Bernie Madoff's Guilty Plea Isn't Good Enough

On Thursday, March 12, 2009, the CNBC financial news network had a clock ticking down to 10 o’clock — the time of disgraced financier Bernie Madoff’s guilty plea. For many of Madoff’s victims, his guilty plea and the sound of the click of handcuffs around his wrist provided a sense of closure that was soothing. It gave them a small measure of justice to know that Bernie would spend the rest of his days in jail for defrauding them of his life savings.

Since I was not looking for revenge, I found his performance in court chilling. The banality of his appearance scares me. His smirk conjured up for me the lyrics of an Okkervil River song. “They’re looking for evil, thinking they can trace it, but evil don’t look like anything.”

His uttering of the word guilty in a soft voice was as disturbing to me as the loud and clear “not guilty” verdict in the OJ Simpson murder case in a Los Angeles courtroom all those years ago. By refusing to admit guilt to conspiracy charges, Bernie was able to pull one over on the government as easily as he was able to defraud his well-heeled investors. Once again, a rich defendant (courtesy of all the money he stole) rode roughshod over prosecutors.

If he had pleaded guilty to the conspiracy charges, Madoff would have been admitting that someone had helped him commit the fraud. He has steadfastly refused to do that because he is trying to protect his family and associates.

The elocution of his plea raised more questions than it answered because it did not address the issues everybody wanted to know. Namely, who helped him carry out the fraud and where is all the money? There is no question that others are guilty in this fraud, either actively or through deliberate ignorance. I have seen several sets of statements of their accounts from Madoff victims. Bernie would not have been able to prepare the multi-page statements without assistance from at least one other person — and maybe more. There are already reports that longtime Madoff employee, Annette Borgiorno, had workers look up stock prices and write up fake tickets.

I suspect that Madoff and his wife Ruth are the aristocratic version of Bonnie and Clyde. Together, they stole from unsuspecting investors. The couple did not need shotguns because their smile and charm were more potent.

In his allocution, Bernie did admit to repeatedly wiring investors’ money, a total of $64 billion, through his supposed legit brokerage business. Since it was used to prop up that business, I am wondering why his sons and brother did not ask the source of the capital entering the business. I suspect that they knew but did not ask. For that, they may be guilty (along with JP Morgan, Madoff’s banker) of deliberate ignorance. This legal concept was successfully used to uphold the conviction of Jeffrey Skilling, CEO of Enron. It is a crime that rises above the strict criminal standard of reasonable doubt.

As the English would say, there should have been others in the dock with him. First to be on trial should be the SEC. Due to the failure to act on repeated warnings from Harry Markopolos and others, it is clear that the SEC is guilty of malpractice and negligence. It seems that standard operating procedure at the SEC was to take Madoff’s word rather than performing an independent verification. This seems as negligent as the cops taking the word of a serial killer that he is innocent.

I am hoping that a brave judge will allow aggrieved Madoff investor Phyliss Molchatksy‘s lawsuit against the SEC to go forward. As a government agency, it is usually exempt from lawsuits, but Chairman Cox has already admitted that the SEC failed to respond to specific and credible allegations of wrongdoing. We need to know what happened.

The argument against the success of this lawsuit — that it will discourage regulation — does not hold water with me. More than anything else, the SEC’s failure to find fraud in the case of Madoff, a former chairman of the NASDAQ exchange, raises the possibility that the SEC is not capable of regulating powerful people on Wall Street. If that is the case, maybe it should be disbanded. A thin veneer of regulation may be worse than no regulation at all. At least with no regulation, the buyer will know to be careful. Now they are under the mistaken notion that the SEC is looking out for them.

Madoff’s accounting firm should also be prosecuted. When I am evaluating the accuracy of the returns of a hedge fund, the first place that I turn to is the accountant. Madoff’s accounting firm, Friehling and Horowitz, need to be held responsible for certifying false results. It is clear that they were doing nothing but sitting back and collecting fees. In addition, they may have deliberately deceived the American Institute of Certified Public Accountants by telling them that they do not conduct audits.

Certainly, the victims themselves bear some responsibility, although they refuse to accept it. One victim that was invested in a feeder fund told me, “I knew that my money was managed by someone in New York, but I did not know who.” It is hard for me to understand how anyone can invest a million dollars without asking who is actually investing the money.

Joe Nocera‘s assessment in the New York Times starting with the title, “Madoff has Accomplices: His Victims” seems harsh, but he does have a point. Many of Madoff’s victims, obviously wealthy people, made major decisions about their wealth without consulting with financial experts. These same people use a trained accountant to file the taxes on the fictitious gains from this investment, but yet did not consult with anyone before investing with Madoff.

Many of these formerly rich victims, including Nobel Prize winner Elie Wiesel, are asking for a bailout from the federal government. Although have great sympathy for the victims, the government is not in the business of bailout out rich people who make bad investments.