By Pam Martens: June 27, 2012
Peter Madoff, brother of convicted Ponzi artist, Bernard (Bernie) Madoff, will plead guilty this week to conspiracy to commit securities fraud and other offenses according to court papers filed today in Federal court in Manhattan.
Peter Madoff worked with his brother as chief compliance officer of the broker-dealer but has in the past denied involvement or knowledge of the Ponzi scheme which was carried out on another floor of the building from where the broker-dealer was housed. But in the tony towns of the North Shore of Long Island, few people have ever bought that story.
Since at least 1978, Peter and Bernie Madoff solicited funds for management from wealthy country club members on the North Shore of Long Island. The brothers promised a fixed rate of return of as much as 13 percent on a stock portfolio. It is illegal to guarantee a fixed rate of return on a stock portfolio and because both brothers were licensed under securities laws, both would have been aware they were breaking the law in making those guarantees. Bernie Madoff, who served in many roles in the self regulatory body known as the National Association of Securities Dealers (NASD) was never caught by law enforcement. He confessed to his two sons in 2008, Mark and Andrew, who were in business with him in the broker-dealer and they turned him in. Andrew has never been charged. Mark committed suicide in December 2010.
The trustee in charge of locating and returning funds to investors, Irving Picard, has estimated that the fraud encompassed approximately $20 billion in actual principal, while the balances on client account statements reflected approximately $65 billion.
The SEC had multiple opportunities to detect the Ponzi scheme and save investors billions in losses. In 1992, the SEC was settling an investigation against two Florida accountants, Frank Avellino and Michael Bienes. The pair had started raising money for Bernie Madoff to manage in 1962, just two years after he came to Wall Street. Avellino and Bienes had sold over $440 million in unregistered notes to thousands of people over yet another three-decade period when the SEC was napping. Mr. Madoff was not charged.
Representing Avellino and Bienes in that matter was Ira Lee Sorkin, the former head of the SEC region in New York City. Mr. Sorkin represented Bernie Madoff when he was charged in 2008. Put in charge as trustee of the Avellino and Bienes funds and records was Lee Richards. In 2009, the SEC again put Mr. Richards in place as a receiver and document custodian in the Ponzi scheme, overseeing the London black hole operation known as Madoff Securities International Ltd.
On November 7, 2005, Harry Markopolos, a professional in the field of finance, sent a 21-page document to the SEC. The letter followed a five-year effort by Markopolos to get the SEC to open an investigation of Madoff.
Here’s how the SEC characterized the letter from Markopolos in a January 4, 2006 memo: “The staff received a complaint alleging that Bernard L. Madoff Investment Securities LLC, a registered broker-dealer in New York (“BLM”), operates an undisclosed multi-billion dollar investment advisory business, and that BLM operates this business as a Ponzi scheme. The complaint did not contain specific facts about the alleged Ponzi scheme…” Don’t the words “Ponzi scheme” coming from a finance professional contain all the specific facts one needs?
This is a tiny sampling of what Markopolos told the SEC in his 21-page November 7, 2005 letter. I count dozens of specific facts — very specific facts:
“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.
From 1998 through 2008, Bernard L. Madoff Investment Securities paid $590,000 lobbying Congress and the SEC, according to the Center for Responsive Politics. His lobby firm for most of those years was Lent, Scrivner & Roth, with Norman F. Lent III signing the disclosure documents in the House and Senate. One of Madoff’s hot button issues during those years according to the disclosure documents was getting a single regulator. That meant, for starters, merging those prying eyes over at the New York Stock Exchange into the clubby pool of self-regulators at the National Association of Securities Dealers where the Madoff family held numerous seats of power.
That wish came true when NASD Regulation merged with the enforcement and arbitration units of the New York Stock Exchange in July 2007 to create the Financial Industry Regulatory Authority (FINRA). CEO of the consolidated body was Mary Schapiro, who formerly headed up NASD Regulation, one of the most conflicted bodies in the history of finance. President Obama appointed Ms. Schapiro to head the SEC in January 2009, where she remains despite a legacy of corruption on her watch.
According to the court filing, Peter Madoff received at least $60 million from the fraud and used fictitious stock trades to justify his withdrawals of cash. The U.S. Attorney has agreed not to seek more than a 10-year prison term. Bernie Madoff is serving a 150-year prison sentence.