Letter to Diana Henriques

July 27, 2009

Ms. Diana Henriques
New York Times
229 W. 43rd Street
New York, NY 10036-3959


Dear Ms. Henriques:

I congratulate you on your excellent article on custodians on Saturday, July 25th.

I do have one problem, however. When I wrote to you on April 21st to extensively explain that the IRS had improperly approved Madoff as a nonbank custodian in 2004 though he was in violation of several of the IRS’s own regulations, you replied on April 23rd that you wished to “pursue a number of topics, and this [the IRS’ approval of Madoff] is a good one. The litigation filed against Fiserv also raises this ‘nonbank trustee’ issue.” But in your article on July 25th, you cite an IRS spokesman as follows: “The Internal Revenue Service monitors only ‘nonbank’ custodians, while most custodians – including the units that Fiserv owned – technically are banks or trust companies, an I.R.S. spokesman explained.”

However, as extensively explained to you in the email of April 21st, the IRS apparently did not “monitor” nonbank custodians, either when they applied for approval or subsequently. For, again as explained on April 21st, the IRS approved Madoff as a nonbank custodian in 2004 even though he was in violation of several of its own regulations governing such custodians. Nor, as far as I know, did it ever revoke that approval prior to December 11, 2008 even though he remained in violation of its regulations. This conduct by the IRS cannot fairly be thought to be “monitoring.” Had the IRS truly “monitored” Madoff in accordance with its own regulations, it would have discovered, exposed and ended his fraud, especially since it would have learned that he never bought or sold securities or options. Your article analogously cites Professor Bullard on this point, when you say “When custodians do these basic chores – custody, record-keeping and compliance – it is difficult for crooks to steal their customers’ I.R.A. savings, said Professor Bullard.”

In view of the fact that the IRS’ performance of its duties with regard to nonbank custodians would have exposed the fraud, it is perhaps little wonder that the IRS has refused a freedom of information request seeking information on how Madoff secured its approval of his company as nonbank custodian. Nor is it surprising that the Commissioner of the IRS has not responded to a letter to him asking how such IRS approval was obtained.

I note in these regards that a number of people have said they had IRAs directly with Madoff, not through Fiserv or other middlemen. Madoff needed IRS approval to legally serve as the custodian for these people, which he did for many years. Also, given the failures of performance of putative custodians, whom you wrote about, to track or keep custody of securities, it is entirely possible -- I would even say certain -- that Madoff was at minimum serving as a co-custodian, or sub-custodian, on thousands of IRA accounts held by purported custodians such as Fiserv. As far as I know, Madoff would have required IRS approval to be a nonbank co-custodian or sub-custodian, as well as to be nonbank custodian.

As said, however, you cited the IRS spokesman as claiming the IRS monitors nonbank custodians, even though you had been given extensive information showing this is untrue. Your action leads me to this question: Especially since you cited the IRS’ claim of monitoring though you must know it is inaccurate, did you do this preparatory to writing -- and are you indeed currently researching and/or planning -- a follow up article on how the IRS came to negligently (or possibly even criminally?) approve the largest Ponzi scammer in history to be a nonbank custodian of IRAs -- on how the IRS came to do this when even the slightest “monitoring” before or after approval of Madoff would have exposed his Ponzi scheme?

Sincerely,

Lawrence R. Velvel

cc: Media
Legislators