Madoff Help News & Assistance

Ron Stein
January 2009

There are certain paper icons that people in this country have learned to trust and rely on implicitly: paper money and stock certificates are a couple that come to mind. While many of us have found mistakes in transactions on bank and credit card statements over the years, most of us have come to believe that the items posted are valid reflections of transactions completed, and we rely on them as well. Trust is an essential underlying component – whether it revolves around a utility bill, checking statement, or credit card. Without that trust, nothing would fly. Just consider how slowly some of are moving to electronic statements, so dependent are we on things printed.

The Investment Statement has come to signify that dependence and trust and then some. It represents what investors, in fact, financially own. It represents what they’ve worked hard for, what will provide some respite in later years, some future dream, some future need. Rather than take personal ownership of stock certificates, investors choose to allow brokerage firms to hold custody of their assets, and trust those firms to accurately represent the values of those assets on their investment statements. These statements represent values legally in court proceedings. They establish valid data for tax returns. The brokerage industry has been built largely around this accurate representation and the trust and reliance it has engendered. Imagine the impossibility of a brokerage industry that didn’t actually hold and accurately report the assets of its clients.

The investment statement has, therefore, become sacrosanct, protected and regulated. Unlike an unregulated hedge fund, where a statement is a piece of paper that indicates the value of the ownership units in an investment pool, a regulated brokerage statement is a statement of precisely what securities the own directly has.The validity of that statement, furthermore, is backed by the ongoing and rigorous regulations provided by government and quasi-government agencies, namely the Securities & Exchange Commission, and FINRA, formerly NASD and insurance though SIPC. It is therefore understood, that the basic auditing and regulatory process is required to make sure that what an investor sees on a statement is, in fact, what is held.

This is what the great laws of the land have demanded to protect an industry and to protect its people. And that is part of the tragedy and betrayal of the Madoff scandal, as it threatens to undo and damage the reputation of the broader brokerage industry.

Bernard Madoff has broken the statement, just as the Reserve Money Market Fund “broke the buck” in 2008 as it dropped below its $1 net asset value, resulting in a potential run on money market accounts across the nation. The US government swiftly averted crisis by guaranteeing money market funds, you may recall, even though it was hardly to blame for the problem. Hardly similar action is being seen around the Madoff debacle, however, in which the government was clearly an enabler.

Indeed, on the government’s watch, under the scrutinizing eyes of the quasi-governmental, self regulating industry watchdogs NASD and FINRA, Madoff was for years printing statements constructed of thin air. The fault is quite clear: both the NASD and FINRA had the responsibilities to ensure that Madoff statements were valid: an awareness that statements were going out to perhaps thousands of customers, that statements matched up with securities held in custody for client accounts, and that trades shown as executed actually were.

To claim that this went beyond the scope of NASD and FINRA regulation, as spokespeople for FINRA have purportedly done, and that they saw no statements going out from the broker-dealer during their bi-annual audits is beyond incomprehensible. Were they really completely unaware of the thousands of people receiving monthly Madoff broker-dealer statements listing FINRA and SIPC on each and every one? Is this possible? Should and do the laws of sovereign immunity – which make it difficult if not impossible to sue a governmental entity apply to NASD and FINRA?

The multitude of failures here is, frankly, beyond belief. The result will be doubt and distrust by investors regarding all but the most well-known financial firms at the expense of smaller firms that have worked diligently and ethically for years, not to mention heightened distrust of the financial industry as a whole, and the distrust of government to do its job.

The investment statement has been broken, and will not be easily fixed. Seeing is no longer believing.

Ron Stein