In today's NY Post, PageSix reports that the author of a new Bernie bio, Jerry Oppenheimer, thinks Bernie was doing business with organized crime including the Israeli mob.

LOL - I don't know about the Israeli mob but Bernie is definitely linked to Ehud Olmert, the former Israeli prime minister who resigned last year amid corruption charges. Among other things, Olmert was charged with accepting cash from one of Bernie's customers, Morris (Moshe) Talansky. (To be fair, the outcome of the war with Lebanon didn't help Olmert either.)

Talansky, a former rabbi with business interests in an Israeli satellite company, had been the executive director of the American Committee For Shaare Zedek Hospital. The committee which raised money for Shaare Hospital in Jerusalem had several Madoff accounts although it is not clear if the hospital lost money in the scandal. Talansky claimed he lost a million dollars.

The Olmert investigation was opened in January 2007. If the Israeli authorities investigated Talansky's finances, they may very well have looked into Bernie's business.

In July 14, 2008 post on NY Magazine's Intel blog, Steve Fishman wrote that he had read  transcripts of secretly recorded meetings and phone calls in which Talansky participated. In one meeting, Talansky referred to "Bernie" who Talansky said was very unhappy about losing money in a business deal:

"Talansky, who one participant at the meetings described as a "wild man," also introduced a mysterious character named Bernie into discussions. Bernie, he said, had lost a lot of money in the deal. No one ever met Bernie. But Talansky, Bernie's confidant, let the rabbis know that Bernie was not someone to be trifled with. The transcripts make clear that the rabbis were afraid. For good reason: Bernie apparently wanted to kill one of the participants before Christmas."

"Bernie" as in Bernard L. Madoff?

 Bernie had other, less direct, ties to Talansky and Olmert. Leon Flax, a director of Bernie's London company, was a major donor to Shaare Hospital through Shaare Zedek UK. Flax's brother and sister-in-law, also Madoff customers, accompanied Bernie on a 2004 Swiss ski trip along with a dozen other of Bernie's friends and associates.    

An August 2008 BMIS American Express bill provided by the bankruptcy trustee shows Peter Madoff and his wife booking round trip tickets from Italy to Israel in mid-September just as the proverbial shit hit the fan.

Hmm...   

In 2006, it looked like Bernie spent all of his cash on hand on stocks. Then he borrowed $65 million and bought some more. The stocks purchased were for Bernie's own account, not the investors.

Bernie didn't have bank debt prior to 2006 so the loan by itself should have been a red flag for the feeder funds. Add in the significant increases in stock-related asset and liabilities and if those feeder funds didn't ask Bernie what was going on, they weren't relying on the audited financials to make decisions about BMIS.

The table below sets forth the changes in the 2005, 2006 and 2007 BMIS statements of financial condition filed with the SEC. The original spreadsheet which includes the 2002, 2003 and 2004 statements is posted on Scribd here.  

(The original statements with the auditor's opinion and notes are posted here. )

Anyone who analyzed the 2006 statement of financial condition who knew about Bernie's investment business should have been concerned about Bernie commingling cash from the investment account with the trading account.

If BMIS had to pay for "Securities sold not yet purchased" before it received the proceeds from the sale of "Securities owned", for example, Bernie didn't have the cash on hand to pay the bill. 

Another question is why Bernie would borrow from a bank rather than liquidate some of his equity holdings (assuming, of course, BMIS actually did borrow from a bank).

The feeder funds should have asked about the nature of the increase in "Receivables from brokers" from $14 million in '05 to $55 million in '06. It looks like Bernie was extending credit of some sort to brokers.  

My understanding, too, is that some, if not all, of the feeder funds were provided with the statements of financial condition but not the income and cash flow statements.

How anyone made a decision about Bernie's business without seeing a full set of financial statements is a mystery to me.

I'm not defending Bernie's hapless auditor, David Friehling, but he did raise enough red flags for someone looking after several billion dollars invested in Bernie's biz to become concerned.   

Note: This comment posted below helps explain my point.   

This is the second in a series of posts examining conventional wisdom about the Madoff scandal.

Myth: In late 1992,  the SEC ordered Avellino & Bienes to refund $432 million invested in Bernie's business to its customers. The fact that all of the money was refunded within two months was evidence that Bernie was on the up and up.

Avellino & Bienes was not Bernie's only investor in 1992 so he had funds from other sources which he could have used to refund the $432 million. Bernie knew the cash outflow was temporary because A&B's customers were advised to re-invest directly with Bernie or through a designated IRA administrator. 

One of Bernie's other customers in 1992 was the Fairfield Greenwich Group which became a customer in 1990. 

According to a 12/18/09 MarketWatch article , Kingate Global, a $3 billion offshore feeder fund, was founded in 1990 or earlier.

SJK Investors, a Madoff customer, was registered in 1985 by Paul Konigsberg, a senior partner at Konigsberg Wolf.

One of the great mysteries of the Madoff scandal is why the SEC never investigated Bernie at the time even though it suspected Avellino & Bienes of operating a giant Ponzi scheme. Surely no one at the SEC believed Bernie's claim he didn't know Frank Avellino and Michael Bienes were unregistered securities dealers.

The SEC knew Bernie was the main cog in an illegal investment scheme that had operated undetected for thirty years and the guaranteed rate of return***  was a common feature of a Ponzi scheme. Apparently, the SEC had no interest in auditing Bernie's books to determine why the scheme was so profitable and whether he had other customers who participated in it.

Hopefully, SEC Inspector General H. David Kotz will shed some light on this sad aspect of the Madoff scandal in his much-anticipated report expected to be issued next month.

*** There has been some speculation that Bernie himself urged the SEC to shut A&B down so he could convert the nature of the investments from loans with a guaranteed interest rate to equity trading accounts.