Here at last is the Executive Summary to SEC Inspector General David Kotz’s “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme.” sec-oig-madoff-executive-summary. The complete REPORT OF INVESTIGATION will apparently come out over the next several days. The SEC’s failure, as detailed in the Executive Summary, was more shocking and abysmal than I ever imagined. It makes me want to vomit. The Executive Summary takes about 15 minutes to read and is well worth the effort. The primary failure appears to have been at the supervisory level.
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Here it is, c/o the USDOJ SDNY website.
According to this piece in the Saturday WSJ, long time Bernie Madoff aide Frank DiPascali (who ran Madoff’s “trading operation”) is set to plead guilty to federal felony charges in Manhattan on Tuesday. If true, this should cause the dam to start breaking. As of this evening, however, no documents regarding DiPascali have been posted on PACER.
The Washington Post’s Zachary A. Goldfarb reports here that Lori A. Richards, longtime Director of the SEC’s Office of Compliance Inspections and Examinations, is resigning after 14 years on the job. Richards’ Office reviewed Madoff’s operations in 1999, 2004, and 2005, without uncovering his Ponzi scheme.
Last week’s Post carried this outstanding piece by Goldfarb on former Office of Compliance Inspections and Examinations attorney Genevievette Walker-Lightfoot. Walker-Lightfoot was hot on Madoff’s trail in 2004, raising and/or trying to ask several pertinent questions about Madoff’s activities, before she was re-assigned to other duties. Walker-Lightfoot’s supervisors at the time were Mark Donohue and his boss Eric Swanson. Swanson later married Madoff’s niece. The SEC’s Inspector General, H. David Kotz, claims to be currently looking at ”all the circumstances surrounding the SEC’s various examinations of Mr. Madoff, including the 2004 examination.” Stay tuned.
The Wall Street Journal reports here on the 150 year term of imprisonment imposed today by U.S. District Judge Denny Chin on all-time Ponzi King Bernie Madoff. If he behaves himself in prison, Madoff will be eligible for release at the age of 199. Initial press reports do not indicate whether Madoff’s sentence includes a term of supervisory release following imprisonment, but it is statutorily mandated. Judge Chin called Madoff’s fraud “staggering” “unprecedented” and “evil.” Chin also said that the 150 year sentence was symbolically important in sending a general deterrence message to future fraudsters. It is clear that neither the judge nor prosecutor believes Madoff has been fully cooperative.
Here is a fascinating story by Jake Bernstein of ProPublica.org about Madoff “victim” Jeffrey Picower. “Between December 1995 and December 2008, Picower and his family withdrew from their various Madoff accounts $5.1 billion more than they invested with the self-confessed swindler, according to a lawsuit filed by the trustee who is trying to recover money for those Madoff defrauded.” This is investigative reporting at its best.
Surprise, surprise. The Second Circuit has affirmed Judge Chin on Bernie Madoff’s incarceration. Here is the WSJ alert.
There was much speculation in the white collar criminal defense community last week about why Bernard Madoff would plead straight up to the charges against him. This assumes that the choice was Madoff’s to make. In fact, there is no way that the U.S. Attorney’s Office for the Southern District of New York (”SDNY”) would have entered into a plea greement with Madoff, given his current posture.
Madoff maintains that none of his employees aided and abetted his massive Ponzi scheme. This is obviously a lie and SDNY doesn’t believe it for a minute. SDNY’s proffer sessions have already uncovered malfeasance by Madoff employees. So how could prosecutors enter into a plea agreement with someone who is already lying to them? A plea agreement presupposes that the defendant is being truthful with the government, at least at the outset. Even the relatively bare-bones SDNY white collar plea agreements typically give a defendant three points for acceptance of responsibility and provide that the agreement is null and void if the defendant lies. Plus, the parties must agree on a “factual basis” in support of the plea.
Thus, entering into an “agreement” with Madoff while he is lying about a key aspect of his crime is unthinkable. Quite simply it would be unethical for the SDNY to give its imprimatur to Madoff’s version of events by entering into a “bargain” with him. Besides, it’s not smart to bargain with the devil.
The government, on the other hand, could not and would not prevent a defendant from pleading straight up to all of the charges.
Madoff is determined to protect any and all who aided him in his crimes–a remarkable exhibition of his continuing sociopathy. The government will make him, his family, and his friends pay for it.
Here, courtesy of the WSJ, is the Criminal Complaint filed on March 17 (and unsealed yesterday) against Bruce David G. Friehling. Friehling is charged with Securities Fraud, Investment Advisor Fraud, and False Filings With The Securities And Exchange Commission. There is no allegation that Friehling knew of Madoff’s fraudulent Ponzi scheme. The crux of the case is that Friehling falsely certified, in various public filings, to having audited BLMIS (Madoff’s company) in accordance with Generally Accepted Accounting Principles (”GAAP”) and Generally Accepted Auditing Standards (”GAAS”). The FBI’s “numerous” interviews with various Madoff employees and its review of Friehling’s workpapers, however, allegedly belie these certifications. Also, according to the Criminal Complaint, Friehling certified to the American Institute of Certified Public Accountants (”AICPA”) between 1994 and 2008 that he had not performed any audits, thereby escaping AICPA’s peer review process. During the same period, however, Friehling certified to the SEC that “he was performing annual audits of BLMIS [Madoff's company] in conformity with GAAS and GAAP.”
As expected, Bernard Madoff pled guilty today in a Manhattan federal court. The Washington Post story is here. Madoff, purporting to be ashamed of his conduct, pled to the government’s 11-count criminal information, available here, which was filed earlier this week. Madoff pled straight up–without a plea bargain agreement. Judge Chin, quite appropriately, ordered Madoff to prison after the plea. Contrary to the previous public outcry, it would have been inappropriate for Madoff to have been jailed before he entered a guilty plea.
It is clear from a close reading of the criminal information, as well as from press stories relating to certain proffer sessions conducted by the SDNY U.S. Attorney’s Office, that the government doesn’t believe Madoff acted alone. However, the criminal information is ambiguous enough in its wording for Madoff to be able to plead guilty to it without admitting that others criminally aided and abetted him.
Today’s Wall Street Journal reports, in a story here by Amir Afrati, that two assistants to longtime Madoff aide Annette Bongiorno were instructed by Bongiorno to generate trading tickets based on their researching of daily share prices for blue chip stocks “from the previous month or several months.” According to the Journal, the trading tickets are “now believed to be bogus.” The information was allegedly revealed by the assistants, Semone Anderson and Winnie Jackson, in proffer sessions with federal prosecutors. Madoff is expected to plead guilty to various offenses in federal court on Thursday.
The Journal article reports that the two former Madoff assistants were interviewed through the vehicle of proffer agreements, which the Journal describes as agreements ”in which prosecutors agree not to use [the assistants'] statements against them as long as they tell the truth, according to people familiar with the matter.”
In fact, the standard SDNY proffer agreement is much broader, and more dangerous, than this description suggests. For example, if the SDNY decides to prosecute one of the former Madoff aides, her proffer statement can be used against her if any portion of her defense, including an attorney’s opening statement or cross-examination question, is inconsistent with her proffer statement. So, assuming that the standard SDNY proffer agreement was used, and assuming further that the Madoff assistants admitted to intentional wrongdoing during the proffer interviews, their right to put on a meaningful defense may be damaged in the event that the SDNY wants to prosecute them, but they do not want to accept a plea offer.
Legal Times reports here, on Law.com, that convicted former Milberg Weiss partners Melvyn Weiss and David Bershad are among Bernard Madoff’s victims. Ironically, the current incarnation of the firm, Milberg LLP, is busy rounding up other victims of the fraud in anticipation of forthcoming litigation.
Today’s WSJ has an interesting story here about the “backwards” progress of the Madoff probe, contrary to the typical “from the bottom up” investigatory model. Of course this was necessitated by the SEC’s failure to investigate Madoff’s investment operation, depite years of credible warnings, topped off by Madoff’s surprise confession. The article focuses almost entirely on the SEC’s current probe, hardly mentioning DOJ’s concomitant investigation, which must result in an indictment before long.