By Pam Martens: November 14, 2012
Next month, it will be four years since the decades-long Madoff Ponzi scheme was discovered – not by the SEC which had for years received reams of documents from whistleblower Harry Markopolos outlining what he believed to be a Madoff Ponzi scheme – but by a confession from Madoff himself.
For those who lost every dollar of savings they had accumulated over a lifetime to Madoff’s scheme, one can only imagine the contempt with which they regard the SEC.
Yesterday, New York State Attorney General Eric T. Schneiderman announced a $210 million settlement with the Ivy Asset Management, LLC, a Bank of New York Mellon subsidiary that advised clients to invest with Bernard Madoff, noting that “when added to future amounts Madoff investors anticipate receiving from the Madoff bankruptcy proceeding, today’s settlement is expected to return all or nearly all the original investment to those defrauded by the Ponzi scheme in this case.”
According to the Attorney General’s office, Ivy received over $40 million between 1998 and 2008 to conduct due diligence for clients with large Madoff investments. One of the areas that Ivy investigated was Madoff’s so-called split-strike conversion option strategy which he credited with allowing him to deliver his stellar results consistently year after year. When Ivy learned there were insufficient options traded to support Madoff’s purported options strategy, he gave Ivy three vastly different explanations – all of which Ivy knew to be false.
The Attorney General’s office obtained internal Ivy documents showing that Ivy had deeply held reservations about Madoff but failed to disclose them to clients. One email from an Ivy principal to a subordinate stated: “Ah, Madoff, you omitted one possibility – he’s a fraud!”
Reading the announcement from the Attorney General’s office, I had a flashback to January 5, 2009 when the House Financial Services Committee held the first of its hearings on the Madoff fraud. Allan Goldstein, a quiet gentleman of 76 from upstate New York, sat patiently in a back row waiting for his turn to speak. When the time came, he told the hearing that he and his wife had lost all their savings to Madoff, his wife was on medication for her emotional state, they were about to lose their home and move in with their children.
It didn’t have to happen at all. A civic-minded citizen, Harry Markopolos, used his professional knowledge and endless amounts of his time to provide the SEC with written outlines of why Madoff had to be running a Ponzi scheme.
Below is an excerpt of what Markopolos told the SEC in his 21-page November 7, 2005 letter:
“I am a derivatives expert and have traded or assisted in the trading of several billion $US in options strategies for hedge funds and institutional clients…(Highly Likely) Madoff Securities is the world’s largest Ponzi Scheme…The [Madoff] family runs what is effectively the world’s largest hedge fund with estimated assets under management of at least $20 billion to perhaps $50 billion…The third parties organize the hedge funds and obtain investors but 100% of the money raised is actually managed by Madoff Investment Securities, LLC in a purported hedge fund strategy. The investors that pony up the money don’t know that BM [Bernie Madoff] is managing their money…Some prominent US based hedge fund, fund of funds, that “invest” in BM in this manner include: A. Fairfield Sentry Limited (Arden Asset Management) which had $5.2 billion invested in BM as of May 2005…Access International Advisors…which had $450 million invested with BM as of mid-2002…Tremont Capital Management, Inc…Tremont oversees on an advisory and fully discretionary basis over $10.5 billion in assets.
“ Clients include institutional investors, public and private pension plans, ERISA plans, university endowments, foundations, and financial institutions, as well as high net worth individuals…Madoff does not allow outside performance audits. One London based hedge fund, fund of funds, representing Arab money, asked to send in a team of Big 4 accountants to conduct a performance audit during their planned due diligence. They were told ‘No, only Madoff’s brother-in-law who owns his own accounting firm is allowed to audit performance’…Only Madoff family members are privy to the investment strategy. Name one other prominent multi-billion dollar hedge fund that doesn’t have outside, non-family professionals involved in the investment process. You can’t because there aren’t any…There are too many red flags to ignore. REFCO, Wood River, the Manhattan Fund, Princeton Economics, and other hedge fund blow ups all had a lot fewer red flags than Madoff and look what happened at those places…”
The SEC’s memo of November 21, 2007 revealed the following about its investigation:
“The staff found no evidence of fraud…All files have been prepared for closing…Termination letters have been sent to Bernard L. Madoff Investment Securities LLC, Bernard L. Madoff, and Fairfield Greenwich Group. The staff has no objection to the eventual destruction of the files and has no knowledge of any impediment to such a disposition.”
Pay careful notice to the words “eventual destruction.” As Matt Taibbi would report in-depth last year, shredding evidence is an art form at the SEC.
As President Obama begins the process of cleaning house to prepare for his next term, the SEC should be among his top priorities.