Published December 24, 2008

Roots of Madoff scam reach back to the 1970s

Combing through the biggest Ponzi scheme in history, the SEC has its work cut out

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(NEW YORK) US regulators, trying to unravel the breadth of Bernard Madoff's alleged US$50 billion fraud, have found evidence of his misconduct stretching back to at least the 1970s, sources said.
Bernard Madoff: (above) His alleged Ponzi scheme is now estimated to have had more than 4,000 customers. On the left is the London Evening Standard newspaper's front page denouncing him

Madoff's investment advisory business, where he allegedly operated the biggest Ponzi scheme in history, is now estimated to have had more than 4,000 customers, they people said.

An advisory unit Madoff registered with the Securities and Exchange Commission claimed in a January filing to have no more than 25 clients.

Earlier this month it was reported quoting sources that he also ran a secret unregistered business.

The SEC, combing through records from Bernard L Madoff Investment Securities LLC in New York, has not made a complete assessment of the earlier misconduct or determined how the alleged Ponzi scheme evolved, one of the people familiar with the case said.

They also haven't uncovered whether the scheme intertwined with sales of unregistered securities targeted in a 1992 SEC lawsuit. Proceeds from those sales were invested with Madoff, who gave documents to an auditor in that case and was not accused of wrongdoing, court records show.

In its 1992 lawsuit, the SEC claimed that accountants Frank Avellino and Michael Bienes began raising money in 1962 and placing it with Madoff while promising investors returns of 13.5 per cent to 20 per cent, court documents say.

As of October 1992, their firm, Avellino & Bienes, had issued US$441 million in unregistered notes to 3,200 people and entities, according to court papers. They invested solely with Madoff, who opened his business in 1960. Avellino and Bienes, who were represented by Sorkin, agreed in November 1992 to shut down their business and reimburse clients. Lee Richards, the court-appointed trustee over Avellino & Bienes, hired auditors Price Waterhouse to scrutinise the books of the firm, which operated as an unregistered investment company, according to the SEC.

Price Waterhouse said that Avellino & Bienes kept few records and asked Madoff to provide copies of account statements issued to the firm, which he did, court records show. Mr Richards, who was named receiver for Madoff's foreign units on Dec 12, didn't investigate Madoff while overseeing Avellino & Bienes, according to the records.

Madoff's case will be at the centre of planned congressional hearings on reforming the SEC, a senior Senate official said this week. President-elect Barack Obama said the scandal 'has reminded us yet again of how badly reform is needed when it comes to the rules and regulations that govern our markets'.

Any new rules may stir privacy concerns among clients of broker-dealers and money managers, said David Becker, a former SEC general counsel. 'It's very easy to detect Ponzi schemes once we suspect that a Ponzi scheme exists. It requires confirming account balances with customers,' said Mr Becker, who is now in private practice at Cleary Gottlieb Steen & Hamilton in Washington. 'However, customers don't really like it when the federal government calls them up and asks them what's in their account.' - Bloomberg