EXCLUSIVE: What Can We Conclude About the Chances of Another Madoff Scam? – with Adam Shapiro, Fox Business

This weekend’s Madoff suicide brings the infamous ponzi schemer back into the limelight (See “Animated History of the Ponzi Scheme“). Fox Business reporter Adam Shapiro recently finished a large investigative report on where the Bernie Madoff case is now, so I asked him to share his insights with Wall St. Cheat Sheet readers …

Damien Hoffman: Adam, how many people knew about Madoff’s scheme?

Adam Shapiro: Several! But only six people have been criminally charged as of December 9, 2010.

It is clear that several people inside BLMIS and outside knew that Bernie was up to no good. Irving Picard, the bankruptcy court trustee has filed hundreds of law suits in which he names several people inside BLMIS and outside the firm who allegedly were in on the game. For instance, Picard is suing 18 former BLMIS employees who he claims were complicit and instrumental in keeping the Ponzi Scheme alive. Enrica Cotellessa-Pitz was Madoff’s controller and joined the firm in 1978. The suit filed against her in Bankruptcy court details how she allegedly shifted money (illegally) between accounts to cover Madoff client withdrawals. She also allegedly helped throw SEC investigators off the trail in 2006.

We tried to get a comment from Pitz but I was unsuccessful. She has not yet been criminally charged. Same with David Kugel who worked at BLMIS almost 40 years. Picard says Kugel was one of the “architects” of a fraudulent trading strategy that was designed to mislead Madoff clients. No criminal charges yet against Kugel either and he didn’t return my calls.

Outside BLMIS several respected money managers and financial institutions willingly ignored reports from their staffs warning that Madoff was a fraud. In the 9 billion dollar law suit against HSBC the trustee alleges that HSBC willfully ignored repeated warnings from KPMG that Madoff was a risk. In the trustee cases against Madoff friends Jeffrey Picower and Stanley Chais (both have died) Picard alleges that they dictated to Madoff staff the gains and losses to be reflected on statements so they could cheat the IRS.

Perhaps instead of asking how many people knew about Madoff’s scheme, reporters like me need to ask, who didn’t know?

Damien: How did he get away with it for so long?

Adam: Bernie got away with it because the SEC and FINRA were clueless. The unwritten code on Wall Street in which those who knew or suspected said nothing but steered themselves and their clients away from Madoff; and human nature to believe what we choose to believe even when confronted with evidence that may contradict our perceptions.

There is a reason people get finance degrees and most of us don’t have them. Yet just about everyone thinks they’re smart enough to pick someone to manage their money. The problem I believe is that we make decisions based solely on returns and that causes us to miss all kinds of warnings and red flags that may serve to protect us. Simple things like 1) can you access your statements and account on line? 2) Is the firm auditing your money manager a recognized name? 3) How often has your money manager been hauled into a FINRA mediation?

People, me included, are embarrassed by our ignorance so sometimes we fail to ask a simple question. But how many people off Wall Street ask their financial planner the most basic of questions like, “how do you get paid?” And if they get an answer to that question do they understand it? I believe this is the biggest risk investors face.

Damien: Adam, the general public wants justice. Why has no one else been charged?

Adam: Damn good question because I can name several people who should be criminally charged.

Damien: So, will Madoff’s victims see their money returned?

Adam: Most of them, no! Some of them yes, but nothing near the amounts that will make them whole.

Picard has recovered about 2.5 Billion but only a small fraction of the claims filed have been approved to move forward. “Net Winners” will receive nothing and in fact are being sued to return money that they may not have. Picard says he is making exceptions in hard luck cases but here is the rub.

Let’s say you invested one dollar with Madoff. Bernie over the life of your investment told you that the dollar grew to three dollars so over the life of the investment you withdrew two dollars. You were taxed on those profits and lived happily ever after until December 11th 2008. That’s when you learned the two dollar gain was bogus and worse, Bernie had used your original dollar to pay other clients who were withdrawing funds believing those funds were legitimate earnings. Now, Picard comes along and says look you were a “Net Winner” to the tune of two bucks and now you have to give it back because that money was never yours it was the original investment of thousands of clients who were “Net Losers” people who withdrew less than they invested.

This is a big issue because if Picard remains successful, and so far the law has ruled on his side, the next group of victims in a Ponzi Scheme like Madoff’s will suffer the double indignity of being cheated out of their original money as well as the fraud perpetrated upon them. Carl Shapiro and original Madoff investor just returned $625 million to Picard and the government and Shapiro is now essentially broke! Of course Shapiro’s family negotiated to keep some of their fortune and they will transfer money to Carl but you get the idea.

Damien: After all this, will there be another Bernie Madoff? Many more Bernie Madoff’s? Surely Enron was not the last Wall Street scandal.

Adam: Absolutely, nothing has changed, it never will. The SEC and DOJ just announced the latest enforcement actions against Ponzi Schemers who stole billions from 120,000 clients nationwide. The game goes on and always will. But Bernie holds the prize right now as king of crooks; 65 Billion is quite a crown. It will take a generation or two to forget the lessons we learned from the Bernie affair so the next King of Crooks may just now be in elementary school.

Damien: Is our money any safer now than it was two years ago?

Hell no! It never was safe and never will be 100 percent safe despite proclamations from SIPC, SEC, FINRA or your money manager.

Millions of investors believe SIPC provides insurance against the kind of fraud and losses sustained by Madoff’s clients. It doesn’t! The amount of recovery under SIPC when these schemes do collapse is minimal to zilch! The SEC tries hard but finance is complicated and the SEC enforcement staff is still being trained. Let me put it like this, the SEC pays $15 million dollars a year for empty office space in New York City according to the SEC OIG and the agency is obligated to pay that rent for empty offices through 2012. If they can’t get right something simple like the rent and needed space, what makes you think they can interpret the thousands of pages of data and documents moving through a firms trades in a timely manner to protect investors?

The SEC relies on tipsters and tipsters are “after the fact.” As for FINRA, it is very telling to listen to people on Wall Street talk candidly about the organization. Those I speak to have little respect for it and consider it a nuisance. FINRA by the way cleared itself of any wrong doing regarding Madoff. Does that make you feel better? At the end of the day a money manager like Bernie is a crook but what about the feeder funds and so called experts who were trusted to protect their clients. They were either crooks along with Bernie or too stupid to do the kind of reviews that would have protected their clients. A lot of those people are still hard at work.

Damien: Thanks for the update, Adam.

Adam: My pleasure.

Adam Shapiro is a reporter for Fox Business Network.

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