Though the final chapter has yet to be written, the events of 2008 may be remembered as the most painfully bizarre episode in the history of human financial fraud and inadequate regulatory oversight.  As if the unprecedented global market turmoil and the financial sector meltdown weren’t enough excitement for one year, investors were socked with the coup de grâce in the very last month by revelation of the alleged fraud at Bernard L. Madoff Investment Securities LLC.

According to The New York Times (on December 12), Wall Street Journal and other early accounts, BMIS was described as “one of the top trading and securities firms in the nation,” and Mr. Madoff himself, a former chairman of NASDAQ, as a “consummate trader” and  “influential spokesman” who “built a trading powerhouse that had prospered for more than four decades.”  Madoff’s operation, in business for decades with billions under management, allegedly conducted  the biggest self-described Ponzi scheme in history, reportedly generating up to a staggering $50 billion in losses.  The SEC Complaint filed December 11, 2008 described the business as investment adviser services, market making services and proprietary trading, and alleged that a Ponzi scheme was conducted through the separate investment advisory arm of BMIS.

The Madoff Investment Securities LLC public image, portrayed on the BMIS Web site, was apparently a smokescreen, touting itself as providing “Quality Executions and Service Through Innovative Technology” and boasting of the following attributes and services: “A Global Leader in Trading U.S. Equities; Providing a Complete Dealing Capability for US Securities in Europe; Advanced Technology and Sophisticated Traders; Clearing and Settlement are Rooted in Advanced Technology; Disaster Recovery Facility Reflects the Attention to Every Detail; The Owner’s Name is on the Door.”

Yet a letter* from the research firm Aksia to it’s clients, on the day the SEC and U.S. Attorney Complaints (link available on The Times Online) were filed, portrayed the firm in less flattering terms, with a chilling list of “red flags” that had previously compelled Aksia to steer its clients away from BMIS’s so called “feeder funds” that allocated capital to BMIS.  Worthy of further analysis is the emerging story of other industry observers who had picked up on BMIS problems and reported them to regulators over the years, to no avail. One of the red flags spotted by Aksia sounded eerily familiar:

“Madoff’s website claimed that the firm was technologically advanced . . . and the feeder managers claimed 100% transparency. But when we asked to see the transparency during our onsite visits, we were shown paper tickets that were sent via U.S. mail daily to the managers.  The managers had no demonstrated electronic access to their funds accounts at Madoff.  Paper copies provide a hedge fund manager with the end of the day ability to manufacture trade tickets that confirm the investment results.”

Our readers may recall that Eppenstein and Eppenstein won a record recovery in 2002 of over $46 million, including out-of-pocket losses and interest, for a group of investors in a massive Ponzi-style fraudulent allocation scheme.  The signature “Ponzi” methodology in our clients’ cases were similar, involving impermissibly late allocation of trades to achieve the investment results of the perpetrators and their clearing firm.

Eppenstein and Eppenstein’s attorneys are currently investigating all aspects of the BMIS collapse on behalf of aggrieved investors.

*appearing on the Internet in a link on The Times’ article