Did Madoff have help with scam?

AFP:

As a probe intensifies into Bernard Madoff, doubts are growing on whether the now-infamous Wall Street investment manager could have committed a record fraud of 50 billion dollars on his own.

In a criminal complaint filed against the 70-year-old Madoff, prosecutors said Madoff stated "in substance, that he had personally traded and lost money for institutional clients and that it was all his fault."

But many members of the financial community are skeptical that Madoff could have single-handedly maintained accounts for the fictitious investment scheme involving tens of billions of dollars and a multitude of clients.

"It doesn't seem to me that a 70-year-old man can do this by himself, nor can he do it simply in conjunction with his accountants," said Doug Kass, founder and president of Seabreeze Partners, a fund that uses "short" sales in an effort to benefit from falling share prices,

"It's a rather extensive scheme, an extensive fraud. It's impossible for it to be a one- to five-person event."

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The Justice Department complaint indicated senior employees of Madoff's firm said the accused ran his adviser business from a separate floor in his New York offices.

One employee told investigators that Madoff "kept the financial statements for the firm under lock and key," and stated that Madoff was "cryptic" about the firm's investment advisory business, the complaint said.

Mace Blicksilver at Marblehead Asset Management said however that it was "unthinkable that he could orchestrate such a scheme by himself."

"Theoretically he wasn't trading the money, he was just running this giant scheme," Blicksilver told AFP.

"He was secluded in his own office. I guess it's easy enough to gin up the documentation if you have nothing to do in your office all day. All these documents, they're just a piece of paper."

If Madoff did not act alone, who helped?

Speculation is mounting about potential accomplices in what may be the biggest investment fraud of all time.

One possibility is Madoff's family. His sons, Andrew and Mark, worked with their father but were believed to have alerted authorities. Other family members who worked with Madoff included his brother Peter Madoff.

Some reports say the probe may also look at the tiny audit firm Friehling & Horowitz, and a longtime Madoff aide Frank DiPascali.

The Securities and Exchange Commission is investigating internally how the watchdog failed to react to almost a decade of warnings about Madoff.

The probe will "include all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm," said SEC chairman Christopher Cox earlier last month.

One issue likely to be examined will be Madoff's niece, Shana Madoff, who married former SEC attorney Eric Swanson in 2007.

Ralph Silva, a London-based analyst at the consultancy Tower Group, said that whether or not Madoff acted alone, he was able to benefit from the "presumed trust" of clients.

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David Kotok at Cumberland Advisors said Madoff's investment scheme broke many ethical rules because it had no internal controls.

"Madoff required that investment management, brokerage, and custody all be with him under the same roof," Kotok said.

"Placing investment management, custody, and brokerage in one institution and agreeing to opacity about the activity is viewed as the riskiest structure by skilled professionals. How their lawyers and accountants and advisers allegedly sanctioned that decision also triggers many questions."

Within financial companies there are a lot of internal controls to track how various profit centers are doing. Accountants accumulate data from each transaction and enter it into software to track profits and losses.

The back office matches the trades with tickets generated by the other side of the transaction. This is where a phony trade would be picked up and reported to the compliance department. Software now kicks out anomalies automatically in most firms.

The NASD, now FINRA, is supposed to examine the books of the firm at least once every three or four years. For the scheme to succeed, the books would have to be cooked in a way to fool them. That would require pretty elaborate cooperation among the staff of the firm and its auditors.

Auditor would be looking for the pieces of paper that verify the transactions. That would include the contra party trade tickets. This is where you should pick up phony trades. An audit should have caught this house of cards in its first year of operation.