Did SEC Fail To Follow A Path To Madoff In 1992?

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Did SEC Fail To Follow A Path To Madoff In 1992?
By Zachary Roth - January 20, 2009, 1:31PM
In recent weeks, the evidence that Bernard Madoff's alleged fraud goes back longer, and implicates more people, than we at first knew, has seemed to grow. And over the weekend, the New York Times added to that impression, with a lengthy takeout on a 1992 SEC investigation into Frank Avellino, an accountant tied to Madoff, who has admitted to not keeping conventional records.

Despite several red flags, the probe ended with Avellino paying only a small fine, and it never appears to have questioned Madoff's own operation.

Here's what seems to have happened:

Avellino and Madoff had had ties going back to the late 1950's, when Avellino worked as an accountant at a firm run by Madoff's father-in-law. Madoff even briefly ran his securities business from Avellino's office.

As the years passed, Avellino gradually shifted the focus of his business from accounting to raising money for Madoff's investment business. Then in 1992, the SEC received marketing materials showing that Avellino and his partner, Michael Bienes, had promised investors returns of up to 20 percent a year. Suspecting a Ponzi scheme, the government launched an investigation.

Avellino's explanation was simply that Madoff -- by then one of Wall Street's biggest stock traders -- was managing the money. Avellino said that if Madoff ever fell short of achieving a 13-20 percent return for investors, then Avellino and Bienes would make up the difference.

And that seems to have satisfied the SEC. As the Times puts it:


No one at the securities commission seems to have questioned why Mr. Avellino and Mr. Bienes offered clients a double-digit guaranteed return on money that they did not even control. Nor do the records offer any hint that the commission considered whether Mr. Madoff, rather than Avellino & Bienes, might be operating a Ponzi scheme.

Avellino returned money to investors, paid a fine, and shut down his business.

But when an audit was conducted by Price Waterhouse, it was discovered that Avellino didn't keep proper records. When Price Waterhouse asked Avellino to do so for 1992, he refused, writing:


"My experience has taught me to not commit any figures to scrutiny when, as in this case, it can be construed as 'bible' and subject to criticism. In this present instance, quite severely. I explained how the profit and loss can be computed from the records you now hold in your possession that Bernard L. Madoff and I supplied."

Still the SEC did nothing, and by the end of January 1993, the audit, too, was over.

Madoff and Avellino appear to still have ties. Madoff's current lawyer, Ira Sorkin, represented Avellino during the 1992 investigation. There's also this:


.In 2003, the Avellinos bought a $4.5 million house in Palm Beach less than five blocks from Mr. Madoff's house there. Their Manhattan apartment is similarly close to Mr. Madoff's apartment.

And Avellino may have been wired into Madoff's alleged fraud right up until the end. the Times reports:


A lawsuit claims that Mr. Avellino warned his housekeeper, who had invested with him, that her money was lost 10 days before Mr. Madoff's fraud became public.

There have been no indications that Avellino is a target of the SEC's current Madoff investigation. But at the least, he's a figure worth keeping an eye on.