Written by Teresa Zink for HB Litigation Conferences LLC

Another big question, according to Paccione, is what was the regulatory scheme that applied to BMIS and what went wrong, if anything.  “A lot of our investors and clients had an earnest belief that Madoff was making the money he was making.  They thought this was a regulated entity; that the SEC was looking at this; that the NASD was looking at this.  How could this have all gone so badly?”

He noted that BMIS was a registered broker-dealer and NASD member and subject to SEC compliance and supervisory programs.  However, he explained, the SEC programs are designed to deter and detect violations of the broker-dealer; not the investment advisor. 

According to Paccione, Madoff’s investment advisory business, which is really the business that is at the heart of everything, became a registered investment advisor in 2006 and from that time would have been subject to routine examinations by the SEC and NASD.  “For whatever reason…the SEC and the NASD did not conduct those routine examinations in 2006 and 2007; or if they did, they did it in a very cursory way.”

“Frankly, it’s unclear to me, had they done anything in 2006, if there still would have been enormous losses at that point.  Certainly, it would have cut off any pain, at least from that point going forward,” according to Paccione.  In addition, he noted “The fact that BMIS used foreign traders to clear these trades – as appears to be the case if there were any trades – that also would have made any investigation of the U.S. broker-dealer less fruitful.”

(See next post.)

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