to the early 1990s.

June 30, 2009

At the age of 71, Bernie Madoff is sentenced to 150 years in prison for his crimes.

--------------------------------------

Folks, we just gave you the highlights.  You merely need to apply your common sense.  Big Bank has huge customer (with credentials, friends and lots of money).  They smell something is fishy in early 2006.  Do you think they just forgot about this multi-billion dollar customer?  Hardly, they became more worried in 2007; worried enough to utter the words “Ponzi scheme”.  But did they do anything?  Nope.  It was a huge account and at the end of the day, no one was going to rock the boat.

Claims against banks like JPMorgan Chase for aiding and abetting are difficult to be sure.  Irving Picard, the Madoff trustee, is pursuing such a claim against JPMorgan Chase; a recent New York Times article on his case is the source of much of the information above.  My firm is involved in several similar cases.  We seek only to hold banks accountable for their willful ignorance.

No these banks did not receive billions in fees, but they played an integral role in the scheme’s success.  Remember your common sense.  How many fancy and sophisticated investors would willingly invest with Mr. Madoff if he stored their earnings in a padlocked trunk under his bed?  A reputable bank makes all the difference in the world.

Assisted by David Martin

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The only way to end the cycle is to bite the bullet and fund the necessary office at the SEC.  Until we break the cycle, tens of thousands and the integrity of the markets remain at risk to predatory schemes like the one Mr. Madoff ran for years and years, right under the Commission’s nose.

The Dodd-Frank financial reform bill has taken its share of hits over the past few months.  This week’s might be the biggest.  The Wall Street Journal reported Friday that a lack of funding will force the SEC to delay opening an independent whistleblower office.  In the meantime, the SEC’s enforcement division will handle the anticipated 30,000 whistleblower claims per year.  Surely you’re not serious; the same SEC that missed Madoff and scores of smaller ponzi schemes?

This delay, just a month after the SEC released its proposed rule governing whistleblowers for public comment.  The bill required that the SEC finalize and adopt the rules by April 12, 2011, but what good are rules without a department to enforce them?  The incentives provided to whistleblowers under Dodd-Frank are an enormous step forward for investor protection in post-economic-crisis America.  Informed citizens alerting the government of fraud and corporate has a proven track record. 

Instead, there is a bit of a vicious cycle: poor whistleblower system helps cause crisis, which helps cause budget shortfall, which results in underfunding the SEC, which leads to poor whistleblower intake, and so on.  But the only way to end the cycle is to bite the bullet and fund the necessary office at the SEC.  Until we break the cycle, tens of thousands and the integrity of the markets remain at risk to predatory schemes like the one Mr. Madoff ran for years and years, right under the Commission’s nose.

Assisted by Zach Kady and David Martin

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Two years after Bernie Madoff’s arrest, the United States Attorney for the Southern District of New York announced the indictment of two key back-office employees.  The first question is, “What took them so long?”  (A question for another day.)  More interesting to me is who these people are and how the largest Ponzi scheme in recorded history operated for so long undetected?

I should say at the outset, I was surprised by the backgrounds of the indicted employees.  In my representation of Madoff victims, I have seen the elaborate and very detailed statements sent out each month by Madoff’s crew of thieves to thousands of investors, including many “sophisticated” fund managers.  These statements were written under the name Bernard L. Madoff Securities of Wall Street and London.  They identified specific securities owned and explained a complex trading methodology that, like magic, paid returns exceeding 10% every year.

I would have thought this grand multi-billion dollar ruse was the work of some computer programming genius.  Think Mark Zuckerberg of Facebook or his friend Sean Parker, the inventor of Napster.  Or perhaps some super nerdy, M.I.T. Ph.D. student who hacks into the Department of Defense’s operational control system for weekend fun.

Nope, it was two Italian grandmothers from New Jersey (I’m actually guessing they are grandmothers – but they could be): Jo Ann Crupi and Annette Borgiorno.  Both from working class backgrounds hired by Madoff back in the 1980s as key punch operators.  

The indictment explains that to fool regulators, they merely set up a phony (second) set of books.  (How clever!)  Continuing on the low-tech theme, Madoff's crew kept records of investments on handwritten note cards – I’m guessing those three by five cards we used in grade school for our class speeches.

If true, what does this say about the SEC and other regulators – fooled by the oldest trick in the book – two sets of books?  Maybe down the road we’ll find that Madoff had a super-computer and the world’s greatest programmers money (a lot of money) could buy.  But for now, these latest indictments merely throw more mud in the eye of those who should have dug deeper.  Not only the regulators, but those “sophisticated” investors (fund managers) who looked the other way while taking their huge monthly fees.

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Last Tuesday, we linked to Elizabeth Warren’s White House Blog post regarding her new position and the Consumer Financial Protection Bureau.  The New York Times has set up a forum for user comments, which are always welcome here at the Corporate Observer as well.

Stanley Chais passed away on Sunday.  The SEC had accused Chais of feeding roughly $1 billion of investor funds into Bernie Madoff’s Ponzi scheme, according to the Wall Street Journal’s Law Blog.

Len Blavatnik, a Russian-born billionaire who lost tens of millions because of JPMorgan’s investment in mortgage-backed securities, has sued the bank.  As the New York Times reports, he is not “someone for whom one’s heart instinctively bleeds.”  However, his goal – paving the way for banks to be held accountable for such criminally negligent behavior – is inspiring.  If only the courts would see it the same way.

Assisted by David Martin

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But it’s a fool’s errand to sue the SEC, a federal agency rightly immune from private lawsuits.  What’s next, suing President Johnson posthumously for not ending the war in Vietnam sooner?  Or how about Alan Greenspan for looking the other way (or tacitly supporting) the explosion of sub-prime debt in the 1990s?  Where would it end?

The Litwin Foundation recently sued the SEC for negligence in failing to detect Bernie Madoff’s Ponzi scheme earlier than it did.  The Foundation, which supports important medical research into Crohn’s disease and Alzheimer’s, alleges the negligence cost it $19 million.  Unfortunately, this is not the first time that investors in Madoff’s scheme have seen fit to sue the SEC for lack of oversight.  But if they really want to know who to blame, these groups need only look in the mirror.  In the first instance, it was their lack of diligence, not the SEC’s, which allowed years of Ponzi fraud to occur.

The blame-the-other-guy-in-the-room attitude will only lead us down the very same road we are trying to escape, especially if the “other guy in the room” is the government agency in charge of oversight.  Should the SEC have done a better job?  Absolutely.  Could Madoff have been caught earlier, saving investors millions of dollars that they will never recover?  Likely.  But it’s a fool’s errand to sue the SEC, a federal agency rightly immune from private lawsuits.  What’s next, suing President Johnson posthumously for not ending the war in Vietnam sooner?  Or how about Alan Greenspan for looking the other way (or tacitly supporting) the explosion of sub-prime debt in the 1990s?  Where would it end?

If the Litwin Foundation is spending charitable assets in the form of attorney’s fees they should be investigated by their State Attorney General and fined.  Filing frivolous lawsuits is not a proper use of charitable funds.  Enhanced diligence must come from us as individuals and from groups like the Litwin Foundation that are supposed to invest money wisely so it has more to provide to its noble causes.

The lesson from Madoff’s scheme should be twofold.

Lesson One: Investors need to realize that a substantial amount of individual diligence must go into every decision.  Just like free lunches, there is no such thing as a “risk-free investment.”  It is the duty of every investor to investigate her own financial opportunities and if necessary, bring any suspect behavior to the attention of the authorities.

Lesson Two: The SEC and other financial regulators cannot operate successfully under the system and attitudes that we had five years ago.  Elizabeth Warren’s Consumer Financial Protection Bureau is a major step forward, but we must continue to empower overseers and encourage enforcement from outside Wall Street and from those working within.

Until we complete the alteration to our rules and our attitudes, the blame game will continue while investors pay the price.

Assisted by David Martin

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It is time to return the term 'Ponzi scheme' to the microfiche headlines of the 1920s where it belongs.  To do so, regulators must start regulating and courts must start finding banks liable.

Over the past year or so, the term “Ponzi scheme” has sadly become as common as “Let’s have lunch” or “Text me.”  Yes, these schemes are emblematic of good old greed and the over-exuberance and blind optimism seen in all markets, but they also illustrate a serious failure in our banking system.  With leading reputable banks at their side, Ponzi schemes have the means to grow, metastasize, and take hard-earned (often retirement) monies from hundreds of thousands of victims.  Change needs to come in the form of enhanced regulation and the courts’ willingness to hold banks accountable.

One notable example is the case of an online Ponzi scheme called ADSURF.  Participants in this scheme were told in compelling YouTube videos, religious-type rallies, and internet ads that they could earn money by simply surfing the web.  When it sounds too good to be true, it is too good to be true.  All ADSURF was doing was recruiting new participants to pay into the scheme; this allowed the organizers to profit wildly while the unlucky newcomers got left holding the bag—just like all good Ponzi schemes.  

Contrary to core compliance requirements recently expanded and tightened in response to funding made available to the 9/11 terrorists, Bank of America placed itself at the heart of the ADSURF Ponzi scheme.  With the help of Bank of America, the ADSURF scheme went on to victimize over 100,000 participants who lost hundreds of millions of dollars.  Bank of America was privy to a slew of information that inexorably led to the conclusion that ADSURF was one big scam:

*         ADSURF was the brainchild of Thomas Bowdoin, a convicted felon with a history of securities fraud violations and failed business ventures.

*          ADSURF sold no products or services, held no intellectual property rights, and had no successful business professionals in management or on its Board.

*          ADSURF had no colorable, legitimate means to produce the massive profits (365% per year) Bowdoin and his co-conspirators promised investors.

*          ADSURF also lacked the means to legally generate the tens of millions of dollars a month flooding its tiny office—a former floral shop—in the small town of Quincy, Florida.

While unthinkable just a few years ago that one of the nation’s largest and most respected financial institutions could act so irresponsibly, their conduct is sadly consistent with a range of lax business practices.  A corporate culture that placed increased profits, seven-figure bonuses, and a higher stock price above sound banking judgment—this is the same culture that caused the Bank’s near-failure last fall (requiring a $45 billion dollar federal bailout because they were deemed “too big to fail”).

It is time to return the term “Ponzi scheme” to the microfiche headlines of the 1920s where it belongs.  To do so, regulators must start regulating and courts must start finding banks liable for knowingly assisting Ponzi schemes and other obvious fraudulent schemes.

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As harsh as it was, the Madoff sentence does virtually nothing to protect investors on Main Street.  What will?  Cleaning up the banks is a good start.

By now it’s old news: Bernard Madoff sentenced to 150 years in jail.  While news agencies and pundits debate ad nausea the deterrent effect and importance of this “symbolic sentence” (with good behavior Mr. Madoff will be released when he is 221 years old), a critical issue remains out of the public glare.  What about the bank Madoff and company used to support the largest and longest-running Ponzi scheme in history?  Remember that Madoff’s scheme relied upon him not buying any securities for his money management clients for over two decades.  Let me say it again, Madoff did not buy any securities for his clients since 1986.

So what did he do with the billions flowing in from feeder funds and a worldwide network of well-heeled promoters from around the world?  The simple answer is he put the money in the bank.  Not just any bank, but one of the world’s largest and most respected financial institutions: JPMorgan Chase.  Month after month, year after year, Madoff deposited billions.  Surely if he was running a legitimate money management firm those deposits would have been a mere fraction of that amount.  Why?  Because the money would be needed to buy securities and stocks for investors.  But he never bought those securities or stocks.  Statements given to his clients were no more real than a romance novel.  The stocks and bonds listed were never purchased, held or traded.  It was all a big lie.

Did JPMorgan Chase ever hush a word of this to the SEC or other regulators?  Did anyone say “this ain’t right”?  Probably not—the bank had huge accounts to service and there was plenty of money to be made.  Despite strict regulations placed on JPMorgan Chase by the Patriot Act, Anti-Money Laundering Act and Bank Secrecy requirements to be on the lookout for suspicious activity, the beat went on until the music finally stopped.

As harsh as it was, the Madoff sentence does virtually nothing to protect investors on Main Street.  What will?  Cleaning up the banks is a good start.  Empowering regulators, prosecutors and private attorneys to go after the banks is a good start.  Because without the banks' complicity, Madoff would have had no ability to take in billions every year.  Even he could not have gotten away with accepting cash or banking at anything less than a large money center bank.  Unless we clean up the banks, the chances are good, indeed certain, that we will see many more Ponzi schemes blossom before Mr. Madoff hobbles out of jail at the ripe old age of 221.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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"A novel in quarterly installments"

I recently had the opportunity to review one of the quarterly statements Madoff sent regularly to victims of his odious crime.  They are rather chilling: 

• You begin from the top with those addresses: very legitimate.  Just off Wall Street and London’s exclusive Mayfair neighborhood; but as you go down the page it gets even more interesting.
• Exact stocks are listed, good blue chip companies: Coca Cola, Hewlett Packard, ExxonMobil (household names) with precise shares and values.
• You then see those Treasury Bills and a purported transfer (transfer numbers included) between long and short positions in stocks to bonds. Truing up at the end of the month in some elegant cosmic unified theory (he touted as a “split strike or conversion strategy used no less to “reduce risk”).
• No penny stocks, middle market unknowns, or exotic derivatives or futures on Manchurian sawdust.
• All the numbers add up – or so they seem.

But it was all a fiction, “a novel in quarterly installments." According to the court-appointed receiver, Madoff hadn’t purchased a security since 1992. These statements were written, devised and distributed to deceive. They did so masterfully; month after month, year after year.  In many cases they were sent to sophisticated investors.  But when you are winning it's only natural to congratulate yourself and not look too hard for problems (“I’m invested with Madoff and I’m making money”). It’s like a poker player who wins three or four hands in a row; it’s not luck or someone feeding him the cards – no it's skill, experience and pure gravitas.

My first reaction to seeing these statements was this could hardly be the work of one man. Surely not a 70 year old man without computer training who likely couldn’t program his cell phone; maybe a computer geek-extraordinaire (think Napster in Italian Job), but that’s only possible in the movies (poor Steven Spielberg, prominent Madoff investor).

No it had to have taken the work of a small – very loyal – cadre of confederates at many levels (heck Danny Ocean needed 11 to steal $150 million). These detailed quarterly statements, tell me it was the work of an IT department and many more generating these lies of a comfortable retirement and money enough for generations. You’d think years ago someone would have cracked and spilled the beans.

But my overriding reaction to seeing those statements (besides empathy for my client) was how true – how accurate – is my own brokerage or IRA statement? Do the stocks listed really exist somewhere and what if I need the cash one day – that day. In fact, how many statements are true?

You’d think the SEC, with its expertise and subpoena power could have asked to see a few of those “transfers” or verify all those purchases detailed in Madoff’s quarterly novellas. And what about the third party custodians controlling at least 1000 IRA accounts invested with Madoff? They surely never checked the basics: custody.  Where were these t-bills and stock certificates listed on those statements? Who had custody? One simple audit would have unraveled this house of cards.

We have long been in an electronic age with trillions of securities transactions daily. Investment houses and banks don’t have to have stock certificates in a big old vault (like the one visited by Harry Potter before heading off to Hogwarts) – but we have the technology to check, to verify, to audit, to ask the right questions, to design the right software to ferret out fraud. We need to use it.

Why not use some of those stimulus dollars to improve technology, coupled with stricter compliance regulations at the state and federal level. Private rights of action that hold banks, custodians and anyone allowed who is entrusted with someone else’s assets accountable are also key. Finally, courts must judge these entities as fiduciaries – requiring them to exercise the highest duty recognized by law.

Creating those protections will not eliminate the next Madoff, but it might just reduce the number and size of future schemes. We will always have swindlers but we must do everything possible to reduce the sheer volume of these schemes, making less likely the enormity of pain and ruined lives Madoff and his confederates left in their wake.

Finally, more protection for all investors will create a higher level of confidence: critical to getting Main Street back into the markets and the financial system back on its feet.        

* Steven Berk is currently co-lead counsel against FiServ and other entities that served as the exclusive third party IRA custodian for Madoff Securities.

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