Soc (2010) 47:534–542 DOI 10.1007/s12115-010-9363-x

CULTURE AND SOCIETY

Madoff’s Victims Go on the Offensive Lionel S. Lewis

Published online: 22 September 2010 # Springer Science + Business Media, LLC 2010

For many of Madoff’s victims, simply blaming him for their misfortunes seemed to be an incomplete response. First and foremost, they wanted their money back and whatever his responsibility and guilt, he was in no position to help in these efforts. Notwithstanding his claim that he devised and carried out the scheme alone, this was difficult to believe in light of its size and complexity. New facts and rumors surfaced weekly detailing how he cheated so many out of so much. All of the new evidence pointed to the involvement of others. It was up to the authorities to find and pursue these others who made the fraud possible; it was up to them to see that the missing money—said to be in Switzerland or in Israel or hidden in one of a number of Caribbean Islands—was returned. For their part, victims could make sure that the authorities did their job effectively. They could also work to shed light on a great many still unanswered questions.

Unrelenting Pressure: The DiPascali Case Not long after Madoff’s arrest, his top lieutenant, Frank DiPascali, Jr., was arrested. DiPascali was not only the next obvious target for the government prosecutors, but he was a very visible target of the Ponzi scheme’s victims’ wrath. Like Madoff, DiPascali, labeled by court records as his “crucial deputy,” pleaded guilty to a number of criminal charges (including misleading “thousands of clients, institutions, individuals, funds, [and] charities” about their accounts for decades). As in the case of Madoff, the list of charges L. S. Lewis (*) 17 Morningside Lane, Williamsville, NY 14221, USA e-mail: [email protected]

against DiPascali was long—conspiracy, security fraud, investment adviser fraud, falsifying books and records of a broker-dealer, falsifying books and records of an investment adviser, mail fraud, wire fraud, money laundering, perjury, and attempting to evade or defeat taxes. He admitted in court that he had “helped Bernie Madoff, and other people, carry out the fraud that hurt thousands of people.” He added: “One simple fact that Bernie Madoff knew, that I knew, and that other people knew but that we never told the clients [or] the regulators like the SEC, no purchases or sales of securities were actually taking place in their accounts. It was all a fake. It was all fictitious.” Unlike Madoff, DiPascali provided federal authorities with considerable information to assist them in their criminal investigation. As a consequence, the office of the federal prosecutor asked that he be released on bail between August 2009, when he entered his plea, and his sentencing, which was to come some months later (after he would no longer prove helpful to the government). Initially, the judge was skeptical about granting bail to someone facing up to 125 years in prison, and raised a number of objections. Nonetheless, both the defense and government attorneys persisted in their efforts to keep DiPascali out of jail for a time, with the latter even recommending “extraordinary” leniency because of what they described as DiPascali’s substantial assistance. The judge reluctantly agreed, with the reminder that DiPascali admitted when he pleaded guilty that he was “part of the scheme to conceal the Madoff firm’s massive fraud; he ‘caused fake trade blotters, ledgers, and other books and records to be made and kept by the firm,’ and he acknowledged that he gave false testimony under oath to the SEC.” He added that he believed what the government attorneys were doing was “misguided.” Within two weeks after the court agreed to grant DiPascali bail, letters from other victims—all vigorously arguing against bail or

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leniency for DiPascali—were submitted to the court. Significantly fewer in number than in Madoff’s case, but just as strident, the letters raised the same issues. (A number of excerpts from these statements can be found in Appendix A.) And there were other pressures.

More Congressional Testimony Madoff’s victims did much more than simply write letters to the court, to their elected representatives, and to other government officials; they embarked, with the help of family and friends, on a protracted campaign, sometimes quite well organized, to be recognized as victims by the federal government and have their funds returned before their plight became even more burdensome. Some of the most concerned faced the prospect of additional financial losses if their immediate problems were not promptly resolved. They mounted an assault on Washington in order to be heard and understood. Some complained that they were being ignored or, worse, treated unfairly by the media, on the internet, and consequently by the public. However, others were quite successful in getting the attention that many beleaguered investors were convinced was the first step in any effort at restitution. A physician whose large practice retirement plan (for 130 employees and former employees) of $11.6 million, with a statement balance of $33 million, had vanished in Madoff’s Ponzi scheme, told a painful story in his testimony at a hearing conducted by the US Senate Committee on Banking, Housing, and Urban Affairs (“Madoff Investment Security Fraud: Regulatory and Oversight Concerns and the Need to Reform”). Here are highlights of his testimony: “The partners of OSG [Orthopaedic Speciality Group] have made routine visits to Madoff’s offices in New York since 1992. The OSG Plan took comfort in the fact that its assets were invested with a well known and highly respected investment advisor and brokerdealer that was registered with the SEC and subject to routine examination and oversight by the SEC and FINRA [Financial Industry Regulatory Authority]. For over 16 years, the OSG Plan received confirmations from Madoff for thousands of securities transactions, mostly in blue chip stocks in major US corporations and US Treasury securities.... “The OSG Plan was audited by the US Department of Labor in 2005 and no concerns were raised. We also had an independent audit conducted in 2008, by a reputable accounting firm in Connecticut, and again no concerns were raised....

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“The news in early December 2008 that all of the investment activity in Madoff was a sham, and that Madoff was in fact the world’s largest Ponzi scheme, was devastating to us. We have three senior employees close to retirement who now do not know when or whether they can stop working. This affected OSG’s recruitment plan to hire new physicians. We have given two new physicians employment offers that we are now unsure we can honor because senior doctors with plans to retire have now decided they need to keep working full time for many more years. Our employees are scared, worried, and angry. They express loss of confidence in the federal government and its agencies.... Some have expressed concerns that they will have to sell their homes when they retire since all their savings have been stolen. We have seen disagreements and friction among our employees over this matter. We fear we may have a very uncomfortable and unhealthy work environment if this takes years to sort out. This is the last thing a medical practice needs when treating patients.... Partners have told me people ask if we are closing down.... “We have had to hire multiple attorneys for OSG, our Plan, and our employees. This month alone we have already incurred legal bills in excess of $70,000. I personally spend at least 2 hours of my day dealing with this tragedy rather than taking care of patients. “Then to add further insult to injury, we learned that the SEC had information linking Madoff to a Ponzi scheme as far back as 1992, and that starting in 1999 a gentleman named Harry Markopolos regularly advised the SEC that Madoff was a giant Ponzi scheme, and in fact provided a roadmap to the SEC as to how to unmask Madoff as a fraud. But the agency allowed Madoff not only to continue in operation, but to continue to take in billions of additional dollars of victims’ funds, including the funds of the OSG Plan. “We learned next that it was highly likely...the 140 [sic] participants in the Plan, who lost a total of $11,581,000 of capital investment, would have to share in a maximum $500,000 recovery. This is not right or just.... “Senators, the 140 participants in the OSG Plan are not wealthy hedge fund investors, nor are they beneficiaries of multimillion dollar offshore trusts. They are regular working class Americans, most of modest means who annually put aside a substantial percentage of their wages to try to ensure that they could enjoy a dignified retirement in the near or distant future. They were let down by Madoff, the regulators, the SEC, and FINRA. We hope that the

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SIPC, which was created to protect small investors from harm, will help us as individuals.”

Few would not be moved by the troubling account told here. The full, extensive, and polluting effects of Madoff’s Ponzi scheme and its ripple effect are fully enough detailed to overwhelm.

Blogging: Seeking Justice in the 21st Century Almost since the moment Madoff’s sons called the authorities and he was arrested, the failure of government in all aspects of his elaborate Ponzi scheme—from the many years he was thriving until after he was imprisoned and beyond—became a prominent theme of bloggers, who passed on facts, opinions, and speculation about the matter. The most visible and reliable blogs about Madoff and his Ponzi scheme continued for months following his arrest, and devoted themselves primarily, but by no means exclusively, to the scandal. A number of blogs—mostly overweighed with speculation, but also containing news and advice—were posted by Madoff’s victims and, not surprisingly, more of their content than in those written by non-victims dwelled on the government’s actions and inactions in the matter, often citing egregious incidents and faulting bungling officials and organizations which permitted him to thrive until his scheme dissolved on its own. The blogging victims repeatedly criticized government agencies and officials for stonewalling, being unresponsive to their needs, and being unnecessarily punitive. As time went by, more blogging victims saw themselves engaged in a permanent skirmish with government on behalf of other victims. Blogs became progressively more strident, more vitriolic. The harangues became shriller. Indeed, the increasing anti-government tone of blogging victims was most striking. Blogging victims seemed to take pride in casting themselves in an adversarial relationship with government. As with all blogs, the Madoff blogs were full of news and commentary, some erroneous, some foolish, and some of which could not be found in the print media. It is unclear, of course, which of these blogs were read and taken seriously, and by whom, and how far-reaching they were. Some material on blogs found its way to the mainstream media and the general public. If perhaps few whose lives were not affected by Madoff’s Ponzi scheme may have read them, a great many of his victims clearly did so looking for general information about his Ponzi scheme, primarily searching for information about a resolution of their financial distress, hoping for a scintilla of good news.

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Attacking the government—a tack that has long been part of civic discourse in America—quickly and easily hit the right note with that segment of the public who view almost all that government does warily. It also had a singular appeal to Madoff victims, who reasoned that if government was more than incidentally the cause of their misfortune, then government had the responsibility to right the wrong, that is, to make them whole. This idea too has long been a part of civic discourse, whether the misfortune is an act of nature or man-made. The victim bloggers had the government in their sights, and what it had done or failed to do with respect to Madoff, from when his Ponzi scheme first began and subsequent to his arrest, did little to reassure its many critics. Of course, the more its failings were discussed, the more the skepticism grew. Simply looking at the contents of one active victim blogger—a “virtual family member” of one of Madoff’s early investors—will provide enough examples of the relentless assault on government that could be found on the internet and provide a clear picture of some of the pervasive themes evident to anyone around the world with access to a computer. A little more than a month after Madoff’s arrest, justifying why he had invested with Madoff, the victim blogger wrote that sometime around 1992 or 1993 he had heard that the SEC had investigated Madoff and “had publicly said it found nothing wrong” with what he was doing. “How could there be anything more important,” he added, “than to know the relevant government agency had investigated a deal and found no wrong on the part of the money manager?” The post becomes more acrid, reminding readers that although over the next 16 years the SEC received many complaints about Madoff and investigated him several times, it never warned investors of possible fraud or never retracted its initial pronouncement: “Right now, there’s nothing to indicate fraud.” A few weeks later the victim blogger quotes at length two e-mails he received from a concerned investor. In one, she writes, “I am almost more overwhelmed with the realization that our government (SEC), our culture is so corrupt, uncaring, filled with greed....SEC can say mea culpa and be done with Madoff investors....Mr. Picard [the SIPC trustee] will earn more by paying us less.” For the first time, but by no means the last time, the question of how the government could have “missed this gigantic fraud” was asked by this blogger. The victim blogger next describes a United States Senate Committee hearing where a law professor contended that the SEC, by rule, “deliberately and inexcusably” permitted incompetent accountants to audit brokers while during the same session two SEC officials refused to answer factual and pertinent questions [for example, ‘testify about the SEC’s examination of Madoff’ or ‘testify about questions about Madoff’s auditor’], the pretext being that it “suppos-

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edly would jeopardize a pending internal investigation and possible criminal cases:” “To me, the refusal to answer seems part and parcel of an impending SEC cover-up, the way the federal agencies always try to cover up their delicts: via secrecy; the way federal agencies always cherry pick and put forward only the good things while hiding all the bad that they are able to hide.” The blog bitterly concludes: “You know, I think these two officials, who each are likely to share in the responsibility for wrecking the lives of thousands but now won’t tell Congress what they or their colleagues did, should do the decent thing, the honorable thing, and commit suicide.” In another blog some weeks later, readers are repeatedly reminded that the SEC was a “contributing cause to the disaster,” “a major cause of the disaster which subsequently occurred” by its 1992 unprecedented public declaration exonerating Madoff of fraud: “the government—the SEC— never retracted its statement.” To make sure the point is fully understood the next paragraph elaborates and summarizes: “So the government, through the SEC, was a major cause of Madoff’s success and of the enormous harm which has befallen thousands of ‘small people.’” Next, the Internal Revenue Service (IRS) also comes in for considerable criticism. It is pointed out that although it had approved Madoff as a non-bank custodian for IRAs and pension funds, the IRS had failed to audit him as required by law. If it had done so, his Ponzi scheme would have been readily exposed. Even if it had only cursorily inspected his books and records, it would have been impossible not to have seen that he was in violation of its regulations, that for decades his business practices had been illegal. Like the SEC, the IRS was judged to be guilty of “negligence (or worse?).” Moreover, the IRS should have been able to discover by comparing the tax returns of Madoff investors with corporate reports of dividends and interest—which it supposedly has the capacity to do—that the figures of the former were significantly greater than the latter, that taxpayers, because they were receiving monthly statements about inflated and imaginary or phantom profits from Madoff, were claiming more income than their investments were in fact earning. Finally, although a sometime partner but not a government agency, FINRA also was faulted. It presumably, as it was obligated to, “inspected Madoff every 2 years,” yet “never uncovered the largest Ponzi scheme in the history of the world.” It is hard to imagine how this could have happened. As the victim blogger saw it, most, if not all, of the government’s actions were designed to frustrate any recovery of investments by Madoff’s victims. For instance, when, within three days after it was filed, the court approved the government’s motion to move ahead on its forfeiture and remission plan for Madoff’s property, the victim blogger complained that it had acted too quickly.

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Not only was this seen as unusual and improper, but it would surely stoke the “deep suspicions that, for years and years, throughout the Madoff matter, the fix has been in and includes the government.” In response to the court’s decision, the victim blogger, a lawyer, filed a memorandum to the court that the government’s motion be withdrawn, and in a most unusual step posted it on the internet even before filing it with the court. One particularly condemnatory posting is given over entirely to reminding readers of the many failures of the SEC—among them, failing to obtain pertinent information about Madoff’s activities and failing to act when provided with information that Madoff lied repeatedly to investigators —to stop his Ponzi scheme. In less than two full pages, twelve specific SEC failures are described in a sentence or more and each is said to be “de facto intentional.” The victim blogger is full-voiced by the end of his tirade: “But the list does make clear why the SEC’s misconduct was so horrid, its degree of negligence was so high, that it has to [be] considered de facto intentional, has to be considered to be exactly the same as what the SEC would have done had it wanted Madoff to continue succeeding with his Ponzi scheme and wanted to destroy the anti-fraud policy of its own statute.” The victim blogger’s conjectures do not end with that salvo. The next week he suggests that the reason one of Madoff’s clients was permitted to withdraw more than $7 billion from his account in which he had only invested about $1.5 billion was not that he was fronting for the Mafia or for one or more secret services, as the victim blogger had initially thought, but because he was hiding the money in foreign countries for Madoff. It would not be an exaggeration to say that by January 2010, the victim blogger’s anger at the government was boundless. He referred to the SEC, SIPC, and the SIPC trustee as “The Malefactors Three” or simply “TMT.” He described their most recent legal brief to allow them to press forward with their work of resolving the financial chaos created by Madoff and not get bogged down in endless litigation as “dumb,” an aspersion repeated three times. He contended that they were not interested in “truth, accuracy, or objectiveness,” but instead selected arguments and facts “in order to try to defeat the victims.” What the government was doing was not serving, but instead destroying, the public interest. Behind it all was the SIPC’s attempt to protect its “management from accountability for incompetence and worse”: “No, you can bet your last farthing that SIPC wants no congressional inquiry or judicial discovery...and will fight to the last ditch against any such investigation or discovery.” In his next installment, the victim blogger accuses a judge of favoring the government, using as evidence his allotting it a disproportionate amount a time in oral arguments regarding the SIPC’s plan to compensate Madoff’s victims. Here he expresses agreement with those who

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“say it shows (yet again) that the judge favors the other side, which to date appears to have continuously gotten whatever it wants from him while our side has been treated oppositely.” For perhaps dramatic flair, he appears to have lifted his reaction to the judge’s decision from classic cinema: “Speaking frankly, I am shocked.” The next few postings stay focused on the compensation hearing. There the courtroom behavior of one SIPC attorney is described as “condescending,” “arrogant,” “insulting,” and “libelous.” The arguments of another are called “disgusting.” And in a provocative lèse majesté, he accuses the judge of bias and describes him multiple times as being capable of little more than “parroting” the SIPC’s faulty arguments. For example in one posting he writes: “When cribbing from and deciding entirely for one side,” the judge “parrots a hypothetical example” and did what the “SIPC wanted” or “by simply parroting the points...he parroted the mistakes.” Some Madoff victims plainly began to see themselves as persecuted by the government, and this view had become more widespread over the months. Their lives had been turned upside down by Madoff. Now they were convinced that the government had stood by and done nothing while he stole from them and was doing so again after he admitted his theft. They obviously could not recover from Madoff what he had stolen, and their expectation was that government would ease their financial burden with fair compensation. Now, this hope was growing dimmer. Of course, what victims saw as “fair compensation” was not shared by non-victims, most importantly many government officials. First, they simply felt misunderstood, but heartened by bloggers, among others, their frustration continued to grow and, in some cases, boil over. Some were distraught. Some were frantic. Many saw the bumbling or unwillingness to share their definition of the situation on the part of government officials as part of a larger plot to do them harm. In a little more than a year, the relationship between the government and Madoff’s bilked investors had unmistakably been transformed into one of adversaries, promising at the minimum more and more conflict and litigation. Few of the victims saw any part of the blogs as wrongheaded or intemperate. On the contrary, it is apparent they served to give the victims’ campaign against the government both focus and force.

The SEC The SEC has primary responsibility for enforcing federal securities laws and regulating the securities industry, the nation’s stock and options exchanges, and other electronic securities markets. Among its core charges is “to protect investors.” The SEC protected Madoff, but fell spectacularly short protecting his investors.

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Less than a week after Madoff was arrested, understanding that it, more than any other government agency, had given Madoff the latitude to engage in such an enormous fraud for so long, the SEC appeared to awake from its extraordinarily long slumber, and seemed to prepare to face up to and understand its subpar performance. The SEC first responded with a press release from its chairman. In it, he acknowledged that Madoff’s “financial wrongdoings...were repeatedly brought to the attention of SEC staff.... I am greatly concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them.... Rather the staff relied upon information voluntarily produced by Mr. Madoff and his firm.” The core of the SEC’s response at this point was that it had been too trusting. In the fall of 2009, two months after Madoff was sentenced, the Office of Investigations of the SEC issued a 457-page public version of its Report of Investigation, Case No. OIG-509, titled Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, a detailed mea culpa of how and why Madoff’s fraud lasted so long and grew so large. The SEC Inspector General (IG) or (OIG [Office of Inspector General]) appears to be open about how badly the SEC stumbled, not stopping Madoff when it might have easily done so on a number of occasions between June 1992, when Madoff caught its attention and December 2008, when Madoff’s house of cards collapsed and he turned himself in to federal authorities. The report is initially, and it would seem primarily, concerned with demonstrating that there was no evidence any of the SEC employees who investigated Madoff had any financial or other inappropriate connection with him or his family that influenced the SEC’s work, although during the period Madoff was supposedly being scrutinized by the SEC, an assistant director of one of its branch offices married his niece, who worked as a compliance attorney in two of her uncle’s businesses. The inspector general also found no evidence that any SEC senior official interfered with the investigative process. Apparently, the SEC investigative staff members made all of the mistakes by themselves. The inspector general appears comfortable in conveying the impression of a SEC staff not up to the job, but honest. Madoff’s investors, and the public, are assured that the reason Madoff was never caught is entirely due to a legion of bureaucratic dullards, who on a number of occasions could not even manage to mail letters, although many of these individuals subsequently received promotion in spite of the part they played in the investigative fiasco. After receiving six (some count eight) substantive complaints in addition to the publication of two articles in 2001 which raised serious questions about his investment advisory business, the SEC became involved in three examinations and two investigations of Madoff. All fizzled.

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For example, in 1999 and again in 2005, a derivatives expert made submissions to the SEC that raised serious questions about Madoff Investment Securities. His 2005, 18-page submission was titled “The World’s Largest Hedge Fund Is a Fraud.” On page one, he wrote, “I have also spoken to the heads of various Wall Street equity-derivative trading desks and every single one of the senior managers I spoke with told me that Bernie Madoff was a fraud.” On page two he wrote: “Scenario #2 (Highly Likely) Madoff Securities is the world’s largest Ponzi scheme.” It is difficult to imagine why Madoff was not caught after such explicit and detailed charges, made not once, but twice. According to the SEC report, not only did it not uncover Madoff’s Ponzi scheme, but he actually used its bumbling to lure more clients. In an interview with the SEC’s Inspector General, Madoff indicated that the fact that his firm passed examinations by the SEC lent it credibility. He stated that some clients would ask, “when was the last time he had an exam and he’d give them the date.” In one interview with the SEC, the chief executive officer of an independent hedge fund research and advisory firm that had looked into Madoff’s operations for two clients stated that in a meeting he had with Madoff, he was told the firm had been examined by the SEC and “got a clean bill of health.” He added that the research firm specifically recalled being told “about [how] the SEC was just in there and they did not find anything.” The SEC Inspector General aptly concluded: “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 —careful scrutiny—was being conducted. Thus, the fact that the SEC had conducted examinations and investigations and did not detect fraud had the effect of encouraging additional individuals and entities to invest with Madoff.” The irony here is striking. In the summer of 2009, twenty-four bilked investors each submitted a notarized affidavit to the SEC swearing that “when investing with, continuing investing in, or leaving investments” with Madoff, they knew of and relied upon the SEC’s 1992 public statement that there was nothing to indicate fraud. “The statement was very important to me,” each added. Here are excerpts from the handwritten section of six affidavits. One of the 167 individuals who submitted a victim impact statement wrote: “We gave a big sigh of relief when we read and heard that a government agency called the SEC said there was no fraud. Since we were so sure that all was well if our government had checked, we went directly into Madoff....” She added that she was audited by the IRS in 2006, that at that time her Madoff records were examined,

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and that she was told “all was well.” She concluded: “My generation [she was born in 1922] was taught respect and trust for our government.” Another of the 167 wrote: “My widowed mother... invested the proceeds...with Madoff because of the SEC’s favorable report. She kept a copy of the Wall Street Journal article reporting the SEC’s giving Madoff a clean bill of health in her files. When I joined her Madoff account in 1994, my husband referred to that report as a key part of our research. The original WSJ article remains in our files.” Yet, another of the 167 wrote that the letter she received from the SEC assured her that it had found no wrongdoing. “I remember discussing this with my parents as an article also came out in a newspaper about the situation. A few months later I reinvested with Mr. Madoff as did all of my family. Mr. Madoff called my parents.... Our family knew of Mr. Madoff from an elderly aunt who was a frequent visitor of Sunny Oaks in the Catskills.” The fourth investor claimed that he “was always a very prudent investor. Before going to Madoff, I checked [it] out. After reading the SEC 1992 statement on Madoff, I decided to invest with him.” The fifth individual also invested for others: “As a trustee, I relied on that same [1992] statement when I invested funds from five different trust accounts for family members. I also invested my own IRA with a Madoff feeder fund.” The last investor’s statement was most succinct: “I have lost my entire life savings.” Although his investors may not have been, Madoff was clearly the beneficiary of the SEC’s activities. It is little wonder that he grew bolder and expanded his Ponzi scheme over the years. The inspector general believed that the “most egregious” mistake the SEC made was the failure of investigators to follow up on a tip that Madoff was not trading the volume of securities that he said he was trading. Madoff would have immediately been caught had the SEC pursued that question, which might have been done by one of its staff members in one afternoon. The ineffectualness of the SEC both baffled and delighted Madoff. In a jailhouse interview with the SEC Inspector General he was far from contrite, but actually arrogant, at times belligerent. His imprisonment had done nothing to diminish the very high opinion he had of himself, not unusual for white-collar criminals. He characterized the work of SEC’s investigators as “nitpicking.” He described how he provided the investigators with a false account number, which, had they bothered to check it out, would have meant “the end game, over.” He talked of a telephone conversation with colleagues at which time he dismissed the SEC staff as mediocrities: “Look, these guys aren’t rocket scientists. That’s the problem.” He went on to describe an SEC senior

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compliance examiner as “very cryptic,” an “obnoxious guy,” an “idiot,” and “a total asshole”: “He talked tough, but didn’t look at anything.” He compared him to television’s Lt. Columbo, who appeared never to ask the right questions. He was dismissive of a number of other investigators. He was most “astonished” that they never looked at any of his stock records. He believed that if investigators had simply checked with the Depository Trust Company, it “would’ve been easy for them to see” the Ponzi scheme. He was more charitable to the SEC political appointees. He bragged of his friendship with one SEC Commissioner whom he portrayed as a “terrific lady,” whom he knew “pretty well,” and the present SEC Chairman as a “dear friend.” And he expressed disdain for those who had early questioned the legitimacy of his business. He referred to one journalist as “that idiot woman from Barron’s” and a detractor who ultimately exposed him as a “joke,” “who was just jealous.” It is somewhat curious that the very few not fooled, that concluded that he may have been stealing people’s money before the world learned of his fraud, particularly angered him. In brief, in a classic understatement, the SEC concluded that a “thorough and competent investigation [of Madoff] was never performed.” It might well be that investors have more to fear from the SEC than from those in the investment world who break the law. Indeed, after the dissemination of this report by the SEC’s Inspector General, if in the future someone were to claim that he or she invested based upon the federal government’s imprimatur, that claim would seem very foolish, perhaps totally lacking legal merit. The assumption that the SEC has the interest or capacity to protect investors is clearly unrealistic and faulty. It is not an assumption that any investor should make. In discussing why it appeared to be so inept, one SEC official sniffed that it was solely because the public was disappointed that “the SEC doesn’t give investment advice,” an arrogance that seemed to match Madoff’s. To be sure, if the Madoff case is any indication, the SEC not only does not give investment advice, it does not do much of anything. In fact, it would seem that the SEC’s bungling of the Madoff inquiry is not an anomaly. Seven months after the SEC Inspector General released his report on the Madoff investigation, he issued another titled Investigation of the SEC’s Response to Congress Regarding Robert Allen Stanford’s Alleged Ponzi Scheme. The government’s case against Stanford is that he defrauded investors of more than $7 billion. As with Madoff, the SEC fumbled a proper investigation of Stanford’s activities, although one SEC administrator had warned, “keep an eye on these people because it looks like a Ponzi scheme to me, and some day it’s going to blow up.” Moreover, the SEC acknowledged receiving a copy of a letter from one of Stanford’s employees that read in part that his businesses

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“WILL DESTROY THE LIFE SAVINGS OF MANY.” The concluding paragraphs, eerily reminiscent of the report on Madoff, are quoted at length in Appendix B. In general, the SEC has been largely ineffective in efforts to protect investors by putting a stop to illegal activities. Even when it has found and attempted to curtail the most blatant financial crime, more often than not it has been unsuccessful. For example, one researcher found that between 1992 and 2001, it referred 609 cases to federal attorneys for criminal prosecution, but by 2002, of the 525 cases that had been completed, just over one-third (187) resulted in a prosecution, 142 individuals were found guilty, and only 87 were sent to prison. Before the SEC decides to refer a case to the US attorney for prosecution, it must consider if it can show criminal intent. Then it must convince a US attorney to pursue a case, not always an easy task as they are generally overburdened hunting down drug kingpins and terrorists, and not really interested in someone who might surely be guilty of insider trading or stock manipulation. In short, the failure to reduce white-collar crime is hardly due to the failure of the SEC alone. No one would dispute the fact that white-collar criminals are treated more leniently by the criminal justice system than street criminals. Madoff and his attorney understood this, and so did the judge who after his confession granted him bail with stolen money as a surety until he pleaded guilty in court. His victims seemed to expect this would happen, as not many were outraged when he was allowed to spend the three months at home rather than in jail. The casual attitude on the part of so many government officials and agencies with regard to white-collar crime leaves its victims greatly disadvantaged. According to The United States Attorneys’ Annual Report for the fiscal year, 2008, the government achieved a 91% conviction rate for cases of violent crime, 91% of convicted defendants were sentenced to prison, 72% of prison sentences were greater than 3 years, and 50% of prison sentences were greater than 5 years. At the same time, for white-collar crime, the government achieved a 90% conviction rate, but only 63% of convicted defendants were sentenced to prison, 29% of prison sentences were greater than 3 years, and 12% of prison sentences were greater than 5 years. Between 1985 and 2002, the white-collar inmate population decreased in prison from less than 3% to less than 1%.

Suing the SEC Six weeks after the SEC issued its report, two of the victims of Madoff’s Ponzi scheme—a disabled, retired single mother and a physician approaching retirement—filed a lawsuit against the federal government accusing the SEC of negligence for failing to protect investors. The suit asked for monetary damages “arising from the serial, gross

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negligence ... [during the SEC’s] multiple investigations and examinations.” Instead, by its implied clean bills of health or seal of approval, the SEC “caused Madoff’s scheme to continue, perpetuate, and expand in billions in losses by investors.” The two plaintiffs argued that Madoff could have and should have easily been stopped. The premise of the lawsuit was that the SEC was responsible to Madoff’s investors as it is reasonable to expect that they would rely on it to remove risk if it had information that he was engaged in illegal activity. Although it was Madoff’s dishonesty that was responsible for their losses, the SEC’s actions and inactions, the plaintiffs contended, were a substantial factor in bringing about their injuries. It had not “carried out its functions with even a minimum of reasonable care,” and it showed a “wanton” indifference to public safety. The SEC had an obligation to examine and investigate “potential wrongdoing within the context of defined policies and routine commonsense practices.” However, in spite of multiple complaints and investigations, as well as the several reviews or inquiries, it had failed to do so The SEC, the plaintiffs argued, disregarded its policy that all relevant information from complaints be vetted. This was due to negligence, incompetence, inexperience, inattentiveness, and laziness. (Indeed, in spite of looking into Madoff’s activities over many years, the SEC never even ascertained the allegation that his outside auditor was his brother-in-law who ran a one-man firm, as his 78 year old partner was retired and living in Florida.) Moreover, policies and practices regarding “case opening and closing memoranda, investigation planning memoranda, and communication between SEC offices and teams” were “routinely disregarded.” Of particular salience, in its inquiries the SEC failed not only to confirm Madoff’s claimed trading activities, it disregarded pertinent information because of inter-office rivalries, and although it caught Madoff repeatedly in contradictions and inconsistencies, failed to validate or ask him to validate his claims. For example, during the course of one investigation, the SEC staff members knew that what he told them about his management of hedge funds, his overseas accounts, the reason his customer statements were so vague about trading details, and about not using e-mail to communicate with clients were all untrue, but they continued to rely on his oral representations. He was most obviously lying when he first claimed large-scale option trading that was patently non-existent and later when he reported that he had stopped using such options. These assertions were purported to be central to his claim of why his investment strategy was consistently successful. The SEC did not appear bothered by the barrage of Madoff’s untruths, as if such behavior was generally expected from the financial organizations it monitored. Perhaps its staff members were simply not paying close attention.

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The government attorneys responded that the SEC’s failure to curtail Madoff’s fraud was due to “discretionary judgments” and as a consequence shielded from liability. Quite simply, this means that even if one were to characterize the investigative work of the SEC as incompetent or negligent, the government cannot be sued unless it agrees to be sued “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty.” The government’s defense was that it has blanket immunity when the judgments of officials are in question. After more than a year of encountering considerable skepticism and even scorn, Madoff’s victims’ publicrelations battle began paying dividends. Their embryonic community kept enough of them energized and focused so that they continued to pursue their claims. Compared to Madoff, they looked pretty good. And compared to government bureaucrats, they did not look all that bad. Legislators and others who might be able to assist them in pressing their case may not have taken concrete steps to help them recoup their losses, but they were willing to listen patiently to their stories and express sympathy. Many who initially saw them as greedy or naïve or both had apparently tired of publicly abusing them in the media or on the internet. They remained dogged in their efforts to receive full restitution.

Appendix A: Excerpts from Victim Impact Statements in DiPascali Case Excerpt #1: “Please note on the record that I, during the 1990s and up until 2008, spoke to Mr. DiPascali on many occasions regarding my account with Madoff. In my estimation, he is at fault and deserves to be punished. I am left with nothing. [It was] very devastating.” Excerpt #2:“ Cooperation with prosecutors does not convert this ignoble criminal, whose actions have harmed members of my family in my generation, the next and the one after that, into a man who deserves your mercy or compassion. Mr. DiPascali’s actions, while he worked for Madoff, were calculated and vicious, his collaboration is calculated too....” Excerpt #3: “Show no leniency. He [Frank DiPascali] is a thief!” Excerpt #4: “He should be serving as long as Madoff .... He has wrecked my family’s financial situation.... He needs to be punished severely.” Excerpt #5: “Why does he deserve leniency? He deserves the maximum sentence in the least forgiving jail.” Excerpt #6: “I have been in his office every year for his explanations and investment advice. His convincing knowledge of the investment program convinced me to avoid all my other investments and invest my pension plan, personal accounts with his company.... I am almost 76 years old and

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my wife and I are living off a bank loan which will be paid when we sell our home.... The reason I write this document is my shock upon reading that the United States Attorney has written the court to request ‘extraordinary’ leniency....” Excerpt #7: “I ask you do not give in to that pressure [for leniency]. He was such an arrogant and rude man when he worked for Madoff’s firm. He never had a nice thing to say to anybody. This is a very evil man and deserves whatever the law can give him.”

Appendix B: Conclusions from Another SEC Investigation “The OIG investigation found that the SEC’s Fort Worth office was aware since 1997 that Robert Allen Stanford was likely operating a Ponzi scheme, having come to that conclusion a mere 2 years after SGC, Stanford’s investment adviser, registered with the SEC in 1995. We found that over the next 8 years, the SEC’s Fort Worth Examination group conducted four examinations of Stanford’s operations, finding in each examination that the sale of CDs [certificates of deposit] through SIB [Stanford International Bank] could not have been ‘legitimate,’ and that it was ‘highly unlikely’ that the returns Stanford claimed to generate could have been achieved with its purported conservative investment approach. While the Fort Worth Examination group made multiple efforts after each examination to convince Enforcement to open and conduct an investigation of Stanford, no meaningful effort was made by Enforcement to investigate the potential fraud, or to bring an action to attempt to stop it, until late 2005. “Moreover, the OIG investigation found that even at that time, Enforcement missed an opportunity to bring an action against SGC for its admitted failure to conduct any due diligence regarding Stanford’s investment portfolio, which could have potentially completely stopped the sale of the SIB CDs through the SGC investment adviser, and provided investors and prospective investors notice that the SEC considered SGC’s sales of the CDs to be fraudulent. The OIG investigation found that this particular type of action was not considered, partially because the new head of Enforcement in Fort Worth was not apprised of the findings in the investment advisers’ examinations in 1998 and 2002, or even that SGC had registered as an investment adviser, a fact she learned for the first time in the course of this OIG investigation in January 2010.

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“The OIG did not find that the reluctance on the part of the SEC’s Fort Worth Enforcement group to investigate or recommend an action against Stanford was related to any improper professional, social, or financial relationship on the part of any former or current SEC employee. We found evidence, however, that SEC-wide institutional influence within Enforcement did factor into the repeated decisions not to undertake a full and thorough investigation of Stanford, notwithstanding staff awareness that the potential fraud was growing. We found that senior Fort Worth officials perceived that they were being judged on the numbers of cases they brought, so-called ‘stats,’ and communicated to the Enforcement staff that novel or complex cases were disfavored. As a result, cases like Stanford, which were not considered ‘quick-hit’ or ‘slam-dunk’ cases, were not encouraged. “The OIG’s findings during this investigation raise significant concerns about how decisions were made within the SEC’s Decision of Enforcement with regard to the Stanford matter.... “The OIG investigation also found that the former head of Enforcement in Fort Worth, Spencer Barasch, who played a significant role in multiple decisions over the years that quashed the investigation of Stanford, sought to represent Stanford on three separate occasions after he left the Commission, and in fact represented Stanford briefly in 2006 before he was informed by the SEC Ethics Office that it was improper to do so. Because the OIG found that Barasch’s representation of Stanford appeared to violate state bar rules that prohibit a former government employee from working on matters in which the individual participated as a government employee, we are referring this Report of Investigation to the Commission’s Ethics Counsel for referral to the Bar Counsel offices in the two states in which he is admitted to practice.”

Lionel S. Lewis (A.B., Washington University; M.A., Cornell University; Ph.D., Yale University) is professor emeritus of sociology, SUNY/Buffalo. He is the author of 5 books and the author or coauthor of 130 research articles, essays, and reviews, a number published in SOCIETY. This article is the second in a planned series on the Madoff Ponzi scheme.