Running head: BERNARD LAWRENCE "BERNIE" MADOFF 1

Bernard Lawrence "Bernie" Madoff

Kevin Tomaszewski

Strayer University-Maitland Campus

Business Law I

LEG 100

Dr. Michael Hanners

November 21, 2010

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Abstract

This report delves into the still mysterious case of Bernard L. Madoff and his longtime

investment securities activities, which ultimately turned into a massive fraud of unparalleled size.

Several types of illegal business behavior are identified, as well as three groups of people who

became impacted through Madoff’s actions. An examination in risk management follows, by

describing three internal behaviors, which if implemented, could have helped prevent the

unraveling of Madoff’s business empire. Then, one looks into three ways that investors could

have easily avoided Ponzi schemes like those of Bernie Madoff. And finally, various legal

actions in the wake of the Madoff fraud discovery are uncovered, with more litigation looming

on the horizon.
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Bernard Lawrence "Bernie" Madoff

Introduction

Bernie Madoff had a reputation for being an enigmatic innovator of investment markets.

He was known as a former chairman of NASDAQ, an electronic forum for ‘penny stocks’, or

over-the-counter stocks too small to be noticed on the New York Stock Exchange. He coined the

term ‘split-strike conversion’ to describe an investment strategy which supposedly provided an

extra edge to one’s portfolios. Yet much of what is known about Bernard L. Madoff Investment

Securities and its owner’s side business remains shrouded in mystery, due to the tight-lipped

confession of the accused for his crimes. Bernie refused to implicate family members and

friends, claiming that he perpetrated the biggest investment fraud in history all by himself. Yet

since his incarceration, details have been gradually surfacing which suggest that Bernie Madoff

may have had many willing accomplices. Perhaps there are more charges that can be filed,

although Madoff’s numerous offenses may already be enough to keep him in prison for the rest

of his life.

Madoff’s Three Types of Illegal Business Behavior

Federal prosecutors filed a total of eleven charges against Bernie Madoff. The first of

those charges was for securities fraud. The crime of securities fraud entails false claims of

investment security holdings, and misinformation regarding stocks and brokerage advice.

Divulging insider information is also considered a component of this criminal activity. Another

major charge involved three counts of money laundering, both domestically and through

international accounts. Money laundering is the funneling of revenue acquired illegally into new

monetary configurations, with the intent of concealing this revenue’s original origins. Plus, in

connection with both his securities and investment adviser businesses, prosecutors also charged
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Madoff with mail and wire fraud. These offenses involve initiating schemes using either the

United States Postal Service or telephone systems towards obtaining money and/or property in a

false or unlawful manner.

Three Types of Parties That Were Impacted

Family members are inextricably linked to Bernie Madoff’s rise to power and prestige.

Bernie’s father-in-law Saul Alpern loaned fifty thousand dollars to help him launch Bernard L.

Madoff Investment Securities in November of 1960. Alpern had founded his own accounting

firm with partner Sherman Heller, and their office on East Fortieth Street in midtown Manhattan

would double as Bernie’s business address during its infancy. Meanwhile, Bernie’s mother

Sylvia was running a brokerage firm named Gibraltar Securities out of her home, which lasted

until the Securities and Exchange Commission initiated an investigation of forty-eight such

‘bucket shops’ in August of 1963. Yet the SEC never prosecuted any of them; a litigation release

issued the following January strongly suggested that an out-of-court settlement had driven these

small operations out of business for failing to file financial reports.

The firms conceded the violation, but requested withdrawal of their registrations; and in

this connection they represented that they are no longer engaged in the securities business

and do not owe any cash or securities to customers. The Commission concluded that the

public interest would be served by permitting withdrawal, and discontinued its

proceedings (Arvedlund, 2009-2010, p. 24).

Family would also serve to introduce Bernie Madoff to two future business partners who

would soon figure prominently in his securities investment ventures. Upon the death of his

business partner in 1967, Saul Alpern would elevate Frank Avellino and Michael Bienes to his

company’s masthead shortly afterward. By then Saul, the two junior accountants and many
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others in the firm were already referring many of their customers to Madoff for investment

management services. When Alpern himself retired in 1974, the name of the accounting firm

was eventually transformed into ‘Avellino and Bienes’, and the first of what would be termed

‘feeder funds’ would already be well established between them and Bernard L. Madoff

Investment Securities.

It’s certainly not uncommon for one’s son or daughter to enter into an identical business

relationship to a successful patriarch. However, in Bernie Madoff’s case this approach was taken

to extreme levels of nepotism. Peter Madoff entered his brother’s firm in 1967, and as business

prospered he began to accumulate several executive titles: Senior Managing Director, Head of

Trading, and even Chief Compliance Officer for both the broker-dealer and more secretive

investment advisor business models. Bernie’s sons Mark and Andrew joined the firm in the mid-

to-late 1980s, and eventually were made co-directors of Madoff Securities International in

London, England. Bernie’s nephew Charles joined up in 1978, and became the Director of

Administration for the investment firm. And Peter’s daughter Shana was hired on in 1995, and

served as in-house Legal Counsel and Rules Compliance attorney for the broker-dealer business.

Other parties greatly impacted by Bernie Madoff’s activities were his business associates

and their many clients over the decades. For example, Frank Avellino and Michael Bienes

themselves funneled over three thousand clients to Madoff’s investment advisory business.

Madoff had consistently advised the pair to remain unregistered in their dealings. But when the

SEC accused the duo of illegally selling securities, Madoff feigned ignorance of their activities,

even though he had secretly instructed them all along. For their trouble, Avellino and Bienes

were forced to pay a fine of three hundred and fifty thousand dollars and shut their business
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down. Other notable business partners eventually left in the lurch by Madoff’s growing fraud

would go on to include Jeffrey Tucker and Walter Noel of Fairfield Greenwich Group.

Non-related people who had worked under Bernie Madoff also became tainted from the

association following his arrest. This employee group includes those who may have had indirect

dealings through Madoff subsidiaries like Cohmad Securities Corporation. However, the idea

also applies to those employed directly, such as former executive assistants Elaine Solomon and

Eleanor Squillari.

Three Business Safeguards Which Should Have Been Adopted

The most glaring failure of the Madoff case proved to be an overall lack of due diligence

practiced not only on the part of company employees, but also investor intermediaries and clients

alike. Due diligence involves identifying and detailing the various risks that could be

encountered within a given organization’s business operations. Few questioned the abnormal

returns rates on Madoff investment statements, even though the validity of the math could not be

duplicated outside of the firm. Research was not conducted by intermediaries or by clients

themselves, who merely assumed Bernard L. Madoff Investment Securities operated in an ethical

business environment. Investors should have insisted on seeing independent reviews of company

activities by outside auditing services. Bernard L. Madoff Investment Securities, on their end,

needed to be more forthcoming and transparent on their entire operation. Also, the firm should

have practiced fiscally astute accountability measures in order to better safeguard the revenues of

clients’ accounts.

Another incredible revelation of the Madoff fraud was the inept failure of the Securities

and Exchange Commission to properly investigate multiple allegations of fiscal abuse, which

according to Inspector General Christopher Cox, had dated back to the year 1999 (Kirtzman,
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2009-2010, p. 254). Many allegations were completely ignored; what few investigations ever

conducted were handled incompetently by neophyte SEC staffers with little prior experience.

The most notable case of SEC negligence began in 2006, a nearly two-year investigation in

response to charges by whistleblower Harry Markopolos. During a sworn testimony with Bernie

Madoff on May 19th, SEC representatives asked whether equity trades were being conducted in

Europe. Bernie lied in the affirmative, and no one at the SEC performed any verification of the

fraudulent claim. Madoff was also asked for his account number with the central Wall Street

clearing house that monitors all stock transactions. Bernie supplied officials with a phony

number, and no one at the SEC bothered to call and verify whether that number had actually

been issued. In November of 2007, an SEC staff attorney astonishingly concluded that the

agency ‘found no evidence of fraud’ (Bandler, 2009, p. 60).

The third business abuse which should have been safeguarded against by the Madoff

organization concerns controlling-person liability. Simply put, too many immediate members of

Bernie’s Madoff’s family maintained controlling positions, and none of them could be held

accountable by anyone else employed by the firm. This rampant nepotism created a wall of

operational secrecy, which often proved to be inpenetrable even by close associates to the

Madoffs themselves. No amount of organizational oversight could possibly be considered

effective under such circumstances. Built-in regulatory compliance and security mechanisms

managed by non-family associates may well have provided a useful check against collusion by

members of the Madoff family.

Three Ways Private Investors Could Have Protected Themselves From Risk

While some investors may yet believe they were duped into believing Bernie Madoff’s

elaborate confidence game, it is also arguable that there were means to protect themselves at
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their disposal. As mentioned earlier, one such method would be to practice due diligence

whenever one is presented with new financial opportunities. Many investors were led astray on

the poor advice of their own friends and family, which isn’t a fiscally sound means of

verification. Independent research needs to be done on the workings of any financial

organization, even those that are supposedly reputable on the surface. One should investigate

third-party custodial relationships at investment firms, and review their auditing practices.

Another way to avoid fraud is to actively request documentation. Hand-written notes

from intermediaries are highly suspicious evidence that revenue is being transacted in a

professional manner. Getting activity in writing must also be coupled to verifiable account

numbers for auditing.

Finally, a healthy amount of skepticism will often prevent one from falling into schemes

which seem on the surface to be easy money generators. For instance, one should never believe

the speculators on television. An unlicensed financial consultant is about as reliable an agent as

allowing an unreformed gambling addict free access to one’s personal treasury. But even beyond

this scenario, one should not assume that overseers are actually doing their jobs, as even they

might be in on the take. Underfunded regulatory agencies sometimes can’t afford to do a

thorough job of investigating suspected malfeasance.

Epilogue-Future Legal Action

On June 29th of 2009, Bernard L. Madoff was convicted of eleven counts of criminal

activity, with a combined sentence of one hundred and fifty years in prison. It seems highly

unlikely that any further charges will ever need to be filed against him, for at his age, Bernie

Madoff seems destined to be incarcerated for the remainder of his life. However, his family and

business associates could still face pending lawsuits, litigation and accusations of wrong-doing
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as new details surface through plea bargain cooperation by former Madoff Chief Deputy Frank

DiPascali. The man allegedly in charge of operations on the organization’s secretive seventeenth

floor of the Lipstick Building, DiPascali pled guilty in August of this year for his longtime role

in the Madoff Ponzi scheme. His cooperation with investigators in helping identify those who

could be held accountable for the fraud has managed to delay DiPascali’s own sentence for

securities fraud, money laundering, and more. Reporters familiar with the case have suggested

that DiPascali’s combined charges could bring him up to one hundred and twenty-five years in

prison. He is currently free on bail after a posting of ten million dollars (Neumeister, 2010).

Based on information from DiPascali’s testimony, Madoff’s former head of operations

Daniel Bonventre was arrested this past February and subsequently charged with conspiracy,

fraud, falsifying records, false filings, and filing false tax returns. He faces up to seventy-seven

years in prison for the combined crimes. Bonventre is also free while awaiting a trial after

posting a five million dollar bond.

Computer programmers Jerome O’Hara and George Perez were arrested on charges of

conspiracy, falsifying books and records of a broker-dealer, and falsifying records of an

investment advisory. Each one is presently facing a maximum of thirty years in prison on these

charges.

At first, prosecutors in the case had suspected that Bernie’s wife Ruth Madoff may have

also been directly involved with the firm; but so far, no specific role been clearly defined as of

this writing. Stories among former employees had circulated that Ruth enjoyed regular access to

the company’s bookkeeping records. But Ruth never held an official title within the company,

even though she did manage an office on the nineteenth floor of the same building, next door to

the firm’s trading area.

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Robert Jaffe, an executive at Cohmad Securities in Boston, recently settled with the

Securities and Exchange Commission to a partial judgment which stated that he ‘made material

misrepresentations and omissions by referring hundreds of investors to Madoff’. Jaffe continues

to deny that he was aware of Madoff’s scheme, although a revised SEC lawsuit is still pending at

this time (Kronenberg, 2010).

Earlier this year, Irving Pickard, the court-appointed trustee representing the liquidation

of Madoff’s remaining assets, made the startling claim that philanthropist Jeffry M. Pickower

may have been the true figure directing the Ponzi scheme instead of Bernie Madoff. Certainly

Pickower would have been the most likely of Madoff’s closest clients to be able to detect

investment irregularities, since he was also the largest beneficiary while it was running,

withdrawing a total of over seven billion dollars from his accounts well before Madoff had

confessed to the fraud. Pickower had also set up his own separate monitoring system for his

various Decision Inc. accounts within Madoff’s firm. Another clue for the proposed allegation

was that Pickower had previously been the target of an earlier Ponzi scheme perpetrated by

Adela Holzer in 1976 and 1977. Unfortunately, Irving Pickard’s claim may never be fully

satisfied, as Pickower was found dead of a heart attack in his swimming pool in October of 2009.

A number of plaintiffs representing former Madoff investors have individually filed

class-action lawsuits against the SEC for their long-standing negligence in uncovering the fraud.

So far, the agency has been protected by its sovereign immunity. However, the victims’ lawsuits

have cited the Federal Tort Claims Act as ample justification for their collective grievance. The

most recent action now taking shape is a non-profit foundation called the Network for Investor

Action and Protection (NAIP). This group of former Madoff investors has been initiating a

‘large-scale effort’ to help victims file substantial legal actions against both the SEC and the
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Internal Revenue Service in the future. In order to sue these two governmental bodies, plaintiffs

are presently being encouraged to file a Notice of Claim form within two years of the date of the

loss. In reference to the Madoff fraud, this means that the filing deadline is December 11th. NAIP

President Ron Stein had the following to say in regards as to why the IRS is also being targeted

as part of the legal action.

The federal government was probably the largest beneficiary of the fraud because the

victims for years paid income taxes on ficticious earnings from the Madoff scheme.

Despite this fact, the IRS has refused to return significant portions of those taxes to

Madoff victims except for the limited time frame currently allowed for theft loss

carrybacks (Waddell, 2010).

According to the NAIP, the IRS recognition of Bernard L. Madoff Investment Securities

as a non-bank custodian actually violated regulations which added a sense of legitimacy to the

company’s Ponzi scheme. Time will tell whether any of these former Madoff investors’ claims

will be accepted for future litigation. In the meantime, the NAIP is also calling on Congress for

tax legislation to be enacted that will grant more theft loss deductions to the victims.

References

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