Madoff might not have made any trades

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Madoff might not have made any trades
Agency can't find evidence his funds bought or sold through his brokerage
By Beth Healy
Globe Staff / January 15, 2009
As investigators try to untangle the scheme that Bernard L. Madoff hid from investors and regulators for a decade or more, one basic fact is emerging: He may not have been making any trades at all.

A federal agency that regulates brokerage firms says there is no record of Madoff's investment funds placing trades through his brokerage operation. That leaves only two options - either he was placing trades only through other firms, which would be highly unusual, or he was not placing any trades.

"There was no evidence of the Madoff broker-dealer executing trades for the [Madoff] investment adviser," said Herb Perone, spokesman for the regulatory group, the Financial Industry Regulatory Authority. A broker-dealer is any firm that buys and sells securities.

FINRA and its predecessor, the National Association of Securities Dealers, has been examining the records of Madoff's broker-dealer operation, Bernard L. Madoff Investment Securities, every two years since the firm started in 1960. The last exam was in 2007, Perone said.

The finding is one of many facts investigators are poring over as they seek to piece together Madoff's alleged $50 billion Ponzi scheme, according to a lawyer involved in the case. Evidence that Madoff - who made his name as a trader of Nasdaq stocks - did not process any of his investment funds' trades through his own brokerage is a key indicator that he was not making the trades he claimed.

Ordinarily, a firm that owns both an investment advisory business and a broker-dealer, like Merrill Lynch & Co., would place a large portion of trades through its own broker-dealer. That's because a firm wants to earn fees on its own trades if possible. Investment firms must seek "best execution," or the best deal they can get on trades for their customers, so some trades typically will be handled by other firms. But to farm out every trade is almost unheard of.

A Madoff lawyer, Daniel J. Horwitz, declined to comment on Madoff's trading.

If Madoff was making no real trades, the complicated statements he sent out to customers were apparently fiction - and in fact may have been part of his coverup. Statements were often so complicated that investors had to call representatives of the firm for explanations.

One Boston-area customer's November 2008 statement is six pages long and shows a dizzying list of trades. According to the statement, Madoff purchased stocks including Wal-Mart, IBM, and Intel, as well as options on the Standard & Poor's 100 index. The statement also says he bought and sold shares of the Fidelity Spartan US Treasury Money Market - a fund Fidelity Investments said had been renamed back in 2005.

Moreover, Fidelity, the Boston investment firm, says Madoff was not a client of the firm. That is, Madoff's firm did not interact with any part of Fidelity that deals with investment advisers and other intermediaries that ordinarily make investments for their clients through Fidelity.Continued...