Senator Chris Dodd, chairman of the Senate Banking Housing & Urban Affairs Committeee, is holding a hearing today on the SEC's failure to detect  the Madoff fraud. The hearing begins at 2:30 and can be viewed live on video here or later in the archives here

The hearing will focus on SEC Inspector General H. David Kotz's 477-page report released late Friday afternoon. The report is online here.  

Kotz is scheduled to appear as a witness as is Harry Markopolos, the now-famous whistleblower who tried to alert the SEC about the Bernie's Ponzi scheme several times.

Rumor has it that Genevievette Walker-Lightfoot, a former SEC staff attorney, will also appear as a witness. In a July article, the Washington Post reported that Walker-Lightfoot, the lead examiner in the 2004 investigation, created a list of nine questions about Bernie's business which, if asked, might have uncovered the Madoff fraud. However, the investigation was effectively terminated by her supervisor without Walker-Lightfoot's questions being answered.

In his report, David Kotz was not inclined to credit Walker-Lightfoot for her work on the investigation. The fact that Walker-Lightfoot refused to testify in person during his investigation apparently was a source of irritation for Kotz. Walker-Lightfoot has said that she wanted her testimony to be in writing to prevent misquotes.   

Having now read the entire report, I think David Kotz tried to be thorough about identifying why each particular investigation failed to uncover Bernie's Ponzi scheme. But he omitted some information that would have been helpful to put the SEC's failure in context.

His analysis is light on what role senior management's played in the investigations and he doesn't provide much information as to how seriously managment took the various allegations of fraud. For example, did Mark Schonfeld, an SEC director in the NY office, assign the investigation of the Markoplos complaint to his A-team or was it relegated to the C-team?

There is no mention in the report about the SEC investigation of the National Stock Exchange (NSX) that took place between 2002 and 2005. Bernie owned a 10% share of the exchange at the time and BMIS may have been one of the firms that engaged in the thousands of instances of frontrunning the SEC uncovered. My understanding is that Eric Swanson played a significant role in the NSX case.

Kotz could have taken a broader view of Shana Madoff's professional and personal relationship with Eric Swanson and the influence Shana Madoff exerted on the SEC investigations. Kotz also appears to have omitted some pertinent informaton about the Swanson-Madoff affair out of professional courtesy for Swanson.

Last December, Eric and Shana Madoff Swanson hired a p.r. firm that helped place articles in the New York Times and the Wall Street Journal that cast the Swansons in a very favorable but, as we now know, untrue light. As such, Swanson's testimony is not totally  credible.   

There are other issues I think Kotz should have explored more fully. The SEC's failure to identify forged documents is one of them. The inability to quickly discount frontrunning as a factor in Bernie's profitability is another.

More to come.  

(Updated 9/6/09 to include reference to 6/24/92 SEC memorandum.)

In June 1992, several customers of an investment firm known as Avellino & Bienes approached the SEC conveying concerns about investments they had made. - SEC Executive Summary of Madoff Investigation

After receiving the information from the Avellino & Bienes' customers, the then-Acting Enforcement Branch Chief and former New York Enforcement Staff Attorney contacted Frank Avellino. Former New York Enforcement Staff Attorney June 24, 1992 Memorandum, at p. 1, at Exhibit 1. - SEC OIG Report on Madoff Investigation

Name:COHN, DELAIRE & MADOFF, INC.
Status:DISSOLUTION BY PROCLAMATION
Date of Status:06-24-1992
- Madoff Corporate Registrations

CIVIL DOCKET FOR CASE #: 1:92-cv-08314-JES
11/18/19921 ORDER, sealing case ( signed by Judge Kenneth Conboy )
- SEC vs. Avellino & Bienes, 1992

Cohn, Delaire & Madoff, Inc. was voluntarily dissolved on June 24, 1992. On the same day, an SEC staff attorney issued a memorandum about the status of a preliminary investigation into Avellino & Bienes. The investigation was opened after investors filed complaints about A&B in June 1992 or earlier.

No one has publicly disclosed the business purpose of Cohn, Delaire & Madoff but it sure looks like someone was in a hurry to shut it down after the SEC became interested in A&B.

According to the SEC OIG's report, the June 24,1992 memorandum refers to contact with Frank Avellino about the nature of A&B's investment business. Avellino probably told Bernie that he had heard from the SEC and, for some reason, Cohn, Delaire & Madoff, Inc. had to disappear.

Cohn Delaire & Madoff may have been another feeder fund, given its June 1986 registration date. At least two or more feeder funds were registered around the same time period. Telfran Associates Corp. was registered in late December 1982, Cohmad Securities Corporation was registered in February 1985. Another possible feeder fund, SJK Investors Inc., was registered in January 1985.  

"Cohn" is very likely Maurice J. "Sonny" Cohn and "Delaire" is very likely Alvin J. Delaire, Jr.  Cohn was a principal and Delaire was an agent of Cohmad. Both men are the target of a lawsuit filed by the Madoff bankruptcy trustee who is suing to recover millions of dollars in commissions that Bernie paid Cohmad agents. Cohn and his daughter, Marcia, have been charged with fraud by the SEC.

If "Madoff" is Bernie's brother, Peter, and Cohn, Delaire & Madoff was a feeder fund, Peter's involvment in the investment advisory business was more hands on than what has been publicly disclosed to date. If the SEC gave Peter a pass, the SEC comes off looking guilty of more than just incompetence.

Peter Madoff was elected vice-chairman of NASD in November 1992

The records in the Avellino & Bienes case should be unsealed. Why they were sealed in the first place is enough cause for concern.

Last Friday, Erin Arvedlund rashly predicted that Fred Wilpon, owner of the New York Mets, will be forced to sell the team after the season is over as a result of $700 million in Madoff-related losses. Arvedlund is the author of "Too Good to Be True", the best book about Bernie Madoff publisnhed to date.  

I say "rashly" because, one, Wilpon's financial affairs are too complex to be reduced to a blanket statement and, two, there is an ongoing criminal investigation of Bernie Madoff.

You can't explain why Wilpon might have a big clawback problem in a 90-second sound bite. If Wilpon withdrew a lot more money from his Madoff accounts than he put in, the bankruptcy trustee can sue Wilpon for the net amount withdrawn. 

Nor is it easy to explain that Wilpon's lenders could be pressuring him if he used Madoff accounts as loan collateral. Wilpon's primary business is real estate and real estate deals are generally highly leveraged. It's no secret either that commercial real estate is in a tailspin and I'm sure at least some of Wilpon's properties have decreased in value, especially those in Manhattan.       

Fred Wilpon was a business associate and friend of Bernie Madoff's for more than thirty years. If they haven't already, the Feds are going to scour the Madoff financial records for any evidence that Bernie gave Wilpon special treatment in the form of unduly high profits, tailored account statements or any other unusual consideration.  

I culled more than 500 accounts from the Madoff customer list that appear to relate to Wilpon as possible family members, investors, business associates, business entities or non-profit institutions. The Wilpon-related accounts are listed on a spreadsheet posted at Scribd.

There are about 185 accounts in the name of Sterling Equities alone and investigators will want to know if each account had a specific purpose or had specific financial terms attached to it. 

Accounts in the name of Judy Wilpon and Iris Katz have identical letters attached to their account names, e.g. "Judy A. Wilpon - K Sterling Equities".  Judy is married to Wilpon and Iris is married to Wilpon's partner and brotherr-in-law, Saul Katz. It looks like the spouse accounts were set up to systematically track funds deposited equally in the respective accounts. K, T, O and W are the only letters left outstanding.

Given the name of the accounts, a couple of the Wilpon-related accounts appear to be linked to aircraft. Wilpon may have used profits generated from the Madoff accounts to make lease payments on his planes or the the accounts could have been posted as collateral in connection with lease agreements.

One of the Wilpon-related accounts is the Sterling Equities Employees Retirement Plan. I took a look at the 5500s filed by the plan (which are available online at FreeErisa.com). At the end of 2007, 214 plan participants had account balances.

At that time, the plan had $16.2 million invested in government securities which comprised almost all of the plan's assets. Since Bernie always converted to treasury bills at the end of a calendar year, the entire $16.2 million may have been invested with him. The fact that plan had aggregate proceeds of $62 million from the sale of assets is another indication  Bernie held the $16.2 million.

If Wilpon's employees lost more than $16 million in the Madoff scandal, did Wilpon cover the loss as a goodwill gesture? Normally, an employer would capitalize on free publicity if that was the case. If Wilpon didn't pick up the tab,  my guess is the plan participants will have some hard hitting questions about how the plan trustees carried out their fiduciary responsibilities.

Who audits Wilpon's multi-billion dollar empire? Last weekend, Robert DuPuy, Major League Baseball president, told the New York Times that he receives quarterly financial reports from the Mets. Do the Mets also provide audited annual financial statements?

The only independent CPA I could find who is associated with Wilpon is Douglas J. Freeman who apparently owns a produce company in Jericho, NY. Freeman signed off as the preparer of the retirerment plan's 2007 5500 and as the preparer of the New York Mets Foundation 2006 990s. Oddly enough, the foundation filed two 990s in 2006 as two different types of non-profit entities. The foundation's 2005 and 2007 990s are not in the 990 Finder or Guidestar databases which could mean they were never filed in the first place.

Douglas J. Freeman may be the world's best accountant but if he is auditing Wilpon's multi-billion empire singlehandedly, the comparison to Bernie's hapless auditor is inevitable. I suppose I should be surpised if Wilpon's lenders accept financial statements audited by Mr. Freeman.

In 2005, Wilpon's hedge fund. Sterling Stamos, lost money in the Bayou hedge fund fraud. That's the one where the fund operator fabricated an entire accounting firm out of thin air. If the Bayou scandal didn't wake up Wilpon and his fund manager, Peter Stamos, as to what was going on at Bernie's, you have to wonder what would have done the trick.

The day after Bernie was arrested, Stamos claimed Sterling Stamos funds did not have any money invested with Bernie. But within two weeks, Stamos changed the story and admitted that six of the the Sterling Stamos funds had two to three percent of their assets invested with Bernie through another fund operated by Ezra Merkin. There was also a seventh fund invested in Madoff that was in the process of being liquidated.

Stamos apparently had personal Madoff accounts but he has not publicly disclosed his losses, if there were any. 

Lastly, there was a Sportsmen's Daily article via the Huffington Post last February about Wilpon hitting up players for temporary loans. His son, Jeff Wilpon, didn't deny it. He said the Wilpons had their money tied up in investments, implying that Wilpon had a temporary cash flow problem.

Maybe Wilpon really is over the hump. Perhaps his lenders were willing to revise loan agreements and waive collateral requirements. But will that be enough if the real estate market doesn't turn around soon? 

Stay tuned.

Just how much money did Mets owner, Fred Wilpon, and his business partner and brother-in-law, Saul Katz, lose with Bernie?

I took a look at Wilpon and Katz's private foundations and both entities had pulled almost all of their money out of Madoff by the end of 2007. Odd because the investments, at least on paper, were reliably profitable. 

NY Post sports columnist, Michael Vaccaro, suggested yesterday that Wilpon should have leveled with Met fans in the beginning of the season about how the team would be affected by his Madoff losses. The loss, initally rumored to be $300 million, was recently upped to $700 million by Larry King in a June GQ interview. King, a Madoff victim, was introduced to Bernie by Wilpon.

How much cash out of pocket Wilpon and Katz actually lost could be a different story. No one is saying whether the $700 million figure includes phantom profits from Madoff investments or whether Wilpon and Katz took out more money than they put in. To date, the bankruptcy trustee has not filed a clawback suit against any entity controlled by Wilpon and Katz but the trustee hasn't completed his work yet.

Another question is whether Wilpon and Katz put up Madoff accounts as collateral for their real estate ventures or other businesses. 

Wilpon and Katz generally operate under the corporate umbrella, Sterling Equities, a privately held company. Sterling has a list of charitable foundations affiliated  with the Wilpon and Katz families on its website. 

Financial data about the foundations is included in 990s which are informational tax returns required to be filed annually with the IRS. The actual 990s are online at Guidestar and the Foundation Center's 990 Finder (no reg. req'd.)

The Judy and Fred Wilpon Family Foundation had $1.5 million invested with Madoff at the beginning of 2005. That year, the amount declined to $396k and, by  the end of 2007, the date of the latest 990 filed, the amount invested in Madoff had been reduced to $74k.

In 2002, the Iris J.and Saul B. Katz Foundation had $3 million invested in Madoff. In 2005, the amount was $1.8 million. By the end of 2007, the date of the latest 990 filed, the foundation had no money invested with Madoff. The $1.8 million was transferred to another investment vehicle.

Between 2006 and 2007, Fred Wilpon contributed $3.4 million to his foundation which was all distributed to charity within the year it was donated. Prior to 2006, Wilpon had not made any contributions since at least 2001.

Saul Katz made no contributions to his foundation between 2001 and 2007.

The New York Mets Foundation had $745k in cash and no other assets at the end of its fiscal year in 2006. But the 990s for 2005 and 2007 are missing.

The Dayle and Michael Katz Foundation reduced its investment in Madoff from $734k in 2006 to $353k in 2007 and that amount included phantom profits.  

The Len, Michael and Dayva Schrier Foundation was the only Wilpon-related entity to file amended 990s for back years. The amended 990s online only date back to 2001 so what the actual loss is cannot be determined. At the end of 2000, the foundation reported a balance of $397k but that probably includes phantom profits.. 

The Valerie and Jeffrey S. Wilpon Foundaton had $394k invested with Madoff at the end of 2006, the latest 990 available online. That amount includes phantom profits although Fred Wilpon did contribute $350k in cash to the foundation between 2001 and 2005.  

The Phyllis and Thomas Osterman Family Foundation had $223k invested with Madoff at the end of 2007. That amount also includes phantom profits.

The other two foundations lost less than $100k and those amounts include phantom profits, too.

All of the foundations listed contributed to various charities ever year, another factor to be considered in the calculation of actual losses.  

Fred Wilpon and Saul Katz didn't lose a lot of money with Bernie Madoff through their foundations nor did their families. Relatively speaking.    

After Bernie was arrested, there was an online buzz about his political contributions but it quickly died down. A Jewish voter in NYC donating mostly to Democrats was not news nor was the dollar amount, $298,000 between Bernie and Ruth over ten years, unusually high. All told, BMIS employees donated $392,00 to federal candidates in that period.  

But what most people didn't know was that Bernie was under investigation by the SEC when he donated $25,000 to the Democrat Senatorial Campaign Committee in May 2005. In the preceding eight years, Bernie had made only one political contribution over $2,300 and that was a $5,000 contribution to the Securities Industry PAC in July 2004.

Bernie continued to make $25,000 contributions to the DSCC in 2006, 2007 and 2008.    

Why contribute to the DSCC?   

Chuck Schumer became chairman of the DSCC in 2004 where his fundraising prowess became legendary. He sits on the senate finance and banking committees and, as such, can attract a lot of money from the financial sector. Schumer's reputation is that of a friend to Wall Street.

After Bernie was arrested, Schumer's office acknowledged that the senator had met Bernie several times but not in the last few years. According to an article in Fortune magazine, Schumer stopped in at BMIS during the runup to the Iraq War and gave a rousing talk. 

(Bernie, Ruth, Peter, Marion, Mark and Andrew each contributed $2,000 to Schumer's campaign in April 2002 and then again in August 2004.)  

Bernie may have thought he needed another powerful friend in Washington in May 2005 because the SEC probably was asking a lot of questions that made him very nervous.

The SEC had opened an investigation of BMIS in January 2004. As reported by the Washington Post, one of the investigators asked a series of pertinent questions about Bernie's operations that were shelved in March 2004 in favor of a more pressing investigation.

The investigator wanted to know whether Bernie had custody of investor assets, among other things.

The case was shipped to the SEC's NY office shortly thereafter and re-opened in early 2005. The SEC subsequently charged Bernie with three minor violations of securities law  and the case was closed some time before November 2005.  

According to a statement in another SEC BMIS investigation opened in January 2006 as a result of the Markopolos complaint, Bernie had misled the 2005 investigators about the nature of his business.

The SEC inspector general's report on the internal workings of the BMIS investigations is due on August 31. Presumably, Inspector General David Kotz will have inquired about outside influences.

The FBI probably already asked Senator Schumer's office about the nature of any contacts the senator or his staff had with Bernie in past years.

One possbility is that Bernie's lobbyists, the firm of Lent Scrivner & Roth, suggested to Bernie that he contribute the maximum to the DSCC.

(Norman F. Lent, a founder of the firm, is on the Madoff customer list. Lent, Bernie and Ruth's sister, Joan Roman, all contributed to Camp Chingachgook at the same time so it appears Bernie had a personal relationship with Lent, another Hofstra grad and former congressman.)

Politicial issues impacting the trading side of Bernie's business could have spurred his $25,000 contribution in May 2005. On the other hand,  Bernie had a lot of riding on the outcome of the SEC investigation that year.

Senator Schumer's former chief legal counsel, Preet Bharara, was confirmed as the next US Attorney for the Southern District of NY last week. In effect, he will now be heading the Madoff investigation.  

I'm sure Mr. Bharara is familiar with the details of Senator Schumer's contacts with Bernie over the years.

Note: Several people have asked me if the DSCC and Senator Schumer returned their contributions from Bernie. Whether the money was returned does not change what happened in 2005  but for those interested, the DSCC gave $100k to the Madoff bankrutcy trustee in March 2009. Schumer did not return the $6k he received, according to FEC records..

It's semi-official!  JoAnn "Jodi" Crupi is going down for her role in the Madoff  scandal.

Although Crupi was second only to Frank DiPascali on the infamous 17th floor, the media has given her a pass up until now.

Yesterday, Fox 5 caught her putting out the trash and chased her up her walkway. Crupi, a runner, nimbly leaped on to her porch and slammed the door in the reporter's face.

The Fox 5 crew then went down to the $2.2 million house on the Jersey Shore Crupi bought with investor money last year and put in her girlfriend's name. Crupi apparently has been renting the house for $7,000 a week when she can.

Fox 5 confirmed that Crupi, along with DiPascali and Annette Bongiorno, is from Howard Beach, Queens.

Last March, Fox 5 famously followed Bongiorno around the parking lot of her "exclusive" Boca Raton condo complex while her husband, Rudy, shrank from view. (How Fox 5 got inside the guarded complex in the first place is still a mystery.)

Crupi and Bongiorno must be sweating it out now that Frank DiPascali's sweetheart deal hasn't turned out to be so sweet after all. After living large for the last seven months on his 7-acre Bridgewater NJ estate, DiPascali has been sitting in the Metropolitan Correction Center ever since Judge Sullivan revoked his bail last week.

DiPascali had expected to remain free until at least May 2010 and probably much longer while he cooperated with the Feds. No such luck.

Rumors are that indictments will be handed down some time after Labor Day. It's a safe bet Crupi will make the cut.   

Last Tuesday, the SEC filed a civil suit against Frank DiPascali. In it, the SEC elaborated on how DiPascali promoted Bernie's Ponzi scheme by providing reams of fake documents to outsiders.

Of particular interest was the part about how DiPascali generated a subset of 10 to 25 BMIS customer account statements that were falsified to make it appear other institutions had custody of investor assets rather than BMIS (see I.E.(1) b). The type of account created was on the basis of RVP/DVP (receive-versus-payment and delivery-versus-payment) which is explained in the suit.

In January 2004, the SEC opened an investigation into Bernie's investment advisory business, of which it apparently knew little or nothing about at the time. As reported by the Washington Post last month, one of the DC SEC investigators, Genvievette Walker-Lightfoot, posed a series of important questions in March 2004 about how the investment business operated but her questions were shelved in lieu of another case deemed more pressing by her supervisors.

One of Walker-Lightfoot's questions was about who had custody of investor assets.  

Some time in or after April 2004, the Madoff case was sent to the SEC 's NYC office and re-opened in early 2005. The case was closed later that year after the SEC charged BMIS with three minor violations of securities law.

In November 2005, Harry Markopolos submitted his famous analysis to the SEC. As a result, the SEC opened another investigation that ran from January 2006 to November 2007. The only consequence of that investigation was that Bernie had to register as an investment advisor with the SEC.

The SEC's opening statement in the '06 case refers to Bernie having "mislead" [sic] the investigators in '05 by, among other things, withholding information about customer accounts.

In 2006, the SEC investigators knew Bernie was supposed to have custody of customer assets and, in fact, Bernie disclosed that when he registered as an investment advisor.

But what were the investigators told in 2005 about custody of the assets? Were all of the account statements they were shown prepared on an RDP/DVP basis? Were any of the feeder fund accounts like Tremont and Fairfield Greenwich Group shown on an RVP/DVP basis?

If so, did the investigators in 2006 uncover evidence that Bernie presented forged documents to the investigators in 2005?

The answer to this question, is important because if Bernie (and Frank) showed forged documents to the SEC in 2005 and the SEC found that out in 2006, the SEC should have called a 5-alarm, all-hands-on-deck, red-lights-flashing emergency and shut Bernie down.

Presenting forged documentation is not being "misleading", it is evidence that someone is committing fraud. Period.  

When the investgators looked at the 10-25 BMIS accounts in 2005, some of the big feeder funds must have been included in the selection. If the Fairfield Greenwich Group or any of other feeder funds account statements were in RVP/DVP format, once the investigators in 2006 knew Bernie had custody of the Fairfield Greenwich assets, they should have checked all of the accounts sampled in the 2005 investigation.     

If the SEC investigators in 2006 blew off forged documents and life was fair, the SEC would consider giving Bernie's victims the balance of whatever money was in Bernie's Chase investment account on 1/31/06, imho.

And why did Charles Wiener and Leonard Mayer charge Worldnet ATT dialup service on the BMIS Amex account? I asked a purported former BMIS IT employee and he said he remembered some talk about dialup service. He also said Wiener and Mayer had no reason to transmit anything between the office and home.  

The Amex bills show a $21.95 charge for Worldnet ATT service on Wiener's account in Janaury 2008 but not July and August.   

Mayer's account shows the Worldnet ATT charge in January and July.

I have no idea when the two of them signed up for the service.  

Wiener is Bernie's nephew and was BMIS director of administration. What the hell did Wiener do all day? He moved from Dix Hills to Centerport and he needed dialup service? Broadband was available on Long Island in 1998. His wife is a lawyer.

 Leonard Mayer is one-half of Mayer & Schweitzer which had a number of FINRA violations, according to FINRA's BrokerCheck. I think, but I'm not sure, that Charles Schwab bought M&S in the early '90s which makes me wonder what kind of outfit Schwab is. It apparently tolerated M&S's shady practices.  

Someone told me that Merrill Lynch bought M&S for $500 million but I can't find any record of it. Sounds fishy to me.

Lennie Mayer joined BMIS in 2001, according to his FINRA file. Mayer lives on Sutton Place so he has some big bucks. I was told Mayer was as computer literate as Bernie.

There could be a perfectly reasonable explanantion as to why Wiener and Mayer both had Worldnet ATT dialup service. Maybe it is a coincidence that no one seems to know what both of them did all day.  

On the other hand, transmitting data via dialup leaves less of a trail than broadband.

Hmm... 

THE DEFENDANT:  I had a glass of wine at dinner the night before last. (8/11/09, Frank DiPascali in response to a question from Judge Sullivan.)

MR. MUKASEY: He sat in our office a couple nights ago explaining to his family the possibilities and the consequences. (8/11/09, Marc Mukasey telling Judge Sullivan that Frank DiPascali would never do anything to hurt his family.) 
 

I hear Frank DiPascali's victims are about to blow their tops over the rock star status the Feds awarded DiPascali. According to the court transcript of his plea hearing on Tuesday, DiPascali and his family have continued to live the good  life they were living before he was exposed as one of the biggest con artists in American history.

(The transcript can be read here in PDF format or here in Word.)

Not only that, the Feds agreed to to let DiPascali remain free on bail until at least May 2010 and probably longer.

The Feds can thank Judge Richard Sullivan for saving their sorry asses. If DiPascali had been let out on bail under the terms proposed by the Feds, Lev Dassin's life would have become one long misery.

Bail was set at $2.5 million and guaranteed by three unnamed "financially responsible" individuals. The only collateral was DiPascali's sister's condo, the value of which was set at $400k.

Joanne DiPascali bought the condo in 2007 for $425k so it is probably not worth that much now. More importantly, it doesn't look like she has a mortgage. Gee, I wonder where Ms. DiPascali came up with $425k in cash. Just how much does she make working at JPMorgan Chase?

And just who are these three financially sound individuals who are willing to stick their neck out for Frank DiPascali, an unrepentant liar and a lifelong scam artist?

For the last nine months, DiPascali has been free to go wherever and with whoever he pleases. No ankle bracelet, no house arrest. His bank accounts have not been seized and he is still living on a 7-acre estate in Bridgewater NJ.

DiPascali still has his 60-foot Viking boat as far as I know. Since Frank is such a standup guy, I wouldn't be at all surprised if he let the Feds use it this summer.

Not only has Frank DiPascali been free as a bird, he has been allowed to spend as much money as he wants to maintain his family's luxurious lifestyle. Muskasy mentioned that DiPascali helped his daughter, Dorothy, move to Brooklyn on Monday since she is starting Brooklyn Law School. DiPascali apparently is paying her tuition.

Mukasey is the one who brought up DiPascali's "poor" children by name so I guess they are fair game now. I've known all along that Dorothy DiPascali went to Boston University and spent a semester or two in Paris. Not cheap. 

I also know Frank Dipascali III attends Villanova.

Two of the DiPascali sons, Greg and Mike, are still in high school and I have no doubt their father plans to send them to expensive private schools. I have no doubt, either, the Feds would agree to let DiPascali put away tuition for his children's education.

The DiPascali children drive BMWs and other expensive cars.  Mrs. DiPascali has never worked. The family spent their summers on a 60-foot fishing boat, complete with captain.

In February 2008, DiPascali bought a $430k condo in Montgomery County in PA so his father had a nice place to live. No word on when that property is being forfeited.

Half of the DiPascali family is on Facebook and they don't appear to be at all embarrassed by Frank's despicable conduct. Maybe they aren't.   

Who cares about Frank DiPascali's family? He ruined their happy little lives, not the investors. They can get jobs and take out student loans like a lot of other people.

Frank DiPascali didn't get caught up in something he didn't know how to get out of. He's a pathological liar who hid income and lied on a resume so he could become a member of the local school board.  

Bernie didn't talk so Frank could. These two scumbags are still working as a team. I know Frank is still lying because he lied about not knowing Bernie's family knew about the fraud.

The Feds are so wrapped up in what Frank is telling them, I don't think they are giving enough attention to how crooked the rest of the business was. Plenty of other people are ready to talk if someone will listen.  

I suspect part of the problem is that the Feds, or at least some of them, identify with Frank DiPascali more than they do with the victims.

Another part of the problem is that Marc Mukasey wants his client to get a really sweet deal so the big crooks with big bucks will call him when they got caught. Getting a deal for Frank DiPascali which allows him to roam around free as a bird for two years after being exposed as a partner in a multi-billion dollar fraud spanning thirty years would sure impress me if I was a crook.

Thank goodness Judge Sullivan has common sense.

(On a different note, part of the proposed bail agreement specifically allows Frank DiPascali to travel to the Eastern District of NY (Howard Beach etc). I wonder if Frank regaled the Feds with tales of his mafia connections and offered to help them track down some mobsters. I hope the Feds didn't fall for that line of crap.) 

If you saw the 6 o'clock news last night, you know Bernie's right hand man, Frank DiPascali, pled guilty yesterday to fraud charges that could send him away for 125 years. DiPascali was hauled off to jail on the spot despite protestations from both prosecutors and defense lawyers who wanted DiPascali to remain free on bail until he is sentenced in May 2009.

After reading the criminal information (a description of the crimes prepared by the US attorney), it's obvious Frank DiPascali should have been making a lot more than $3 million a year. This guy was a creative dynamo and a self-starter who did a lot more than generate a few thousand phony account statements every month, DiPascali was an indispensable part of Bernie's Ponzi scheme and Bernie couldn't have carried it off without him.

DiPascali's efforts puts "Crazy Eddie" Antar's antics to shame. Tino De Angelis of salad oil fame was one of the best but he was nowhere near this good. DiPascali's almost flawless execution of Bernie's Ponzi scheme for thirty years will be the gold standard by which every other fraud will be measured for years to come.

DiPascali helped develop Bernie's infamous "split strike conversion strategy" which was never employed in real life. The strategy was a fiction created in the early '90s by Bernie and Frank (and who knows who else ) to justify Bernie's consistent success in the market and lure in new investors. For almost twenty years, "SSC" was Bernie's signature trademark and, as a marketing tool, it was invaluable.

DiPascali ran a tight ship on the 17th floor and his apparently very loyal crew helped him produce whatever documents he needed. But their relationship went further than that.

The SEC civil complaint filed against Dipascali described how Bernie and Frank set up a phantom computer trading platform on the 17th floor. In the event they ever had surprise visitors looking to confirm real time trading activity, one employee was instructed to enter trades on a computer screen while another employee went to a computer in another room and pretended to be the European counterparty to these trades. DiPascali periodically conducted drills to make sure the plan would work.

The elaborate and copious documentation generated to fool the SEC alone was worth a few million to Bernie. I can just imagine how many late-nighters DiPascali and his team had to pull to get their ducks in a row.

One bit of Madoff fiction was cleared up yesterday. The checks that were in Bernie's desk drawer when he was arrested were not bonus checks. After Bernie informed DiPascali the ship was going down, DiPascali and his crew prepared a list of employees and friends who had accounts with Madoff and checks were drawn in the amount of the account balances.

DiPascali and his crew were somewhat naive to think that their plan would work and I suspect Bernie went along with it to humor them, knowing the checks would never be distributed. As soon as Mark and Andrew Madoff heard about the them, they lawyered up.

In the months to come, DiPascali's co-conspirators will be indicted and we'll find out which investors knew or should have known Bernie was a fraud. Bit it's too bad we can't hear DiPascali describe in his own words what it was like going to work every day, knowing he was committing a crime that could send him to prison for the rest of his life.

Worth more than $3 million a year, imho.     

(Links at bottom of page)

The Fairfield Greenwich Group's Madoff-invested funds were hemorrhaging cash in 2005 and into 2006. The funds paid out over $1 billion more than they took in during a sixteen-month period and Bernie was laying out a lot of his precious cash with no end in sight.

The bleeding stopped when Bernie increased his rate of return from 7.3% in 2005 to 9.4% in 2006** and the money started rolling in again. Between 2006 and 2007, the funds raked in more than $1 billion. By the end of 2007, the funds had a combined value of $7.4 billion, up from $5.1 billion in 2005.

The folks at Fairfield Greenwich had a lot of money riding on Bernie's profitability in 2006. Were they at all surprised when Bernie pulled a rabbit out of his hat? Or did they think God wanted them to have the money just like he wanted Michael Bienes to have his?

The p.r. reps at Sitrick & Company have done a pretty good job portraying FFG management as amiable bumblers rather than crooks but the FFG execs were sophisticated and smart and by 2006, they had plenty of reasons to be skeptical about Bernie Madoff's 9.4% return.

The Fairfield Greenwich Group had its own issues, too.

In 2005, the Bayou Hedge Fund fraud was exposed and everyone found out that Samuel Israel, the fund manager, had fabricated an entire auditing firm out of thin air. Naturally, FFG's investors were concerned and they began asking questions about FFG's auditors and Bernie's (David Friehling who is on his way to prison).  

In a memorable email exchange between FFG principal, Jeffrey Tucker and CFO, Daniel E. Lipton, Tucker asked Lipton about the size of Friehling & Horowitz at the request of an investor. Lipton told Tucker that F&H was a small-to-medium sized firm that had "hundreds of clients" and was well-respected in in the local community. In Lipton's opinion, the size of an auditing firm didn't really matter and he cited as Enron as an example.

Two days later, the FFG controller told Tucker that Freihling & Horowitz was a one-man band but whether Tucker told the investor is not clear since the meeting with the customer had already taken place. Tucker would have known investors would be up in arms to learn that Bernie was audited by a one-man firm because they were up in arms about one of his funds being audited by a two-man firm.

FFG had two major Madoff-invested funds, Fairfield Sentry, based in the British Virgin Islands and Greenwich Sentry, a U.S. entity. Fairfield Sentry was audited by Pricewaterhousecoopers. Greenwich Sentry, however, was audited by a two-partner firm in Greenwich, Berkow Schecter, up until 2005 when Pricewaterhousecoopers took over.***

FFG probably let Berkow Schecter go in 2005 because customers were concerned that it was too small to be auditing a $167 million hedge fund. They may have been right. A comparison of the 2004 report to the one prepared by Pwc in 2005 shows a different level of disclosure.

Ed Schecter, one of the Berkow Schecter partners, is on the Madoff customer list several times which may have been a conflict of interest.

 Then there's the compliance issue.

In December 2005, the SEC contacted the Fairfield Greenwich Group in connection with the Harry Markopolos complaint. I think the  SEC also took a look at FFG's operations and mandated some changes in the way it operated. 

As disclosed in the 2005 and 2006 financial statements, Greenwich Sentry placed its unqualified investors in a new partnership which ostensibly was a legal move to increase the allowable number of investors in GS. The fund's general partner, Greenwich (Bermuda) Ltd. then registered with the SEC as an investment advisor and, as a result, had to disclose certain information about its operations.   

These changes took place in March 2006, only three months after the SEC made its initial contact with FFG. The wording in the note to the financials makes it appear that the changes were voluntary. But if the changes were made at the behest of the SEC, it raises questions about FFG's much-vaunted compliance department and whether FFG openly flouted SEC rules.

The Fairfield Greenwich Group's seeming indifference to auditors and to the rules cost its customers $7 billion. When does it stop being indifference?

Me, I'd like to know if FFG ever talked to Bernie about where the market was headed.

** Rates of return for 2004, 2003, 2002, 2001 and 2000 were 6.4%, 7.3%, 8.4%, 9.8% and 10.7%, respectively. 

 *** The Fairfield Greenwich Group itself is audited by Rothstein Kass, according to the 10/07 due diligence report. RK specializes in hedge funds.

References:

Fairfield Sentry historic rates of returns for all years here.
Greenwich Sentry financial statements here and here.
Fairfield Sentry financials here, here, here and here.
Fairfield Sentry due dliligence report dated October 2007 here.
Email exchange between Tucker and Lipton here (Exhibit 18).
Chart of Sentry redemptions and subscriptions here (last page). 
Reference to $1 billion net withdrawal over 16 months here (p.11).

As Beth Healy in the Boston Globe reported yesterday, the Carl & Ruth Shapiro Family Foundation filed an amended 2005 990  with the IRS to account for losses of more than $140 million from its Madoff investments. The original and the amended 2005 990s are posted here and here.

On May 19th, the Wall Street Journal reported that Carl Shapiro and two other wealthy philanthropists are under investigation in the Madoff case. The article came out very soon after the amended 2005 990 was submitted to the IRS. Since then, the Foundation has not filed any other amended returns, although it appears the Foundation would be entitled to a substantial refund on the more than one million dollars it paid in income taxes in 2006 and 2007. 

Several features of the Foundation's operations make it stand out against other similar foundations with Madoff investments.

The most obvious difference is that Bernie's now infamous split strike conversion strategy was not employed to manage the Foundation's investments. In 2005, the Foundation reported a net loss of $6k from four separate sales of corporate (stock) and government securities (treasury bills) which were the only sales of securities for the entire year. This is unusual because Bernie's strategy was to buy and sell a basket of stocks several times a year which resulted in numerous transactions. But the big thing is that Bernie never incurred a net loss on the sale of securities over the course of a year for his other customers.

Who did the Shapiros think made the decision to buy and hold but not sell any of the Foundation's stock in 2005? Frank DiPascali?

From 2003 to 2007, the Foundation's cash balance increased from $6 million to $100 million from a combination of $82 million in cash contributions, interest earned and money pulled out of the Madoff accounts. The Foundation preferred to earn relatively low money market rates on the cash balance rather than invest more money with Bernie.

(The 2004, 2006 and 2007 990s are posted here, here and here.)

Between 2006 and 2007, the Shapiros contributed $46 million in stock to the Foundation. If that stock was transferred from another Madoff account owned by the Shapiros, the stock was non-existent and there was no legitimate contribution. My guess is the Shapiros would now have to pay income taxes on the phantom $46 million contribution if they originally took a charitable tax deduction for it (which may be one reason for not rushing to amend the 2006 and 2007 990s).

In 2006, the Foundation's investment activity resembled Bernie's split strike conversion strategy minus a key component -  the stock options that were supposed to hedge the stocks.

Bernie's performance in 2006 was stellar. The Foundation recognized a net profit of $52 million on $285 million in sales of securities.  There were 45 separate sales and, out of the 45, only five represented losses and the total was less than $15k. 

By the end of 2006, the Foundation had sold all of its stock. 

In 2007, the Shapiros contributed $31 million in cash and $40 million in stock to the Foundation which was the largest donation by far in at least six years.  

That year. the Foundation recognized a gain of $32 million on the sale of $452 million in securities but almost all of the gain was generated by the sale of $40 million in stock.. Unlike other years, the individual stocks were not listed.

Presumably, the $40 million of stock sold was the $40 million in stock donated. However, at the end of the year, the Foundation reported owning $14 million in stock and on a line item on the statement of changes in fund balance, there is a negative balance of $31 million that purportedly represents the difference between the cost and fair market value of donated stocks.

In effect, the Foundation is claiming that it owned $45 million in donated stock at the end of 2007 that had lost $31 million of its value in the preceding 12 months.

I checked the prices of some of the stocks donated in 2007 and none of them appeared to have plummeted in price during 2007. 

As the Boston Globe article pointed out, the Foundation fired its former tax preparer, Paul Konigsberg, a senior partner at Konigsberg Wolf in New York and hired a small Boston firm to prepare the amended 2005 990. (The 990 did not provide any evidence that the Foundation's books were audited after Bernie's fraud was exposed.)

Paul Konigsberg, of course, was a close business associate and personal friend of Bernie's who prepared 990s for a number of private foundations and charities with Madoff investments. In fact, Konigsberg's own foundation, the Westlake Foundation, had money invested with Bernie but whether the money was still invested with Bernie at the end of 2007 is not clear in the 2007 990 which is online here.

Interestingly, the Westlake Foundation generated a loss of $7k in 2007 from the sale of $4.2 million in securities held in a Madoff account. But if Westlake Foundation transferred its Madoff investment to another entity during the year, the 2007 990 might not reflect a full year of Madoff account activity.

Geri Denterlein, CEO of Denterlein Worldwide Public Affairs, a p.r. firm, is representing the Shapiro Foundation. Denterlein, no doubt, will be fielding more calls about the Foundation in the months to come.  

Somehow I missed the final list of Bernie's forfeited assets signed off by Judge Chin on 6/26/09. To me, the most interesting items on it are the loans and promissory notes made in favor of Bernie and/or Ruth.

In an earlier post, I speculated that Eric and Shana Madoff Swanson's $2.8 million East Hampton house purchased in 6/08 had been paid for out of the proceeds from Peter Madoff's $9 million loan from Bernie on 12/12/07. 

Not so. Item 20(r) on the list is a $2.8 million transfer of funds from Bernie to Marion Madoff who is Peter's wife and Shana's mother: 

r. A May 8, 2008 loan or other transfer of funds in the amount of $2,800,000 from Bernard L. Madoff to Marion Madoff;

Since the Swansons bought the East Hampton house the very next month, it's a safe bet Marion gave them the money to buy it. 

The Swansons were married on 9/27/07 and the SEC's investigation of Bernie wrapped up two months later on 11/27/07.  Bernie forking over $2.8 million to his niece and her husband, the former SEC investigator, less than six months later wouldn't have been such a great idea.

The East Hampton house will probably be siezed by the Feds within the next few months so this summer is the last opportunity for the Swansons to enjoy it. (The buzz has Shana under indictment very soon.)

The $9 million loan to Peter Madoff appears to be related to real estate investments. From the list:

o. A December 12, 2007 unsecured promissory note for $9,000,000 executed by Peter Madoff in favor of Bernard L. Madoff, due December 31, 2012, at 4.13% interest and all property traceable thereto, including a 50% interest in BDG Yaphank, LLC, and a 50% interest in BDG Leroy, LLC, held in the name of Peter Madoff and/or Essex Realty Development, LLC;

The BDG is Blumenthal Development Group, owned by Ed Blumenthal, a Madoff customer who thought he was a close friend of Bernie's. BDG Yaphank was registered in 12/05 and BDG Leroy in 10/07.

Essex Realty Development was registered in NY on 12/07 to Peter Madoff's home address but no registered agent was listed. WhitePages.com lists Craig Kugel, a former BMIS employee, as the contact for Essex.

Kugel was in the news a few months ago because he cosigned a lease for Bernie's 2009 Mercedes as a BMIS director at Peter Madoff's behest. Kugel then tried to get out of paying $58k in expenses related to the lease when BMIS went under.

According to the list, Bernie loaned $1.5 million to Kugel's father. David, a long time BMIS employee, in 2003 and then loaned him another million dollars in in 8/07.

(Craig Kugel owns the inactive domain, Kugel.net, and 22 other sites. He blocked access to Kugel.net and his wife's domain, litmanpllc.com, with robot.txts in the internet archives.) 

In 6/08, Bernie loaned or transferred $780k to Eric Lipken, a 17th floor employee whose father, Irwin, was an accountant at BMIS for many years. 

In the same month, Bernie gave $475k to JoAnn Crupi, another 17th floor employee. In 10/08, Bernie gave Crupi $2.2 million more which she used to buy a house in an exclusive community on the Jersey Shore. Interesting that the Feds did not put Crupi's $2.8 million on the list of assets to be forfeited.   

Bernie loaned a total of $3.1 million to the Madoff Family Fund LLC in 2004 and 2005. The company was registered in NY in 4/01 and changed its name to the Madoff Family LLC in 2005.  The company is distinct from the Madoff Family Foundation and its purpose is not clear.  

In 2004, Bernie loaned $1 million to Steven [Stephen] Raven, CEO of Madoff Securities International Limited in London. Sometime in or after 2005, he loaned Raven another $300k. After Bernie's arrest, Raven was quick to issue a statement in which he claimed MSIL had nothing to do with BMIS despite the fact that it charged BMIS for millions of dollars in "research" fees and at least $250 million was transferred in and out of BMIS to MSIL in 2008.

One intriguing item on the list is a $1 million loan made to Allan Gary Klesch in 1999. In another post, a reader recently commented  that Klesch's name is mentioned three times in a 7/09 Tatler article about MSIL (not available online). Klesch, an ex-patriate investor living in London, made his name by buying into distressed European companies in the '80s. His company, Klesch & Co., now focuses on commodites-related businesses.   

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.