Wednesday, July 08, 2009

Re: The Vast Amount That We Don’t Know About The Madoff Matter.

July 8, 2009

Re: The Vast Amount That We Don’t Know About The Madoff Matter.

My memory may be faulty, but I do not remember a major crime in which, at the times of plea and sentencing of the lead culprit, the details of what happened, of what was done, were as little known publicly (and perhaps to investigators) as in Madoff. Consider:

We do not know when or why the Ponzi scheme started. The government has said it started at least as early as the 1980s. But does it go back even further -- does it go back to the 1970s or even the 1960s? Court papers filed by governmental or quasi governmental bodies say that Madoff was friends of (and used) certain co-culprits like Sonny Cohen and Stanley Chais since the 1970s and 1960s. Were they present at the creation, so to speak? Was the fraud a mutual plot? -- from the beginning? Was it conceivably even something hatched initially in the office of Madoff’s father-in law in the early 1960s, when Avellino and Bienes started funneling money to Madoff? Nobody knows about this, unless the government has learned the facts but isn’t disclosing them yet.

Why was the fraud undertaken? We don’t know that either. Madoff hinted at his sentencing hearing that it was undertaken because of some failed investment. He indicated that he thought he could work his way out of the problem but instead got into a deeper and deeper hole. (He had, I think, made similar comments about how frauds develop before his own fraud was discovered.) If his Ponzi scheme began because of some investment failure, what was the failure and when did it happen? Most of us probably think Madoff’s hint was a smokescreen meant to hide the fact that he was a crooked greed merchant in one way or another for decades. But the truth of why the fraud started is not known, at least not publicly.

It also is not yet known precisely who knew of the fraud and, of those, who knew that the nature of the fraud was that it was a Ponzi scheme. Unless and until the prosecutors affirmatively give clean bills of health to Ruth Madoff, Peter Madoff, Shana Madoff, and Madoff’s two sons, Mark and Andrew, an awful lot of people are going to think they had to know something was wrong. If I remember correctly, Ruth had seen or even kept the company’s books for awhile. Peter Madoff had, if I remember correctly, set up the company’s computer systems -- and an old computer on the 17th floor (which was not connected to the outside world, so there could be no slip ups and no hacking into it and it couldn’t make trades) was central to the fraudulent scheme. Shana Madoff must have known that Cohmad and BLMIS were paraded as being separate but really weren’t; as was said in a complaint, she was the compliance officer for both Cohmad and BLMIS. The sons -- and Peter and Shana too, I would think -- must have known (i) that Madoff told those who asked that he was content to make his money by the commissions from having his trading arm execute the trades for the investment management arm, but (ii) that in fact the trading arm made no trades for the investment arm. Some of these individuals must have known, or even participated in, lies told to the SEC, the NASD and FINRA when these organizations conducted inspections. So family members had to have known something was wrong. But the precise knowledge of each, and the degree of participation (if any) by each, is currently unknown.

Who on the 17th floor knew something was wrong and, possibly, that a Ponzi scheme was going on? One is tempted to say that DiPascale, people who researched stock prices, people who entered numbers in the computer and printed out numbers and statements, and Bongiorno, Buccellato and Jones must or at least were likely to have known everything, and that it is impossible for anyone on the 17th floor to have known nothing. These people all worked in the same place. They must have talked to each other every day. Aside from everything else, did nobody ever notice or mention that no actual trades were taking place? That anyone on that floor was wholly innocent is not believable. It is more believable that several of them knew everything. But, right now, who knows?

Then there is also the question of what was known by the major feeders. The complaints filed by Picard and the SEC against such as Chais, Cohmad, Fairfield and Picower make it clear that all of these knew something illegal was going on, but whether they specifically knew there was a Ponzi scheme is left unsaid. Instead, Picard and the SEC use the lawyer’s weasel language of saying that the defendants knew or should have known of illegality. This makes clear, of course, (or at minimum implies) that Madoff hasn’t told the government the relevant facts (and neither, of course, have the defendants in the various cases (some of whom have taken the 5th)), just as Picard told Judge Chin that Madoff had not cooperated and Judge Chin expressed the same view. Yet the SEC and Picard know enough to set forth facts showing that these various defendants knew very well that something was drastically wrong. Variously, some of them would tell Madoff what they wanted their accounts to “earn,” and he would by fiat do as they wished. Some had accounts that would “earn” 100 or 500 or even 950 percent. Some would order up backdated losses for their own purposes (one would think the purpose was to evade taxes), and Madoff would then create backdated securities transactions with the required losses. At least Cohmad, and perhaps others, was paid commission strictly on the basis of a customer’s cash in minus his cash out (the same way, I gather, that SIPC is calculating net equity), not on the basis of the total amount in the customer’s account, including profits, which is the customary basis on which mutual funds and hedge funds are paid. Cohmad (and others?) could not help but suspect, if it did not actually know -- which one suspects it surely did -- that the reason it was paid commission strictly on a cash in minus cash out basis, and not on profits too, as is customary, is that there were no profits -- that the whole deal was a Ponzi scheme. In this vein, two people from Cohmad, Marcia Cohn (who is Sonny Cohn’s daughter) and a guy I never heard of until recently named John Joseph Kelly, had keys to the 17th floor -- which, generally speaking, was off limits to everyone except those working on the fraud scheme. Marcia Cohn used her key a fair amount apparently, including on December 11, 2008.

The various players being discussed here took out hundreds of millions and billions of dollars more than they put in. Picower took out over five billion dollars more than he put in -- and it is not even clear, I think, that Picower, like others, was a feeder of anything but his own money. If all he fed was his own money (which at least seems to be the case), not money from other investors, why did Madoff give about 6½ billion dollars to this guy who put in only about 1½ billion?

All of these people had to know something was very, very wrong, and it seems to me likely that some of them, maybe even all of them, even knew that the whole deal was a Ponzi scheme. But is their level of knowledge and participation publicly known for a fact? Nope.

Where did all the money go? This is another unknown. It was said at the hearing that the Probation Office, which submitted a lengthy but confidential report prior to sentencing, claimed the money was used up in redemptions. But how can we be confident the Probationary Office knows anything. Its report was the same one that recommended Madoff be given only 50 years -- bah. More to the point, it also said, according to statements at the sentencing hearing, that only 13 billion dollars was lost -- even Judge Chin did not believe that. He said he thought the Probationary Office had ignored money invested through feeder funds.

So where did the money go? The government made clear last week its belief that over the years 170 billion dollars had moved through Madoff. This obviously is a staggering sum of money. Supposedly (at least according to the Probation Office), it was all redeemed, except for what Madoff kept for himself and what little was left at the end. Maybe that is what happened, but who is going to believe it until it is proven to be the case? If you ask me, it is more likely that there was someone else involved in the deal who got a lot of the money -- some think the American mafia, some think the Russian mafia, some think the Mossad and/or the CIA, some think others. Some think a lot of the money is still in banks overseas and one wonders about all the excess billions withdrawn by Picower -- where, or to whom, did that money go. The only fact currently known is that we don’t know what happened to all the money. And we are not going to know until a lot more information becomes public.

Then there are the questions of how did Madoff get the SEC and the IRS to play ball with him, not to mention FINRA and, before that, FINRA’s predecessors. The SEC not only ignored Markopolos, as well as warnings issued, we are learning, by some of its own lawyers, but, in an act which securities lawyers tell me it never commits, the SEC also announced publicly in 1992 that there was nothing to indicate fraud. Securities lawyers say the SEC never does this; rather it merely closes investigations and, if someone’s reputation has been harmed because the existence of an investigation leaked out, it may give the person a “no action” letter which he can then use as he wishes. So how and why did the SEC -- what did Madoff do to get the SEC -- to publicly say there is nothing to indicate fraud. That public statement sucked in people (myself included) ever afterwards: it sucked in people when they transferred money from Avellino and Bienes to Madoff in 1992 and 1993, when they subsequently invested with Madoff for the first time, when they added money to their accounts in later years, when people later decided to leave money in Madoff rather than investing at least part of it elsewhere (all of which is of no consequence to mainstream media anti-victim bigots like Joe Nocera). To some people, the SEC’s public statement was so important that, as they have said in affidavits being submitted to the SEC’s Inspector General, they marked up, kept and/or still have the 1992 newspaper articles detailing the clean bill of health given Madoff by the SEC. But how Madoff procured this false, unprecedented, unique, and crucially important statement of a clean bill of health from the SEC is something we do not know.

Nor do we know where Madoff, in 1992 (over a weekend, one gathers), got the money -- over 400 million dollars -- that he allegedly would return to customers of Avellino and Bienes if the customers ultimately wished the return of their money, nor how many of the customers did not wish this but instead, because of the SEC’s statement of a clean bill of health, transferred their accounts from Avellino and Bienes to Madoff himself.

Perhaps the SEC’s Inspector General’s Report will answer these questions. It remains to be seen.

Then there are the questions about the IRS. Why did it approve Madoff as a so called nonbank custodian for IRAs in June of 2004 when he was in serious violation of crucial regulations the IRS itself had established to insure that persons with IRAs will not lose their money because of misconduct by or unfortunate events occurring to nonbank custodians? How did Madoff get the IRS to approve his company as a nonbank custodian despite his serious violations of the IRS’ own regulations, and despite the fact that inspection of Madoff by the IRS to insure that its regulations were met would have disclosed the fraud? Was there criminal conduct on the part of the members of the IRS -- acceptance of bribes, for example? Was there “only” simple gross negligence, incompetence and gross dereliction of duty (as, perhaps, by failing to inspect Madoff to be sure he complied with the regulations)? Right now nobody knows -- and the mass media, though informed of the matter, doesn’t care about it and doesn’t investigate it. Imagine: the mass media neither cares nor investigates how the country’s federal tax service aided the commission of the biggest fraud in history.

And if you, Mr. or Mrs. Average citizen, make inquiries of the IRS as to how it came to assist the fraud, as I did, the answer you will likely get back, as I did, is that the IRS will give you no information because Madoff’s company was a taxpayer and the affairs of the taxpayer are confidential unless Madoff or his authorized representative consent to their release. Can you beat that? Madoff is literally the biggest crook by dollar figures in the history of the world, but you cannot be told how he obtained the cooperation of the IRS because his company was a taxpayer and therefore its IRS affairs are confidential.

You know, the IRS is quite a piece of work in the Madoff scandal. For decades it has gotten a total of untold billions of dollars in taxes paid on phantom income from victims of Madoff. It is not telling us how much it got, though I imagine this would not be very difficult to determine in this age of supercomputers. But I suspect that the total tax it received on phantom income must be in the tens or scores of billions of dollars over the years. If people paid tax over twenty or thirty years on “as little” as 30 billion dollars of phantom income, that would amount to approximately ten billion dollars in taxes. If 20 billion of the 65 billion dollars shown on the November 30, 2005 statements was principal (was “cash-in”), so that the remaining 45 billion was phantom profit, the income tax on the final numbers alone was about 15 billion dollars minus amounts not owed because the phantom profits went to tax-free entities or because money went to foreigners who may not have been liable for or may simply have evaded tax.

But one way or another, and even though it so far won’t disclose the amount, over the course of 20 or 30 years, or maybe even longer, the IRS received billions upon billions of dollars in taxes on phantom income -- taxes on money it had no constitutional right to tax because the Sixteenth Amendment allows it only to tax “income,” not “phantom income.” But now the IRS will give you a refund of only a few years of those taxes -- money which we now know you were cheated out of from the beginning, to put the matter candidly -- and the IRS relies on the courts and Congress to agree that you don’t have to be paid back the taxes you were cheated out of, since letting taxpayers get refunds of all such taxes might be hurtful to the federal fisc. Nor will you get back more than a small fraction of your losses by virtue of the IRS’ new theft deduction rule, which, as has been said here from the beginning (and as others are coming to agree), is quite inadequate for many people and will extensively benefit only the obscenely wealth, who will receive scores of millions of dollars worth of tax deductions (with the word on the street being, rightly or wrongly, that the IRS’ rule was initially drafted for the wealthy by a white shoe Wall Street law firm that has represented huge money for over a century). All in all, one might paraphrase the statement made with regard to the Barbary pirates 200 and some years ago by saying, “Trillions to bail out the bankers who brought down the economy, but not one cent, or at least very little, for average people who were cheated and defrauded by Madoff and governmental agencies who were his defacto accomplices.”

You know, when you look at the whole thing systemically, it is quite a picture. People got sucked into a Ponzi scheme by the affirmative 1992 statement of one federal agency, the SEC. They remained sucked in because of the SEC’s incompetence when it was told of the fraud in later years, and by the incompetency of FINRA and its predecessors too. Meanwhile the IRS benefitted to the tune of untold billions of dollars and, when the fraudster in effect asked it to help him by approving him as a nonbank custodian, the IRS did this even though he was in gross violation of its own regulations. Subsequently the IRS will give back only a fraction of the taxes you have been cheated out of -- unconstitutionally, no less. To put icing on the cake, SIPC, as all know, is screwing people out of money they have a right to. And when people seek to sue the SEC or the IRS for their horrendous misconduct that enabled Madoff to succeed for decades or for the billions in taxes to which the government had no right, the defrauded plaintiffs will be met with claims by the government -- which always makes these claims -- that you cannot sue the government, and/or that statutes of limitations have run regardless of how horrible the government’s misconduct was. Joe Nocera will love it since he thinks it was all the (stupid) victims’ fault anyway.

Then there are the twinned questions of who on Wall Street knew or had good reason to suspect that Madoff was perpetrating a fraud but did not report this to the SEC, and why didn’t they report it to the SEC? In his warning memos to the SEC, Markopolos identified four major companies or prominent individuals who were knowledgeable about derivatives and who, he said, were persuaded that Madoff could not be for real. They included “heads of equity derivatives trading at Morgan Stanley, Goldman Sachs, J.P. Morgan and CitiGroup.” In complaints he has filed, Picard has listed no less than seven prominent houses that he thinks refused to do business with Madoff because of “serious concerns” that his “operations were not legitimate.” They include “Société Générale, Goldman Sachs, CitiGroup, Morgan Stanley, Merrill Lynch, Bear Stearns, and Credit Suisse.” From their refusal to do business with Madoff, one deduces, as Picard has indicated, that they suspected Madoff’s bona fides. In addition, one has read of others who suspected or had reason to question Madoff’s bona fides, especially if they were rich enough to have expensive professionals assess Madoff for them (i.e., do due diligence for them) or were themselves wealthy professionals, sometimes obscenely wealthy professionals, who could do this for themselves. One even reads of wealthy persons who apparently were not financial professionals but who heard rumors that touted them off Madoff.

Did any of these people or institutions let the SEC know of their suspicions -- warning from the likes of Goldman, Sachs, CitiGroup, or Morgan Stanley, for example, might have forced the SEC to move, after all. If, as is apparently the case, they -- and other types whom Joe Nocera consorts with but to whom the rest of us have no access -- didn’t tell the SEC of their suspicions, why didn’t they? If memory serves, Markopolos, in his prior lengthy warnings to the SEC, and then in his testimony to Congress, implied that those experts’ silence was a product of concern that their lawyers, for some reason (natural lawyeresque caution and fear of slander suits, one supposes), would not let them talk openly to investigators, plus a Wall Street code of silence arising because everyone on Wall Street has skeletons. Whatever the reasons, these powerful Wall Street institutions and persons did a profound disservice to thousands upon thousands of people by not informing authorities of their suspicions and of the underlying reasons. But right now we know relatively little about the universe of people who held suspicions, their reasons (if different from red flags that Markopolos wrote of), why they failed to alert the authorities, or how, it appears, certain non professional but very wealthy people seemed to get the word that touted them off Madoff. Nor does the mass media seem to have an interest in tracking down any of this.

So. . . . . . . we are currently in a place (so to speak) where a simply fantastic amount about the Madoff scam remains unknown; more remains unknown than I can ever remember being true at the time of the plea and sentencing of the lead culprit in any other major fraud case. To a significant extent, one thinks, the present lack of knowledge is a result of the absence of a trial in the Madoff case -- Judge Chin did us no favors by letting Madoff plead instead of forcing a trial at which much would inevitably be revealed. Also responsible for the current lack of knowledge is the typical dearth of serious investigatory work by the mass media -- which steadfastly refuses to look into the IRS connection, among other important problems. The extent to which the dearth of knowledge will be rectified by ongoing investigations by prosecutors and Picard, by an investigation by a possible special prosecutor (Professor Elizabeth Warren’s name has been floated in this connection), by investigations by Congress, by future work by authors of books on the Madoff matter, or by future trials (which I doubt will occur because culprits are likely to cop pleas), is presently unknown. And I, for one, cannot think of any way -- not one -- in which this vast lack of knowledge is doing any good for anyone connected with the Madoff affair who is honest. That it is vitally helpful for many who were dishonest goes without saying, of course.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to comment on the post, on the general topic of the post, or on the comments of others, you can, if you wish, post your comment on my website, All comments, of course, represent the views of their writers, not the views of Lawrence R. Velvel or of the Massachusetts School of Law. If you wish your comment to remain private, you can email me at

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