Call them the mini-Madoffs: Investment advisers accused of conducting Ponzi scams that echo the one allegedly pulled off by the disgraced Wall Street money manager.

In recent weeks, both the Wall Street Journal (sub. req.) and the New York Times report, a spate of mini-Madoffs has come to light

The Journal looked at SEC records and found an increase in cases in which the agency alleged Ponzi schemes. Last year, it brought at least 23 Ponzi cases, up from 15 in 2007. This year, it has already filed four. The paper explains why:

More schemes are emerging now, experts say, in part because of the economic downturn. Tough times have prompted people to seek to cash in their investments, only to find out their money is missing. New investment also dries up in slumps, making it harder for fraudulent funds to replenish their coffers and make the payments needed to keep their operations going.

Let's go down the list of the mini-Madoffs to emerge recently:

- Arthur Nadel, the missing Florida hedge-fund adviser, was arrested yesterday, accused by the feds of defrauding clients to the tune of millions of dollars.

- Nicholas Cosmo, a Long Island money manager, raised more than $370 million, promising eye-popping returns of 48 percent by funding commercial loans. But he lent little money and only about $746,000 remains, according to an affidavit. Cosmo surrendered to authorities Monday.

- Joseph S. Forte, an investment manager in Phildelphia, was accused by the SEC earlier this month of running a Ponzi scheme since at least 1995, claiming returns as high as 38 percent and raising $50 million.

- Darren Palmer, an Idaho Falls money manager, is being probed by state authorities, with investors claiming they lost up to $100 million in a Ponzi scheme.

- Marcus Schrenker, an Indiana financial adviser, was arrested in Florida earlier this month after apparently trying to stage his own death in a plane crash. He faces charges, in both states, of swindling investors.

- Rod Cameron Stringer of Texas is alleged by the SEC to have set up a Ponzi scheme that lured elderly investors, claiming annual returns of 61 percent.

- Robert C. Brown of California is accused by the SEC of using millions in clients' money "to pay for lavish personal expenses, such as upkeep on his Ferrari, limousine services and shopping trips."

- Anthony James of Florida set up a "classic Ponzo scheme", says the SEC, through which he got access to at least $2.4 million in client funds, which he used to pay for a six-bedroom home, a Porsche and season tickets to the Miami Heat.

There are more.

Sounds like the SEC's plans to beef up their enforcement unit can't happen quickly enough.

After the Bernard Madoff fraud came to light, costing investors an estimated $50 billion, it emerged that the SEC had fallen down on the job, in part because, as we detailed last month, it had soft-pedaled its enforcement duty. And today, the head of the agency's Office of Compliance, Inspections and Examinations, Lori Richards, testified before the Senate Banking committee about how to prevent future Madoffs.

Richards said the agency plans to increase the frequency of its examinations of investment advisers, investigate the existence of unregulated advisers, and broadly consider different regulatory structures -- an idea that seems to have gained ground lately.

Richards said that in recent years, the number of registered investment advisers has grown past 10,000. OCIE has just 425 employees to oversee them. And Madoff wasn't even registered -- hence the need to begin monitoring them too.

It'll be a while until we know how all this will play out. But it certainly looks like under President Obama and new agency chair Mary Schapiro, enforcement will no longer take a backseat at SEC, as it did during the Bush years.

The wages of Madoff continue to grow...

A new bill being introduced by Senators Chuck Schumer and Richard Shelby would aim to crack down on financial fraud by adding hundreds of new prosecutors and investigators to the Department of Justice -- including the FBI -- and the Securities and Exchange Commission, at a cost of $110 million.

A press release explains:

In recent months, amid the financial crisis that has roiled the U.S. economy, a rising number of securities and accounting fraud cases have surfaced, accounting for billions of dollars in losses for investors. But the agencies on the front lines of policing the Wall Street's top financial institutions and investment managers have been hamstrung by a lack of resources.

And it quotes Schumer:

Our white collar crime divisions are under-staffed, under-funded, and overwhelmed," Schumer said. "When a wave of violent crime sweeps through a city, the immediate response is to beef up the police forces, putting more cops on the beat, extending overtime, and making sure the city returns to safety. Our reaction to the financial crisis and the massive and complex financial fraud investigations that loom should be no different.

In recent weeks, there has been talk of re-structuring the financial regulatory system, of which the SEC is a major pillar, in response to the current financial crisis. So we'll see how this new effort fits in.

Read more »

In recent weeks, the evidence that Bernard Madoff's alleged fraud goes back longer, and implicates more people, than we at first knew, has seemed to grow. And over the weekend, the New York Times added to that impression, with a lengthy takeout on a 1992 SEC investigation into Frank Avellino, an accountant tied to Madoff, who has admitted to not keeping conventional records.

Despite several red flags, the probe ended with Avellino paying only a small fine, and it never appears to have questioned Madoff's own operation.

Here's what seems to have happened:

Avellino and Madoff had had ties going back to the late 1950's, when Avellino worked as an accountant at a firm run by Madoff's father-in-law. Madoff even briefly ran his securities business from Avellino's office.

As the years passed, Avellino gradually shifted the focus of his business from accounting to raising money for Madoff's investment business. Then in 1992, the SEC received marketing materials showing that Avellino and his partner, Michael Bienes, had promised investors returns of up to 20 percent a year. Suspecting a Ponzi scheme, the government launched an investigation.

Avellino's explanation was simply that Madoff -- by then one of Wall Street's biggest stock traders -- was managing the money. Avellino said that if Madoff ever fell short of achieving a 13-20 percent return for investors, then Avellino and Bienes would make up the difference.

And that seems to have satisfied the SEC. As the Times puts it:

No one at the securities commission seems to have questioned why Mr. Avellino and Mr. Bienes offered clients a double-digit guaranteed return on money that they did not even control. Nor do the records offer any hint that the commission considered whether Mr. Madoff, rather than Avellino & Bienes, might be operating a Ponzi scheme.

Avellino returned money to investors, paid a fine, and shut down his business.

But when an audit was conducted by Price Waterhouse, it was discovered that Avellino didn't keep proper records. When Price Waterhouse asked Avellino to do so for 1992, he refused, writing:

"My experience has taught me to not commit any figures to scrutiny when, as in this case, it can be construed as 'bible' and subject to criticism. In this present instance, quite severely. I explained how the profit and loss can be computed from the records you now hold in your possession that Bernard L. Madoff and I supplied."

Still the SEC did nothing, and by the end of January 1993, the audit, too, was over.

Madoff and Avellino appear to still have ties. Madoff's current lawyer, Ira Sorkin, represented Avellino during the 1992 investigation. There's also this:

.In 2003, the Avellinos bought a $4.5 million house in Palm Beach less than five blocks from Mr. Madoff's house there. Their Manhattan apartment is similarly close to Mr. Madoff's apartment.

And Avellino may have been wired into Madoff's alleged fraud right up until the end. the Times reports:

A lawsuit claims that Mr. Avellino warned his housekeeper, who had invested with him, that her money was lost 10 days before Mr. Madoff's fraud became public.

There have been no indications that Avellino is a target of the SEC's current Madoff investigation. But at the least, he's a figure worth keeping an eye on.

So we're confused about something.

Yesterday, as we reported, Sen. Carl Levin announced that the Treasury Department had agreed to release the contracts for bailout funds that it signed with 10 firms -- though it remains unclear whether Levin's office will release them publicly.

But at least some of those companies appear to have filed documents with the SEC covering their receipt of the funds. These "Letters of Agreement" are contracts signed by bailout czar Neel Kashkari and firm executives, which spell out in detail the amount of capital the firms are receiving, on what terms, and even cover issues like executive pay limits.

For instance, here's the one for AIG (not technically a part of the TARP program) which seems similar to what Levin has obtained.

And here's the agreement Treasury came to with American Express, signed by the firm's CEO Kenneth Chenault.

And the database appears to contain similar Letters of Agreement for hundreds of other companies that have receive TARP funds -- though it's not clear that it contains such letters for all the firms Levin has asked for.

We called Levin's office to ask whether there's additional information -- beyond what's in the SEC filings -- contained in the contracts Treasury has agreed to hand over, but have not yet received a response.

Late Update: And here's what seems to be Bank of America's "Letter of Agreement" with Treasury, signed October 26. B of A is another firm that Treasury has agreed to release its contract for, according to Levin's announcement. It has received $15 billion in TARP funds.

And here's the same thing for Bank of New York Mellon, which got $3 billion in TARP funds back in October, and is another firm for which Treasury has agreed to its release the contract to Levin.

When Mary Schapiro was announced as Obama's pick for SEC chair, she was warmly received, in general, as someone likely to restore the agency's regulatory teeth after the free-market ideologues who ran the place under Bush.

But it looks Schapiro's confirmation hearings, set to begin this week, may not go perfectly smoothly all the same.

Schapiro heads the Financial Industry Regulatory Authority, the non-governmental body that supervises oversees U.S. brokerages. And as we noted last week, Finra, under Schapiro, failed to catch Bernard Madoff's alleged "$50 billion ponzi scheme". Indeed, it conducted an inquiry into Madoff's operation that concluded, in 2007, that he had violated certain technical rules and had failed to promptly report some transactions, but identified no more serious wrong-doing -- a very similar story to the SEC's.

Still, it's also worth pointing out that Finra's investigation into Madoff was focused on his brokerage operation, which, according to a Finra spokeswoman, is all that it is legal empowered to look into. Madoff's business was split into brokerage and investment-advisory arms -- but the alleged fraud, investigators believe, was centered on the investment-advisory arm. So Finra would appear to bear less responsibility than SEC for missing Madoff.

But that's not the only potential confirmation headache for Schapiro. She was accused in two recent lawsuits of making misleading statements in an effort to build support for the creation of Finra, which was created two years ago by merging the regulatory units of the NYSE and the Nasdaq. Schapiro headed the Nasdaq regulator at the time, and became the head of Finra, seeing her yearly salary rise from $2 million to $3.1 million.

The New York Times explains the details:

Among the misstatements that she is accused of making is that the Internal Revenue Service had prohibited the NASD from paying each member more than $35,000 as part of the merger deal. Although an NASD proxy statement issued while the deal was pending said that the I.R.S. would not permit the organization to give more compensation to members, the I.R.S. did not actually issue a ruling on the matter until March 2007, long after the deal closed and three months after the members voted to approve it.

The first lawsuit was rejected by a Federal judge but is on appeal. The second suit, which is similar and was brought by a former SEC lawyer, appears to have been filed soon after Schapiro was nominated to head the SEC, though lawyers for the plaintiffs say it was in the works before then.

Looks like those hearings could be more lively than we thought. We'll be watching closely later this week...

We've heard talk from various quarters in recent weeks about the pressing need to re-regulate the financial markets, in response to the SEC's failure in the Bernard Madoff case, and to the broader financial crisis.

And in his interview yesterday with CNBC, Barack Obama added a bit more detail to the picture of what we can expect, and when.

Perhaps most importantly, he suggested that the overlapping "alphabet soup" of financial regulatory agencies -- the SEC, the FDIC, the OTS, and so on -- might be combined into one super-regulator. He signaled he'd be more interested than his predecessor in working with overseas allies on a global financial regulatory system. And he said he'll have a proposal by early spring.

Here's his answer in full:

CNBC: How extensive an overhaul of the financial regulatory apparatus will you propose and support? When will you do that? And do you think there is a global regulatory apparatus that needs to be created? You've got the G-20 coming up in April in London.

Obama: Well, by the time that G-20 meeting takes place, we, I believe, will have presented our approach to financial regulation. I think some international coordination has to be done. But right now, we just have to take care ... (unintelligible) ... and Wall Street has not worked, our regulatory system has not worked the way it's supposed to. So it's going to be a substantial overhaul. We're going to have better enforcement, better oversight, better disclosure, increased transparency. We're going to have to look at this alphabet soup of agencies and figure out how do we get them to work together more effectively. We've got to stop splintering functions in such a way that capital in one form is treated one way and capital in another form is treated another way, because these days in global financial markets, they're all fungible. And there's systemic risks that are possible, whether it's in the form of derivatives or insurance or traditional bank deposits. So we've got to update the whole system to meet the needs of the 21st century. This is an assignment that my team is already beginning to work on and I think that we will have, fairly shortly, a package that we've worked alongside Barney Frank and Chris Dodd, to present to the American people.

In a sign pointing in a similar direction, Obama yesterday announced that he intended to keep Sheila Bair on as chair of the FDIC (pending any massive reorganization of the regulatory system that would abolish the agency, presumably). Though she's a Republican, Bair, who has pushed for stronger efforts to prevent foreclosures, was described by the New Republic as "the high-ranking government official most likely to attack Obama's economic policies from the left."

Yesterday we noted that, based on his testimony before Congress, SEC Inspector General David Kotz appears to be conducting an aggressive investigation of the agency's failures in connection with the Bernard Madoff case.

But on one crucial point, Kotz's tetimony was much less heartening.

Questioned by lawmakers about his authority to gain access to documents and witness testimony, Kotz admitted that he didn't have the power to subpoena former SEC employees for their testimony. (We'll post the video or the relevant portion of the transcript when it becomes available.)

Here's why that matters. Three SEC enforcement staffers -- Assistant Regional Director Doria Bachenheimer, Branch Chief Meaghan Cheung, and Staff Attorney Simona Suh -- were listed on the "closing document" for the 2006-07 inquiry into Madoff, which has emerged as exhibit A in the case against the agency. According to an SEC enforcement source, only Suh, the most junior of the three, remains at the agency. (A receptionist at the agency's New York office, where all three had been based, confirmed to TPMmuckraker that Bachenheimer and Cheung no longer worked at the SEC.)

So Kotz wont have the power to compel testimony from the two SEC staffers who were perhaps the most central on-the-ground players in the agency's failure to catch Madoff. That may well limit his ability to draw broad conclusions about the SEC's slip-up, and how to avoid similar mishaps in the future.

We noted earlier today that Madoff whistleblower Harry Markopolos over the weekend cancelled his scheduled testimony before a House committee, citing illness. Markopolos had been one of the key witnesses scheduled to appear, so his eleventh-hour withdrawal raised a few eyebrows.

We've now spoken to Markopolos' lawyer, Phil Michael, who assured TPMmuckraker that his client was incapacitated and unable to leave his home, and that Markopolos still intends to find a time to testify in the near future.

We look forward to hearing from him.

SEC Inspector General David Kotz, who is conducting an investigation into the agency's failure to detect Bernard Madoff's alleged "$50 billion ponzi scheme" despite conducting several probes of Madoff's business over the last decade, testified before Congress today.

And from the sound of his opening statement, his inquiry could be worth paying attention to.

Here, paraphrased, are a few highlights from the statement:

- Kotz has asked SEC employees to preserve relevant documents.

- He has sought information from the office of SEC chair Chris Cox, and with senior officials from the agency's compliance section, whose performance is at the heart of concerns that the SEC fell down on the job.

- He has obtained emails sent by former and current employees, both those at the Washington DC headquarters and in the New York and Boston regional offices.

- He hopes to add four new investigators to his team, and is seeking additional office space and administrative help.

- He has scheduled an on-the-record interview with Harry Markopoulos for later this month. Markopolos, who first rasied concern about Madoff's business in a lengthy complaint to the SEC, was scheduled to testify before Congress today but cancelled, citing illness.

- He'll probe conflicts of interest at SEC stemming from Madoff's and his family's relationships with SEC officials.

- He'll also look at the overall operations of the enforcement division.

- And his probe will be "independent and as hard-hitting as necessary."

More news from today's hearing to follow...

When the House committee that will hold hearings today on Bernard Madoff and the role of the SEC announced its witness list, one of the most interesting names was that of Harry Markopolos. The former rival investor to Bernard Madoff, who had first argued in a complaint to the SEC that Madoff's business was not on the level, was the closest thing this scandal has had to a heroic whistleblower.

But now Markopolos has pulled out, citing illness. Given the low public profile he has maintained since his role in the scandal became public, that move raised our interest.

A spokesperson for Rep. Paul Kanjorski, who chairs the sub-committee holding the hearings, told TPMmuckraker in an email, referring to Markopolos: "He has said that he looks forward to testifying at a subsequent hearing."

So perhaps we'll get to hear from him in the end. But until we do, this will bear watching.

The Wall Street Journal has a deeper look at the various government investigations into Bernard Madoff's business, stretching back over the last 16 years -- all of which failed to detect the alleged "$50 billion ponzi scheme" that Madoff is said to have been running.

Among other nuggets, the Journal reports:

The failure to stop Mr. Madoff also is an embarrassment for Mary Schapiro, the Finra chief who has been nominated by President-elect Barack Obama as the next SEC chairman. Finra [the Financial Industry Regulatory Authority, an industry-run watchdog for brokerage firms] was involved in several investigations of Mr. Madoff's firm, concluding in 2007 that it violated technical rules and failed to report certain transactions in a timely way.

Ms. Schapiro declined to comment. Mr. Cox has previously acknowledged mistakes by the SEC. The agency declined to comment.

Close SEC watchers generally have said they expect that under Schapiro, the agency will be a more vigilant watchdog than it has been under President Bush's various chairs, culminating with Chris Cox.

Still, Finra's failure, under Schapiro, to catch Madoff is another reminder that, even though the SEC's problems were in part a result of the pure free-market ideology to which the Bush administration largely subscribed, those problems likely won't immediately be solved by the change of administrations.

Was Madoff just the tip of the iceberg?

The SEC is investigating at least one case in which investors may have been cheated out of as much as $1 billion, by money managers using tactics similar to those alleged to have been employed by Madoff, Bloomberg reports, based on anonymous sources "with knowledge of the inquiries."

It adds:

Regulators may discover additional Ponzi arrangements as declining stock markets prompt investors to withdraw their cash and they question how their money is being managed. This week, the SEC said it halted what the agency described as a $23 million scam targeting Haitian-Americans, and said the Florida- based operators had tried as recently as last month to bring in more investors.

And it throws in an additional nugget of news stemming from Madoff's providing a list of his assets to the SEC on Wednesday:

A catalog of Madoff's assets provided by his attorneys to the SEC on Dec. 31 hasn't revealed any major sources of additional cash, a person familiar with the matter said.