Who Aided And Abetted Madoff, Mr. Ponzi?

Isn’t it amazing how individuals, who had earned hundreds of millions of dollars, and proprietors of "knowledgeable" hedge funds, invested with Bernard Madoff-and lost all their money?

Madoff enticed individuals by paying his original investors a steady return of 10-12% per annum-even during periods of market decline and volatility. New investors had to be recommended, and many investors sought out individuals who had successfully invested with Madoff and requested that they be recommended to him.

Let’s examine the structure of Madoff’s investment strategy. Originally Madoff hit up his Palm Beach friends and members of the Harmonie Club to invest in his Bernard L. Madoff Investment Securities (BLM). Madoff did not openly invite individuals to invest in his firm. Madoff enticed investors by stressing the exclusivity of his clientele. Clients of BLM had to be referred by other individuals. But then Madoff sought money from foreign banks-and that is where he obtained tens of billions of dollars.

Madoff’s clients should have remembered another famous Ponzi scheme, by an even more respected financial institution. In 1928 Goldman Sachs, a reputable Wall Street partnership, founded The Goldman Sachs Trading Corporation, which was a closed end mutual fund. In July 1929 Goldman Sachs founded the Shenandoah Corp. and sold $67 million of convertible preferred and common shares. Goldman and Central States Electric Corp. owned 80% of Shenandoah.

Overwhelmed by the success of the Shenandoah Corp., Goldman founded another fund, Blue Ridge Corp., which sold over $72 million in convertible preferred and common stock. Who bought the stock of Blue Ridge? Shenandoah invested $62 million. Blue Ridge then invested in the stock of Central States Electric and other utilities. So what we had was Goldman Sachs as a fund of funds, of which investors could never possess enough. And what happened? The stock market crashed in 1929. The value of Goldman Sachs Trading Corp. declined from a capitalization of $500 million to approximately $10 million.

But there was no SEC in 1929. How could Bernie Madoff have accomplished his feat today? With a little help from his friends at the Securities and Exchange Commission, in particular, Arthur Levitt, a former SEC chief. It has been widely reported in the press that one individual in particular, Harry Markopolos, had reported that Bernard Madoff was operating a Ponzi scheme.

As I discussed in my previous column, "Lax Law Enforcement and Wall Street Skid, "Arthur Levitt, one time Chairman of the (SEC), never investigated his friends, except once; that was when A R Baron collapsed and Baron’s clearing firm, Bear Stearns was drawn into the investigation. Levitt permitted his friends at Bear Stearns to violate federal securities law with the knowledge that the SEC would only give Bear Stearns a slap on the wrist.

Fortunately Madoff will go to prison-unlike the perpetrators of the Goldman Sachs Trading Company debacle. But so too should those members of the SEC, who protected Bernard Madoff.

And let me explain one thing to the reader. The Commissioners vote to investigate and the Chairman ultimately decides, who gets investigated.

In April 1999 a seminal article, "Scandal On Wall Street," was published. The article detailed major violations of federal securities law at the American Stock Exchange. Levitt ordered that the American Stock Exchange not be investigated, so there was no investigation.

To this day there has never been an investigation of the American Stock Exchange—that demonstrates how powerful Levitt is. In October 2008, the American Stock Exchange merged with the New York Stock Exchange-Euronext.

It is Arthur Levitt, who should be investigated.