Madoff Help News & Assistance

Part One – The SEC-Madoff Scandal

Ron Stein

“Accordingly, we found that not only was the SEC unable to uncover Madoff’s fraud in the several investigations and examinations it conducted over a period of years, the fact that they had conducted examinations and investigations and did not detect the fraud, lent credibility to Madoff’s operations and had the effect of encouraging additional individuals and entities to invest with him.” ¹
— Inspector General David Kotz

Stunned! So here we are a few weeks after the release of the stunning Kotz report. No less than six times, from 1992 on, the SEC flubbed its examination of Madoff. Reading the original Executive Summary left me in disbelief. Reading the actual document has been shocking. The bungling is so comprehensive and confounding it’s akin to a Keystone Cops reel. If it wasn’t so sad, it would make for a good premise for a comedy show. You cannot make this up. As I read the Kotz summary, listened to his testimony, and poked through his full 470 plus report I found myself tumbling through a series of reactions: from disbelief, to laughter at the absurdity, to despair, to outrage. If you want a stimulating read, read the Executive Summary click here – it’s more titillating than most summer reading!

They still don’t get it! As I’m poring over the sundry articles and media clips on the report, a fundamental point jumps out that remains largely missed. The epiphany light hasn’t yet clicked on for most of the victims, but especially for the media, who continue to see this as the Madoff scam with the SEC’s incompetence a minor sideshow. The balance is wrong, folks. Were we not on the back end of a financial crisis, this should be front and center financial and mainstream news.

People who know me know I’m pretty much a mainstream guy. I don’t spend time on the fringe, I’m not one to front a demonstration and I generally focus on the pragmatic. Listen to me: this is not the “Madoff fraud” – Bernard Madoff was but a two-bit player in this game. This is the SEC-Madoff scandal, with emphasis on the “SEC”. Read the above OIG text again. Simply put, at least $62 billion of this $64 billion catastrophe sits squarely in the hands of the SEC. The Kotz report drives this thesis home — loud and clear. Point, set, match.

It’s akin to a bank robbery where the bank manager deliberately left the doors unlocked and vault open, asked his employees to look the other way as the robbers rummaged through the vault, and valet-parked and then unwittingly drove the getaway car. Again and again.

So it’s more than that the SEC (and NASD and FINRA) failed to recognize this scam. Indeed, they – in the largest part — caused it. Since 1992, the SEC has effectively given their “Good Housekeeping Seal of Approval” to the Madoff scheme. Being an NASD-FINRA regulated and regularly audited broker-dealer provides an important fundamental level of protection way above and beyond an unregulated investment (i.e. a hedge fund). In and of itself, those credentials alone should provide some comfort against there being a Ponzi scheme, front-running, or insider trading. However, being regulated and annually audited, and publicly examined and investigated (multiple times) by the SEC is a whole other level of risk reduction. The SEC’s effective Seal of Approval is the component that turned this from a minor stick-up to huge heist.

Frankly, the government could not have done more to facilitate this fraud short of selling it themselves, packaged as Madoff Savings Bonds.

Still dubious? Follow me here. How many Mom and Pop’s would put all their money in a hedge fund? How many hedge fund managers and banks would have completely relaxed their due diligence standards unless they were convinced of Madoff’s legitimacy as a regulated and pristine broker-dealer with an SEC-validated history, as hedge fund great Jim Simons did? ² How many charities with fiduciary responsibilities would have been willing to subject their board and directors to lawsuits by investing in unregulated, un-vetted investments?

Get my drift? To blame this entirely on Madoff is an affront to reality. To blame this on Madoff investors is shear lunacy. I’m not saying the SEC deliberately perpetrated the fraud, but they enabled it, catalyzed it, caused it. Simple as that. Call it what you will: willful intelligence. Or, as Dean Larry Velvel describes it, “defacto intentional.” So to you, dear media person, if you’re still focusing on the sideshows you’re missing the real story – the SEC’s $60 billion dollar scandal.

You broke it, you fix it. So where does this leave the damaged – the tens of thousands of victims, maybe more — in this calamity? In a recent interview with a journalist from a major paper, I was asked how does one justify the American government taking on the burden of this error. I thought for a moment, but the answer is quite simple. First, aside from Madoff’s family and friends, the government has been the largest beneficiary of this fraud, collecting years of taxes at the highest possible tax rate. Second, and more importantly, we have a system of justice that’s built around compensating victims damaged by the acts, intended or negligent, of others. That system applies whether these are acts of individuals, corporations, or governments. When a corporation acts negligently, it must pay its restitution for the damage caused. The costs are borne by the corporation and its insurers, and ultimately the public: as shareholders, or consumers. The system operates this way because it must and it works – if people and entities are not held accountable for their actions, anarchy would reign, and the system cannot function. Accountability keeps risk down, keeps quality up.

It’s as simple as this: let’s start with the assumption that here, like everywhere in America, justice should prevail, and the SEC and those responsible for the fraud held accountable. The citizens of the US have enjoyed for years the tremendous benefits of the investment and financial universe overseen by the SEC, with trillions of dollars of wealth added to Americans’ net worth. In the midst of this growth, mistakes happen, people are injured, people are compensated, justice is done. We have arguably the finest justice system in the world, for good reason.

Everybody in the pool! So watch the pile-on begin – as perhaps thousands of victims of this fraud appropriately file claims against the SEC seeking compensation for damages. Howard Elisofon – a Herrick attorney interviewed in a prior blog see interview here – on behalf of his client initiated the first action of this sort months ago. I can’t imagine the Kotz report could have helped his case more. What seemed unrealistic to so many six months ago is beginning to seem so obvious now.

The tide is changing, the bar is raised. The Madoff victim, after months of battering and terror, may rise up. Congress and the Administration, we hope, are taking note. Indeed, at the Senate Banking Committee hearings around the Kotz report, Senators talked about helping the Madoff victim. Sure, all would like to put the SEC-Madoff Scandal in the rear view mirror and focus, instead, on repairing the SEC. However, the upcoming legal battles will be enormously costly to all, time consuming, and draining, and will publicly remind us all for years the government’s missteps. So, dear government, you have a wonderful opportunity to knock off two birds with one stone: do the right thing by those so terribly harmed, and save a fortune in legal fees and embarrassment by engaging proactively now, and putting this truly in the rear view mirror.

The upshot is this: what we suspected before, we now know, even more than we could have imagined. Madoff had a not-so-secret partner – an unwitting, yet culpable accomplice far more significant than the front man himself. A partner with deep pockets, and deeply at fault. Let conversation and justice begin.

– Ron Stein

NOTES:
1. “Investigation of the Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme – Public Version”, US SEC, Office of Investigation, August 31, 2009, OIG-509, p 419.
2. Ibid., [Jim] Simons [from Renaissance] cited their understanding that the SEC had looked at Madoff and given him a “clean bill of health” as a reason Renaissance did not initially divest itself of its Madoff-related investment. Id. at p. 28. Renaissance understood the SEC had examined “the whole business.” Id. at p. 17. Laufer agreed, “What was also on our minds … was that Madoff had been investigated – and cleared” by the SEC. Laufer Interview Tr. at pgs. 35-36. (All Page 1570
Renaissance also doubted Madoff could be engaged in fraud because he operated through highly-regulated brokerage accounts:
[B]ecause of the nature of the fact that these were brokerage statements, and he had a big broker-dealer business and big market-maker and – you just assume that someone was paying attention to make sure that there was something on the other side of the trade. … (All Page 158.)