Academic

TV Show on the SEC Inspector General's 457 Page Report on the SEC's Malfeasance in the Madoff Matter.

By Lawrence Velvel

Dear Colleagues:

To prepare for a television show with Erin Arvedlund on the SEC Inspector General?s 457 page Report on the SEC?s malfeasance in the Madoff matter, I have identified what I think the most important excerpts from the Report. The best excerpts comprise about eleven percent of the full Report. They are appended below and are also posted on my website (Velvelonnationalaffairs.com). Also appended below is a list of major topics (done in shorthand expressions), together with page numbers showing where given topics can be found in the excerpts.

The excerpts too give page numbers. But these numbers show where particular points can be found in the full 457 page Report. There is one complication here: near the beginning of the full Report, starting in the middle of page 20 and running through the end of page 41, is the Executive Summary. That Summary, however, was published by itself before the full Report came out. By itself, the Executive Summary?s pagination runs from 1 to 22. I read the Executive Summary when it came out by itself before the full Report, and the pages I give in the excerpts showing where points can be found in the Executive Summary are keyed to the Executive Summary as an independent document paginated 1-22 rather than to it as part of the subsequent full Report with page numbers running from pages 20-41. So . . . . whenever you see, in the excerpts, references to pages 1-22, those references are to the pages of the separate Executive Summary which came out prior to the full Report. Any references in the excerpts to pages 23 and higher are to the full Report.

For your convenience, I have appended below not just all the excerpts I have chosen, but also the separate Executive Summary which came out prior to the full Report (in which it was of course included).

I believe the excerpts from the Executive Summary and from the entire rest of the Report could prove helpful to persons who are litigating, talking to Congress, writing news stories, etc.

The television show with Erin Arvedlund is being taped on Friday, February 12th, and will be shown a few weeks later. It will also be posted on MSL?s website and, I believe, on YouTube. CDs of it will also be made available for those who would like them or have a use for them.

Larry Velvel

NOTES ON WHERE STUFF APPEARS IN
THE INSPECTOR GENERAL?S REPORT

1, 16, 17, 22, 29, 40, 41 SEC had more than enough info to uncover the Ponzi
scheme and should have as early as 1992. It never really investigated him for a Ponzi.

1 Red flags.

1, 2, 8, 31, 38, 39 Letters from an obvious insider.

2 Were told it?s a Ponzi scheme.

2, 21, 24, 26, 30, 31, 32,
33, 34, 38, 42 Teams knew he had lied to them, had made inconsistent statements.

2, 14 Teams were young and inexperienced, overawed.

3 In 1992 the SEC knew Madoff made all the decisions, yet hardly investigated him.

4, 29 2003 complaint from hedge fund manager: indicia of a Ponzi.

5, 15 SEC laziness -- didn?t want things to be too time consuming.

5, 16, 24 Hedge fund business making more money than brokerage.

5, 17, 18, 19, 20, 25, 26,
29, 30, 34 Red flag emails from Simon?s company. Not possible that he is doing options, questions re options, and questions re is he trading at all.

6, 14, 17, 20, 22, 26 One man auditor. Not independent. No real auditing.

6 Tips not from an insider.

6, 10, 22, 42, 43 Madoff being well connected.

6 Not resolving open questions.

7 Unprepared to take Madoff?s testimony.

9 A&B?s nonrecordkeeping and reasons.

9 Fake DTC records.

9, 10 Ira Sorkin and A&B.

9, 11 Only brief examination of Madoff in 1992.

10 Price Waterhouse can?t audit A&B.

11 Judge Sprizzo

11 3 to 7 billion in 2000.

12 Not allowing performance audits.

12 Ward apparently lied.

12 NERO refused to investigate in one day.

13 SEC did zip after Barron article.

13 The Hedge Fund Manager?s complaint with red flags, especially the lack of options, which SEC didn?t investigate.

15 Swanson?s lack of note taking.

16 Only concerned with front running.

18, 19 Renaissance (like ordinary people) took comfort from fact SEC gave him clean bill of health.

19 Again, is he actually trading?

21, 23, 27, 40 DTC?s business and what DTC would have told SEC.

21, 27, 31 Barclay?s.

22, 23 Madoff didn?t provide requested documents.

23, 33 The jig was up episode. Over the weekend didn?t contact DTC.

23, 27, 41 FINRA/NASD regarding is he trading.

24, 25 SEC superiors sometimes called a halt.

26 Should have contacted custodians.

28 Representing that he no longer uses options.

28, 29 Ignoring non insiders; not following tips.

31, 34, 35, 36, 37 Suh?s amazing failure to understand the necessary role of banks.

31, 32 Learning from NASD he had not held options on relevant days.

32 Many on Wall Street were dubious.

35 Commingling.

DAMAGING EXCERPTS FROM THE
SEC INSPECTOR GENERAL?S REPORT ON THE
SEC?S MALFEASANCE IN THE MADOFF AFFAIR

The OIG investigation did find, however, that the SEC received more than ample information in the form of detailed and substantive complaints over the years to warrant a thorough and comprehensive examination and/or investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three examinations and two investigations being conducted, a thorough and competent investigation or examination was never performed. The OIG found that between June 1992 and December 2008 when Madoff confessed, the SEC received six10 substantive complaints that raised significant red flags concerning Madoff?s hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading. Finally, the SEC was also aware of two articles regarding Madoff?s investment operations that appeared in reputable publications in 2001 and questioned Madoff?s unusually consistent returns. (Page 1)

The SEC actually suspected the investment company was operating a Ponzi scheme and learned in their investigation that all of the investments were placed entirely through Madoff . . . . (Page 1)

[The complaint submitted in 2005 was entitled] ?The World?s Largest Hedge Fund is a Fraud? and detailed approximately 30 red flags indicating that Madoff was operating a Ponzi scheme, a scenario it described as ?highly likely.? (Page 2)

In May 2003, the SEC received a third complaint from a respected Hedge Fund Manager identifying numerous concerns about Madoff?s strategy and purported returns, questioning whether Madoff was actually trading options in the volume he claimed, noting that Madoff?s strategy and purported returns were not duplicable by anyone else, and stating Madoff?s strategy had no correlation to the overall equity markets in over 10 years. According to an SEC manager, the Hedge Fund Manager?s complaint laid out issues that were ?indicia of a Ponzi scheme.? (Page 2)

The red flags identified included Madoff?s incredible and highly unusual fills for equity trades, his misrepresentation of his options trading and his unusually consistent, non-volatile returns over several years. One of the internal e-mails provided a step-by-step analysis of why Madoff must be misrepresenting his options trading. The e-mail clearly explained that Madoff could not be trading on an options exchange because of insufficient volume and could not be trading options over-the-counter because it was inconceivable that he could find a counterparty for the trading. The SEC examiners who initially discovered the e-mails viewed them as indicating ?some suspicion as to whether Madoff is trading at all. (Page 2)

[A letter that appeared to come from an insider said] ?Your attention is directed to a scandal of major proportion which was executed by the investment firm Bernard L. Madoff . . . . Assets well in excess of $10 Billion owned by the late [investor], an ultra-wealthy long time client of the Madoff firm have been ?co-mingled? with funds controlled by the Madoff company with gains thereon retained by Madoff.? (Page 2)

It may be of interest to you to that Mr. Bernard Madoff keeps two (2) sets of records. The most interesting of which is on his computer which is always on his person.? (Page 3)

The complaints all contained specific information and could not have been fully and adequately resolved without thoroughly examining and investigating Madoff for operating a Ponzi scheme. The journal articles should have reinforced the concerns about how Madoff could have been achieving his returns. (Page 3)

The OIG retained an expert in accordance with its investigation in order to both analyze the information the SEC received regarding Madoff and the examination work conducted. According to the OIG?s expert, the most critical step in examining or investigating a potential Ponzi scheme is to verify the subject?s trading through an independent third party. (Page 3)

The OIG investigation found the SEC conducted two investigations and three examinations related to Madoff?s investment advisory business based upon the detailed and credible complaints that raised the possibility that Madoff was misrepresenting his trading and could have been operating a Ponzi scheme. Yet, at no time did the SEC ever verify Madoff?s trading through an independent third-party, and in fact, never actually conducted a Ponzi scheme examination or investigation of Madoff. (Page 3)

In the first of the two OCIE examinations, the examiners drafted a letter to the National Association of Securities Dealers (NASD) (another independent third-party) seeking independent trade data, but they never sent the letter, claiming that it would have been too time-consuming to review the data they would have obtained. The OIG?s expert opined that had the letter to the NASD been sent, the data would have provided the information necessary to reveal the Ponzi scheme. In the second examination, the OCIE Assistant Director sent a document request to a financial institution that Madoff claimed he used to clear his trades, requesting trading done by or on behalf of particular Madoff feeder funds during a specific time period, and received a response that there was no transaction activity in Madoff?s account for that period. However, the Assistant Director did not determine that the response required any follow-up and the examiners testified that the response was not shared with them. (Page 4)

In 2004 and 2005, the SEC?s examination unit, OCIE, conducted two parallel cause examinations of Madoff based upon the Hedge Fund Manager?s complaint and the series of internal e-mails that the SEC discovered. The examinations were remarkably similar. There were initial significant delays in the commencement of the examinations, notwithstanding the urgency of the complaints. The teams assembled were relatively inexperienced, and there was insufficient planning for the examinations. The scopes of the examination were in both cases too narrowly focused on the possibility of front-running, with no significant attempts made to analyze the numerous red flags about Madoff?s trading and returns. (Page 4)
During the course of both these examinations, the examination teams discovered suspicious information and evidence and caught Madoff in contradictions and inconsistencies. However, they either disregarded these concerns or simply asked Madoff about them. Even when Madoff?s answers were seemingly implausible, the SEC examiners accepted them at face value. (Page 4)

In both examinations, the examiners made the surprising discovery that Madoff?s mysterious hedge fund business was making significantly more money than his well-known market-making operation. However, no one identified this revelation as a cause for concern. (Page 4)

In the first of the two OCIE examinations, the examiners drafted a letter to the National Association of Securities Dealers (NASD) (another independent third-party) seeking independent trade data, but they never sent the letter, claiming that it would have been too time-consuming to review the data they would have obtained. The OIG?s expert opined that had the letter to the NASD been sent, the data would have provided the information necessary to reveal the Ponzi scheme. In the second examination, the OCIE Assistant Director sent a document request to a financial institution that Madoff claimed he used to clear his trades, requesting trading done by or on behalf of particular Madoff feeder funds during a specific time period, and received a response that there was no transaction activity in Madoff?s account for that period. However, the Assistant Director did not determine that the response required any follow-up and the examiners testified that the response was not shared with them. (Pages 4-5)

Both examinations concluded with numerous unresolved questions and without any significant attempt to examine the possibility that Madoff was misrepresenting his trading and operating a Ponzi scheme. (Page 5)
The investigation that arose from the most detailed complaint provided to the SEC, which explicitly stated it was ?highly likely? that ?Madoff was operating a Ponzi scheme,? never really investigated the possibility of a Ponzi scheme. (Page 5)

As with the examinations, the Enforcement staff almost immediately caught Madoff in lies and misrepresentations, but failed to follow up on inconsistencies. They rebuffed offers of additional evidence from the complainant, and were confused about certain critical and fundamental aspects of Madoff?s operations. When Madoff provided evasive or contradictory answers to important questions in testimony, they simply accepted as plausible his explanations. (Page 5)

Although the Enforcement staff made attempts to seek information from independent third-parties, they failed to follow up on these requests. They reached out to the NASD and asked for information on whether Madoff had options positions on a certain date, but when they received a report that there were in fact no options positions on that date, they did not take any further steps. (Page 5)

The OIG also found that numerous private entities conducted basic due diligence of Madoff?s operations and, without regulatory authority to compel information, came to the conclusion that an investment with Madoff was unwise. Specifically, Madoff?s description of both his equity and options trading practices immediately led to suspicions about Madoff?s operations. With respect to his purported trading strategy, many simply did not believe that it was possible for Madoff to achieve his returns using a strategy described by some industry leaders as common and unsophisticated. In addition, there was a great deal of suspicion about Madoff?s purported options trading, with several entities not believing that Madoff could be trading options in such high volumes where there was no evidence that any counterparties had been trading options with Madoff. The private entities? conclusions were drawn from the same ?red flags? in Madoff?s operations that the SEC considered in its examinations and investigations, but ultimately dismissed. (Pages 5-6)

We also found that investors who may have been uncertain about whether to invest with Madoff were reassured by the fact that the SEC had investigated and/or examined Madoff, or entities that did business with Madoff, and found no evidence of fraud. Moreover, we found that Madoff proactively informed potential investors that the SEC had examined his operations. When potential investors expressed hesitation about investing with Madoff, he cited the prior SEC examinations to establish credibility and allay suspicions or investor doubts that may have arisen while due diligence was being conducted. Thus, the fact the SEC had conducted examinations and investigations and did not detect the fraud, lent credibility to Madoff?s operations and had the effect of encouraging additional individuals and entities to invest with him. (Page 6)

As the SEC began investigating the matter, they learned that Madoff had complete control over all of Avellino & Bienes? customer funds and made all investment decisions for them, and, according to Avellino, Madoff had achieved these consistent returns for them for numerous years without a single loss. (Page 6)

The SEC suspected that Avellino & Bienes was operating a Ponzi scheme and took action to ensure that all of Avellino & Bienes? investors were refunded their investments. Yet, the OIG found that the SEC never considered the possibility that Madoff could have taken the money that was used to pay back Avellino & Bienes? customers from other clients as part of a larger Ponzi scheme. (Page 6)

The SEC actually conducted an examination of Madoff that was triggered by the investigation of Avellino & Bienes, but assembled an inexperienced examination team. The examination team conducted a brief and very limited examination of Madoff, but made no effort to trace where the money that was used to repay Avellino & Bienes? investors came from. In addition, although the SEC examiners did review records from DTC, they obtained those DTC records from Madoff rather than going to DTC itself to verify if trading occurred. According to the lead SEC examiner, someone should have been aware of the fact that the money used to pay back Avellino & Bienes? customers could have come from other investors, but there was no examination of where the money that was used to pay back the investors came from. Another examiner said such a basic examination of the source of the funds would have been ?common sense.? In addition, although the SEC?s lead examiner indicated that the investment vehicle offered by Avellino & Bienes had numerous ?red flags? and was ?suspicious,? no effort was made to look at the investment strategy and returns. (Pages 6-7)

The SEC lawyers working on the matter were aware of the questionable returns and the fact that all the investment decisions were made by Madoff, but the focus of the investigation was limited to whether Avellino & Bienes was selling unregistered securities or operating an unregistered investment firm. A trustee and accounting firm were retained to ensure full distribution of the assets, but its jurisdiction was limited, and they did not take any action to independently verify account balances and transaction activity included in Madoff?s financial and accounting records. Even after the accounting firm was unable to audit Avellino & Bienes? financial statements and uncovered additional red flags, such as Avellino & Bienes? failure to produce financial statements or have the records one would have expected from such a large operation, no further efforts were made to delve more deeply into either Avellino & Bienes? or Madoff?s operations. (Page 7)

The result was a missed opportunity to uncover Madoff?s Ponzi scheme 16 years before Madoff confessed. The SEC had sufficient information to inquire further and investigate Madoff for a Ponzi scheme back in 1992. (Page 7)

The SEC?s lead examiner said Madoff?s reputation as a broker-dealer may have influenced the inexperienced team not to inquire into Madoff?s operations. (Page 7)
Markopolos? complaint stated that Madoff?s returns were unachievable using the trading strategy he claimed to employ, noting Madoff?s ?perfect market-timing ability.? Markopolos also referenced the fact that Madoff did not allow outside performance audits. (Page 7)

Although this time the BDO did refer Markopolos? complaint, NERO decided not to investigate the complaint only one day after receiving it. The matter was assigned to an Assistant Regional Director in Enforcement for initial inquiry, who reviewed the complaint, determined that Madoff was not registered as an investment adviser, and the next day, sent an e-mail stating, ?I don?t think we should pursue this matter further.? The OIG could find no explanation for why Markopolos? complaint, which the Enforcement attorney and the former head of NERO acknowledged was ?more detailed than the average complaint,? was disregarded so quickly. (Page 8)

The OIG found that the SEC was aware of the Barron?s article when it was published in May 2001. On May 7, 2001, an Enforcement Branch Chief in the BDO followed up with NERO regarding Markopolos? 2001 complaint and the Barron?s article, and asked the Director of NERO if he wanted a copy of the article. However, the decision not to commence an investigation was not reconsidered and there is no evidence the Barron?s article was ever even reviewed. (Page 9)

In May 2003, OCIE?s investment management group in Washington, D.C. received a detailed complaint from a reputable Hedge Fund Manager, in which he laid out the red flags that his hedge fund had identified about Madoff while performing due diligence on two Madoff feeder funds. (Page 9)

The complaint also described specific concerns about Madoff?s strategy and purported returns such as the fact that the strategy was not duplicable by anyone else; there was no correlation to the overall equity markets (in over 10 years); accounts were typically in cash at month end; the auditor of the firm was a related party to the principal; and Madoff?s firm never had to face redemption. (Page 9)

According to an SEC supervisor, the Hedge Fund Manager?s complaint implied that Madoff might be lying about its option trading and laid out issues that were ?indicia of a Ponzi scheme.? One of the senior examiners on the team also acknowledged that the Hedge Fund Manager?s complaint could be interpreted as alleging that Madoff was running a Ponzi scheme. (Page 9)

The OIG?s expert concluded that based upon issues raised in the Hedge Fund Manager?s complaint, had the examination been staffed and conducted appropriately and basic steps taken to obtain third-party verifications, Madoff?s Ponzi scheme should and would have been uncovered. (Page 9)

A Planning Memorandum for the examination was prepared, but it failed to address several critical issues from the complaint, including the unusual fee structure; the inability to see the volume of options in the marketplace; the remarkable returns; the fact that Madoff?s trading strategy was not duplicable; the returns had no correlation to actual equity markets; the accounts were in cash at month?s end; there were no third party brokers; and the auditor of Madoff?s firm was a related party. (Page 10)

In addition, courses of action outlined in the Planning Memorandum that involved verification of trading with independent third parties should have been carried out, but were not. For example, the staff drafted a letter to the NASD (an independent third-party), which was critical to any adequate review of the complaint because the data and information from the NASD would have assisted in independently verifying trading activity conducted at Madoff?s firm. However, the letter was never sent, with the explanation given by staff that it would have been too time-consuming to review the information they would have obtained. According to the OIG?s expert, had the letter been sent out, the NASD would have provided order and execution data that would have indicated that Madoff did not execute the significant volume of trades for the discretionary brokerage accounts that he represented to the examiners, and the data would likely have provided the information necessary to reveal the Ponzi scheme. (Page 11)

The examiners also made the surprising discovery that Madoff?s mysterious hedge fund business was making significantly more money than his well-known market-making operation. (Page 11)

In a subsequent draft of a supplemental document request to Madoff, the examiners sought detailed audit trail data, including the date, time, and execution price for all of his trades in 2003. But the examiners removed the request for this critical data from the supplemental request before it was sent out. The reason given was that they were generally hesitant to get audit trail data ?because it can be tremendously voluminous and difficult to deal with? and ?takes a ton of time? to review. No requests were made from independent third-parties for any data, although an OCIE examiner acknowledged obtaining such data should not have been difficult. (Page 11)

In April 2004, a NERO investment management examiner had been conducting a routine examination of an unrelated registrant when it discovered internal e-mails from November and December 2003 that raised questions about whether Madoff was involved in illegal activity involving managed accounts. These internal e-mails described the red flags the registrant?s employees identified while performing due diligence using widely available information on their Madoff investment. The red flags the registrant had identified included Madoff?s: (1) incredible and highly unusual fills for equity trades; (2) misrepresentation of his options trading; (3) secrecy; (4) auditor; (5) unusually consistent and non-volatile returns over several years; and (6) fee structure. (Page 12)

Crucially, one of the internal e-mails provided a step-by-step analysis of why Madoff must be misrepresenting his options trading. The e-mail explained that Madoff could not be trading on an options exchange because of insufficient volume and could not be trading options over-the-counter because it was inconceivable he could find a counterparty for the trading. For example, the e-mail explained that because customer statements showed that the options trades were always profitable for Madoff, there was no incentive for a counterparty to continuously take the other side of those trades since it would always lose money. These findings raised significant doubts that Madoff could be implementing his trading strategy. The internal e-mails included the statement that the registrant had ?totally independent evidence? that Madoff?s executions were ?highly unusual.? (Page 12)

As with the examination, in Washington, D.C., there was a significant delay before the examination was commenced. Although the e-mails were discovered in April 2004 and immediately referred to the NERO broker-dealer examination program, a team was not assembled until December 2004. (Page 12)

Once again, although the e-mails raised significant issues about whether Madoff was engaging in trading at all, the decision was made to focus exclusively on front-running. (Page 13)

To the extent that the NERO examiners did examine issues outside of front-running, they conducted their examination by simply asking Madoff about their concerns and accepting his answers. With respect to the significant concerns about Madoff?s options trading, they asked Madoff about this issue, and when Madoff said he was no longer using options as part of his strategy, they stopped looking at the issue, despite the fact that Madoff?s representation was inconsistent with the internal e-mails, the two 2001 articles, and the investment strategy Madoff claimed to employ. As to why Madoff did not collect fees like all other hedge fund managers, they accepted his response that he was not ?greedy? and was happy with just receiving commissions. (Page 13)

Several issues, including the allegation in the internal e-mails that Madoff?s auditor was a related party, were never examined at all. Yet, after Madoff confessed to operating a Ponzi scheme, a staff attorney in NERO?s Division of Enforcement was assigned to investigate Madoff?s accountant, David Friehling, and within a few hours of obtaining the work papers, he determined that no audit work had been done. (Page 13)

In addition, although one of the NERO examiners placed a ?star? next to the statement in the internal e-mails about having ?totally independent evidence? that Madoff?s executions were ?highly unusual,? NERO never followed up with the registrant to inquire about or obtain this evidence. The NERO examiners explained that it was not their practice to seek information from third parties when they conducted examinations. (Page 13)

When the examiners began their on-site examination of Madoff, they learned Bernard Madoff would be their primary contact and Madoff carefully controlled to whom they spoke at the firm. (Page 33)

Madoff made efforts during the examination to impress and even intimidate the junior examiners from the SEC. Madoff emphasized his role in the securities industry during the examination. (Page 33)

Throughout the examination, the NERO examiners ?had a real difficult time dealing with? Madoff as he was described as growing ?increasingly agitated? during the examination, and attempting to dictate to the examiners what to focus on in the examination and what documents they could review. Yet, when the NERO examiners reported back to their Assistant Director about the pushback they received from Madoff, they received no support and were actively discouraged from forcing the issue. (Pages 33-34)

One effort was made to verify Madoff?s trading with an independent third-party, but even after they received a very suspicious response, there was no follow-up. The Assistant Director sent a document request to a financial institution that Madoff claimed he used to clear his trades, requesting records for trading done by or on behalf of particular Madoff feeder funds during a specific time period. Shortly thereafter, the financial institution responded, stating there was no transaction activity in Madoff?s account for that period. Yet, the response did not raise a red flag for the Assistant Director, who merely assumed that Madoff must have ?executed trades through the foreign broker-dealer.? The examiners did not recall ever being shown the response from the financial institution, and no further follow-up actions were taken. (Page 34)

One of the few points that was made in a conference call between the offices was a comment by a senior-level Washington D.C. examiner reminding the junior NERO examiners that Madoff ?was a very well-connected, powerful, person,? which one of the NERO examiners interpreted to raise a concern for them about pushing Madoff too hard without having substantial evidence. While the Washington, D.C. examination team decided not to resume their examination and sent their workpapers to NERO, the NERO examiners reported conducting only a cursory review of the workpapers and did not recall even reviewing the Hedge Fund Manager?s detailed complaint that precipitated the D.C. examination, appear to have never discussed the D.C. examiners? open questions about Madoff?s representations and trading, and did not compare the list of clients Madoff produced to them with the list he produced to the D.C. team. (Page 34)

As had been the case with the Washington, D.C. examination, the NERO examiners learned that Madoff?s well-known market making business would be losing money without the secretive hedge fund execution business. Although they described this revelation as ?a surprising discovery,? the issue was once again never pursued. (Page 35)

Although the NERO examiners determined Madoff was not engaged in front-running, they were concerned about issues relating to the operation of his hedge fund business, and sought permission to continue the examination and expand its scope. Their Assistant Regional Director denied their request, telling them to ?keep their eyes on the prize,? referring to the front-running issue. When the examiners reported that they had caught Madoff in lies, the Assistant Director minimized their concerns, stating ?it could [just] be a matter of semantics.? The examiners? request to visit Madoff feeder funds was denied, and they were informed that the time for the Madoff examination had expired. The explanation given was that ?field work cannot go on indefinitely because people have a hunch or they?re following things.? (Page 35)

Thus, the NERO cause examination of Madoff was concluded without the examination team ever understanding how Madoff was achieving his returns and with numerous open questions about Madoff?s operations. Many, if not most, of the issues raised in both the Hedge Fund Manager?s complaint that precipitated the Washington, D.C. examination and the internal e-mails that triggered the NERO examination had not been analyzed or resolved. In September 2005, NERO prepared a closing report for the examination that relied almost entirely on information verbally provided by Madoff to the examiners for resolution of numerous ?red flags.? One of the two primary examiners on the NERO examination team was later promoted based on his work on the Madoff examination. (Page 35)

While the Madoff investigation was assigned within NERO Enforcement, it was assigned to a team with little to no experience conducting Ponzi scheme investigations. The majority of the investigatory work was conducted by a staff attorney who recently graduated from law school and only joined the SEC nineteen months before she was given the Madoff investigation. She had never previously been the lead staff attorney on any investigation, and had been involved in very few investigations overall. The Madoff assignment was also her first real exposure to broker-dealer issues. (Page 16)

The NERO Enforcement staff, unlike the BDO, failed to appreciate the significance of the evidence in the 2005 Markopolos complaint and almost immediately expressed skepticism and disbelief about the information contained in the complaint. The Enforcement staff claimed that Markopolos was not an insider or an investor, and thus, immediately discounted his evidence. (Page 17)

The NERO Enforcement staff also received a skeptical response to Markopolos? complaint from the NERO examination team who had just concluded their examination. Even though the NERO examination had focused solely on front-running, NERO examination team downplayed the possibility that Madoff was conducting a Ponzi scheme, saying, ?these are basically some of the same issues we investigated? and that Markopolos ?doesn?t have the detailed understanding of Madoff?s operations that we do which refutes most of his allegations.? (Page 17)

Yet, the Enforcement staff almost immediately caught Madoff in lies and misrepresentations. An initial production of documents the Enforcement staff obtained from a Madoff feeder fund demonstrated Madoff had lied to the examiners in the NERO examination about a fundamental component of his claimed trading activity. Specifically, while Madoff told the examiners he had stopped using options as part of his strategy after they scrutinized his purported options trading, the Enforcement staff found evidence from the feeder funds that Madoff was telling his investors that he was still trading options during that same time period. Yet, the Enforcement staff never pressed Madoff on this inconsistency. After an interview with an executive from a Madoff feeder fund, the Enforcement staff noted several additional ?discrepancies? between what Madoff told the examiners in the NERO examination and information they received in the interview. The Enforcement staff also discovered that the feeder fund executive?s testimony had been scripted and he had been prepped by Madoff. (Page 18)

As the investigation progressed, in December 2005, Markopolos approached the Enforcement staff to provide them additional contacts and information. However, the branch chief assigned to the Madoff Enforcement investigation took an instant dislike to Markopolos and declined to even pick up the ?several inch thick file folder on Madoff? that Markopolos offered. (Page 18)

At a crucial point in their investigation, the Enforcement staff was informed by a senior-level official from the NASD that they were not sufficiently prepared to take Madoff?s testimony, but they ignored his advice. On May 17, 2006, two days before they were scheduled to take Madoff?s testimony, the Enforcement staff attorney contacted the Vice President and Deputy Director of the NASD Amex Regulation Division to discuss Madoff?s options trading. The NASD official told the OIG that he answered ?extremely basic questions? from the Enforcement staff about options trading. He also testified that, by the end of the call, he felt the Enforcement staff did not understand enough about the subject matter to take Madoff?s testimony. The NASD official told the OIG that he answered ?extremely basic questions? from the Enforcement staff about options trading. He also testified that, by the end of the call, he felt the Enforcement staff did not understand enough about the subject matter to take Madoff?s testimony. The NASD official also recalled telling the Enforcement staff that they ?needed to do a little bit more homework before they were ready to talk to [Madoff],? but that they were intent on taking Madoff?s testimony as scheduled. (Page 19)

During Madoff?s testimony, he provided evasive answers to important questions, provided some answers that contradicted his previous representations, and provided some information that could have been used to discover that he was operating a Ponzi scheme. However, the Enforcement staff did not follow-up with respect to the critical information that was relevant to uncovering Madoff?s Ponzi scheme. (Page 19)

Each member of the Enforcement staff accepted as plausible Madoff?s claim that his returns were due to his perfect ?gut feel? for when the market would go up or down. (Page 19-20)

During his testimony, Madoff also told the Enforcement investigators that the trades for all of his advisory accounts were cleared through his account at DTC. He testified further that his advisory account positions were segregated at DTC and gave the Enforcement staff his DTC account number. During an interview with the OIG, Madoff stated that he had thought he was caught after his testimony about the DTC account, noting that when they asked for the DTC account number, ?I thought it was the end game, over. Monday morning they?ll call DTC and this will be over . . . and it never happened.? Madoff further said that when Enforcement did not follow up with DTC, he ?was astonished.? (Page 20)

This was perhaps the most egregious failure in the Enforcement investigation of Madoff; that they never verified Madoff?s purported trading with any independent third parties. As a senior-level SEC examiner noted, ?clearly if someone ? has a Ponzi and, they?re stealing money, they?re not going to hesitate to lie or create records? and, consequently, the ?only way to verify? whether the alleged Ponzi operator is actually trading would be to obtain ?some independent third-party verification? like ?DTC.? (Page 20)

A simple inquiry to one of several third parties could have immediately revealed the fact that Madoff was not trading in the volume he was claiming. The OIG made inquiries with DTC as part of our investigation. We reviewed a January 2005 statement for one Madoff feeder fund account, which alone indicated that it held approximately $2.5 billion of S&P 100 equities as of January 31, 2005. On the contrary, on January 31, 2005, DTC records show that Madoff held less than $18 million worth of S&P 100 equities in his DTC account. (Page 20)

When Madoff?s Ponzi scheme finally collapsed in 2008, an SEC Enforcement attorney testified that it took only ?a few days? and ?a phone call ? to DTC? to confirm that Madoff had not placed any trades with his investors? funds. (Page 20)

On May 16, 2006, three days before Madoff?s testimony, the Enforcement staff reached out to the Director of the Market Regulation Department at the NASD and asked her to check a certain date on which Madoff had purportedly held S&P 100 index option positions. She reported back that they had found no reports of such option positions for that day. Yet, the Enforcement staff failed to make any further inquiry regarding this remarkable finding. The Enforcement staff also failed to scrutinize information obtained in the NERO cause examination when the examination staff had attempted to verify Madoff?s claims of trading OTC options with a financial institution and found that ?no relevant transaction activity occurred during the period? requested. Finally, although the Enforcement staff attorney attempted to obtain documentation from U.S. affiliates of European counterparties and one of Madoff?s purported counterparties was in the process of drafting a consent letter asking Madoff?s permission to send the Enforcement staff the documents from its European account, the inexplicable decision was made not to send the letter and to abandon this effort. Had any of these efforts been pursued by the Enforcement staff, they would have uncovered Madoff?s Ponzi scheme. (Pages 20-21)

[A letter to the SEC said] ?Your attention is directed to a scandal of major proportion which was executed by the investment firm Bernard L. Madoff ? Assets well in excess of $10 Billion owned by the late [investor], an ultra-wealthy long time client of the Madoff firm have been ?co-mingled? with funds controlled by the Madoff company with gains thereon retained by Madoff.? (Page 21)

In investigating this complaint, the Enforcement staff simply asked Madoff?s counsel about it, and accepted the response that Madoff had never managed money for this investor. This turned out to be false. When news of Madoff?s Ponzi scheme broke, it became evident not only that Madoff managed this investor?s money, but also that he was actually one of Madoff?s largest individual investors. (Page 21)

Shortly after the Madoff Enforcement investigation was effectively concluded, the staff attorney on the investigation received the highest performance rating available at the SEC, in part, for her ?ability to understand and analyze the complex issues of the Madoff investigation.? (Page 21)

[A second letter to the SEC from the same source said] ?It may be of interest to you to that Mr. Bernard Madoff keeps two (2) sets of records.? The most interesting of which is on his computer which is always on his person. (Page 22)

As the foregoing demonstrates, despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff?s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme. Had these efforts been made with appropriate follow-up at any time beginning in June of 1992 until December 2008, the SEC could have uncovered the Ponzi scheme well before Madoff confessed. (Page 22)

Shortly after the investigation began, the former New York Enforcement Staff Attorney said he recalled, ?Ike? Sorkin18 counsel for Avellino and Bienes, ?calling up and saying, ?I represent Avellino and Bienes? and ?nothing inappropriate is going on here.?? (Page 45)

Bienes described how at one time Avellino & Bienes had borrowed money from Chemical Bank for investing, but in 1988, they paid off the loan because they ?didn?t want to have to explain what [their] investment strategies were ? [and] didn?t want to submit detailed, annual, personal and business financial statements.? Id. at pgs. 53-58. Avellino also indicated that some investors were getting higher returns than others. (Page 45)

The FTI Engagement Team noted that the fact that some investors were getting higher returns than others could be indicative of a Ponzi scheme. (Page 45)

The FTI Engagement Team stated that such a long-standing relationship with no losses could raise the question as to whether Madoff may have been collaborating in a scheme with Avellino & Bienes.
(Page 46)

All the examination team members described the Madoff cause examination as brief and limited. Gentile stated it was a very brief examination and he did not recall if he ever went on site, although he believed he spoke with Bernard Madoff on the telephone. Gentile Interview Tr. at pgs. 12-13. Vasilakis stated the examination was very short, very limited . . . . (Page 47)

According to the examination team, they would have received DTC statements from Madoff himself, rather than seeking those records directly from DTC. (Page 48)

Gentile stated that if Madoff provided fake DTC records, ?we would have relied on the fakes.? Gentile Interview Tr. at p. 18. He further acknowledged that if they were real DTC records, they would tell the story of whether there was trading going on. (Page 49)
The Examiners Were Aware of Madoff?s Stature. (Page 50)

The Complaint also did not charge the defendants with fraud or give any indication that they were suspected of running a Ponzi scheme. (Page 51)

Former New York Enforcement Staff Attorney #2 recalled that ?there was a concern that Avellino and Bienes was operating a Ponzi scheme? that arose from ?the returns that were being promised [by Avellino & Bienes] combined with a lack of transparency about how the monies were invested.? (Page 52)

Former New York Enforcement Staff Attorney #2 acknowledged that she was aware that Avellino and Bienes were stating that all the investment decisions were made by Madoff. (Page 52)

She also said she was not aware of any analysis undertaken to determine how Madoff was able to achieve the returns he was promising for Avellino & Bienes? clients, although she acknowledged remembering that Avellino & Bienes had maintained that they never had a loss with their investments. (Page 53)

Lee Richards stated that he did not believe it was his role to look at whether Madoff could have misappropriated other customer funds in order to provide the capital needed to pay back the investors of Avellino & Bienes. Id. at pgs. 10-11. Lee Richards indicated that he was hired for the particular purpose of liquidating the accounts and ensuring that the investors were repaid. (Page 54)

In December 1992, Price Waterhouse reported back to Lee Richards and the SEC that they were unable to perform the function that they were directed to perform because of the lack of records maintained by Avellino & Bienes and their refusal to cooperate with the audit. (Page 55)

. . . Price Waterhouse reported that Frank Avellino ?refus[ed] to prepare financial statements,? refused to provide requested documentation, and sent a letter to Price Waterhouse instructing them that they ?should ?not direct any further questions to a [representative of an outside computer service bureau],?? which had maintained the Avellino & Bienes? noteholders? ledger. Consequently, Price Waterhouse indicated that it would be unable to render an opinion or audit Avellino & Bienes? financial statements even for the limited period of January 1, 1989 through November 1992. (Page 55)

Sorkin ?vehemently oppose[d]? the request for additional time, noting that his clients have had their assets frozen during the period of Price Waterhouse?s audit. (Page 55)

On January 21, 1993, Price Waterhouse issued its final report to Lee Richards as Trustee, concluding that they were unable to render any opinion on Avellino & Bienes? financial statements because of the lack of records and cooperation from Avellino & Bienes. Price Waterhouse Letter dated January 21, 1993, at p. 2, at Exhibit 127. Price Waterhouse?s report noted that even during the period from January 1989 until November 16, 1992, ?records critical to the performance of an audit which one would expect a company that invested and borrowed over $400 million to have (such as security legers, security purchase and sales journals, monthly reconciliations of securities brokerage transactions and positions and investor/noteholder balances to Partnership records) were not maintained.? Id. Price Waterhouse?s report stated that when Frank Avellino was asked about the preparation of financial statements, he responded as follows: ?My experience has taught me to not commit any figures to scrutiny when, as in this case, it can be construed as (bible) and subject to criticism.? (Page 56)

However, with respect to discovery, former New York Enforcement Staff Attorney #2 stated that ?this was a fairly contentious litigation, that, you know, defense counsel [Sorkin?] was very aggressive.? (Page 58)

Judge Sprizzo also indicated in the same hearing that he did not believe Avellino?s testimony on the fee issues, stating, ?I don?t believe your client. I heard his testimony, I saw his demeanor, I heard his inconsistencies on direct and cross. I noted the inconsistency in the position he took in the letter and the position he took on trial. I don?t believe him. (Page 58)

In connection with its investigation of Avellino & Bienes in 1992, according to FTI, there were several red flags that should have triggered a wide-ranging investigation of the existence of a Ponzi scheme on the part of Avellino & Bienes and potentially Bernard Madoff. For example, Avellino & Bienes was offering ?100%? safe investments, which they characterized as loans, with high and extremely consistent rates of return over significant periods of time. (Pages 59-60)

While the SEC?s relatively inexperienced examination team conducted a brief and very limited examination of Madoff, they made no effort to trace where the money that was used to repay Avellino & Bienes? investors came from, and relied upon DTC records from Madoff rather than going to DTC itself to verify if trading occurred. (Page 60)

The SEC lawyers working on the matter were aware of the questionable returns and the fact that all the investment decisions were made by Madoff, but the focus of the investigation was limited to whether Avellino & Bienes was selling unregistered securities or operating an unregistered investment firm. (Page 60)

Even after Price Waterhouse was unable to audit Avellino & Bienes? financial statements and uncovered additional red flags, such as Avellino & Bienes? failure to produce financial statements or have the records one would have expected from such a large operation, no further efforts were made to delve more deeply into either Avellino & Bienes? or Madoff?s operations. (Page 60)

The 2000 submission also compared the amount of money Madoff was thought to manage at the time, $3 billion to $7 billion, with the open option positions on the Chicago Board Options Exchange (CBOE), and concluded that the ?hedging cannot be taking place as described. ? [I]f only $3 billion are allocated to this strategy, then there still aren?t enough options in open interest for this type of hedging to occur, since Madoff would be at least 1/3 of the open interest, and we know that?s not the case.? (Page 62)

[Markopolos? red flags in 2000 included that ] ?Madoff has perfect market-timing ability: One investor told me that Madoff went 100% to cash in July 1998 and December 1999, ahead of market declines.? (Page 63)

[Markopolos? red flags in 2000 included that] ?Madoff does not allow outside performance audits: One London based fund of funds representing Arab money, during the due diligence process, asked to send in a team of Big Six accountants to verify performance. They were told no, that only Madoff?s brother is allowed to audit performance for reasons of secrecy. Amazingly, this London based fund of funds invested over $200 million of their Arab client?s money anyway, because the low volatility of returns was so attractive.? (Page 63)

[Markopolos? red flags in 2000 included that] ?Having a broker/dealer subsidiary that is also an [Electronic Communication Network], which is then able to generate false trading tickets would also be a huge advantage. Not allowing external auditors in to verify performance would also be something a Ponzi Scheme operator would do.? (Page 63)

[Markopolos said] ?[Ward] did not have an industry background that I was aware of. He had zero comprehension of topics being discussed. He seemed very ill-trained, uninformed about industry practices, did not understand financial instruments. Didn?t even have a basic understanding of finance.? (Page 64)

However, the OIG has found no documentary evidence that Ward referred the matter to NERO and, as discussed below, Marcelino?s understanding from speaking with Ward was that Ward had ?decided not to pursue it.? (Page 65)

As part of its investigation, the OIG reviewed all e-mails produced by the Office of Internet Technology (OIT) from Ward?s files for the relevant time period and, in addition, reviewed all relevant e-mails from NERO?s files produced by OIT for the same period, and found no evidence that the 2000 submission was referred to NERO. (Page 65)

According to Adelman, Marcelino told him that he had spoken recently with Ward and Ward had told Marcelino: (1) that Ward remembered the Markopolos meeting in 2000;
(2) that Ward said he had ?decided not to pursue? the matter in 2000; and (3) that Ward had said he was ?perfectly comfortable with how he had handled it.? (Page 67)
Based on Marcelino?s testimony and Adelman?s corroborating statement, Ward?s testimony to the OIG was not credible regarding: (1) whether he recalled meeting with Markopolos or hearing concerns about Madoff?s hedge fund in 2000; and (2) the substance of his February 4, 2009 conversation with Marcelino. Accordingly, the OIG concludes that, based upon the preponderance of the evidence, Ward met with Markopolos in 2000 and told Manion that he had referred the complaint to NERO, but never actually did. (Page 67)

[Markopolos? red flags in his 2001 submission included] ?Only 3 down months vs. the market?s down 26 months during the same period, with a worst down month of only -1.44% (April 1993) vs. the market?s worst down month of -14.58% (August 1998).? (Page 67)

NERO Decided Not to Investigate Madoff Only One Day After Receiving the 2001 Submission. (Page 71)

Finally, Kazon also acknowledged that the 2001 submission should have been reviewed for more than one day before a decision was made regarding its disposition. (Page 73)

NERO Did Not Reconsider Its Decision Not to Investigate Madoff After Publication of the Articles. (Page 76)

The SEC did not commence an investigation of Madoff after the publication of the MARHedge and Barron?s articles. Schonfeld acknowledged that Barron?s is a ?reputable publication? and that ?the fact that in addition to a complaint being provided to you that there were two newspaper articles providing similar information as the complainant,? ?would be [a] factor[] to consider in triaging, [which was the process utilized by NERO to determine if a complaint was worth pursuing.]? (Page 77)

Kelly signified in her notes that the following one piece of information the Hedge Fund Manager provided was of particular importance (by placing it in a box and drawing a star next to it): ?For volume must see options on street yet never see them.? (Page 78)

On the following day, May 21, 2003, the Hedge Fund Manager sent Kelly a detailed complaint by e-mail, in which he laid out the red flags that his fund had identified about Madoff while performing due diligence on two Madoff feeder funds. (Page 78)

The CIO?s suspicions triggered, he called CBOE to find out how much daily volume traded on the exchange. He described his call to CBOE, as follows: ?And the problem is ? that the volume was never there for Madoff. So that was problem No. 1 for me. Problem No. 2 was ? I called up buddies of mine around the street who were now running the equity derivatives departments of a number of firms, and I asked them all if they were trading with Madoff. And nobody was. Nobody was doing these OEX options. And in fact, the funny part about it was they all said, yeah. You know, I hear that he?s doing all these trades but, you know, we don?t see it anywhere ? And so things just began to, you know, not match up. (Page 78)

The complaint also described the following specific concerns about Madoff?s strategy and purported returns:
according to [BMIS], the options are traded with a number of traders and crossed on CBOE. With a 8-10 billion size, you must see the volume, but unfortunately you don?t. We actually checked with some of the largest brokers (UBS, Merril [sic], etc) which told us they never traded with them OEX options. The question is do they really implement the full strategy.
(Page 79)

To Kelly, the complaint indicated ?that there are areas that need to be answered, and we needed to look into them more.? Kelly Testimony Tr. at p. 37. She also understood that the Hedge Fund Manager was implying that BMIS might be lying about its option trading, and ?some of the issues? that the [Hedge Fund Manager] laid out in the complaint were ?indicia of a Ponzi scheme.? (Page 80)

Another examiner testified that in his experience it was unusual for Richards to personally call registrants at the start of an examination. (Page 87)

Walker?s ??view? of the team assigned to the Madoff investigation was that they did not have much experience in equity and options trading. Rather, their experience was in general litigation.? (Page 91)

Issues raised by the Hedge Fund Manager?s complaint and the two 2001 articles62 other than front-running ? such as auditor independence, Madoff?s extraordinary returns, and lack of liquidity in the options market to support alleged trading ? were not investigated at all in the examination. (Page 93)

McCarthy testified he did not make a mistake in focusing the examination on front-running ?because that?s where my area, my team?s area of expertise led.? (Page 94)

The FTI Engagement Team opined that to focus an exam based upon the expertise of a team rather than on the complaint itself is nonsensical. As a result of the decision to not request assistance from the Investment Management Examination Group, the FTI Engagement Team concluded the project was not properly staffed with the expertise needed to address the allegations raised in the complaint. (Page 94)

According to the FTI Engagement Team, the allegation regarding BMIS?s auditor should have been investigated because the lack of an independent auditor raises concerns as to whether or not the auditor is unbiased, fair and impartial. (Page 95)

[After Madoff confessed] Within a few hours of obtaining the work papers, the New York Staff Attorney determined that no audit work had been done. New York Staff Attorney Testimony Tr. at p. 10. Immediately upon reviewing Friehling?s work papers, the New York Staff Attorney testified, there ?were red flags for me as to the auditor. ? I didn?t see anything that resembles kind of formal work papers, auditor work papers that would comply with generally accepted audit standards. (Page 95)

However, the OCIE examination team did not take any measures to verify whether or not Madoff was trading options on CBOE, and Donohue conceded that the examination did not engage in sufficient analysis or examination of options trading issues raised in the Hedge Fund Manager complaint. (Page 96)

As referenced in the Planning Memorandum, the staff prepared a draft letter to the NASD, dated December 17, 2003. Draft letter dated December 17, 2003 from Swanson to Luparello, at Exhibit 166. Examiners addressed the letter to Stephen Luparello of the NASD, and requested ?Transaction data for all order executions effected by Madoff Securities? from ?January 1, 2001 through December 15, 2003.? (Page 97)

Likewise, Swanson stated that ?the NASD was oftentimes the best source to get accurate, timely sales data. So what we would have been doing is getting information about the market making trades that were reported to NASD from Madoff during that time period.? (Page 97)

However, the letter to the NASD was never sent. Nor did the staff request trade data from another independent third-party. Rather, the staff relied exclusively on trade data provided to them by Madoff. (Page 98)

If the staff had requested audit trail information from the correct third-party, the examiners could have uncovered Madoff was not making the trades he claimed to be making, according to Donohue who stated, ?I think that we would have been able to uncover that he was not trading there.? (Page 98)

It appears that the letter to the NASD was not sent because it was less time-consuming for examiners to request and use data supplied by Madoff . . . . (Page 98)

Moreover, until Madoff?s confession to running a Ponzi scheme in December 2008, it was not unusual for OCIE to rely exclusively on records and data produced by the registrant, even in instances in which the registrant was being examined for possible fraud. (Page 98)

Madoff recalled that Donohue looked at the right things for front-running, but only would have discovered it was a Ponzi scheme if he had gone to an independent third-party. (Page 98)

Swanson recalled speaking with Madoff right before or soon after sending the initial document request. Swanson Testimony Tr. at p. 66. Swanson stated he does not believe he took notes of the conversation, as he did not typically take notes of telephone conversations with registrants. Id. Swanson recalled Madoff told him ?there was a Chinese wall in place? and there was no basis for the Commission?s concerns he was running a hedge fund. (Page 100)

On January 16, 2004, Madoff personally responded to the document request. Madoff wrote in his response letter to Swanson, ?Neither Madoff securities, nor any person or entity affiliated with Madoff Securities, manages or advises hedge funds,? and ?we have no interest in becoming a manager or adviser to hedge funds.? Id. Instead, Madoff claimed BMIS only executed trades for institutional clients, stating, ?As executing broker, Madoff Securities is compensated thru execution commissions derived from the Split Strike Conversion strategy transacted over our Institutional Department?s Execution Trading Platform.? (Page 100)

It was atypical for the CEO of an entity the size of BMIS to personally respond to an information and document request. Wood does not recall working on any other examination in which the CEO responded to an information and document request. Wood Testimony Tr. at p. 100. According to the FTI Engagement Team, examinations of small firms with few employees may necessarily involve significant participation from senior executives, but large firms (including Madoff) have compliance officers and other compliance staff that are typically involved in responding to SEC information requests. (Page 100)

Madoff?s response to the Document and Information Request contradicted the Hedge Fund Manager?s complaint and the two 2001 articles about Madoff which indicated Madoff was managing money for hedge funds. Michael Ocrant, Madoff Tops Charts; Skeptics Ask How, MARHedge, May 2001, at Exhibit 146; Swanson Testimony Tr. at p. 65; Donohue Testimony Tr. at p. 63. Swanson and Wood did not recall the team making any effort to determine whether statements Madoff made in his responses to their document requests were accurate ?and that he wasn?t in fact managing money.? Wood Testimony Tr. at p. 59; Swanson Testimony Tr. at p. 65. As Swanson explained, ?I didn?t test that. My concern was front-running.? (Page 101)

Notably, the examiners made the surprising discovery that BMIS?s mysterious institutional business was making significantly more money for BMIS than was BMIS?s well-known market making operation. Id. However, Wood and Walker did not identify this finding as a cause for concern in the memorandum:

The commission revenues generated from these four institutional clients account for the overwhelming majority of commission revenues generated for the firm

Full post as published by Velvel on National Affairs on February 11, 2010 (boomark / email).