"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.
