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The Vast Amount That We Don't Know About The Madoff Matter.

By       Message Lawrence Velvel     Permalink
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July 8, 2009

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Re: The Vast Amount That We Dont 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 Madoffs father-in law in the early 1960s, when <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Avellino and Bienes started funneling money to Madoff? Nobody knows about this, unless the government has learned the facts but isnt disclosing them yet.

Why was the fraud undertaken? We dont 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 Madoffs 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.

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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 Madoffs 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 companys books for awhile. Peter Madoff had, if I remember correctly, set up the companys 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 couldnt make trades) was central to the fraudulent scheme. Shana Madoff must have known that Cohmad and BLMIS were paraded as being separate but really werent; 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 lawyers 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 hasnt 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 customers 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 customers 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 Cohns 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 6 ½ billion dollars to this guy who put in only about 1 ½ 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 dont know what happened to all the money. And we are not going to know until a lot more information becomes public.

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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, FINRAs 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 someones 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 SECs public statement was so important that, as they have said in affidavits being submitted to the SECs 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 SECs statement of a clean bill of health, transferred their accounts from Avellino and Bienes to Madoff himself.

Perhaps the SECs Inspector Generals Report will answer these questions. It remains to be seen.

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Lawrence R. Velvel is a cofounder and the Dean of the Massachusetts School of Law, and is the founder of the American College of History and Legal Studies.

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