Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Lars Toomre's blog

Anshul Rustagi Returns To Stark Investments

Some three years ago Toomre Capital Markets LLC ("TCM") wrote the post Deutsche Bank Dismisses CDO Trader Anshul Rustagi. Mr. Anshul Rustagi traded complex financial instruments known as synthetic collateralized debt obligations ("CDOs") and apparently had a problem with having overstated the value of his trading positions by almost £30m. As a result, he was dismissed for gross misconduct after a disciplinary hearing.

This month, some three years later, Mr. Rustagi has re-emerged at the London offices of the alternative investment firm Stark Investments. That firm is headquartered in Milwaukee, Wisconsin. The London office started in 2002 and is run by Mohsinuddin Ansari. Their London operation apparently is rather small with approximately twenty-five registered staff members.

Toomre Capital Markets LLC hopes that his new employer assigns one of those employees full-time to review and further double-check each one of Mr. Rustagi's positions. Sadly, Lars Toomre has learned from personal experience that a proverbial "leopard does not change his spots" — or in the instance of "over the counter" securities traders, given a trader has mis-marked his positions once, he is highly likely to do so again despite all protestations that he or she has changed their ways. The behavior of such a trader is very much akin to a spouse in marriage who cheats. Far too often that straying individual will cheat again.

TCM hopes that there will not be news in the future about Mr. Rustagi having further valuation issues. Investors in Stark Investments should be aware that they are potentially playing with fire regarding this individual and need to check on what special safe-guards have been put into effect to protect their interests.

Bob Jaffe Ordered To Testify

Bob Jaffe, Ruth Shapiro, Ellen Jaffe, and Carl ShapiroThe State of Massachusetts took an early lead in aggressively pursuing another of the "feeder funds" that deposited investment monies with Bernie Madoff's fraudulent scheme. This feeder fund apparently was run through an entity known as Cohmad Securities, a FINRA-licensed broker-dealer, which was jointly owned by Maurice "Sonny" Cohn and Bernie Madoff. Cohmad Securities apparently operated out of the same office space as Bernie Madoff's primary firm and paid rent to Madoff's broker-dealer operation.

Mark and Andrew Madoff claim not to have known anything about their father's alleged fraud. "Mark and Andrew Madoff are economically and emotionally devastated by what their father has done, which among others things has destroyed the valuable market-making and proprietary trading businesses they spent 20 years building," their attorney, Martin Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison, said in a statement. However, on their 19th trading floor, they had to be aware that some employees of Cohmad Securities were working just a few feet away.

According to one news report, the pair of Madoff sons knew Cohmad only as a retail brokerage operation through which they would occasionally place trades to the floor of the New York Stock Exchange because the firm was not a NYSE member. While Mark and Andrew knew Cohmad was one of their father's ventures, "if they had a role with asset management it was not anything they knew about," the spokesman said.

Given how Bernard Madoff Investment Securities was very much a family-run business, many have been very skeptical about this explanation. Hence, both aggrieved investors and regulators have wanted to get a better explanation of just what business Cohmad Securities conducted, how it reimbursed individuals who referred business for investment in Bernie Madoff's asset management operation and what exactly its principals knew about Madoff's investment operation.

Robert M. Jaffe is/was both a broker with Cohmad Securities and the son-in-law of Carl Shapiro, the Boston philanthropist who allegedly lost $545 million that was invested with Bernie Madoff. As Toomre Capital Markets LLC ("TCM") wrote about in the post Bob Jaffe, Bernie Madoff's Man To See, Ducks Subpoena, Mr. Jaffe thus far has missed two schedule appearances to appear before Massachusetts state security regulators. The original subpoena for his appearance and that of the Cohmad Securities' chief compliance officer, Marcia Beth Cohn, were issued shortly after Mr. Madoff's arrest. Neither has yet given any testimony that might assist prosecutors, regulators and investigators further understand who else might have been involved in Bernie Madoff's fraudulent activity.

Former Fairfield Greenwich Executive To Sell Manhattan Townhouse

Walter Noel and FamilyThe Sunday January 25th 2009 edition of The New York Times has an article in its Real Estate section entitled Every Man for Himself. This article details how one Richard Murphy in 2007 paid $33 million for the 25-foot-wide town house at 7 East 67th Street.

At the time, this purchase was the highest price on record for an Upper East Side town house built on a standard 25-foot-wide lot. The home has 12,000 square feet of space on seven levels, including the basement. Apparently Mr. Murphy has been considering listing it now for $36 million. "But brokers were skeptical that he would get that price, with one suggesting it might eventually sell for $30 million at most, about 10 percent less than he paid." This story is indicative of how even Manhattan real estate is beginning to sag under the weight of Wall Street layoffs, hedge fund retrenchment and the economic recession.

Toomre Capital Markets LLC ("TCM") took particular note of this story because of the firm Mr. Murphy until very recently worked for: Fairfield Greenwich Group, the "feeder fund" group with the largest exposure to Bernie Madoff's fraudulent investment business. Fairfield Greenwich is reported to have had approximately $7.5 billion invested with Madoff at the time of his arrest. The article notes that Mr. Murphy is listed as one of the defendants, along with other Fairfield Greenwich partners, in lawsuits brought by disgruntled and aggrieved investors.

According to this court document, The New York Times may have gotten Mr. Murphy's first name wrong. The name listed in the lawsuit with other Fairfield Greenwich partners is Charles Murphy, who lives at 202 Round Hill Road in Greenwich, Connecticut — a short distance from 175 Round Hill Road and the home of Fairfield Greenwich Group founder, Walter Noel. Their Fairfield Sentry fund is said to have had substantially all of its approximate $7.2 billion in assets invested with Bernie Madoff.

Walter Noel and his wife Monica are parents to five daughters. The picture in the upper left of this post is from their 2005 Christmas card and show clockwise from the left, Lisina, Corina, Walter, Monica, Ariane, Marisa, and Alix. Each of the five daughters is now married and many of the son-in-laws became involved in Fairfield Greenwich Group business. Four of the five son-in-laws along with Walter Noel are named in the above referenced lawsuit.

Corina, the eldest, married a Columbian named Andres Piedrahita, who became a partner of Fairfield Greenwich. Corina and her husband apparently relocated to London some years ago and subsequently spent considerable time in Spain as well while raising funds from European and Latin American investors. Rumor has it that Andres Piedrahita "may have done something fatally stupid by placing 2x-3x-laundered Columbian Drug Cartel money into the FFG-Madoff sinkhole". The court document referenced above includes Andres Piedrahita as one of the defendants. According to that document, Mr. Piedrahita is being represented by Andrew Levander, the same lawyer who also happens to be representing Ezra Merkin and his "feeder funds" in lawsuits by other distraught Madoff investors.

The Talented Mr. Madoff

Bernie MadoffIn the event that the visitor to this website has not already done so, Toomre Capital Markets LLC ("TCM") strongly encourages one to read the Sunday January 25th 2009 New York Times article entitled The Talented Mr. Madoff. This article has a good review of just who Bernard L. Madoff is. Included in that article is the suggestion by Gregg O. McCrary, a former special agent with the FBI who spent years constructing criminal behavior profiles, that Bernie shares many of the destructive personality traits typically seen in a psychopath.

Apparently this is partly why so many who came in contact with Bernie have been left reeling and in confusion about his motives. “People like him become sort of like chameleons. They are very good at impression management,” Mr. McCrary says. “They manage the impression you receive of them. They know what people want, and they give it to them.”

The article also includes a reference to J. Reid Meloy, a forensic psychologist, who indicated that Bernie Madoff reminds him of other criminals he has studied. “Typically, people with psychopathic personalities don’t fear getting caught,” explains Dr. Meloy, author of a 1988 textbook, The Psychopathic Mind. “They tend to be very narcissistic with a strong sense of entitlement.”

This NYT article concludes with the thought "All of which has led some forensic psychologists to see some similarities between him and serial killers like Ted Bundy. They say that whereas Mr. Bundy murdered people, Mr. Madoff murdered wallets, bank accounts and people’s sense of financial trust and security. Like Mr. Bundy, Mr. Madoff used a sharp mind and an affable demeanor to create a persona that didn’t exist, according to this view, and lulled his victims into a false sense of security. And when publicly accused, he seemed to show no remorse.

“They believe ‘I’m above the law,’ and they believe they cannot be caught,” Mr. Meloy says. “But the Achilles’ heel of the psychopath is his sense of impunity. That is, eventually, what will bring him down.” He says it makes complete sense that Mr. Madoff would have courted regulators, even if he ran the risk of exposing his own actions by doing so. “In a scheme like this, it’s very important to keep those who could threaten you very close to you,” Dr. Meloy explains. “You want to develop them as allies and shape how they go about their business and their attitudes toward you.”

Marc Dreier Bail Terms Modified

Marc DreierIn other scandal news this week, on Thursday January 22nd 2009, Marc Dreier, the New York lawyer jailed since his arrest for allegedly cheating hedge funds out of more than $400 million, had his detention ruling modified. Rather than being ordered to be held without bail until trial, Marc Dreier, a graduate of Harvard Law School and Yale College and the head of the now bankrupt 250-lawyer legal firm Dreier LLP, is now able to be freed provided that he comes up with a $20 million bond. That bond must be signed by four co-signers in the event that it is satisfied by property or $10 million in cash. Also, Mr. Dreier must then submit to home detention and electronic monitoring as well as seeing a psychiatrist twice a week.

Mr. Dreier's lawyer, Gerald Shargel, told U.S. Magistrate Judge Douglas Eaton that Mr. Dreier would not be likely to satisfy the terms of bail. Hence, Mr. Dreier is likely to remain jailed until his trial where he faces up to 30 years in prison. Mr Dreier was arrested based on a criminal complaint. Prosecutors must file an indictment in court before February 7th according to Mr. Shargel. The case is US v Dreier 08-mj-2676 U.S. District Court for the Southern District of New York (Manhattan).

What is particularly interesting about this decision is that Magistrate Judge Eaton in this case is the same one who set the terms of home detention in the case of Bernie Madoff. Toomre Capital Markets LLC ("TCM") wonders what is so different in Mr. Dreier's case. Bernie Madoff allegedly defrauded many more investors both sophisticated and not out of approximately $50 billion; Mr. Dreier "only" apparently defrauded "sophisticated" hedge funds for only one percent of the amount Madoff apparently confessed to. Both are white-collar professionals who allegedly has traveled extensively abroad and might have funds from the fraud in foreign locales.

Why then was Bernie Madoff's bond famously set at $10 million while Marc Dreier's has been set at $20 million? As Gerald Shargel argued, should not his client get a similar amount of bail and a similar deal? Apparently, Magistrate Eaton felt that the risk of flight is greater in Mr. Dreier's case than that of Bernie Madoff. TCM does agree that, given the high amount of publicity Mr. Madoff has received from the media and the anger of his many investors, it would be virtually impossible for him to move about in the greater New York City area without many "regular" citizens noting his movement. A less public figure such as Mr. Dreier might succeed in fleeing the jurisdiction without notice, but again is very unlikely.

Recent Madoff Customer Contributions To Be Segregated

Late on Friday January 23rd 2009 Reuters reports that at least two customers, who deposited their funds with Bernie Madoff just days prior to his fraud admission, will have those funds segregated from the other monies recovered for distribution to other investors. These funds will remain segregated until these recent investors' judicial claims to be treated differently are resolved.

For those who do not recall, New York fuel company businessman Martin Rosenman wired $10 million on December 5th to JP Morgan Chase for the account of Madoff's firm. This was six days before Bernie Madoff was arrested by the FBI. Mr. Rosenman claims to have been told directly by Bernie Madoff that he could wire the funds early, but his funds would not be invested until the start of the next month when Madoff's investment fund next would be open for investments. Mr. Rosenman apparently received a fax back from some member of Madoff's investment management unit acknowledging receipt of the wire transfer.

Miami business man Stanley Kriegler through his firm Hadleigh Holdings LLC appears to have had a similar experience. He deposited $1 million of funds in a Madoff firm account on December 8th at the same bank. He too apparently received receipt acknowledging that the transfer had been completed.

Both of these Madoff investors are represented by lawyer Howard Kleinhendler. In lawsuits respectively filed on January 1st and 7th against the trustee, lawyer Irving Picard, hired by SIPC and JP Morgan Bank, Mr. Klienhendler argued that these monies could be "traced because it was deposited soon before Madoff's assets were frozen." The cases are Rosenman Family LLC v Picard et al 09-01000 in U.S. Bankruptcy Court for the Southern District of New York (Manhattan) and Hadleigh Holdings LLC v Picard et al 09-01005.

"To the extent funds are transferred from the Chase Account to the Trustee, the Trustee shall withhold from distribution the amount of $10,000,000 until the merits of the (case) are adjudicated," the order in the Rosenman case entered Jan. 20 in U.S. Bankruptcy Court in New York said. The same order was also applied to Hadleigh's $1 million, according to court documents.

Earlier on Friday January 23rd, Toomre Capital Markets LLC ("TCM") posted the article Investigators Work Backward On Madoff Fraud. This article discussed how investigators have been forced to work backwards to figure out who else could have assisted Bernie Madoff, who rather implausibly claims to have committed this fraud alone. Two of the figures that investigators have been focusing on include JoAnn "Jodi" Crupi and Frank DiPascali.

Care to guess the names of the Madoff firm employees that show up on the documentation filed with the Rosenman and Hadleigh Holdings lawsuits? Reader comments and thoughts are welcome.

Investigators Work Backward On Madoff Fraud

The Friday January 23rd 2009 edition of The Wall Street Journal included an article entitled Probers Work Backward on Madoff written by Kara Scannell and Amir Efrati. This article summarizes the unusual case in the Bernie Madoff scandal where the principal figure was the first to confess to his criminal behavior. Normally, prosecutors and investigators work their way up the chain to the principle figure(s). In the Madoff case, they have been forced to work backwards to figure out who else could have helped Mr. Madoff, who said that he acted alone.

According to the article, the SEC recently issued subpoenas to a Madoff lieutenant, one JoAnn "Jodi" Crupi, and a brokerage firm affiliated with Mr. Madoff. Ms. Crupi is represented by lawyer Eric R. Breslin. Regulators are focused on documents about her compensation and her dealings with certain firm clients, including some charities. They also have asked for access to her personal computer. This last request makes Toomre Capital Markets LLC ("TCM") wonder whether regulators suspect that there were communications with clients from private e-mail accounts (as reportedly happened earlier in the timeline of this scandal).

Also, apparently regulators are preparing to issue a second subpoena to another Madoff associate, Frank DiPascali. He is represented by lawyer Marc Mukasey of the firm Bracewell & Giuliani LLP in New York. Mr. DiPascali has been reported to be Mr. Madoff's senior assistant (or even chief financial officer) and, according to Bloomberg News, investors' "Go-To" guy in the operation of the investment management business. According to investor Tim Murray of Minnesota, Mr. DiPascali was a “street-smart New Yorker” who fielded calls about the millions of dollars he entrusted to the firm. “To a Madoff customer with a discretionary account, he is the guy,” said Mr. Murray, 57, a real-estate developer. “There is nobody else.”

Ms. Crupi and Mr. DiPascali both worked on the now infamous 17th floor where the investment management portion of Bernie Madoff's business was kept separate from the broker/dealer market making operations. Like many who have learned of this fraud, authorities do not believe Mr. Madoff's assertion that he acted alone in pulling off such a large fraudulent scheme that seems to have stretched back at least three decades and involved literally thousands of investors. Those investors received monthly and quarterly account statements that are now believed to be fraudulent. One of the open questions is: Who helped Bernie Madoff prepare such detailed and ultimately fraudulent statements?

John Thain: Lack of Perspective and Judgment

On Thursday January 22nd 2009, John Thain, the former CEO of Merrill Lynch, resigned from his new post at the merged Bank of America Corporation. Bank of America Chief Executive Ken Lewis flew to New York to talk with Mr. Thain on Thursday, and they mutually agreed "that the situation was not working out" and that he would resign, said Bob Stickler, a spokesman for Bank of America.

Some privately say though that Mr. Thain was fired after the banking giant lost confidence in his leadership, particularly during the transition period since the acquisition was announced in the hours following the collapse of Lehman Brothers on September 14th 2008. Apparently Mr. Thain failed to tell the acquiring bank about mounting losses at Merrill in the fourth quarter. Those losses apparently totaled more than $15 billion and which were much larger than Bank of America had factored into its acquisition analytics.

The shareholder votes were held on December 7th approving the merger. At the time, the large Merrill losses were not disclosed. Sometime later in December, the Merrill Lynch merger team and not Mr. Thain himself informed Bank of America of the losses, quite a bit apparently attributable to soured trading positions. These losses prompted Bank of America to seriously consider walking away from the deal and eventually led to another contribution from the TARP fund earlier this month.

Press reports indicate that Mr. Thain at the time was off skiing in Vail, Colorado. When he returned, apparently on a head count adjusted basis, the Merrill bonus pool was distributed to firm employees three days before the merger was concluded. That bonus pool is said to have been down less than ten percent from the 2007 levels. That is right! Less than a ten percent year prior when most other firms distributed pools that were less than half of the prior year!! Mr. Thain also was apparently scheduled to shortly depart for Davos, Switzerland where the World Economic Forum will be held later this month. This was despite strong hints from others at Bank of America that such a trip would not be appropriate at this time.

UBS Restructuring FICC Division

On Thursday January 22nd 2008, UBS announced that it is "finally" restructuring its Fixed-Income, Currencies and Commodities division ("FICC"). Part of the change involves completely closing down its real estate and securitization businesses as well as its exotic structured products operation. These changes are "part of a radical change that is needed to take FICC forward" announced Carsten Kengeter and Jeff Mayer, joint heads of FICC who arrived late in 2008.

As part of the restructuring, Sascha Prinz and David Sacco, global co-heads of the rates business, Chris Ryan, global head of credit, and Todd Morakis, global head of commodities, are leaving the bank. There are part of the changes announced by Jenker Johansson that "will enable us to leverage our core strengths while relying on lower risk and balance sheet utilization."

According to the memo announcing these changes, UBS is repositioning its investment bank, with the overriding strategy about emphasizing client business on "facilitation and flow," as well as providing strategic and tactical solutions with less reliance on the bank's balance sheet. Under the restructuring, the existing products areas in the FICC division are to be consolidated into three new business areas - macro, credit and the workout group.

Madoff Accountants and Steven Mendelow

According to this profile prepared by Forbes, Steven B. Mendelow is a Director of Iconix Brand Group Incorporated, a New York, NY consumer goods company in the Textile – Apparel Footwear & Accessories. According to this profile,

Steven Mendelow has served on our Board of Directors since December 1999. He has been a principal with the accounting firm of Konigsberg Wolf & Co. and its predecessor, which is located in New York, New York, since 1972. Mr. Mendelow was a director of New Retail Concepts, Inc. from 1992 until its merger with us in 1998. He also serves as a director of several privately-held companies. He is a trustee of The Washington Institute for Near East Studies and actively involved with the Starlight Starbright Children's Foundation and the Foundation for Fighting Blindness. He received a Bachelor of Science degree in business administration from Bucknell University in 1964 where he was elected to Delta Mu Delta, the national Business Administration Honor Society.

Konigsberg Wolf & Co. is a mid-size accounting firm in Manhattan and the same firm that employs one Paul J. Konigsberg as its senior tax partner. Paul Konigsberg also happened to sign the 2007 and 2006 Federal Tax From 990s for The Madoff Family Foundation, the same 990s that indicate there was a rather inordinate amount of trading. Toomre Capital Markets LLC ("TCM") wonders just what account and trade information was provided to this accounting firm to prepare these tax returns.

The Konigsberg CPA website lists Steven B. Mendelow as its only Principal and not notably as one of the firm's Partners. Perhaps this is because Steven Mendelow is the same individual who was sanctioned with Frank Avellino and Michael Bienes by the SEC in late 1992 for selling unregistered notes to investors?

NYT: '92 Ponzi Case Missed Signals About Madoff

Nantucket home of Frank AvellinoIn the Saturday January 17th 2009 edition of The New York Times, Alex Berenson penned at article entitled '92 Ponzi Case Missed Signals About Madoff. Toomre Capital Markets LLC ("TCM") does not often "scoop" the old "Gray Lady." However, interested readers may wish to also read the TCM entry posted on Thursday January 15th at 2:43 pm entitled Frank Avellino, Michael Bienes and Bernie Madoff. (Particularly interested readers might also want to note that an IP address associated with The New York Times subsequently and repeatedly visited that TCM posting. It is surprising is not how much of the information is the same, is it not?)

For those not familiar with the 1992 part of the Madoff fraud scandal, Frank Avellino and Michael Bienes, now both quite wealthy, apparently effectively took over the accounting firm of Bernie Madoff's father-in-law, Alpern & Heller. Their firm Avellino & Bienes ("A&B") first began soliciting funds for Bernie Madoff in the early 1960s. By 1984, they had effectively ceased offering normal accounting services to focus almost exclusively on gathering investors that could funnel funds to Mr. Madoff. An anonymous tip in late 1992 about A&B offering guaranteed 20% on investor notes caused the SEC to investigate the allegations of an apparent Ponzi scheme. A settlement soon thereafter was reached when it was revealed that Bernie Madoff apparently had all of the investors' funds and he was able to return every single penny. The SEC settled the case by ordering A&B to close, to pay a fine and to return all investor funds.

Other source materials indicate that after the SEC settlement, Michael Bienes actively urged investors in the A&B notes to directly open accounts with Bernie Madoff's firm. There also have been some suggestions that Mr. Bienes continued to solicit investment funds for Bernie Madoff in the current decade. The NYT article reports "Mark Raymond, a lawyer for Mr. Bienes, said that his client had no knowledge of Mr. Madoff’s fraud and had lost tens of millions of dollars, most of his savings, in the fraud. Mr. Bienes worked mainly as a fund-raiser, while Mr. Avellino actively managed Avellino & Bienes, according to court documents and people who knew the men."

This New York Times article further advances the understanding the A&B element of Bernie Madoff's fraud scheme. Without attribution, the article definitively states that Mr. Avellino continued to send money to Mr. Madoff after the conclusion of the 1992-93 SEC inquiry. Apparently Gary Woodfield, a former federal prosecutor, who now represents Mr. Avellino, had no comment. So too was the case with a certain Francis B. Brogan, Mr. Avellino's long-time lawyer and a partner at Greenberg Traurig in Fort Lauderdale, Florida.

The article continues: "Mr. Avellino has been connected to Mr. Madoff for his entire career. After graduating from the City University of New York in 1958, Mr. Avellino began working as an accountant at a firm run by Saul Alpern, Mr. Madoff’s father-in-law. Mr. Madoff also briefly ran his securities business from the firm’s offices. As early as 1962, according to the S.E.C.’s complaint against him, Mr. Avellino began raising money for Mr. Madoff, who was running a small brokerage company. Mr. Bienes joined in 1965. In 1977, Mr. Avellino and Mr. Bienes formed an accounting firm in Midtown Manhattan. Mr. Avellino owned half the company; the remainder was owned by Mr. Bienes and his wife, Dianne. In 1980, the Bieneses moved to Fort Lauderdale, while Mr. Avellino remained in New York."

Later the article addresses the issue of lawyer of Ira Lee Sorkin, lawyer then in the 1992 SEC matter to both Mr. Avellino and Mr. Bienes and at present to Bernie Madoff. According to the NYT article, "In an interview, Mr. Sorkin said this week that he could not recall whether Mr. Madoff referred Mr. Avellino and Mr. Bienes to him. He has known Mr. Madoff since at least the early 1980s, he said, but did not represent Mr. Madoff at the time of the Avellino case."

Sosnik, Bell & Co. Successor to Avellino & Bienes???

Late on Friday afternoon January 16th 2009, John Carney at Clusterstock posted a most interesting entry entitled Madoff's Favorite Accountants "Inherited" Clients. This post concerns the rather obscure New Jersey accounting firm of Sosnik, Bell & Co. that somehow came to be retained by many of the victims of Bernie Madoff's fraud.

Back in December 2008, there was quite a bit of conjecture about how such a small, virtually unknown accounting firm could come to prepare their various investment accounting statements for so many Madoff victims. Now, in the above post, John Carney speculates that Sosnik Bell took over some of the accounting duties previously performed by the accounting firm of Avellino & Bienes, the accounting firm whose principals were busted by the SEC in 1993 for running an unregistered securities business that raised money about $440 million in principal notes that were subsequently invested with Madoff.

By happenchance a day earlier, Toomre Capital Markets LLC ("TCM") wrote the post entitled Frank Avellino, Michael Bienes and Bernie Madoff. This included details about the relationship between these former accountants, Frank Avellino and Michael Bienes, their former firm Avellino & Bienes ("A&B"), Bernie Madoff, Ruth Alpern Madoff, and Saul Alpern (Ruth's father and head of the firm when A&B was then known as Alpern & Heller).

TCM too had read the story back on Christmas Eve 2008 on entitled Life Savings Erased. That story explained

The Fort Lee accountants whose firm handled statements for hundreds of Madoff's clients also lost "several million" dollars in Madoff's alleged scam.

[Scott] Sosnik and [Larry] Bell, principals in the eight-person firm based near the George Washington Bridge, also lost their pensions with Madoff's firm, said Robert Anello, an attorney speaking for Sosnik and Bell. "These guys are screwed, royally," Anello said. "Mr. Madoff leaves many in his wake."

The accounting firm Sosnik Bell & Co. only received monthly statements from Bernard L. Madoff Investment Securities LLC, tallied reported profits and losses, and prepared tax summaries and schedules for clients' other accountants to use, Anello said.

"That's all this was — not to do any analysis of the trading or anything that even remotely got involved with the stock selection or the strategy," he said.

At the time scant attention was paid to a later paragraph in the story, "Anello said Sosnik and Bell took on many of its clients who invested with Madoff when they took over an accounting practice in 1993, and they gained more Madoff clients through word-of-mouth recommendations, Anello said." [TCM emphasis added]

Toomre Capital Markets LLC agrees with John Carney that this comment points to the strong likelihood that Sosnik Bell & Co. took over the investment accounting function of the old A&B firm. That latter firm reached a settlement with the SEC in late 1992 that demanded that A&B close up shop and that the settlement was implemented during the first portion of 2003. The timing of the Sosnik and Bell's taking on Madoff clients is far more than coincidental.

Stanley Chais, A Fund Feeder to Bernie Madoff

Stanley ChaisStanley Chais, 82, is a private investor who has been active in a wide range of Israeli and American Jewish charitable activities over the past 30 years. Apparently, over the past thirty years, Mr. Chais has combined his business activities with a wide range of philanthropic endeavors for the benefit of Jewish communities in the United States, the former Soviet Union (FSU) and Israel. He believes that “all Jews are responsible for each other", and therefore, he, who can afford it, should support areas that promote learning and culture.

Stanley Chais also is the head of a limited partnership or investment management firm, Brighton Co. of Beverly Hills, California, that apparently served as a "feeder fund' to Bernie Madoff's investment scheme. It had invested and hence lost about $250 million with Bernie Madoff. From The Los Angeles Times, one might learn that apparently Mr. Chais previously served on more than one charitable boards with Bernie Madoff. Stanley Chais and his firm also have been sued by one Michael Chaleff of Arlington, VA, a former Justice Department lawyer. Mr. Chaleff's lawyer, a certain Reed Kathrien, with the Oakland firm of Hagens Berman Sobol Shapiro, indicates that many of Brighton's investors were in the investment business and lost small fortunes "because they'd been in [the investment funds] for 10 or 20 or 30 years."

According to the suit, Mr. Chaleff was part of a 50-member investment group called CMG that lost $75 to $80 million it gave to Brighton Co. Mr. Chais apparently managed about 10 such groups of investors and substantially all of those collective funds were invested in Bernie Madoff's fraudulent scheme.

The class-action suit filed on Mr. Chaleff's behalf alleges that the Brighton firm was "aware of, or recklessly disregarded, the misuse and mismanagement of investment funds." Subsequent to Bernie Madoff's arrest, Stanley Chais indicated that he had not only personally invested with Madoff, but also had "facilitated" others who desired to do likewise. He also claimed that he and his family also were "swindled" and had lost "a huge amount of money."

A bit ominously for Mr. Chais, both the Securities and Exchange Commission and the California Department of Corporations reported that they could not find any records of Chais registering as an investment advisor or broker. Also of concern, Mr. Chais apparently took a piece of the partnership's profits as management fees, usually according to one investor about 3.8%, from a partnership that was a "kind of private, hush-hush fund" geared toward "private arbitrage accounts." That same investor indicated that he and his wife thought the partnership funds were invested in currencies, stocks and other securities. More ominously, Bernie Madoff's name and his investment firm never were mentioned.

Madoff Source of Investor Funds in 1992 Refund?

Over the past couple of days, Toomre Capital Markets LLC ("TCM") has spent some time focusing on the Bernie Madoff fraud scandal and particularly on how he could have perpetuated the fraud in such a great amount on so many investors over such a great period of time. Some of the resulting TCM posts have included:

TCM has been particularly interested in what lessons might be learned from this scandal, particularly regarding the areas of Enterprise Risk Management and due diligence. Let's summarize TCM's understanding to date about Bernie Madoff's early days:

Apparently Bernie Madoff started out in 1960 with $5,000 in funds that he had "saved" from a lifeguard and home sprinkler installation jobs. He was married to his high school sweetheart, Ruth Alpern Madoff. He may have worked earlier for his future father-in-law at the Manhattan accounting firm Alpern & Heller where Frank Avellino and Michael Bienes also then worked. His first investor was the philanthropist was Carl Shapiro. Apparently, though, Bernie Madoff never made a single trade for his investment business customers.

Starting in 1962, Frank Avellino and Michael Bienes solicited monies that were then "invested" with Bernie Madoff that generated steady returns for investors in the range of 13.5 per cent to twenty per cent. Their investment solicitation business was so successful that by 1984 Avellino and Bienes gave up their accounting business. By 1992, Avellino and Bienes had amassed more than 3,200 investors and approximately $450 million in investment principal.

Then, in late 1992 based upon a tip from an anonymous source about a possible Ponzi scheme, the SEC investigated Avellino & Bienes ("A&B"). The SEC was surprised to learn that the funds were invested with the then current Chairman of the NASDAQ, a certain Bernie Madoff. The books apparently were in order and according to reports at the time, "all of the money was there." Hence, the SEC only sanctioned Avellino and Bienes for running an unregistered investment advisor and ordered that the firm close after returning all of the funds to its investors. Apparently, Madoff, Avellino and Bienes also returned "every cent" to those early investors.

At that point in 1992, given that:

  1. Bernie Madoff had been running his fraud for about twenty years,
  2. Bernie Madoff apparently had been "generating" returns of at least 13.5% per year (or at least that is what he reported to A&B), and
  3. Bernie Madoff also apparently never did a trade (and hence never had any market exposure)

One question suddenly screams out: What were the sources of the funds that Madoff used to return both the interest earned and investment principal A&B's investors in 1992? In short, if Madoff was running a Ponzi scheme for A&B (as alleged in 1992), what other sources of funds were available to Madoff? Did he have as much other "invested" monies at that point? Or did he have some "rabbi" (like Carl Shapiro thought he was being in November 2008) from whom Bernie Madoff borrowed money?

(Apparently, subsequent to the SEC settlement, many of the A&B unregistered note investors rolled over their investments into accounts directly with Bernie Madoff's securities firm. One has to wonder though why none of these investors inquired about and/or confirmed whether that firm was indeed registered as an investment advisor.)

Madoff's Fund May Never Have Made Any Investments

Bernie MadoffAccording to an January 16th 2009 overnight report from Reuters, an industry-run regulator for brokerage firms, Financial Industry Regulatory Authority ("FINRA"), reports that Bernie Madoff's investment operation may never have executed a single trade! That is right!! This fraudster appears to never have invested any of the money he received over the years from investors. As a result, the detailed statements mailed to investors each month are likely to be no more than an elaborate mirage.

"Our exams showed no evidence of trading on behalf of the investment advisor, no evidence of any customer statements being generated by the broker-dealer," said Herb Perone, spokesman for the FINRA. Given that FINRA supposedly conducted an audit of Madoff's broker-dealer firm every two years since it started back in 1960 and did not highlight anything as seriously amiss, one does wonder just what was included in such regulatory reviews. One also has to question what type of due diligence each and every investor and/or "feeder fund" conducted around Madoff's investment operation, especially when there never was a single trade!!

One also has to wonder just when Madoff's fraudulent activities started. Toomre Capital Markets LLC ("TCM") understands that Bernie Madoff's first client was Carl Shapiro. If there truly were no trades, did Bernie just report fictitious numbers to Mr. Shapiro? It would be truly ironic if the ultimate success of Bernie Madoff's fraudulent activities were based on fictitious account statements sent to that very first investor.

No doubt the "success" of Mr. Shapiro and other very early investors were used to trumpet the supposed expertise of Madoff's investment strategies. Did the Madoff fraud really start with that first investor, who perhaps did not review his initial statements too carefully? From all of the news reports, Madoff attracted funds through word of mouth. One investor would tell another prospect of just how wonderful the Madoff returns were. In the late 1980s and early 1990s, the reported returns were in the range of 13.5% to 20% according to documents from SEC litigation. One wonders what Madoff reported to Mr. Carl Shapiro in those early years.

Toomre Capital Markets LLC also wonders just how Bernie Madoff came to take on Carl Shapiro as a client. Was by chance Mr. Shapiro a client of the accounting firm Alpern & Heller? Or was it through some connection of a common religious faith? Was there any connection back at Bernie Madoff's start with Frank Avellino or Michael Bienes?