Westport Bank Sent Clients’ Cash to Its Madoff Account

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Bank Sent Clients’ Cash to Its Madoff Account
Published: February 5, 2009
More than $60 million of Westport National Bank customers’ money was in an account that the bank had with Bernard L. Madoff shortly before he was arrested in December and charged with operating a global Ponzi scheme.


None of the money belonged to the bank, a division of Connecticut Community Bank in Westport, but the account was in its name. For that reason, the true customers may not qualify for the federal securities insurance program that is expected to cushion investors’ losses, lawyers said.

Though it was one of many routes by which billions flowed into Mr. Madoff’s hands, the odd arrangement in Westport is one of the few to involve routine customer accounts at a federally regulated banking institution in the United States.

The bank’s role became public on Dec. 31, when lawyers for a Florida couple said they were investigating how money the couple had put into a bank custody account wound up being lost with Mr. Madoff. That couple thought they were investing with Westport National, the lawyers said.

The bank’s president, Richard T. Cummings Jr., said at the time that the bank had simply maintained custody accounts for customers who knowingly invested with Mr. Madoff. Mr. Cummings declined then to say how much money was involved, and he did not respond to several requests for information this week.

But documents the bank sent recently to customers show about $60.7 million in the bank’s Madoff account at the end of November, said Adam Rabin, a lawyer for the Florida couple based in West Palm Beach.

Although each customer had a separate custody account at the bank, money in those accounts was apparently pooled into a single account with Mr. Madoff.

The Securities Investors Protection Corporation does not cover fraud losses, but could replace up to $500,000 in cash or securities missing from customer accounts of liquidated brokerage firms.

The corporation, a government agency, is overseeing the liquidation of the Madoff firm, and if it extends coverage would typically apply it only to official Madoff accounts.

In this case, that would be the Westport National account, with a maximum coverage of $500,000. In a letter to customers recently, the bank said it would argue to the Securities Investors Protection Corporation trustee that each custody account at the bank should be individually insured.

Further examination of the Westport National arrangement shows that many of the disputed custody accounts paid fees to Robert L. Silverman, a professional actuary who runs a small pension consulting firm about half a mile from the bank.

Mr. Silverman’s business, PSCC Services, got about four-fifths of the fees the bank collected from customers, and more than a dozen customers have told their lawyers that Mr. Silverman recommended the arrangement.

Some customers said the connection was personal — they knew Mr. Silverman socially and he had recommended the custody accounts as a good investment, their lawyers said. Other bank customers, including at least 10 small medical practices in Connecticut and Florida, had used Mr. Silverman’s business to set up profit-sharing or retirement programs.

Mr. Silverman did not respond to several messages left at his Westport office this week. Mr. Cummings, the bank president, responded to questions about the arrangement by providing a statement issued by the bank on Jan. 2.

That statement emphasized that the bank had not provided any investment advice to the affected customers and that the customers had given Mr. Madoff “full discretionary authority” to invest their money — an assertion some customers dispute.

The arrangement seemed odd to specialists on bank custodial services.

Custody accounts typically involve an array of specific services, explained Marshall N. Carter, the retired chairman and chief executive of State Street Bank, one of the largest custodial banks in the world. Those include settling customer trades, insuring safekeeping of the securities, servicing customer transfers and providing information about the portfolio.

In this case, no customer trades were settled and the safekeeping of securities was apparently left to Mr. Madoff. Finally, although the bank said it provided record keeping, tax reporting and “other ministerial services” to the custodial clients, Mr. Silverman was also being paid a “record keeping” fee.

Together, the fees paid to the bank and PSCC Services were almost 4 percent of the customers’ assets — well above normal levels for those services, according to Charles Ruffel, founder and director of Plan Sponsor, a financial information business serving institutional investors.

The bank’s custody fee was about three times the going rate, Mr. Ruffel said, and he called the record-keeping fee paid to PSCC “unconscionable.”

Neither the bank nor Mr. Silverman responded to requests for comment about the fee arrangement.