It’s a Cohmad Mad Mad World!

Posted in Madoff by Nina Mehta on February 24, 2009


Following Friday’s announcement by the trustee of Bernard L. Madoff Investment Securities that Madoff apparently hadn’t executed a single trade on behalf of his investment customers for at least 13 years, the operations of Cohmad Securities Corp. may command more scrutiny. Cohmad was just one of many “feeder funds” to Madoff’s investment business, but it was a broker-dealer that Madoff himself co-founded over two decades ago. As such, how Cohmad functioned could shed light on Madoff’s broader operation.

On Feb. 11, the Massachusetts Securities Division suspended Cohmad’s state broker-dealer license. According to Massachusetts regulator, the Cohmad broker and Bernard L. Madoff Investment Securities exhibited a “deeply intertwined relationship.”

Cohmad was co-founded by Madoff and Maurice Jay (Sonny) Cohn in February 1985. Although the documents Cohmad turned over to the Massachusetts securities division were incomplete, according to the complaint, the “limited documents that actually were produced to the Division evidence connections between the two firms that were so pervasive that they acted in many respects as interconnected arms of the same enterprise.”

Cohmad was based in Manhattan and operated out of Madoff’s broker-dealer offices. The firm also had a Boston office that was managed, starting in 1989, by Robert M. Jaffe, the son-in-law of Carl J. Shapiro, Madoff’s first big investor in the 1960s. Shapiro’s foundation, the Carl and Ruth Shapiro Family Foundation, reportedly lost hundreds of millions of dollars when Madoff’s Ponzi scheme collapsed in December.

For over two decades, Cohmad funneled investors’ money to Madoff. The Massachusetts complaint provides no evidence that Cohmad employees knew about Madoff’s Ponzi scheme. Indeed, many Cohmad employees and their families lost money through Madoff Investments. But the complaint noted that the lack of cooperation by executives at Cohmad left large gaps in what Massachusetts officials knew about the broker-dealer and its principal employees.

Massachusetts victims identified Cohmad and Jaffe as “conduits” to the Madoff investment scheme that was exposed as a colossal fraud in December, according to the complaint. Subpoenas requiring the testimony of Jaffe were subject to “delay tactics,” the Massachusetts authorities said. The exasperated securities division wrote that “Jaffe’s multitudinous and often conflicting excuses [for not providing testimony in response to subpoenas] delved deeply into the realm of the absurd.”

On Feb. 4, Jaffe finally invoked his Fifth Amendment right to refuse to testify. Marcia Beth Cohn and her father Maurice Cohn refused to appear to testify. Since January 2004, Marcia Cohn has served as the president, chief operating officer and chief compliance officer of Cohmad. Another executive, Alvin J. Delaire Jr., was a no-show for his testimony, scheduled for Feb. 10, according to the complaint. Delaire was a registered representative at Cohmad.

The Massachusetts securities division took action against Cohmad because, it said, Massachusetts investors were among the victims of Bernard Madoff’s Ponzi scheme. The securities division, which oversees the state securities market and enforces state laws, is part of the Massachusetts Secretary of the Commonwealth William F. Galvin’s office.

The inner circle at Cohmad had personal ties that reached back decades, or were related to one another. Peter Madoff, Bernard Madoff’s brother, was a Cohmad director. So was Milton Cohn, Maurice’s brother. Maurice Cohn and Delaire also went way back. Cohn and Delaire first worked together in the late 1960s when they were in the specialist business. They worked at Cohn & Delaire (which Cohn had established with Delaire’s father in 1963), and at Cohn, Delaire & Kaufman, the successor firm.

Even after Cohmad’s launch, several of the key players entered into another joint business. In June 1986, a company called Cohn, Delaire & Madoff Inc. was formed in New York. The firm, which was not a broker-dealer, is now inactive, and no information is publicly available about what the firm did. According to the New York State Division of Corporations’ web site, the company could be contacted through a law firm called Schizer & Schizer in Manhattan. That estate planning and family law firm, run by attorneys Hazel and Zevie B. Schizer, still exists. (The Schizers’ son, David W. Schizer, is the dean of Columbia Law School.)

Through its investigation into Cohmad’s operations, the Massachusetts securities division has hauled up a bonanza of material. The Feb. 11 complaint and many of the documents gathered are available online. The information includes annual income statements from Cohmad, monthly requests for money from Bernard L. Madoff Investment Securities (BMIS), information about investor accounts, and additional documents detailing activities such as Ruth Madoff’s withdrawal of $5.5 million on Nov. 25 and another $10 million on Dec. 10, the day her husband Bernard told their sons he had been running a giant Ponzi scheme. Ruth Madoff had a brokerage account at Cohmad.

Cohmad’s business was unusual in several ways. The brokerage, which rented space from Madoff’s office at 885 Third Avenue in New York, billed the Madoff firm monthly for rent, the electric bill, market data and exchange fees, a phone lease, long-distance calls and other expenses. BMIS, however, did not have an ownership stake in Cohmad.

The Madoff firm also paid Cohmad $67 million from 2000 through last year. Monthly payments were made for “professional services,” “brokerage services” and “fees for account supervision.” According to the Massachusetts securities division, the payments “appear to have been based on the amount of assets that clients referred by Cohmad’s registered representatives had under management with Madoff Investments.” Those payments represented in excess of 84 percent of Cohmad’s total income over the last eight years. (The Massachusetts securities division requested information from Cohmad only from January 2000 through mid-December 2008.)

The $67 million did not include payments to Jaffe, according to the complaint. The documents indicated that Cohmad paid a total of $526,000 to Sonya Kohn, a Vienna-based private banker who steered European investment clients to Madoff. The complaint said that Sonya Kohn, who is also known as Sonja Kohn, was not associated with Cohmad or employed by the firm. A spokesperson at Bank Medici, which is majority-owned by Kohn, told Reuters on Feb. 12 that Kohn never received any payments from Cohmad.

The commissions that Cohmad’s registered representatives received thus came, indirectly, from BMIS. Cohmad also distributed monthly dividends to Cohmad’s equity owners, according to the complaint. The owners included Bernard Madoff, who controlled approximately 15 percent of the firm, and his brother Peter Madoff, who had a 9 percent stake. Cohmad’s registration with the Financial Industry Regulatory Authority indicates that Maurice Cohn was the largest stakeholder in Cohmad, owning between 25 percent and 50 percent of the firm. Marcia Cohn, Milton Cohn, Jaffe and an employee named Rosalie Buccellato also had Cohmad stakes.

In addition to bringing in investors, Cohmad at times advised clients to consider using a particular accounting firm. One of the complaint’s exhibits includes a letter Jaffe wrote on Nov. 2, 2001, to an investor in Lowell, MA, who was setting up an account with Madoff. He informed the person: “For accounting purposes I suggest that you call Scott Sosnik and Larry Bell of Marder, Sosnik & Co. CPA’s PC. They do the accounting for many Madoff clients and can provide a detailed summary at a very reasonable price.” That accounting firm, and its predecessor Sosnik Bell & Co., provided accounting services to hundreds of Madoff clients, according to the BMIS trustee’s list of Madoff investors.

Although 84 percent of Cohmad’s income came from BMIS for the assets it brought in, Cohmad displayed a mixed reaction to its relationship with Madoff’s firm. It both downplayed its asset management business and, at times, described the activities of Madoff Investments as if they were its own. In a Nov. 21, 1991, letter to a prospective investor in Lexington, Mass., Cohmad’s then-president Maurice Cohn wrote: “Our primary business is not managing client accounts. We do manage accounts for family and friends using a simplistic, and most important, a very conservative strategy in a disciplined manner, always ‘insuring’ the accounts against major loss by using put options.”

Another letter from Maurice Cohn to an investor, dated July 17, 1992, apprised that recipient of Cohmad’s goals. He wrote: “Our ‘mission’ is to protect your investment (and mine!). To accomplish this, we maintain our discipline and stick with the same strategy, by buying a portfolio of ‘blue chip’ equities, selling call (index) options on your portfolio, and buying put (index) options to protect your portfolio against violent bear markets. Once again, we are not economists or security analysts. We are risk managers and our associates are very good at what they know best—namely, trading.”

That letter advised the investor that funds could be withdrawn from “C&M” trading accounts on only one day each quarter. The minimum addition for investments was $25,000.

The Massachusetts securities division’s complaint noted that the “involved parties” at Cohmad are Marcia Beth Cohn, Robert Martin Jaffe, Maurice Jay (Sonny) Cohn, Stanley M. Berman, Alvin James Delaire Jr., Jonathan Barney Greenberg, Cyril David Jalon, Morton David Kurzrok, Linda Schoenheimer McCurdy, Richard George Spring and Rosalie Buccellato.

In addition to the main players already discussed, some of the other individuals had longstanding relationships with Bernard Madoff and his wife Ruth. Linda McCurdy, who was with Cohmad since May 1998, is related to Pierre Schoenheimer, whose wife is Idee German Schoenheimer. Idee Schoenheimer is a co-author with Ruth Madoff of Great Chefs of America Cook Kosher. Ruth Madoff received an M.S. in nutrition from New York University’s School of Education in 1993. The third co-author, Karen MacNeil, is an established food and wine expert. (The Great Chefs publisher, Vital Media Enterprises, was run by the Jewish National Fund, with the book’s sales proceeds benefiting the JNF. Vital Media’s first and only other book was Trees: The Green Testament by cartoonist Ya’akov Kirschen, nee Jerry Kirschen. Perhaps ironically, Kirschen, who was born in Brooklyn and moved to Israel in 1971, has taken inky inspiration from the Madoff scandal.)

Linda McCurdy has been listed as a director at the Schoenheimer Foundation since at least 2001 (the oldest publicly available Form 990). That year, the directors were Pierre L. Schoenheimer, Joyce A. Schoenheimer and Linda McCurdy, all of whom were listed at Pierre’s home address. The fourth director was Robert C. Lapin, who remains a director. Lapin is a trustee of the Robert I. Lappin Charitable Foundation, whose assets were invested in Madoff. Lapin has known the Schoenheimers for many years. Starting in 1981, he was a director at Radix Ventures Inc., an over-the-counter company in the international freight shipping business that was bought by Air Express International Corp. in 1995. Pierre Schoenheimer founded Radix Organization Inc., a private investment bank, in 1970, and became chairman of Radix Ventures in 1979.

Several Cohmad executives also worked at the same firm earlier in their careers. In the early 1980s, Jaffe, Marcia Cohn and Greenberg were all at broker-dealer Cowen & Company. Jaffe, who joined Cohmad in November 1989, had been at Cowen & Co. from April 1980 until he moved to Cohmad. He was at E.F. Hutton & Co. earlier, starting in 1969. (The career history of these registered reps comes from FINRA.)

Marcia Beth Cohn joined Cohmad in July 1988. While registered as a representative at Cohmad, she worked, from November 1992 until August 1998, at M.A. Berman Co., a broker-dealer in Boca Raton (the broker doesn’t appear to be connected to Stanley Berman). Earlier still, from June 1982 until June 1988, she worked at Cowen & Co.

Jonathan Greenberg’s Linkedin profile describes him as a vice president at Cohmad. His profile page states: “I manage equity portfolios for individual investors.” The Greenwich, Conn., resident graduated from Kenyon College in 1977 and from Columbia University’s business school in 1992. He joined Cohmad in October 1986, after four years at MJ Whitman & Co. and an earlier, short stint at Cowen & Co.

Rosalie Buccellato appears to have managed the Cohmad office and administrative work. A principal at the firm, she’s also a notary public in the state of New York. Buccellato has been at Cohmad since at least 1992. Previously, she worked at Bear Stearns and Normura Securities.

Cohmad relied on established brokers to sell access to Madoff Investments, dispelling concerns some customer may otherwise have had. Kurzrok, who is 69, came to Cohmad in April 1992. He was also registered at Hampshire Securities Corp. from January 1992 until April 1998. Prior to that, he worked for four years at Stuart, Coleman & Co., and before that at Fialkov, Scheinman & Co. In the early 1980s, he was at Lehman Brothers Kuhn Loeb Inc. Jalon, who is now 95, started at Cohmad in April 1991. He worked at Brean Murray, Foster Securities Inc. from 1974 until 1991. Earlier, he spent five years at MKI Securities Corp.

The registered reps at Cohmad who brought in the most assets in recent years were Spring and Berman. Spring, who is 73, joined Cohmad in January 1986. He had worked at David J. Green and Company, a brokerage, starting in 1968. Berman, who is 88, became a registered rep at Cohmad in December 1986 and stayed until June 2007. In the mid-1980s, he worked briefly at both Gruntal & Co. and at Bear Stearns. Berman received a $400,000 retirement bonus from Cohmad in October 2007, according to documents published in connection with the Massachusetts complaint.

The documents available online from the Massachusetts securities division also include Cohmad’s P&L statements and annual audited financial statements. Sosnik Bell, in addition to doing to the accounting for many Madoff clients, was the firm responsible for Cohmad’s accounting. Some of the exhibits are faxes of statements sent by Sosnik Bell to Cohmad.

The Massachusetts complaint exhibits also include audited financial statements by Cohmad’s auditor, Kaufmann Gallucci & Grumer LLP, for the year ending June 30, 2007. The firm operated from January 2003 until November 2007. The complaint does not say who audited Cohmad’s books in other years.

Kaufmann Gallucci & Grumer is an accounting practice that was sold to Citrin Cooperman & Company in late 2007. According to the latter’s web site, Citrin Cooperman is the 34th largest accounting firm in the U.S. and one of the top 10 accounting firms in the New York metropolitan area.

KG&G helped establish Cohmad’s bona fides. The partners were Robert Kaufmann, Ronald Gallucci and David Grumer, all of whom now work at Citrin Cooperman. Kaufmann is a past chairman of the New York State Society of Certified Public Accountants’ stock brokerage accounting committee, and a current member of that committee and the organization’s investment companies committee. He is also a member of the Securities Industry and Financial Markets Association’s financial management division and internal auditors division. In mid-2008, the NYSSCPA noted that Grumer was the incoming vice chairman of its stock brokerage accounting committee.

The Cohmad documents unearthed by the Massachusetts securities division do not ascribe guilt to Cohmad’s employees or associates for Madoff’s massive fraud. But the complex web of relationships, and the lack of information about the due diligence conducted about BMIS, clearly raise questions about who knew what, and when. More importantly, they raise questions about who should have known more about Madoff Investments.


Loyalty on the Slopes: Madoff Goes Skiing in 2004

Posted in Madoff by Nina Mehta on January 29, 2009


Bernard Madoff may have wiped out the life savings and shattered the confidence and trust of thousands of investors around the world, but Madoff could be a loyal friend and patron. Witness his January 2004 boondoggle to Zermatt, Switzerland, accompanied by a large group of people, most of whom had ties to his fraudulent investment advisory business.

Bernard Madoff, his brother Peter Madoff, and their respective wives, Ruth and Marion, played host to 13 people on a ski trip organized by Interbourse, a European organization that aims to get stock exchange representatives and their guests to mingle, chat and engage in friendly competition on the slopes. The week-long trip in January 2004, which had a total of 600 attendees, was hosted by the SWX Swiss Exchange. (This year’s Interbourse trip is underway and will end on Saturday.)

The Madoffs and their friends were part of the National Stock Exchange group at the Zermatt event. No full-time employee or executive from the NSX appears to have been on the trip. The Madoff brothers’ association with the NSX, however, goes back decades. According to the Wall Street Journal, Peter Madoff, the second-in-command at Bernard L. Madoff Investment Securities, joined the board of the NSX, then called the Cincinnati Stock Exchange, in 1980. (He left the NSX board and the board of its parent company this past week.) The Madoff securities firm is owned entirely by Bernard Madoff.

Cincy became the first all-electronic U.S. stock market in 1980. In the run-up to that, the Madoff firm reportedly spent about $250,000 to help the exchange overhaul its technology. The all-electronic Nasdaq market at the time was not an exchange but an over-the-counter market. Madoff for years has also described his firm as one of five broker-dealers that had a big hand in developing the Nasdaq market.

The Madoff firm’s involvement with the Cincinnati exchange occurred through what, so far, appears to be the legitimate end of Bernard L. Madoff Investment Securities. Madoff operated his long-running Ponzi scheme from the 17th floor of the Lipstick Building in Manhattan, while the main broker-dealer operation, which was regulated by the Financial Industry Regulatory Authority (formerly called the National Association of Securities Dealers), was on the 19th floor.

The Zermatt ski trip brought together a number of people with connections to Madoff’s investment advisory business. What they had in common was their deep and long-standing relationships with Bernard Madoff. Indeed, the roster includes several people who may yet be candidates for a debriefing by the Securities and Exchange Commission.

For these visitors, the alpine trip also had a memorable ski-centered perk. Just weeks earlier, on Jan. 4, 2004, the Zermatt ski lodge unveiled Europe’s longest glacial chair lift. The 8,465-foot-long Furggsattel lift, at the Swiss-Italian border, took a year and a half to build, and ferried skiers from Trockener Steg, at 9,642 feet, to Furggsattel station, at 11,040 feet, in under nine minutes.

The Madoff brothers were the ski team’s co-captains. Back at home, they ran the market-making firm together. Peter Madoff, who joined his older brother’s 10-year-old business in 1970, eventually took over management of the trading operation on the 19th floor. He was the senior managing director at the firm. Other family members also worked at the broker.

Peter Madoff, in addition, was a director at Cohmad Securities Corp., a New York-based broker-dealer set up by Bernard Madoff and Maurice (“Sonny”) Cohn, a friend of Bernard’s since the 1960s. The company name is a conjunction of Cohn and Madoff.

According to regulatory filings, Cohmad was formed in February 1985. Sonny Cohn, the chairman and CEO, currently owns 25-50 percent of the firm. His daughter, Marcia Beth Cohn, the president, chief operating officer and chief compliance officer, owns 10-25 percent of the firm. Milton Cohn, Maurice’s brother, has a 5-10 percent stake. Bernard Madoff owns 10-25 percent of the firm, while Peter Madoff has 5-10 percent. Two others, Robert Jaffe and Rosalie Buccellato, each owns less than 5 percent.

William Galvin, the Secretary of the Commonwealth of Massachusetts, is now investigating Cohmad, which allegedly helped execute trades for Madoff’s investment advisory business. Galvin has issued a subpoena to Robert Jaffe, who has homes in Massachusetts and Florida. Jaffe is the son-in-law of Carl J. Shapiro, the Boston-raised billionaire philanthropist who made his money in the clothing business, and who was an early and large investor in Madoff (before his son-in-law was in the picture). The Carl and Ruth Shapiro Family Foundation has lost hundreds of millions of dollars through Madoff’s Ponzi scheme. Over the last two decades, Jaffe brought wealthy Palm Beach, Florida, investors into Madoff’s investment universe through a firm called M/A/S Capital Corp., registered in Palm Beach. The firm’s Boston office shares Cohmad’s address and phone number.

Back in January 1990, Cohmad was fined $30,000 by the Massachusetts securities regulator for transacting business in the state before registering as a broker-dealer there. The case, which involved trading in municipal debt, was initiated by the State of Massachusetts Securities Division, according to FINRA.

Joining the Madoffs in Zermatt, Switzerland, at the foot of the Matterhorn, was Paul J. Konigsberg, his wife Judy, and two other Konigsbergs: Victoria, and Steven (which might be a misspelling of Stephen). It is not clear how Victoria and Steven are related to the older Konigsberg couple.

Paul J. Konigsberg is the senior tax partner at Konigsberg Wolf & Co., the accounting firm that signed off on Madoff’s family foundation’s books in at least 2006 and 2007. His brother, Robert I. Konigsberg, is the firm’s managing partner.

The sole principal of Konigsberg Wolf is Steven Mendelow, who operated an unregistered investment company that functioned as a feeder fund for Madoff from 1989 until 1992, when the SEC shut down that fund along with a much bigger one operated by Avellino & Bienes, a New York accounting firm run by Frank J. Avellino and Michael S. Bienes. The latter firm grew out of the accounting practice run by Madoff’s father-in-law and his partner, called Alpern & Heller (see this blog’s Dec. 22 post). Mendelow ran his firm, called Telfran Associates Corp., with Edward R. Glantz of Lake Worth, Florida. Avellino, Bienes, Mendelow, Glantz and their two firms in 1993 paid the SEC a total of $700,000 in civil penalties stemming from their illicit activities.

Paul Konigsberg is also the only non-family shareholder of Madoff Securities International, Bernard L. Madoff Investment Securities’ London-based operation, which opened its doors in 1983. That business is currently owned by Bernard Madoff, Bernard’s wife Ruth, their sons Andrew and Mark, and Paul Konigsberg. The U.K.’s Serious Fraud Office opened an investigation earlier this month into the British operations of Madoff’s company.

Other members of the NSX-sponsored ski team were also tied to the investment side of Madoff’s business. Alvin J. Delaire Jr. and his wife Carole Delaire were on the Zermatt trip. Alvin Jr., known as Sonny, appears to have been a point-man for Madoff’s investment operation. The Wall Street Journal reported on Jan. 14 that he was the go-to man for account information, withdrawals from Madoff’s fund and other administrative functions. Delaire appears to have initially worked at Madoff’s firm and then at Cohmad.

Sonny Cohn and Delaire go back at least four decades. Cohn and Sonny Delaire’s father, Alvin Delaire Sr., started Cohn & Delaire, a New York Stock Exchange specialist firm, in October 1963. Sonny Delaire took over after his father’s partnership after Alvin Sr.’s death in 1968. Sometime before 1971, the firm also began functioning as a specialist on the American Stock Exchange. In 1978 the firm transitioned into Cohn, Delaire & Kaufman, with Joseph L. Kaufman, an Amex member since 1957, stewarding the operation. It’s not clear when the firm shut down.

Other guests of the Madoff bothers in Zermatt also had links to the investment side of Madoff’s business. These include Marja Engler, her son Steven Engler and his wife Laura Engler.

Marja’s husband, Mendel (Michael) Engler, worked in the Minneapolis theater and entertainment industry in the 1950s, before venturing into the securities business. According to a profile of Mike Engler published in the Minneapolis Star-Tribune on Dec. 20, 1994, Engler later on became an “investment counselor” for Madoff’s investment business. A Fortune report noted that Engler began raising money for Madoff in the 1980s.

In 1961, after Engler and Eli Budd, a businessman who came from the grocery industry, met through Engler’s accountant, they joined forces and entered the brokerage business as Engler & Budd Co. They dealt in local over-the-counter Minnesota stocks and then moved into underwriting securities, selling the company in 1986. According to a Bloomberg article, Engler steered many well-heeled families who belonged to the Oak Ridge Country Club, just west of Minneapolis, into investments with Madoff. The Star-Tribune profile noted that Engler, who died in 1994, had been a member of the NASD’s ethics committee.

Both Bernard Madoff and Peter Madoff had ties to NASD. Bernard Madoff became a member of NASD’s board of governors in January 1984, according to a Jan. 20, 1984, notice in the New York Times. Bernard Madoff noted that he had also been a member of “numerous NASD committees” in a brief bio for a book published in 2003. Peter Madoff was elected vice chairman of the NASD in November 1992. The Associated Press published a notice about the election on Nov. 19, 1992. Two days earlier, on Nov. 17, the SEC had charged Avellino and Bienes with operating an unregistered investment company. They functioned as the first feeder fund for Madoff’s investment business. They began funneling money to an unnamed money manager in 1962, according to the SEC. The Commission did not reveal the name of the money manager, but the Wall Street Journal on Dec. 16, 1992, said it was Bernard Madoff.

Another couple on the alpine ski trip was Elana Flax and her husband Dr. Herschel Flax of Great Neck, NY. Elana worked at Madoff’s firm. In addition, Herschel’s brother Leon was a director at Madoff Securities International, Madoff’s London office that’s now under investigation.

The final couple on the 2004 ski trip was Jean-Pierre Michaux and Patricia Michaux. It isn’t clear whether he and his wife have ties to Madoff’s investment business. Michaux was a foreign exchange broker at several firms who eventually worked at his family company Michaux, becoming the chairman in the mid-1990s and then chairman of the successor firm Michaux Gestion, a portfolio management company based in Lyon, France. In 2005, that firm was absorbed into KBL European Private Bankers, which then became KBC Group NV. KBC has said that its funds did not have significant exposure to Madoff, unlike several other private banks in Europe, whose customers had placed money through those banks with Madoff.

The End of a Sure Thing: Madoff’s Long Bet

Posted in Madoff by Nina Mehta on December 22, 2008


The Madoff affair has been unfolding for just over a week, yet the legacy of what is now being learned is likely to resonate long into the future for the Securities and Exchange Commission, the U.S. regulatory infrastructure, legions of individual investors, hedge funds, charities and industry groups. The scope of Bernie Madoff’s Ponzi scheme is breathtaking, and the losses—reputedly $50 billion, according to the SEC—dwarf most previous frauds and scandals.

But while the end of the fraud occurred on Dec. 10, when Madoff confessed to his two sons that the cupboards were bare and he had scammed friends and investors for years, what’s not known is how early the fraud started. Based on several interviews with Madoff clients, it’s clear that Madoff has been managing money both directly and indirectly for investors since the early 1970s, if not before. Those early investors, whose return rates were guaranteed, garnered even more stratospheric rates of return than the high rates the most recent investors received.

Some of those early clients remained customers until Dec. 11, when the FBI arrested Madoff on a single count of securities fraud and the façade of Bernard L. Madoff Investment Securities disintegrated, setting off shock waves of anger and confusion. Madoff’s company was known primarily as a third-market firm, a market-maker that got its start in 1960 trading over-the-counter stocks and then NYSE-listed stocks away from the Big Board. Bernie Madoff was instrumental in helping form the Nasdaq Stock Market in 1971 and was chairman of that market in 1990, 1991 and 1993. He helped shape the regulatory structure for the equities market that affected the way stocks now trade. But during all those years as a macher in the securities industry, Madoff also operated an investment advisory business that colleagues and regulators knew little about. That closely held secret at the heart of Madoff’s company is now gradually coming unglued.

Based on conversations with three individual Madoff investors, including two who invested with Madoff in the 1970s and a third who began investing with him in the late 1980s or early 1990s, a different picture emerges than the one dominating the headlines. That picture fleshes out the early years of what was a four-decade-long saga of exceptionally high returns. It is not known how early the fraud may have begun, but the pattern of returns never changed significantly over the decades. The three investors interviewed are identified as Investor A, Investor B and Investor C. None wanted to reveal his or her name publicly.

 “What should have raised a red flag was that in 1987, when the market dropped, we still got our 20 percent return,” said Investor A, a man who began investing with Madoff around 1971. The investor currently lives in Manhattan and works in the real-estate business. He invested directly with Madoff in the 1970s, and received a guaranteed return of 20 percent annually, regardless of the market’s gyrations. The return never wavered, and the investor received 20 percent per year until 1992.

Madoff’s eventual father-in-law, Saul Alpern, was Investor A’s family accountant in the 1950s and 1960s. The Manhattan accounting firm in the West 40s, called Alpern & Heller, was run by Alpern and his colleague Sherman Heller. Heller was a friend of Investor A’s father. Two junior accountants at the firm were named Frank Avellino and Michael Bienes. These men would wind up playing a key role in Madoff’s brush with a Securities and Exchange Commission investigation in 1992. Heller died in the mid-1960s at the age of 46, according to Investor A, and in the 1970s Avellino and Bienes took over the accounting firm.

In the late 1970s or early 1980s, Investor A recalled, Madoff decided he didn’t want to handle small individual investor accounts. So Avellino and Bienes packaged together the accounts of people who had been invested directly with Madoff. “Madoff traded them as a single entity instead of maintaining them as single accounts with separate statements,” this investor said. “He didn’t want the bookkeeping of all the separate accounts.” This investor met Madoff a number of times over the years, but was not friends with him.

Investor A brought several friends into Madoff’s ambit as investors, via Avellino & Bienes. While he continued to get 20 percent annual returns, paid out on a quarterly basis, A&B gave these friends 19 percent. “As the years went on, as people went in, they offered lower and lower percentages,” he said. “At the end, they were giving [investors] 13 percent.” He added that the investments were considered loans. “My 20 percent was considered interest income on a loan,” he said. “The tax returns treated it as interest income. That’s how Avellino and Bienes set it up.”

Investor B, who is related to Investor A through her husband, a physician in Manhattan, said the couple began investing indirectly in Madoff’s accounts in the 1970s. In the mid-1960s, Avellino & Bienes had become the couple’s accountants. Sometime in the 1970s, when the couple had saved up some money, the accountants recommended an investment to them that they had offered to other clients.

 “Other members of our family had been involved in this,” the woman said. “We put some money in with them. We were guaranteed a very nice interest rate on that money. No matter what happened, we got that money.” The couple never knew the money was managed by Madoff.

Like Investor A, the couple received quarterly checks from Avellino & Bienes, for close to 20 percent. “They sent us a check every quarter for what our money had earned,” the woman said. She does not recall receiving monthly or quarterly statements about the investment.

Investor C, a medical researcher who knows the husband of Investor B, began investing with Madoff through Avellino & Bienes in the late 1980s or early 1990s. He never met Madoff, he said, but instead relied on the faith that several prominent people in the financial arena, whom he knew, had in Madoff. “There were no statements,” he said. “We had put $25,000 or $50,000 in there in the 1980s and got 16 to 20 percent interest because, we were told, it was an arbitrage. We always got a quarterly check and the principal stayed the same.”

The guaranteed profits lasted until 1992. On Nov. 17 of that year, Avellino and Bienes were charged by the Securities and Exchange Commission with having run an unregistered investment company since 1984. The civil complaint, filed in New York federal court, also alleged that from 1962 until 1992 the two accountants had sold unregistered securities to the public in the form of notes. According to the SEC summary, Avellino and Bienes had “accepted funds from customers and guaranteed those customers interest rates ranging between 13.5% and 20%. The money the defendants collected from investors was then invested in securities with one broker-dealer.” The complaint noted that more than 3,200 investors had purchased these notes and that the accountants had raised over $441 million from investors.

The broker-dealer that invested the money was Madoff’s firm. Madoff had been the chairman of Nasdaq’s board in 1990 and 1991, according to a Bloomberg report, and would again be chairman in 1993. Bloomberg did not explain he gap year in Madoff’s leadership of Nasdaq’s board.

On Nov. 25, 1992, another firm, Telfran Associates, was charged by the SEC with having run an unregistered investment company and with selling unregistered securities, from 1989 to 1992. The two partners at Telfran sold notes that paid about 15 percent to investors and used those funds to purchase notes from A&B. The SEC said that more than $88 million had been raised from 800 investors who bought the Telfran notes.

The following year, in November 1993, A&B agreed to pay a civil penalty of $250,000, and Avellino and Bienes each agreed to pay civil penalties of $50,000. The same penalties were applied to Telfran and its two partners, Steven Mendelow and Edward Glantz. Ira Lee Sorkin, one of Madoff’s current attorneys, represented Avellino, Bienes, Mendelow and Glantz in 1993.

According to an article in the Wall Street Journal on Dec. 16, 1992, Madoff told the WSJ reporter that he hadn’t known A&B had raised the money illegally. The article also quoted Richard Walker, the SEC’s New York regional administrator, saying SEC officials had initially feared a scam. “We went into this thinking it could be a major catastrophe,” Walker had said. But Lee Richards, the court-appointed receiver, found all the money in Madoff’s investment accounts. Richards last week was named the court-appointed receiver for Madoff’s Ponzi scheme. The 1992 WSJ article also raised a number of questions about how Madoff’s investments had achieved consistently high returns.

In 1992, Richard Breeden was chairman of the SEC. One of the other three commissioners was Mary Schapiro, who is President-Elect Obama’s choice to be the next SEC chairperson (the fifth commissioner had resigned earlier that year). Schapiro is currently CEO of the Financial Industry Regulatory Authority, which oversees about 5,000 broker-dealer member firms.

None of the investors who had bought the A&B notes lost their money. “Avellino and Bienes weren’t registered securities dealers, and someone complained to the SEC,” said Investor A. “Every account was closed with Avellino & Bienes, but everyone got every penny back. Madoff then agreed to take on everyone [who had invested through A&B], and everyone who wanted to opened accounts with him.”

Investor B concurred. “Everyone got their money back, every cent,” she said. “[Avellino and Bienes] were taking funds and investing them with Madoff. That was the first I heard of Madoff, when the two were put out of business.” After that, she said, Madoff gave the accountants’ former clients the option of investing directly through him. “He didn’t call it a fund,” she said. “He didn’t guarantee a certain [return] percentage, compared to what the original people did. But compared to what was around in those economic times, we always got a nice return.” She signed a letter of agreement with Madoff in December 1992.

According to Investor B’s husband, the SEC had caught wind of A&B’s scheme when the stock-broker boyfriend of the daughter of a big investor, who was hard-pressed to believe what his girlfriend had said about her father’s investments, contacted the SEC. That led to the November 1992 charges. Investor B’s husband said Bienes contacted him at the time and told him investors would get their money back. Investors, he recalls, were “urged” to return the money to Madoff. This investor said Madoff had worked at Alpern & Heller in the late 1950s, with Avellino and Bienes, and was friendly with them [this last statement could not be independently verified].

Once investors were investing directly with Madoff, the documentation associated with those investments began to flow. “Once we were back with Madoff, we got transaction slips and a statement every month,” Investor A said. “We got a list of stocks we owned, the number of shares, and what we paid for them. On another page were the dividends. We could set up the account in two ways—we could roll the profits over or have a check issued every quarter.” This person added that the quarterly statements showed the initial investment, how much had been made to date, the balance and the percentage return for the quarter or year to date. He did not remember what information had been included in the statements he had received directly from Madoff in the 1970s, or whether those earlier statements were similar to those he later received.

The level of Madoff’s investment returns were in the same ballpark each year after 1992, but on a quarterly basis the returns varied, according to Investor A. His annual returns through Madoff were in the range of 10 percent to 11 percent. Asked if his Madoff account ever had a negative quarter, he replied: “No, never.” The lowest quarter, he said, “was maybe 1 percent,” or 4 percent on an annualized basis. “But [the lower return] was made up the next quarter.”

Investor B’s post-1992 experience was similar. “We got transaction slips every month,” she said. “It was forests and forests of trees—two inches worth a month, plus a big spreadsheet statement reflecting all of the [trading] activity.” She and her husband also received quarterly statements that said how much they had earned so far that year.

Investor B said she noticed, in flipping through recent records, that the annualized return in one quarter had been about 3 percent. “That was unusual,” she said. She added that she didn’t remember ever seeing a negative quarter. This year, her quarterly statements showed annualized returns of 3.30 percent, 11.96 percent and 10.01 percent. In 2007, they were 8.95 percent, 10.33 percent, 11.02 percent and, finally, 10.86 percent.

Some investors took their quarterly returns out of their Madoff account, while others left the returns in their account since statements showed they were consistently outperforming the market. Investor A said he took money out at various times. “If I ever wanted a check, I’d drop a letter off at their office, and within a week I’d have a check,” he said.

Investor B and her husband never took any money out. “We know of people who did, and they always could get it within a few days,” the woman said. “I’m assuming that because of bad economic times now, people wanted their money back. [Madoff] just must have never had so many people anxious about needing the money. I don’t think they suspected him, they just must have needed the money.”

The woman estimated that the couple had given Madoff about $100,000 to invest over the years since 1992. “We added money, but with no regularity,” she said. “We never took it out. We let it sit there as a cushion.” Her portfolio management reports came from Bernard L. Madoff Investment Securities LLC, New York and London. According to the statement, the firm was affiliated with Madoff Securities International Ltd., Mayfair and London.

So what did these investors know about Madoff’s strategy? Precious little. “Zero, zero,” said Investor A. “It was all based on confidence in [Madoff]. I’ve been in there for 37 years. I had no reason to question it.” Investor B said she knew the investment strategy had to do with “arbitrage,” but didn’t know what that was. She said that was the strategy in the 1980s with A&B as well.

Investor C, who also transferred his money to Madoff after A&B were charged in 1992, is angry that the deception and fraud may have gone undetected for years. “Everyone had a high opinion of Madoff, he was the chairman of Nasdaq,” Investor C said. “He was helping the SEC set up regulations. It’s like finding out that a Justice of the Supreme Court is a gangster.”

Investor C is focused on trying to regain as much of the money he gave Madoff to manage as possible. He wants to know who should have uncovered Madoff’s vast fraud. “If the SEC is part of the federal government and we as investors pay taxes to the federal government for regulation, policies and procedures, why isn’t the federal government responsible?” he said. “Their SEC went in 10 years ago, and just admitted that in September 2006 they gave Madoff a clean bill of health. Who is responsible for what happened, other than Bernard L. Madoff?”

Harry Markopolos, who a decade ago was chief investment officer at Rampart Investment Management Co. in Boston, first contacted the SEC’s Boston office in May 1999 with doubts about the veracity of Madoff’s investment returns. He pursued his suspicions and in November 2005 sent the SEC a 19-page report detailing evidence he had accumulated indicating that Madoff was either front-running customer order flow in the broker-dealer arm of his business or running the “world’s largest Ponzi scheme.” Markopolos’s prescient memo said the latter was “highly likely” and estimated that Madoff was managing between $20 billion and $50 billion. He also provided a detailed list of 29 “red flags” suggesting that Madoff’s investment business was generating fraudulent returns. Last week the Wall Street Journal published the November 2005 document.

The SEC’s Division of Enforcement opened a case file in January 2006 to determine whether Markopolos’s allegations were true and whether Madoff was running a Ponzi scheme. It closed the file in November 2007, after finding that Madoff had misled the SEC examination staff about his investment strategy and had withheld information about customer accounts. It also found that Madoff had acted as an investment adviser to several hedge funds without registering as an adviser. However, the first line of the report’s conclusion noted: “The staff found no evidence of fraud.” Prior to the case closing, Madoff registered as an investment adviser.

During this time and subsequently, individual investors had no cause to doubt Madoff. Their confidence remained a high as it had ever been. Investor C gave Madoff $1 million this year after taking money out of other accounts because those investments had fared poorly. “I am sick about it,” he said. Investor C kept his quarterly profits in the Madoff account. “There was one time when I took out $100,000, but I quickly replaced it,” he said. He got a cousin of his into Madoff’s investment business as a client earlier this year.

Investors B and C both said that friends and relatives who tried to open accounts with Madoff over the years were rejected. Some of those individuals had a net worth of millions of dollars.

Investor C said he never questioned his Madoff investment. “There was a never a negative quarter,” he said. “We had years with Madoff where we got 6 or 7 percent. But other accounts we had were getting that amount, so it didn’t throw us off. And it was taxable.” He added that an overall taxable income of 8 or 9 percent wasn’t that far “off the wall.” In his view, the A&B investment returns had been more unusual, but he believed those returns were as high as they were because the investment was risky. Of course, the investment turned out not to be risky.

Investor C said his November statement from Madoff showed that his account was up 1 or 2 percent for the month. Reading that November statement, he said, was the first time he thought, “Wow, how could this be, when the markets are down so much?” The statement showed a portfolio of T-bills, a Fidelity Spartan fund investment, a range of blue-chip stocks, and a lot of puts, indicating short positions.

When Investor C heard last week that Madoff had been arrested by the FBI in connection with his investment business, he was shocked. “I couldn’t eat dinner, I was ill,” he said. “When I first heard, I said ‘Oh,’ but I never thought my account was in jeopardy.” He said two-thirds of his life savings were invested with Madoff.

Investor B was equally stunned. “When you think it’s been working and working for many years, you just don’t question it,” the woman said. “There were a lot of well-known companies on the list. He tells you in each of these statements how much you own, the price and symbol, and how much you sold it for or bought it for.” She said her last statement indicated long positions in Wells Fargo, Walmart, Johnson & Johnson, Intel, McDonald’s, Oracle, Apple, Amgen, Bank of America, Pfizer, UPS, Cisco, Verizon, General Electric, United Technologies, U.S. T-bills and a Fidelity Spartan fund. She said she now doesn’t know if any of the buys and sells listed in the statement were actually made.

Investor A, who began investing directly with Madoff around 1971 and stuck with him for nearly four decades, said he was floored by Madoff’s arrest. “It was a complete shock, complete shock,” he said.

But even now, these investors can’t pinpoint where things went wrong. “I don’t think I would have done anything differently,” said Investor A. “Because of [Madoff’s] track record, I never questioned it. You started out small over the years, gave him more, and never really thought twice about it because it was so consistently good.” He describes the amount of money he lost through Madoff as “significant.” He added that a “lot of friends invested with Madoff, and the whole family.”

Investor B said she, too, never questioned the returns from her Madoff investment. “Who’ll rock the boat when it’s so lovely?” she said. “No one thought it was dishonest. We thought we’d wandered into a good deal, and we were grateful.”