Madoff Under House Arrest as
SEC Says It Missed Signs
DAVID GLOVIN & JESSE WESTBROOK / Bloomberg 17dec2008
Bernard
Madoff is surrounded by reporters as he arrives to his apartment building
after being placed under house arrest Wednesday.
photo: European Pressphoto Agency
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· Great Ponzi Schemers |
Bernard Madoff, accused mastermind of a $50 billion investment fraud, was placed under house arrest as pressure mounted on the Securities and Exchange Commission to explain its failure to detect his financial wrongdoing for almost a decade.
Madoff, 70, will be subject to electronic monitoring and a 7 p.m. curfew while his wife, Ruth, agreed to give up homes in Montauk, New York, and Palm Beach, Florida, if her husband flees. Madoff, who appeared briefly today with his wife in Manhattan federal court, was arrested Dec. 11 after telling his sons that his firm was “one big lie,” the SEC said.
The legal developments came after SEC Chairman Christopher Cox said yesterday the agency failed to act on “credible, specific” allegations about Madoff dating back to 1999. The Madoff affair will be at the center of planned congressional hearings on the reform of the SEC, said a senior Senate official, speaking on condition of anonymity.
The allegations “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday, without detailing the allegations. He announced an internal probe to review the “deeply troubling” revelations. Cox today said the agency has no evidence of any wrongdoing by SEC personnel.
The SEC, already faulted in connection with the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc., now faces criticism for failing to detect what Madoff termed “a giant Ponzi scheme.” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Senator Charles Grassley, an Iowa Republican, have questioned its vigilance in enforcing securities laws. A House panel will hold a hearing next month.
Victims
Victims of Madoff’s fraud stretch from Tokyo to Paris, encompassing foundations set up by Boston philanthropist Carl Shapiro and Nobel laureate Elie Wiesel and clients of global banks such as Banco Santander SA of Spain, Nomura Holdings Inc of Japan, and HSBC Holdings Plc of the U.K. Yeshiva University in New York lost $110 million, mostly through hedge funds controlled by trustee J. Ezra Merkin.
Madoff’s responses during a 2005 SEC inspection of his brokerage operation should have raised suspicions and prompted further inquiries, said two people familiar with the matter.
Two years later, the agency closed a separate probe into tips and press reports suggesting his investment returns were too good to be true. Money manager Harry Markopolos helped trigger that inquiry by suggesting Madoff may be running a Ponzi scheme or front-running, in which traders buy shares for their account before filling customers’ orders, a person with knowledge of the case said.
Front-Running
Investigators focused on the front-running theory and, after encountering obstacles, didn’t finish verifying trades Madoff claimed were for advisory clients, the person said. His company’s trades had been cleared through a single account at the Depository Trust & Clearing Corp., making it difficult to distinguish transactions specifically for Madoff’s advisory business. Others transactions were completed through foreign brokerages, forcing the SEC to persuade foreign regulators to collect the data. Instead, investigators closed the case.
Cox, a Republican appointed by President George W. Bush, has said he will leave office when Bush leaves office Jan. 20. Cox’s term ends in June 2009 after taking over in August 2005. President-elect Barack Obama may name Cox’s successor as soon as tomorrow, people familiar with the matter said.
Instead of wielding subpoena power to obtain information, SEC staff “relied upon information voluntarily produced by Mr. Madoff and his firm,” Cox said.
Recusals
The internal review will include “all staff contact and relationships with the Madoff family and firm,” he said, and mandate the recusal of any SEC employee with more than an “insubstantial personal” contact with Madoff and his family.
Eric Swanson, a former assistant director of compliance and examinations at the SEC, is married to Madoff’s niece, Shana, who was a compliance lawyer at the Madoff firm. Swanson left the SEC in August 2006 and is now general counsel of Bats Trading Inc., the third-largest U.S. equity exchange by trading volume.
Cox, speaking after a commission meeting today, said determining what happened is of “utmost’ importance and he had “no reason” to think staff suppressed the Madoff allegations. Cox declined to discuss possible action against any employees.
“We have thus far found no evidence of any wrongdoing by any SEC personnel,” Cox told reporters.
DiPascali
Besides talking with Madoff, who met with federal prosecutors yesterday, authorities are scrutinizing the role of Frank DiPascali, a senior official in Madoff’s investment advisory firm, according to people familiar with the case.
Janice Oh, a spokeswoman for acting Manhattan U.S. Attorney Lev Dassin, declined to comment. Madoff’s lawyer, Ira Sorkin, didn’t return a call seeking comment.
“Like everyone else, we’re trying to sort out everything and learn the facts,” DiPascali’s lawyer, Marc Mukasey of Bracewell & Giuliani in New York, said in an interview, declining further comment.
U.S. Attorney General Michael Mukasey, Marc Mukasey’s father, has recused himself from the Justice Department’s investigation into Madoff because his son represents someone involved in the case, a department spokesman said today.
Michael Mukasey is a 1959 graduate of the Ramaz School, a modern Orthodox Jewish school in New York that invested as much as $6 million in a fund that invested with Madoff, said Kenny Rochlin, Ramaz’s director of institutional advancement. Mukasey’s wife, Susan, was headmistress of Ramaz’s Lower School for children in primary grades, Rochlin said.
Passports Surrendered
U.S. Magistrate Judge Gabriel Gorenstein in Manhattan also ordered Madoff and his wife, Ruth, to surrender their passports. The ruling came as a bail hearing for her husband was postponed for a second time in as many days.
The number of co-signers on his $10 million bond was reduced by Gorenstein from four to two after Madoff was unable to find two additional guarantors. Madoff’s wife and brother, Peter, have co-signed the bond.
Madoff and his wife were in court today to sign a confession of judgment to properties they in Montauk, Palm Beach and on Manhattan’s Park Avenue.
The case is U.S. v. Madoff, 08-mag-2735, U.S. District Court, Southern District of New York (Manhattan).
source:17dec2008
Cox:
No Evidence Yet of Wrongdoing by SEC Staff in Madoff Case
Madoff to Wear Monitoring Device; Mukasey Recusal
AARON LUCCHETTI, KARA SCANNELL and AMIR EFRATI / Wall Street Journal 17dec2008
WASHINGTON — Securities and Exchange Commission Chairman Christopher Cox said Wednesday that no evidence of wrongdoing by staff has surfaced yet in connection with the agency's failure to investigate credible claims about money manager Bernard Madoff, at the center of an alleged $50 billion Ponzi scheme.
The investigation by the agency's inspector general is just beginning. Mr. Cox ordered the probe Tuesday after he learned of "multiple failures" by staff over a decade to look into allegations about Mr. Madoff's business.
He stressed that there was "no reason to believe" information about the alleged multibillion dollar fraud was suppressed by any SEC staff. He stressed that the SEC's staff was "extraordinarily professional," saying, "I'm enormously proud of them."
In an extraordinary admission that the SEC was aware of numerous red flags raised about Bernard L. Madoff Investment Securities LLC, but failed to take them seriously enough, on Tuesday Mr. Cox ordered a review of the agency's oversight of the New York securities-trading and investment-management firm. The review will include whether relationships between SEC officials and Mr. Madoff or his family members had any impact on the agency's oversight.
Curfew, Monitor for Madoff
Prosecutors agreed to modify Mr. Madoff's bail conditions Wednesday after it appeared he couldn't secure two additional co-signers for his bond. In a letter Wednesday, U.S. Magistrate Judge Gabriel Gorenstein in Manhattan signed off on the modified conditions and canceled a bail hearing set for later Wednesday.
"In light of this order and the agreement of both the defendant and the government to the changes in the bail conditions, there is no need for a further hearing on bail today," the judge wrote.
Mr. Madoff was released Wednesday on a $10 million personal recognizance bond secured by his Manhattan apartment.
The initial bail package required four co-signers, but Mr. Madoff apparently was able to get only two: his wife and his brother. Under the new package, Mr. Madoff will be required to be on home detention with electronic monitoring. Also, a curfew will be imposed, requiring him to be at home from 7 p.m. EST to 9 a.m. EST.
In a letter to the court Wednesday, Assistant U.S. Attorney Marc Litt said pretrial services personnel will be able to evaluate the suitability of Mr. Madoff's apartment for electronic monitoring and "will install monitoring equipment as expeditiously as possible."
Mr. Madoff's wife, Ruth, also will surrender her passport, and they will put up properties in Montauk, N.Y., on Long Island and in Palm Beach, Fla., to secure the bond.
On Wednesday afternoon, Mr. Madoff and his wife briefly stopped by the federal courthouse in lower Manhattan to sign paperwork in which he and his wife would forfeit the properties if he flees or violates his bail conditions. The document valued their co-op apartment on Manhattan's Upper East Side at $7 million, but didn't have values for the other properties. Mukasey Recuses Himself
Also Wednesday, Attorney General Michael Mukasey recused himself from the Madoff probe, the Justice Department said.
Marc Mukasey, partner at the Bracewell & Giuliani law firm in New York and the attorney general's son, is representing Frank DiPascali, a senior official at Madoff Investment Securities.
Justice officials said the involvement of Mr. Mukasey's son on the defense side of the case made it necessary for the attorney general to remove himself from overseeing matters in the investigation.
The probe is being led by investigators from the Securities and Exchange Commission and federal prosecutors in New York's Southern District, where both Marc Mukasey and his father previously served as assistant U.S. attorneys.
Questions About Relationship
Mr. Madoff's niece, Shana Madoff, married a former SEC attorney named Eric Swanson last year. Mr. Swanson worked at the SEC for 10 years, including as a senior inspections and examination official, before leaving in 2006. Ms. Madoff is a compliance lawyer at the securities firm.
Among Mr. Swanson's duties was supervising the SEC's inspection program in charge of trading oversight at stock exchanges and electronic-trading platforms, according to a press release from Bats Trading Inc., an electronic stock exchange that hired Mr. Swanson as general counsel earlier this year.
Neither person is named in the SEC statement as a target of the probe, which is being led by the agency's inspector general, David Kotz. But Mr. Kotz said in an interview that he intended to examine the relationship between Mr. Madoff's niece and Mr. Swanson.
In a statement Tuesday night, a spokesman for Mr. Swanson acknowledged that "the compliance team he helped supervise made an inquiry about Bernard Madoff's securities operation," without being more specific. He said the couple began dating in 2006, and were married in 2007.
A second representative of Mr. Swanson said the romantic relationship with Ms. Madoff began "years after" the regulatory scrutiny in which Mr. Swanson was involved. Mr. Swanson will "fully cooperate" with the SEC investigation, the representative said.
Ms. Madoff couldn't be reached for comment.
Mr. Cox's statements represent a strong rebuke of an agency already facing criticism of its response to the credit crisis. Mr. Cox said an initial review of SEC oversight of Mr. Madoff's firm found that "credible and specific allegations" made as far back as 1999 "were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action."
Mr. Cox wasn't specific about the past claims that were inadequately investigated. But around 2000, Harry Markopolos, at the time an executive at a rival firm to Mr. Madoff's, contacted the SEC with suspicions about Mr. Madoff's business. "Madoff Securities is the world's largest Ponzi scheme," Mr. Markopolos wrote in a letter to the agency. Mr. Markopolos pursued his accusations for years, dealing with the SEC's regional offices in New York and Boston, according to documents reviewed by The Wall Street Journal.
In 2005, the SEC's inspections division in New York examined Mr. Madoff's business operations, concluding there was a violation of technical trading rules, according to the SEC. The agency's enforcement staff in New York completed an investigation in 2007 without recommending action.
Late Tuesday, Lori Richards, director of the SEC's inspection and examinations division, detailed Mr. Swanson's role in oversight of Mr. Madoff's firm, saying he was a member of a team that looked at the securities-trading business in 1999 and 2004. "He did not participate in the 2005 exam," she said.
Ms. Richards added that the SEC "has very strict rules prohibiting SEC staff from participating in matters involving firms where they have a personal interest. Subsequently, Mr. Swanson did not work on any other examination matters involving the Madoff firm before leaving the agency."
Phony Records Found
Mr. Cox's criticisms of the agency came as investigators searching the offices of Mr. Madoff's firm in New York City discovered what they described as phony sets of records used to cover up its alleged $50 billion fraud, even as it became clear that Mr. Madoff was trying to attract new investors as recently as early December.
Those potential investors included the Pritzkers, one of America's wealthiest families, people familiar with the matter say. Mr. Madoff's efforts didn't result in an investment from the family.
Meantime, a financial firm with ties to Mr. Madoff is being drawn into the probe by regulators. The Massachusetts Secretary of State has subpoenaed Cohmad Securities Corp., which was closely affiliated with Mr. Madoff and advisers who helped bring investors to his business.
No one answered calls placed to two phone numbers for Cohmad in New York on Tuesday.
Investigators, hunkered down in the 17th-floor office where they believe Mr. Madoff carried out what he allegedly described to his sons as a $50 billion fraud, have found what appear to be "falsified records," according to Stephen Harbeck of Securities Investor Protection Corp., the securities-industry nonprofit group helping to oversee the firm's liquidation. These include a set of books that doesn't accurately reflect the assets held by the firm, he said.
"Some customer statements do not reflect securities in the firm's possession," Mr. Harbeck said.
The firm's records are in disarray, and the company has officially ceased operations, Mr. Harbeck said. According to Mr. Cox, Mr. Madoff "kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators."
The alleged scam is widely expected to cause billions of dollars in losses for banks, hedge funds, well-known investors and charities around the world, some of whom have been wiped out. Investors and other affected parties have disclosed combined exposure of more than $25 billion.
While the firm Mr. Madoff started in 1960 has been run as a tightknit family business, several of Mr. Madoff's relatives who worked there concentrated their efforts in the firm's established securities-trading business, which matched buyers and sellers of individual stocks and captured the fleeting gaps between the prices at which investors are willing to buy and sell.
The court-appointed trustee, Irving Picard, who is in control of the firm's U.S. operations, will decide whether the securities-trading arm of the firm can be sold.
Many of his closest friends, and even his sons, Andrew and Mark, both executives at Mr. Madoff's firm, were among his victims who lost millions.
Through their lawyer, Martin Flumenbaum, Mr. Madoff's sons alerted federal authorities after confronting their father about his investment operation last week. The sons told the Federal Bureau of Investigation that Mr. Madoff described his firm's investment-advisory arm as a "giant Ponzi scheme."
"Mark and Andrew Madoff are not involved in the firm's asset-management business, and neither had any knowledge of the fraud before their father informed them of it on Wednesday," Mr. Flumenbaum said in a statement. "The brothers were among the many victims of this scheme and will continue to cooperate" in the investigation.
Prosecutors haven't accused any of Mr. Madoff's family members of wrongdoing. They are focusing on how Mr. Madoff raised money and what role his wife may have played in the fund-raising, people familiar with the matter said.
Bernard Madoff was trying to raise funds for his investment empire as recently as early this month, as redemptions were about to prompt an unraveling of the apparent fraud.
According to a criminal complaint, Mr. Madoff told a senior staff member that clients during the first week of December had requested about $7 billion of assets from their accounts. Mr. Madoff's firm has said it managed about $17 billion. Mr. Madoff told the employee, according to the complaint "that he was struggling" to "meet those obligations."
In mid-November, Mr. Madoff was holding talks aimed at securing an investment from Tom Pritzker, a Chicago-based investor who heads a big chunk of the family empire, people familiar with the matter say. Mr. Pritzker met briefly with Mr. Madoff to discuss the idea, these people say. Mr. Madoff also discussed the potential Pritzker investment with a business contact from outside the firm in late November, a person familiar with the matter said.
It's unclear how large an investment was being considered by the Pritkzers, who control the Hyatt hotel chain. In the end, no money changed hands.
One New York investor, who had recently sold an oil company for more than $100 million, invested several million dollars with Mr. Madoff in the first week of December. According to people familiar with the investment, Mr. Madoff approached the investor in late November and encouraged him to invest up to $10 million.
Mr. Madoff registered his investment-advisory business with the SEC in 2006, but the agency never completed an examination of that business, the SEC says. The agency usually conducts examinations such as these within the first year of registration.
In 2000, the SEC asked Mr. Madoff to participate in an advisory panel on stock-market trading rules. Former SEC officials said Mr. Madoff would share his views on various market-related issues even when potential rule changes wouldn't necessarily help his business.
—Dionne Searcey, Robert Frank, Mark Maremont Jenny Strasburg, Evan Perez, Jessica Holzer and Chad Bray contributed to this article.
source:17dec2008
Congress to Probe SEC Role in Madoff Affair
JOHN POIRIER & RACHELLE YOUNGLAI / Reuters 17dec2008
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Bernard Madoff walks back to his apartment in New York December 17, 2008. Disgraced financier Madoff, accused of orchestrating a $50 billion fraud, was placed under house arrest on Wednesday as BNP Paribas became the latest European bank to be sideswiped by the scandal. Photo: Shannon Stapleton / Reuters |
WASHINGTON — A U.S. House of Representatives panel plans to convene an inquiry in January into the failure of regulators to unearth an alleged $50 billion securities fraud by financier Bernard Madoff, a key lawmaker said on Wednesday.
Madoff, a former Nasdaq Stock Market chairman, was arrested last week and charged with running a massive Ponzi scheme. He is accused of defrauding banks, investment funds, charities and wealthy individuals who invested in funds he controlled.
The U.S. Securities and Exchange Commission has come under fire for not uncovering the scandal until senior employees of Madoff went to authorities.
The agency, chaired by Christopher Cox, has been accused of missing a number of red flags about the way Madoff operated his investment business.
Rep. Paul Kanjorski, chairman of the House Financial Services subcommittee on capital markets, plans to examine the alleged scheme as soon as possible after Congress returns on January 6.
"Unfortunately, these events have only further weakened already battered investor confidence in our securities markets," Kanjorski, a Pennsylvania Democrat, said in a statement. "And they have raised even more troubling questions about the effectiveness of our regulatory system."
Kanjorski said the panel will look into why the U.S. markets watchdog as well as other regulators and market participants failed to detect "substantial evasions" that harmed innocent investors and charitable groups.
He said the inquiry will help the full committee, chaired by Massachusetts Democrat Barney Frank, to craft a strong, effective and modern regulatory system.
The committee's top Republican, Spencer Bachus, also wants hearings to investigate Madoff and the adequacy of the SEC, as well as supplemental oversight by the Financial Industry Regulatory Authority (FINRA).
"Obviously, there was a failure of regulatory oversight," said Bachus, who is from Alabama.
Sen. Chuck Grassley, the ranking Republican on the Senate Finance Committee who has repeatedly been critical of the SEC, drafted a letter on Wednesday to the SEC's inspector general, David Kotz, who is leading his own investigation into the agency's handling of the Madoff case.
Grassley said he is "extremely interested in learning how the massive frauds being described in the press could have been perpetrated despite SEC regulatory and investigative activity regarding Mr. Madoff."
MADOFF-SWANSON ROMANCE
Cox, a Republican, said he was gravely concerned about the SEC's failure to examine Madoff's activities, which were flagged going back to at least 1999 and repeatedly brought to the attention of SEC staff but never recommended for commission action.
In light of past credible allegations brought to the staff, Cox has asked the agency's inspector general to probe the agency's conduct in the case.
"We have thus far no evidence of any wrongdoing by any SEC personnel," Cox told reporters after an open meeting on Wednesday.
Madoff's niece, Shana Madoff, a compliance lawyer at his firm, is married to a former SEC lawyer, Eric Swanson, who was the agency's assistant director in the office of compliance inspections and examinations.
A spokesman for Swanson said his relationship with his wife began years after the compliance team he helped supervise inquired into Bernard Madoff's securities operations.
SEC compliance chief Lori Richards said Swanson was a member of an examination team that looked into Madoff's broker-dealer business in 1999 and 2004.
Richards said Swanson was not part of a 2005 examination of the broker-dealer firm by the SEC's New York office. She said there are very strict rules banning staff from engaging in matters involving companies and a personal interest.
"Subsequently, Mr. Swanson did not work on any other examination matters involving the Madoff firm before leaving the agency," she said.
Frank and Senate Banking Committee Chairman Christopher Dodd are likely to lead efforts in Congress to overhaul the regulation of the financial services industry after banking and securities regulators failed to rein in the creation of risky securities that led to the current financial crisis.
Dodd, concerned about the harm to investors, is seeking more information from the SEC. Dodd also may hold hearings, according to Senate aides.
A Senate subcommittee on securities, chaired by Jack Reed, a Rhode Island Democrat, may look into quickly pulling together a blue ribbon commission to make recommendations on regulatory changes.
Additional reporting by Kevin Drawbaugh and Karey Wutkowski; Editing by Andre Grenon, John Wallace and Jeffrey Benkoe
source:17dec2008
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