Securities Law Blog

Another brick in the Madoff scam crumbles under further investigation by the Securities and Exchange Commission (SEC). On February 25, 2010, the former Director of Operations at Bernard L. Madoff Investment Securities, LLC (BMIS), Daniel Bonventre, was charged for his involvement in the multi-billion dollar fraud.

At BMIS, Bonventre oversaw the firm’s accounting and securities clearing functions for about the last thirty years. The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, made several allegations about Bonventre’s role in the scam.

According to the SEC complaint, Bonventre allegedly falsified financial reports to investors to avoid disclosing the firm’s massive liabilities. BMIS financial reports were allegedly doctored by Bonventre to inappropriately state how investor funds were being used and maintained.

The SEC alleges that Bonventre was aware that billions of investor funds were not being used to purchase securities on behalf of investors, and worked alongside Madoff and others to disguise the information. When BMIS came under review, Bonventre and others allegedly produced reams of false reports and data filled with “serial misrepresentations.”

George S. Canellos, Director of the SEC’s Regional New York Office said, “A fraud of this magnitude requires a coordinated effort. Bonventre played an essential part by creating bogus financial records to give BMIS the appearance of legitimacy, when in fact the firm lost money and could not have survived without the fraud.”

To hide that BMIS was consistently operating at a significant loss, the firm allegedly used over $750 million in investor funds to artificially improve reported revenue and income.

Finally the SEC alleges that the former Director of Operations made an estimated $1.9 million in illicit personal profits through fake backdated trades in his own investor accounts at BMIS. One such trade was backdated by twelve years.

If convicted on all charges, Bonventre, 63, faces up to 77 years in prison. The SEC is also seeking to impose financial penalties and disgorgement of all ill-gotten gains.
The charges against Bonventre mark the SEC’s seventh enforcement action concerning the Madoff scam since its collapse in December 2008. Previous actions where parties have pleaded guilty to criminal charges include Madoff and BMIS, DiPascali, and auditors David G. Friehling and David G. Friehling & Horowitz CPAs, P.C. Certain feeder funds have also been charged with committing securities fraud, and two computer programmers at Madoff’s firm were charged for their role in concealing the scheme.

The Financial Industry Regulatory Authority (FINRA) recently released a regulatory notice to remind firms of their responsibilities when dealing with deferred variable annuities. FINRA outlines several steps that ought to be taken in order to ensure customer suitability when buying deferred variable annuities and compliance measures that can be set up by the firm.

The recommendation requirements state that:

*No recommendation of the purchase or exchange of a deferred variable annuity shall be made unless a member or person associated with a member has reasonable basis to believe that the customer has been informed of various features of deferred variable annuities, and that the customer would benefit from certain features of deferred variable annuities.

*Prior to recommending the purchase, the associated person must research the customer’s background and needs. Such fields should include but are not limited to age, income, financial situation, investment experience/objectives, assets and risk tolerance.

*After receiving necessary information, the application should be submitted to the firm’s office of supervisory jurisdiction (OSJ).

*A registered principal shall review and determine whether he/she approves the recommended purchase or exchange of the deferred variable annuities prior to submitting to the insurance company.

*Each suitability determination should be documented and signed by the person recommending, approving or rejecting the transaction.

FINRA also reminds firms that it is their responsibility to establish and maintain specific supervisory procedures reasonably designed to achieve compliance. Surveillance procedures should be implemented to prevent inappropriate exchanges and corrective measures should be in place to deal with inappropriate conduct.

Training policies or programs should be developed and documented to ensure that persons who effect and those who review transactions dealing with deferred variable annuities comply with the requirements of this Rule and understand material features of deferred variable annuities.