Notes For Madoff Case

Company:
- Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960
- The firm was one of the top market maker businesses on Wall Street
- which bypassed "specialist" firms by directly executing orders over the counter from retail
brokers.
- a penny stock trader with $5,000, earned from working as a lifeguard and sprinkler installer.
- His fledgling business began to grow with the assistance of his father-in-law, accountant
Saul Alpern, who referred a circle of friends and their families.
- In order to compete with firms that were members of the New York Stock Exchange trading
on the stock exchange's floor, his firm began using innovative computer information
technology to disseminate its quotes
- He has built a highly profitable securities firm, Bernard L. Madoff Investment Securities,
which siphons a huge volume of stock trades away from the Big Board. The $740 million
average daily volume of trades executed electronically by the Madoff firm off the exchange
equals 9% of the New York exchange's. Mr. Madoff's firm can execute trades so quickly and
cheaply that it actually pays other brokerage firms a penny a share to execute their
customers' orders, profiting from the spread between bid and asked prices that most stocks
trade for.
- At one point, Madoff Securities was the largest buying-and-selling "market maker" at the
NASDAQ
- In the 1980s, Madoff's market-maker division traded up to 5% of the total volume made on
the New York Stock Exchange.
[19]
Madoff was "the first prominent practitioner"
[27]
who paid a
broker to execute a customer's order through his brokerage, called a "legal kickback
- ",
[28]
which gave Madoff the reputation of being the largest dealer in NYSE-listed stocks in
the U.S., trading about 15% of transaction volume
- By 2000, Madoff Securities, one of the top traders of US securities, held approximately $300
million in assets.
- The business occupied three floors of the Lipstick Building, with the investment management
division, referred to as the "hedge fund", employing a staff of approximately 24.
- Madoff ran a branch office in London, separate from Madoff Securities, which employed 28,
handling investments for his family of approximately 80 million.
[34]
Two remote cameras
installed in the London office permitted Madoff to monitor events from New York
Operation:
- Madoff's use of futures and options helped cushion the returns against the market's ups and
downs.
- Madoff said he made up for the cost of the hedges, which could have caused him to trail the
stock market's returns, with stock-picking and market timing

Case:
- The Madoff family gained unusual access to Washington's lawmakers and regulators
through the industry's top trade group. The Madoff family has long-standing, high-level ties to
the Securities Industry and Financial Markets Association (SIFMA), the primary securities
industry organization
- In 2001, an SEC official met with Harry Markopolos at their Boston regional office and
reviewed his allegations of Madoff's fraudulent practices.
[64]
The SEC claimed it conducted
two other inquiries into Madoff in the last several years, but did not find any violations or
major issues of concern.
[66]

- In 2004, after published articles appeared accusing the firm of front running, the SEC's
Washington office cleared Madoff.
[64]
The SEC detailed that inspectors had examined
Madoff's brokerage operation in 2005,
[64]
checking for three kinds of violations: the strategy
he used for customer accounts; the requirement of brokers to obtain the best possible price
for customer orders; and operating as an unregistered investment adviser. Madoff was
registered as a broker-dealer, but doing business as an asset manager
- "The staff found no evidence of fraud". In September 2005 Madoff agreed to register his
business, but the SEC kept its findings confidential.
[64]
During the 2005 investigation,
Meaghan Cheung, a branch head of the SEC's New York's Enforcement Division, was the
person responsible for the oversight and blunder, according to Harry Markopolos,
[17][68]
who
testified on February 4, 2009, at a hearing held by a House Financial Services Subcommittee
on Capital Markets
- In 2007, SEC enforcement completed an investigation which began on January 6, 2006, into
a Ponzi scheme allegation which resulted in neither a finding of fraud, nor a referral to the
SEC Commissioners for legal action
- In 2007, the Financial Industry Regulatory Authority (FINRA), the industry-run watchdog for
brokerage firms, reported without explanation that parts of Madoff's firm had no customers.
"At this point in time we are uncertain of the basis for FINRA's conclusion in this regard,"
SEC staff wrote shortly after Madoff was arrested.
[64]

- As a result, the chairman of the SEC, Christopher Cox, stated that an investigation will delve
into "all staff contact and relationships with the Madoff family and firm, and their impact, if
any, on decisions by staff regarding the firm".
[72]
A former SEC compliance officer, Eric
Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney.
[72]

- his brother Peter, as Senior Managing Director and Chief Compliance Officer;
- Peter's daughter Shana Madoff, as the firm's rules and compliance officer and attorney;

- Peter has since been sentenced to 10 years in prison
[10]
and Mark committed suicide by
hanging exactly two years after his father's arrest
- Frank DiPascali, 52, who referred to himself as "director of options trading" and as "chief
financial officer" at Madoff Securities pled guilty on August 11, 2009, to 10
counts:
[120]
conspiracy, securities fraud, investment advisor fraud, mail fraud, wire
fraud, perjury, income tax evasion, international money laundering, falsifying books and
records of a broker-dealer, and an investment advisor. He has agreed to connect the dots
and to name names, with sentencing in May 2010.
[121]
He is awaiting bail.
[100]
Prosecutors are
seeking more than $170 billion in forfeiture, the same amount sought from Madoff, which
represents funds deposited by investors and later disbursed to other investors. The same
day, a SEC civil complaint
[122]
was filed against DiPascali.

- Ignoring opportunity costs and taxes paid on fictitious profits, half of Madoff's direct investors
lost no money.
[10]
It is also the largest accounting fraud in American history.
Fun:
- Madoff's personal and business asset freeze created a chain reaction throughout the world's
business and philanthropic community, forcing many organizations to at least temporarily
close, including the Robert I. Lappin Charitable Foundation, the Picower Foundation, and
the JEHT Foundation
-

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