Written by Teresa Zink for HB Litigation Conferences LLC

Quoting Professor John Coffee’s testimony to the Senate Banking Committee, Paccione noted two basic problems with Madoff’s business structure.  First, although the investment advisor had to use a “qualified custodian” to hold the funds, “qualified” doesn’t mean independent.  In order to be “qualified” the advisor has to be a registered broker-dealer, which BMIS was.  Professor Coffee has suggested that the regulation should be changed to require an “independent” custodian.

“The other problem addressed by Professor Coffee is the lack of a registered auditing firm,” according to Paccione.  “The auditing firm that was looking at the BMIS books and records and the investment advisors, as we all have read, is a firm of three people; one of whom was retired, one of whom was clerical, and one of whom was operating out of a small office, I believe, in Rockland County.”

Paccione also discussed the SEC’s “risk triage” system by which it focuses its regulatory efforts on the highest risk entities and on determining which tips to investigate.  As a result of the Madoff scheme, Paccione predicts a call for more regulation of hedge funds, and increased enforcement efforts by the SEC.  “I think they’re going to become more difficult to deal with, and I think rightly so.  They’ve been put under the spotlight and I think they’re going to step up their efforts again.”

(See next post.)

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