Who Knew About Madoff’s Ponzi Scheme — Anyone?

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

I don’t usually write about crooks like Bernard Madoff. Usually, it is the same old story, told far too many times, about greed and rotten characters. But in his case, I found something else intriguing. According to both Madoff and the Securities and Exchange Commission (SEC), there were numerous probes into the business of the former by the latter. Yet, realizing the full scope of Madoff’s Ponzi scheme eluded the regulator, or so its perpetrator claims. According to a prison interview conducted with Madoff back in June, but released only recently, Madoff appears convinced that “it never entered the SEC’s mind that it was a Ponzi scheme.”

Reading a quote like that, you have got to wonder, how is something like that even possible? Despite this argument to the contrary, the SEC is not universally known for employing stupid people. So, was Madoff just boasting, touting his own intelligence to cover his tracks really well, or could have the SEC investigators really been that incompetent as not to even entertain the idea of a Ponzi scheme? Mind you, Madoff played his game well. When he was asked to show up at the SEC’s enforcement division’s inquiry, he would not bring a lawyer with him. First, Madoff believed he didn’t need one. And second, bringing a lawyer was a half admission of guilt in his mind. Coming alone signaled to the regulator that he had nothing to hide.

Incidentally, Madoff successfully spent over 16 years hiding the “nothing.” Of course, the SEC carried out probe after probe. Yet, so many years later, Madoff was still able to say things such as, “I was worried every time. It was a nightmare for me. I wish they caught me six years ago, eight years ago.” I’m sure Madoff’s numerous investors share the sentiment, as well as their incredulity at the SEC’s astonishing failure to catch this fraudster before he managed to swindle billions of dollars from investors for almost two decades. Sure, he got his punishment — 150 years in all — but it still feels like it was too little too late.

When something like this happens, conspiracy theories abound. For example, rumors that Madoff had a close relationship with SEC Chairman Mary Schapiro, who was previously head of the Financial Industry Regulatory Authority (FINRA), do not appear to be supported by concrete evidence. There is only Madoff’s reference to Schapiro as a “dear friend,” and an acknowledgment that, by now, “she probably thinks, I wish I never knew this guy.” Incidentally, FINRA also visited Madoff and subjected his operations to examination, indicating organizational breakdown, whereby Madoff’s brokerage ran its investment business well hidden from the regulators. Still, not even FINRA found anything.

The way it looks to me, the SEC plans to hide its incompetence behind Madoff’s accountant, David Friehling, who is potentially facing 108 years in prison for securities fraud, investment adviser fraud, making false filings to the SEC, obstructing justice and defrauding the Internal Revenue Agency. The list of charges is both long and serious. But what I find interesting is that the well known and, at the time, well-respected Wall Street institution Madoff, which managed over $65.0 billion in assets, would hire a virtual nobody in the auditing business with a miniscule office somewhere in NYC suburbia and that no one would found that peculiar. Or, at the very least, why no one investigated all the rubber stamps that Friehling had put on Madoff’s records?

I’m not sure if the scapegoat is enough to appease investors. The investigation into how Madoff’s Ponzi scheme could have been allowed to go on for so long and to reach such magnitude is ongoing and looking for blood. The SEC’s Madoff records tell a tale of their own, including how investigation staffers quarreled over their findings, how there was appalling lack of communication among various SEC offices, how credible customer complaints were ignored, etc.

No one knew anything was wrong, so no one did anything. But how could anyone have done anything about something no one knew anything about to begin with? If your head is spinning and if you’re feeling slightly nauseous, no worries, you’re not the only one. Imagine how investigators felt when they asked Madoff whether he was concerned about the testimony of his CFO Frank DiPascali, who had pled guilty to all charges in August, and when he responded, “No, he didn’t know anything was wrong, either.”