Madoff's Mugshot

Madoff's Mugshot

On Monday, June 29th 2009, US District Court Judge Denny Chin handed the perpetrator who facilitated “the largest, longest and most widespread Ponzi scheme in history” a 150 years behind bars, but what is next or should I say who is next? If you take Madoff’s statement to the court, his ludicrous explanation for his “error in judgement” verbatim. He would have you believe he committed  “the largest, longest and most widespread Ponzi scheme in history” by himself, no co-conspirator’s he acted alone.

Your Honor, I cannot offer you an excuse for my behavior. How do you excuse betraying thousands of investors who entrusted me with their life savings? How do you excuse deceiving 200 employees who have spent most of their working life working for me? How do you excuse lying to your brother and two sons who spent their whole adult life helping to build a successful and respectful business? How do you excuse lying and deceiving a wife who stood by you for 50 years, and still stands by you? And how do you excuse deceiving an industry that you spent a better part of your life trying to improve?

Madoff’s admitted solitary in this labyrinth of financial deception, is as unbelievable as the number of victims enveloped in the precedent setting scheme, now reportedly 8000.  Bernard Madoff Investment Securities, LLC (BMIS) wasn’t your run of the mill securities firm. BMIS did not have to seek out investors, instead  referrals were pouring in, word of mouth, friends referring friends, business partners referring contacts, you get the picture.  Who could blame them, who wouldn’t be lured by a promised 8-12% annual return on their investment? In reality though, Madoff never made any investments, instead he used  the money received from new investors to pay returns to existing clients and as revealed in his trial, to finance his and his family’s lavish lifestyle.

So exactly how did Madoff’s ponsi scheme stay below the radar for so long? Harry Markopolosa, a former investment manager tried to warn federal regulators about Madoff  not once but repeatedly since 2000, his warnings were ignored. In March, Markopolosa  testified for the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. Markopolosa’ testimony was explosive, he told house members the SEC was in fact enabling Madoff and he “would turn over new evidence to the agency showing the alleged Ponzi scheme mastermind had not acted alone”. 

Markopolos: I gift wrapped and delivered the largest Ponzi scheme in history to the SEC.

“They looked at the size of Madoff and said he’s a big firm and we don’t attack big firms,” said Markopolos, who became aware of Madoff when the firm he worked for tried to pursue the same kind of strategy Madoff did but never got the same steady, strong returns.

During the hearing, five SEC officials wouldn’t answer lawmakers’ questions, earlier SEC commissioners had voted  to “assert a privilege” not to answer questions from Congress. Why? Madoff and his family had many Wall Street connections, including co-conspirators connections working within the SEC. You know, the kind of co-conspirators connections you would want and need to pull off a scheme of this magnitude, you need people willing to turn a blind eye. Charlie Gasparino of the Daily Beast points out in his article, “How the SEC Got in Bed with the Madoffs. Literally” the not so obvious regarding the Madoff’s SEC connections.

In 1999 and then again in 2004, Eric Swanson, an assistant director in the inspections division of the SEC, was part of the team that examined Madoff’s brokerage firm. During those exams, the SEC team said it found almost nothing wrong, certainly not the fraud that the firm’s chief executive, Bernard Madoffadmittedto last Thursday evening, as he sat in the FBI’s New York offices with his one wrist handcuffed to a chair and the other holding a telephone he used to contact his attorney, the famed white-collar lawyer Ira Lee Sorkin.

Swanson doesn’t lead the SEC office in charge of such inspections; Lori Richards has that job. But he is noteworthy for another reason: Swanson married Madoff’s niece, Shana, in 2007, and knew members of the Madoff family well. Shana was the Madoff firm’s compliance counsel, one of the people in charge of making sure the firm played by the rules. The two had met at industry conferences.

In 2006, while at the SEC, Swanson sat on a panel sponsored by the Securities Traders Association, a leading market trade group that deals with regulators and the government over policy issue. Also on that panel was Robert Colby, the head of market regulation at the SEC, and Mark Madoff, Bernard’s son, who worked at the firm as well. Adding another level of intrigue, Swanson’s future and current father in law, Peter Madoff, is in charge of compliance for the Madoff operations. Swanson is now the general counsel for a company called BATs, which is an electronic trading company. As most people on Wall Street know, Bernard Madoff is one of the fathers of the electronic trading business, having been one of the founders of the Nasdaq stock market.

“Adding another level of intrigue”, 10 more are  to be charged with Madoff.

A person familiar with the investigation said 10 more people would face federal charges by the time the probe into the multibillion-dollar fraud is complete. So far, only Madoff and an accountant accused of failing to make basic auditing checks have been criminally charged.

The person, who spoke on condition of anonymity because the investigation is ongoing, wouldn’t detail potential charges or say whether the 10 would include Madoff’s family or former employees.

Considering the evidence and the scope of this case 10 is laughable, especially when you consider the number of people, Madoff’s family and Wall Street insiders associated with BMIS.

 In 2008, BMIS had $700 million of equity capital and handled approximately 10% of the NYSE trading volume. Its 200 employees (100 people in trading, fifty in technology, and fifty in the back office) were divided between New York and London, but only twelve of them were assigned to the famous split-strike conversion strategy devised by Madoff.

The financial red flags associated with Madoff’s scheme were ignored across the board, there is plenty of blame to go around. This case proves it is hard to exercise due diligence when it is associated with the all mighty dollar but not having it comes with a price, just ask Madoff’s victims. What good is more prosecutions without addressing the abject failures of the SEC, what will justice solve? Absolutely nothing, but there are 8000 reasons and counting we have to.