SEC Trying to Decipher Madoff Mess

Records indicate that thousands of investors appear to be caught up in the <"https://www.yourlawyer.com/topics/overview/Bernard_Madoff_Investment_fraud">Bernard Madoff investment fraud, according to a new report in The Wall Street Journal.  However, investigators from the Securities and Exchange Commission (SEC) have not determined if those records represent a true account of activity at Madoff’s investment-advisory business.

The 70-year-old Madoff was arrested on one count of securities fraud late last week.  Madoff – once a chairman of the Nasdaq stock exchange – is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.  According to The Wall Street Journal, if initial estimates prove true, the Madoff securities fraud would be nearly five times larger than the accounting fraud that drove telecom company WorldCom into bankruptcy proceedings in 2002.

According to one SEC memo reviewed by the Journal, Madoff maintained records on thousands of securities positions for clients that were with “clearing banks.” But the memo said that as of Dec. 12, the SEC was unable to identify any such clearing banks.  The SEC memo expressed concern that those positions do not exist, The Wall Street Journal said.  The records could be an indication that Madoff kept two sets of books in order cover his alleged fraud.

The Journal also reports that SEC officials have interviewed a key Madoff employee, Frank DiPascali, who along with Madoff, controlled access to the floor where the investment-advisory business was located.  The Journal said the memo indicated that DiPascali was evasive in the interview.  Another employee provided authorities with information about a bank account at J.P. Morgan Chase & Co., the Journal said.  According to the memo, he told the SEC, “Here are all the secrets.”

The SEC is also looking at the role  of Ruth Madoff, who worked at her husband’s firm for a time.  According to Bloomberg.com, the SEC found evidence she may have helped track payments.  Her name also appears on related transactions, Bloomberg said.  However, she has not been charged with any wrongdoing.

The 67-year-old Ruth Madoff is only the latest relative to be caught up in the scandal.  Madoff’s sons are said to have reported his alleged fraud to authorities last week.  According to The Washington Post, an internal probe at the SEC is said to be focusing, in part, on the relationship between Madoff’s niece, Shana Madoff, and her husband, Eric Swanson.  Shana Madoff served as her uncle’s compliance officer, and Swanson, a former SEC official, was involved in a 2004 SEC examination of Madoff’s business before their marriage, the Post said.  Swanson also conducted an internal review of an examination that occurred in 1999.

The SEC maintains that Swanson played no role in any Madoff examinations after his personal relationship with Shana Madoff began in 2006.   But according to the Washington Post, Madoff reportedly bragged of their marriage at a conference last year, when he spoke of having “close” ties with regulators.