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SEC Complaint vs. Frank DiPascali, Jr

Posted by Larry Doyle on August 13, 2009 3:23 PM |

I just reviewed the complaint filed by the SEC as plaintiff against Madoff CFO Frank DiPascali Jr. as defendant. For anybody interested in the dynamics of our markets and regulatory system, this 31 page document is a must read:

Securities and Exchange Commission, Plaintiff versus Frank DiPascali, Jr. Defendant.

Many highlights, but to me the following jump out:

1. DiPascali was a college dropout who rose to become CFO of a supposed major financial money manager. Come on. Any legitimate feeder fund and any legitimate regulator should have immediately questioned the credibility and qualifications of this individual rising to that position.

2. Madoff did not officially become a registered investment adviser until 2006. To that point, his entire business would have been regulated by the SEC and NASD. Why does the regulatory arm of NASD, the parent organization of FINRA, seem to get a pass in this scandal?

3. The financial subterfuge was so widespread that it seems regulators would have almost been trying to miss this fraud. I view the SEC complaint as much an indictment of the regulators as it is an indictment of Madoff and DiPascali. As Harry Markopolos asserted, he knew it was a fraud 5 minutes after looking at it and it took him only 4 hours to prove it!!

4. Madoff’s fraudulent activities have operated for a very long time. How do we know? The complaint highlights that while Madoff started in the 1960s . . .

Over time this advisory business expanded and various accountants and financial advisors began soliciting individual investors around the country and providing the money they raised to BMIS. These “feeders” sometimes issued to investors promissory notes that guaranteed high rates of return (~ 19%) and then invested the proceeds with BMIS at higher rates promised by Madoff (~ 21%), seeking to pocket the difference for themselves. Unlike the friends and family accounts, Madoff and BMIS did not deal directly with these individual investors. Instead, Madoff dealt with the feeders and set up aggregate, pooled accounts at BMIS for each feeder, leaving it to the feeder to deal with the individual investors, issue statements to such investors, and make distribution payments to them.

21% guaranteed returns? Are you kidding me? Regulators missed that?

I repeat my assertion the other day when I wrote “Madoff CFO, Frank DiPascali, Singing Like a Canary”:

Who were the regulators from NASD/FINRA and the SEC responsible for monitoring the Madoff operation? Are they nervous as well? Will investigators dare to pursue this angle?

I strongly encourage people to fully read this complaint. It is an easy read. One will receive a bird’s eye view into this enormous financial fraud and equally enormous case of financial regulatory malfeasance.

LD

Related Sense on Cents Commentary:
Madoff Sentencing Only the Beginning (June 29, 2009)

  • silver

    It must have been exhausting to constantly live a lie!

  • beach

    Interesting that BMIS was prepared for a surprise visit by regulators, but no mention that a surprise visit ever happened. Not sure which party I find more despicable, BMIS or the regulators. Disgusting!

    • New

      Silver and Beach,

      I agree with you both!!

  • TeakWoodKite

    Thanks LD, the complaint reads like a fantasy football pool.

    Madoff was careful to avoid ever disclosing the scope and magnitude of the accounts, hiding the fact that there were several thousand accounts with aggregate values in excess
    of $50 billion.

    How is this even possible? That is a LOT of money “leaking” from the market. You think that it would be noticed.
    Just WOW!






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