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Investigation of Madoff Associate in '92 Raised Specter of Ponzi Scheme

Jan 19, 2009 | Parker Waichman LLP An investigation into an associate of Bernard Madoff in 1992 raised serious questions about the alleged swindler that were never pursued.  According to The New York Times, investigators for the Securities and Exchange Commission (SEC) at the time actually worried that they had "stumbled upon a Ponzi scheme."  

More than a decade-and-half-later, Madoff is accused of running a Ponzi scheme that may have cost investors as much as $50 billion.  According to the FBI, the alleged fraud likely went on for decades.

According to The New York Times, in 1992 the SEC was investigating Frank Avellino, an accountant who had been recruiting investors for Madoff since the 1960s.   The 1992 investigation began after the SEC became aware of marketing materials for  the firm Avellino & Bienes that  promised investors annual returns of up to 20 percent. The SEC suspected a on Ponzi scheme.

The SEC's probe raised several red flags regarding Madoff, the Times reported, but investors took much of what Avellino told them "at face value".  This despite the fact that Avellino & Bienes kept almost no records.  According to the Times, when asked by auditors to prepare a balance sheet, Avellino responded that “my experience has taught me to not commit any figures to scrutiny.”   Despite this, Avellino's lawyer managed to get the audit curtailed, the Times said.

In the end, Avellino agreed to return to investors the money he and his partner had raised and to pay a small fine.  The investigation ended and he continued to raise money for  Madoff.

Madoff's connections with Avellino go back to 1958, when Avellino worked as an accountant for Madoff's father-in-law.  According to the Times, in 1962, Avellino began recruiting investors for Madoff.  

This is not the first time that the SEC has apparently missed warning signals pointing to possible irregularities involving Madoff's investment advisory business. According to a report last month in The Washington Post, the SEC conducted routine examinations of the company in 1999, 2004, and 2005, as well as an investigation that ended in 2007. Only the 2005 examination found “minor problems”.

The SEC is currently conducting an internal probe of its failures regarding the Madoff scandal.

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