Whistleblower document warned SEC in Nov. 2005 about Madoff’s Ponzi scheme

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article:

I seldom have the urge to give a comforting pat on the back to people profiled in the Wall Street Journal.  But that was my reaction when I read the 21-page whistleblower document about Madoff that was written by Harry Markopolos to the Securities and Exchange Commission (SEC) on November 7, 2005. The Journal still has the document on its web site and Markopolos provides a step by step plan for the SEC to follow to nail Madoff as a Ponzi fraudster. The letter followed a five-year effort by Markopolos, who supplied documentation and made repeated requests to the SEC to investigate 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…”

Here’s a tiny sampling of what Markopolos told the SEC in his 21-page November 7, 2005 letter.  You decide if these are “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 Fun, Princeton Economics, and other hedge fund blow ups all had a lot fewer red flags than Madoff and look what happened at those places…”

Here is what the SEC’s memo of November 21, 2007 said following 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.”

Let me run that by you again.  Mr. Markopolos, a private citizen, uses his personal time and energy over a seven year period to document a fraud occurring under the nose of the SEC that could impact the international reputation of the United States along with the financial well being of pensioners, university endowments, foundations and private investors.  After losing track of the case for five years, the SEC finally gets around to investigating using taxpayers’ monies.  They come up with nothing despite being given a perfect path to follow to the fraud.  And their final suggestion for dealing with the investigation is to destroy the files!  With regulators like these, who needs Ponzi artists?

In 1992, eight years before Mr. Markopolos started hounding the SEC to take  action against Madoff, 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 has 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 represents Bernie Madoff today.  Put in charge as trustee of the Avellino and Bienes funds and records was Lee Richards.  The SEC has put Mr. Richards in place as a receiver and document custodian in the current matter, overseeing the London black hole operation known as Madoff Securities International Ltd.

Marc Mukasey, the son of the U.S. Attorney General, Michael Mukasey, is representing Frank DiPascali, a key Madoff employee.  This has resulted in the highest law enforcement officer in the nation recusing himself from the investigation of the largest Ponzi scheme in history.

Naturally, the Madoff money trail of special favors and exceptions leads straight to Washington.  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 is Mary Schapiro, who formerly headed up NASD Regulation, one of the most conflicted bodies in the history of finance.  Ms. Schapiro has just been nominated by President-Elect Barack Obama to be the new SEC Chair.  Expect to hear more about killing off the SEC (instead of giving it some teeth) and giving Madoff and his fellow miscreants their ultimate dream of just one compromised regulator instead of three.

The Madoff family almost uniformly gives to the same candidates.  Cumulatively, since 1993, they have given more than $400,000 to political candidates, committees and PACS.

The Madoff family is also a uniquely telepathic group.  When one member had an idea, invariably they all had the same idea.  For example, in May 1998, June 1999 and June 2004, a total of seven members of the Madoff family (all living in New York) decided to enrich the coffers of the Ed Markey Committee to the tune of $30,000.  Mr. Markey does not represent New York.  He is a Democrat who has represented the 7th Congressional District of Massachusetts for more than 30 years.  What could have been the motivation?

On February 24, 1997 I flew on US Air flight 6431 from New York to DC along with producer Dean Irwin and a film crew from ABC’s 20/20.  We were all heading to Ed Markey’s Congressional office to talk about one of Wall Street’s dirtiest secrets: their denial of an employee’s right to sue the Wall Street firm in an open courtroom, mandating instead, as a condition of employment, that the workers contractually agree to usher all claims (even whistleblower claims) into a crony system of arbitration run by Wall Street firms where case law and legal precedent are not followed and discovery is limited.  The system draws a dark curtain around the misdeeds of Wall Street and is an enabling agent for ever greater crimes sealed in secrecy.  A dream come true for a Ponzi operator.

Congressman Markey was a threat to Wall Street because he continued to introduce legislation known as the Civil Rights Procedures Protection Act that would have outlawed mandatory arbitration for certain employee claims and allowed those claims to proceed to an open courtroom.

The 20/20 crew spent a good portion of the afternoon filming Congressman Markey and myself talking about arbitration.  When the program aired, Congressman Markey was gone from the film and just a brief statement was inserted.  For decades now, that legislation, or similar legislation, has been introduced and then died a quiet death; much like the SEC investigations of Madoff.

December 22, 2008

Full article: CounterPunch

1 thought on “Whistleblower document warned SEC in Nov. 2005 about Madoff’s Ponzi scheme”

  1. Oy Vey!!!!!!!!!!!! Ithis story keeps getting worse…… this perfect Ponzi scheme of Madoff (Made-Off) continues to fascinate ….A true financial holocaust… He managed to lose or steal 50 billion dollars, which can’t be easy to do no matter how hard you try…… and nobody else knew?????????????? .not the other 2 dozen employees who worked closely with him there?????? they must have been blinded by some sort of quantitative trading wizardry I smell rotten lox..I actually feel bad for Charles Ponzi ..Ponzi scammers will have to change their name to “Madoff schemers”.and Mr.Ponzi will disappear as a mere memory …..but in researching more about hedge funds I came across a few books that were also fascinating… Hedge Fund Trading Secrets Revealed by Robert Dorfman… and Confessions of a Street Addict by Jim Cramer….both these books take you on a great ride about hedge funds how they make and lose millions…… and expose many other scam practices in this game. Dorfman actually teaches his strategies. Great reads


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