Whistleblowers will collect $100 million

After his warnings about Bernard Madoff’s Ponzi scheme went ignored for years, Harry Markopolos urged U.S. regulators to encourage tipsters. Now, the forensic accountant and a team he put together are in position to benefit from those new incentives.

U.S. government settlements with State Street Corp. and Bank of New York Mellon Corp. could produce a windfall for three former employees who blew the whistle on the banks’ alleged mistreatment of foreign-currency-trading clients. Mr. Markopolos, who assembled the group and advised them, could reap a slice of any payouts awarded to the whistleblowers…

Those awards could exceed a combined $100 million, the largest such awards on record, according to an analysis by The Wall Street Journal.

The currency investigations have changed the way trust banks operate, crimping what had been a profitable corner for the banks as the markups in currency trades have fallen, analysts said. The potential payouts also could encourage more tips to regulators about possible improprieties.

“Whenever there’s a big award…there’s an uptick of filings and submissions,” said Erika Kelton, an attorney who has represented whistleblowers. “Those large awards show these programs work, and that the risk of stepping forward may be a risk worth taking.”

I’ll second that emotion.

A Ponzi scheme goes to trial, resolution over religion and the law

Sugarcreek, Ohio – This village is as sweet as its name. Main Street climbs gently from a tidy railroad crossing, past a few gift shops to the simple brick First Mennonite Church…

This postcard from a gentler and simpler America is about as unlikely a place imaginable for the news that broke in September: one of Sugarcreek’s own, a prominent member of what some people here call the Plain Community, was under arrest, accused by federal prosecutors of running a Ponzi scheme that betrayed his neighbors’ trust and wiped out more than $16 million of their savings.

The news media made the obvious comparisons…

But the most intriguing aspect of Monroe Beachy’s story is how different it seems from Bernie Madoff’s — and from almost every other story with a “Ponzi scheme” headline over the years.

While victims of Mr. Madoff’s fraud, like most Ponzi victims, condemned their accused betrayer in court as a monster, many of Monroe Beachy’s investors have said in court that it is more important to forgive him than to recover their money.

While the Madoff case and others like it have inevitably created conflict between longtime investors fighting to keep their fictional profits and more recent investors trying to recover lost principal, some Beachy investors urged that their own share of his estate should be given to those in greater need.

And while Mr. Madoff’s wife and sons instantly became social pariahs in Manhattan, Mr. Beachy’s wife and children remain at his farmstead here, living peacefully with their neighbors…

It became the forum for a rare bankruptcy court battle over religious freedom, with Mr. Beachy’s Amish and Mennonite creditors insisting that the court’s way of dealing with his downfall could not be squared with their faith or with his…They formed their own committee to resolve the crime. There were two confounding contradictions: [1] all the creditors were not members of their faith and bound by the same methods or conclusions; [2] we still live in a constitutional republic where civil law takes precedence over religious rote.

Last March, Federal Bankruptcy Judge Russ Kendig in Canton, in the federal courthouse closest to Sugarcreek, ruled that “delegating insolvency proceedings to a religious body” would be unconstitutional…

No part of this story contrasts as sharply with the real Bernie Madoff case as what happened next…

We are agreed among ourselves to accept your ruling as the will of Almighty God in this matter,” they wrote, after thanking him for considering their point of view so carefully. “If there is anything which we can do as members of the Amish-Mennonite community to facilitate the bankruptcy process and help bring it to a speedy conclusion please do not hesitate to contact any member” of the committee.

Unlike most American flavors of fundamentalist religion, these folks recognize and respect the law of the land over their religious beliefs. They call it God’s Will. An interesting way around the contradictions of their belief system; but, it leaves our constitution intact and doesn’t waste months and years trying to wear down the court system.

RTFA. It is a long and convoluted tale. One not without illustrations of every human frailty – even for folks who assay that frailty results from the supernatural.

Bernie’s blame game!

Bernard L. Madoff said he never thought the collapse of his Ponzi scheme would cause the sort of destruction that has befallen his family. In his first interview for publication since his arrest in December 2008, Mr. Madoff — looking noticeably thinner and rumpled in khaki prison garb — maintained that family members knew nothing about his crimes.

But during a private two-hour interview in a visitor room here on Tuesday, and in earlier e-mail exchanges, he asserted that unidentified banks and hedge funds were somehow “complicit” in his elaborate fraud, an about-face from earlier claims that he was the only person involved…

In many ways, however, Mr. Madoff seemed unchanged. He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them.

They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

While he acknowledged his guilt in the interview and said nothing could excuse his crimes, he focused his comments laserlike on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. In an e-mail written on Jan. 13, he observed that many long-term clients made more in legitimate profits from him in the years before the fraud than they could have elsewhere. “I would have loved for them to not lose anything, but that was a risk they were well aware of by investing in the market,” he wrote.

Mr. Madoff said he was startled to learn about some of the e-mails and messages raising doubts about his results — now emerging in lawsuits — that bankers were passing around before his scheme collapsed.

“I’m reading more now about how suspicious they were than I ever realized at the time,” he said with a faint smile.

He did not assert that any specific bank or fund knew about or was an accomplice in his Ponzi scheme, which lasted at least 16 years and consumed about $20 billion in lost cash and almost $65 billion in paper wealth. Rather, he cited a failure to conduct normal scrutiny.

RTFA. Long and detailed, confirming – if I may say – my cynical suspicions about the biggest banks, lending and financial institutions. It all fits in with what I observed on financial streets before the crash that resulted in the Great Recession. Everyone knew what was going on – except the little guys who either believed the checks and balances built into regulation were being observed – or the other little guys suckered in by the Free Market ideological crap that helped Republicans and Blue Dog Democrats deregulate the markets and remove oversight.

Interesting personal stuff in the article. If you’re interested in how criminals think. It can’t be much different from, say, a Bush or Rumsfeld autobiography except that Madoff probably isn’t as committed to self-deception and political deceit.

Swiss bank UBS bans tight skirts and fake nails


Dress like this guy — while acting like this guy

Swiss banking giant UBS has issued a strict dress code for employees, calling on them to wear “skin-coloured” lingerie and to ditch “fancy and coloured” artificial fingernails.

In a document stretching to more than 40 pages, UBS described a head to toecompany dress code, including permissible hairstyles, what cut of skirt and which type of socks to wear.

Women should not wear “flashy” jewellery or skirts that are “too tight behind.”

Underwear must not be “visible against clothing or spilling out of clothing.” Rather, they should be “skin-coloured under white shirts…”

Men should wear a “straight-cut two button jacket and pants that make up part of a classic professional suit.”

They should not wear ties that do not match the “morphology of the face” nor socks with cartoon motifs. And suits for both women and men must be either grey, black or navy blue.

Women are restricted to wearing seven items of jewellery.

“The reputation of UBS makes up our most precious asset. Adopting an irreproachable behaviour implies having an impeccable presentation,” said the bank, which has been trying to rebuild its reputation since suffering record losses during the financial crisis.

In the document, employees are also advised to avoid smelling of strong perfume, garlic, onion or cigarette smoke.

Somehow, I doubt if the smooth-talking gangsters who promulgated illegitimate mortgage loans, the cluster-grope that led eventually to illicit derivatives traded in private closets – dressed in any fashion outside the rules and rote of this code of appearances. If anything, appearances ruled their criminal activities – working to conceal the corruption of what their business had become.

Madoff whistleblower says SEC still too timid


Daylife/AP Photo used by permission

Financial regulators have not fully learned their lessons despite missing the massive fraud engineered by Bernard Madoff, said the man who tried for years to raise the alarm about Madoff’s scheme.

The warning from Harry Markopolos carries the weight of the fame he gained a year ago, including an appearance before Congress to blast the Securities and Exchange Commission for ignoring his tips that something was amiss with Madoff’s investment management business and its years of amazingly consistent profits…

Even now, “The SEC is nowhere near aggressive enough,” Markopolos, 53, told Reuters. “It still has the mind-set where it will only enforce securities law instead of enforcing ethics…”

His book calls for sweeping changes at the SEC such as firing half the agency’s staff and doubling the pay of many positions to attract the best talent. Markopolos would also move the agency out of Washington.

Madoff came onto his radar when Markopolos worked at a Boston money manager and was asked to design a math program to replicate Madoff’s eerie string of returns…

Unable to do so, Markopolos concluded that Madoff was up to no good and debated with colleagues over whether Madoff was running a Ponzi scheme — one where early investors are paid with money from new clients — or was illegally “front-running” orders from clients.

Markopolos reported Madoff to the SEC several times over a number of years. But the agency famously passed up the tips, leading to a public flogging before Congress and a devastating follow-up report by the agency’s inspector general…

Much of the SEC’s staff is too inexperienced to catch sophisticated financial wrongdoing, and too often the agency settles cases without getting defendants to admit guilt, he writes.

I like this guy’s style. Of Madoff he says, “The Death Penalty was too good for him.”

His book comes out this week. I’d love to see him sit down with Charlie Rose on Bloomberg TV and elaborate on the bureaucrats who couldn’t be bothered to act on behalf of the citizens of this land.

Latest in MADOFF saga: Now they come for the PROGRAMMERS….


Jerome O’Hara (left) with his attorney
Daylife/Getty Images used by permission

Two of Bernard Madoff’s former computer programmers were sued by U.S. regulators for allegedly helping to hide his fraud for more than 15 years and trying to cover their tracks after a “crisis of conscience” in 2006.

Jerome O’Hara, 46, and George Perez, 43, wrote programs to generate fake trade blotters, stock records and other documents to back nonexistent transactions, the Securities and Exchange Commission said today in a statement announcing its civil lawsuit.

“Without the help of O’Hara and Perez, the Madoff fraud would not have been possible,” George Canellos, head of the SEC’s New York office, said in the statement….

“O’Hara and Perez had a crisis of conscience in 2006 and tried to cover their tracks,” the SEC said in the statement.

They allegedly sought to delete about 218 of 225 so-called special programs from a computer, known as “House 17,” used to process money management account data. They didn’t delete the monthly backup tapes, the SEC said.

O’Hara and Perez then cashed out hundreds of thousands of dollars from their personal accounts at Madoff’s firm, before confronting him and refusing to generate more bogus records, the SEC said.

I love these “crises of conscience”. They always seem to come after people accumulate a small fortune. I suspect that they just got cold feet. We’ll probably be hearing that they had a Jesus experience. Just watch.

Incompetent SEC examiners kept scheme alive – says Madoff


Daylife/Reuters Pictures used by permission

Nobody was more surprised that the Securities and Exchange Commission did not discover Bernard L. Madoff’s enormous Ponzi scheme years ago than Mr. Madoff himself.

After all, it would have been pretty simple, he said in a transcript of a jailhouse interview that is part of a trove of official exhibits released on Friday by the S.E.C.’s inspector general, H. David Kotz.

In the interview, Mr. Madoff said that the young investigators who pestered him over incidentals like e-mail messages should have just checked basics like his account with Wall Street’s central clearinghouse and his dealings with the firms that were supposedly handling his trades.

If you’re looking at a Ponzi scheme, it’s the first thing you do,” he said.

Those simple steps, he added, could have revealed years earlier that he was running the largest Ponzi scheme ever, a crime that has now dragged the S.E.C. into the worst scandal in its 75-year history. “It would have been easy for them to see,” he added.

The new exhibits consist of 6,157 pages of interviews, letters, e-mail messages, telephone records and other background material gathered during Mr. Kotz’s 10-month investigation of how the commission handled, and mishandled, numerous tips and warnings it received about Mr. Madoff over the years. His full report, released last month, found the agency had received six substantive complaints since 1992 — and botched the investigation of every one of them. He found no evidence of any bribery, collusion or deliberate sabotage of those investigations.

You needn’t worry much about investigators when you know the highest agency of the electorate – the United States Congress – has abdicated any responsibility for oversight. It started in 1994 with Newt’s Contract on America – accelerated and grew through K Street and C street – culminating in the Halliburton Years with Dickie and George W..

SEC failed every aspect of due diligence on Madoff


What did these clowns do to earn their paycheck?
Daylife/Getty Images used by permission

Unseasoned investigators from the Securities and Exchange Commission were alternately intimidated and enthralled by a name-dropping, yarn-spinning Bernard L. Madoff as he dodged questions about his financial house of cards, according to a scathing new report on the agency’s repeated failure to uncover the huge investment fraud.

“Unseasoned investigators” is Wall Street-speak for Lazy Incompetent Hacks.

“Madoff carefully controlled to whom they spoke at the firm,” the S.E.C.’s independent watchdog said in the report released on Wednesday.

When one of Mr. Madoff’s employees was talking to investigators in 2005, an aide to Mr. Madoff broke up the conversation, explaining that it was time for lunch — at 3 in the afternoon.

I guess Martha Stewart should have fixed lunch for them. Then, they wouldn’t have been so dedicated about going after her “enormous” profit.

The incident was one of several recounted by the agency’s inspector general, H. David Kotz, in a report that concludes numerous “red flags” were missed by the agency from at least 1992, not just because of inexperience and incompetence, but because investigators failed to follow incriminating evidence in plain sight and were cowed by Mr. Madoff, who had an inflated reputation on Wall Street.

The report details six substantive complaints against Mr. Madoff received by the agency, which were followed by three investigations and two examinations. Yet the agency never verified Mr. Madoff’s trading through a third party. Time and again, it was noted that the volume of his purported options trades were implausible. When the enforcement staff received a report showing that Mr. Madoff indeed had no options positions on a certain date, the agency simply did not take any further steps…

It was not Mr. Madoff’s cleverness that enabled him to fleece thousands of investors out of billions of dollars for years, Mr. Kotz said. It was the fact that, “despite numerous credible and detailed complaints,” the S.E.C. never took “the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme.”

RTFA. It’s good.

Here’s the link to the 22-page executive report. The detailed 450-page report will probably just piss me off for another year.