On Thursday January 29th 2009, Bloomberg News ran a story entitled Madoff’s Tactics Date to 1960s When Father-in-Law Was Recruiter. This article suggests that his father-in-law, Saul Alpern, was actively involved in steering clients, friends and their families to Bernie Madoff from the earliest days of the founding of the son-in-laws brokerage firm in 1960.

According to one Cynthia Arenson, the owner at one time of the Sunny Oaks Hotel in New York State's Catskill Mountains region, apparently promised investors double-digit returns from the earliest days. “His son-in-law just opened a firm, and he was doing very well,” said Ms. Arenson, 68, who lost at least $1.25 million with Madoff. “Wouldn’t you encourage your friends to invest with him? Sometimes they got 18 percent, sometimes they got 19 percent.”

Ms. Arenson was a classmate and childhood friend to Ruth Madoff. Like many of Ruth Madoff's friends and classmates at Far Rockaway High School, she too encouraged friends and members of her family to invest money with the Bernie Madoff "bank" or near-guaranteed money machine. The lure of returns between fifteen and twenty percent were apparently too much from getting others to invest in a "good thing".

Over the past couple of days, Toomre Capital Markets LLC ("TCM") has spent some time focusing on the Bernie Madoff fraud scandal and particularly on how he could have perpetuated the fraud in such a great amount on so many investors over such a great period of time. Some of the resulting TCM posts have included:

• Update on Bernie Madoff Scandal and Feeder Funds,
• Ezra Merkin and Madoff Feeder Funds Face More Lawsuits,
• Fairfield Greenwich Sued Again Over Madoff Losses,
• Bob Jaffe, Bernie Madoff's Man To See, Ducks Subpoena,
• Frank Avellino, Michael Bienes and Bernie Madoff and
• Madoff's Fund May Never Have Made Any Investments.

TCM has been particularly interested in what lessons might be learned from this scandal, particularly regarding the areas of Enterprise Risk Management and due diligence. Let's summarize TCM's understanding to date about Bernie Madoff's early days:

Apparently Bernie Madoff started out in 1960 with $5,000 in funds that he had "saved" from a lifeguard and home sprinkler installation jobs. He was married to his high school sweetheart, Ruth Alpern Madoff. He may have worked earlier for his future father-in-law at the Manhattan accounting firm Alpern & Heller where Frank Avellino and Michael Bienes also then worked. His first investor was the philanthropist was Carl Shapiro. Apparently, though, Bernie Madoff never made a single trade for his investment business customers.

Starting in 1962, Frank Avellino and Michael Bienes solicited monies that were then "invested" with Bernie Madoff that generated steady returns for investors in the range of 13.5 per cent to twenty per cent. Their investment solicitation business was so successful that by 1984 Avellino and Bienes gave up their accounting business. By 1992, Avellino and Bienes had amassed more than 3,200 investors and approximately $450 million in investment principal.

Then, in late 1992 based upon a tip from an anonymous source about a possible Ponzi scheme, the SEC investigated Avellino & Bienes ("A&B"). The SEC was surprised to learn that the funds were invested with the then current Chairman of the NASDAQ, a certain Bernie Madoff. The books apparently were in order and according to reports at the time, "all of the money was there." Hence, the SEC only sanctioned Avellino and Bienes for running an unregistered investment advisor and ordered that the firm close after returning all of the funds to its investors. Apparently, Madoff, Avellino and Bienes also returned "every cent" to those early investors.

At that point in 1992, given that:

1. Bernie Madoff had been running his fraud for about twenty years,
2. Bernie Madoff apparently had been "generating" returns of at least 13.5% per year (or at least that is what he reported to A&B), and
3. Bernie Madoff also apparently never did a trade (and hence never had any market exposure)

One question suddenly screams out: What were the sources of the funds that Madoff used to return both the interest earned and investment principal A&B's investors in 1992? In short, if Madoff was running a Ponzi scheme for A&B (as alleged in 1992), what other sources of funds were available to Madoff? Did he have as much other "invested" monies at that point? Or did he have some "rabbi" (like Carl Shapiro thought he was being in November 2008) from whom Bernie Madoff borrowed money?

(Apparently, subsequent to the SEC settlement, many of the A&B unregistered note investors rolled over their investments into accounts directly with Bernie Madoff's securities firm. One has to wonder though why none of these investors inquired about and/or confirmed whether that firm was indeed registered as an investment advisor.)

According to an January 16th 2009 overnight report from Reuters, an industry-run regulator for brokerage firms, Financial Industry Regulatory Authority ("FINRA"), reports that Bernie Madoff's investment operation may never have executed a single trade! That is right!! This fraudster appears to never have invested any of the money he received over the years from investors. As a result, the detailed statements mailed to investors each month are likely to be no more than an elaborate mirage.

"Our exams showed no evidence of trading on behalf of the investment advisor, no evidence of any customer statements being generated by the broker-dealer," said Herb Perone, spokesman for the FINRA. Given that FINRA supposedly conducted an audit of Madoff's broker-dealer firm every two years since it started back in 1960 and did not highlight anything as seriously amiss, one does wonder just what was included in such regulatory reviews. One also has to question what type of due diligence each and every investor and/or "feeder fund" conducted around Madoff's investment operation, especially when there never was a single trade!!

One also has to wonder just when Madoff's fraudulent activities started. Toomre Capital Markets LLC ("TCM") understands that Bernie Madoff's first client was Carl Shapiro. If there truly were no trades, did Bernie just report fictitious numbers to Mr. Shapiro? It would be truly ironic if the ultimate success of Bernie Madoff's fraudulent activities were based on fictitious account statements sent to that very first investor.

No doubt the "success" of Mr. Shapiro and other very early investors were used to trumpet the supposed expertise of Madoff's investment strategies. Did the Madoff fraud really start with that first investor, who perhaps did not review his initial statements too carefully? From all of the news reports, Madoff attracted funds through word of mouth. One investor would tell another prospect of just how wonderful the Madoff returns were. In the late 1980s and early 1990s, the reported returns were in the range of 13.5% to 20% according to documents from SEC litigation. One wonders what Madoff reported to Mr. Carl Shapiro in those early years.

Toomre Capital Markets LLC also wonders just how Bernie Madoff came to take on Carl Shapiro as a client. Was by chance Mr. Shapiro a client of the accounting firm Alpern & Heller? Or was it through some connection of a common religious faith? Was there any connection back at Bernie Madoff's start with Frank Avellino or Michael Bienes?

Back in 1992, the United States Securities and Exchange Commission ("SEC") reached a settlement with Avellino & Bienes ("A&B"), a tiny New York accounting firm that was run by Frank Avellino and Michael Bienes. According to legal documents from that case, these two started raising money from clients, friends and relatives in the early 1960s and handed over that cash over to Bernie Madoff to invest. (This was about the same time that Bob Jaffe's future father-in-law, Boston philanthropist Carl Shapiro, gave Bernie Madoff his first funds with which were used to start his investment business.) By 1984, apparently Avellino and Bienes had ceased their accounting practice to focus exclusively on finding additional investors for Madoff.

In 1989, two other accountants Steven Mendelow and Edward Glantz and later Glantz's son Richard also began raising funds for Bernie Madoff. By the time that the S.E.C. ordered these three firms to return all funds to their investors for selling unregistered shares, some $454 million had been raised from more than thirty-two hundred investors. Apparently, the S.E.C investigation had been sparked by a confidential tip that one of the money managers was promising annual returns of up to twenty percent.

The regulators subsequently examined Madoff's books and it appears that they were satisfied when every penny was returned to the former accountant's investors. Bernie Madoff and his investment operation never were sued by the regulator and consequently never was subject to any operational restrictions. The former accountants were collectively ordered to pay $875,000 and to cease from further violations of securities laws.

Rather interestingly, Avellino & Barnes were then represented by Ira "Ike" Sorkin, the lawyer who currently represents Bernie Madoff in his criminal proceedings. In another connection between Avellino and Madoff, Lee Richards, who has been appointed by the SEC as the receiver of all Bernard Madoff Investment Securities assets, also served as the court-appointed trustee over Avellino & Bienes during its legal dispute with the federal agency, according to Bloomberg News.

What originally caught the attention of Toomre Capital Markets LLC ("TCM") about Frank Avellino and Michael Bienes was their relationship to Bernie Madoff's eventual father-in-law, Saul Alpern. Mr. Alpern was the lead partner of a Manhattan accounting firm back in the 1950's and 1960's then called Alpern & Heller. His colleague was Sherman Heller. Two of the junior accountants at the firm were named Frank Avellino and Michael Bienes. Mr Heller apparently died in the mid-1960's at the age of 46 and then in the 1970's Avellino and Bienes took over that accounting business renaming it Avellino & Bienes. According to the blog mehtafiscal in their post The End of a Sure Things: Madoff's Long Bet, one early investor with A&B and Madoff claimed that "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]."

TCM was previously unaware that Bernie Madoff had worked at an accounting firm. (Perhaps it was this accounting firm was the source of the original connection between Carl Shapiro and Bernie Madoff?) Carl Shapiro was Madoff's original investor and also one of his last when he supposedly contributed $250mm to Madoff in November 2008. Carl Shapiro also likely was the link that connected his son-in-law, Robert Jaffe, with Bernie Madoff and eventual employment at Cohmad Securities Corp.

Various charity filings with the SEC subsequent to 1992 suggest that both Frank Avellino and Michael Bienes continued to have at least some funds invested with Bernie Madoff. Whether they played a larger role after 1992 in Madoff's investment business remains to be disclosed. However, given that their personal relationships with Madoff that apparently were far deeper than the SEC disclosed back in 1992, one is left to wonder.

Two interesting pieces of news this month contribute to this state of wonder. On Monday January 12th, Mr. Bienes, "the fabulously wealthy Fort Lauderdale benefactor", abruptly resigned from the board of the prestigious Broward Center for the Performing Arts via a short one sentence letter of resignation. Why did he suddenly resign at this time? One might also wonder just how this formerly junior accountant became so wealthy. Did he really make his millions because "he got lucky on Wall Street"? Or perhaps some of his "wealth" came from his old buddy Bernie Madoff?

The other piece of intriguing news concerns his partner Frank Avellino. Mr. Avellino too has progressed far from his younger days as an accountant at Alpern & Heller. Today he apparently owns a $4 million home in Palm Beach, a residence in New York City and another $10 million summer residence on Nantucket. Also apparently, Mr. Avellino just recently put his Nantucket residence on the market. The timing of that move too is interesting and perhaps quite innocent, particularly in these difficult economic times.

However, when one learns that Mr. Avellino also has recently been accused of bilking his house-cleaner out of $124,000 life savings, one really begins to wonder. This article in Nantucket's Inquirer and Mirror has more details of the suit filed by one Nevena Ivanova against Mr. Avellino. Apparently a few years ago, Mr. Avellino accepted some funds from Ms. Ivanova for investment. Then recently he announced that all of her money had been lost. It is unclear how exactly Mr. Avellino was supposed to invest the householder's money. Perhaps he invested it with his good buddy Bernie? If so, how then did Mr. Avellino allegedly announce on December 1st that all of her funds had been lost? Did perhaps Mr. Avellino know something about Bernie Madoff's fraud some ten days before his arrest?

Inquiring minds really would like to know more about the recent relationships between Bernie Madoff, Frank Avellino and Michael Bienes. Hopefully, more information will be forthcoming shortly.