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Tremont Capital

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Maxam Capital Management Sues Auditor Over Madoff Losses

On Friday January 30th 2009, Maxam Capital Management LLC, yet another "feeder fund" to Bernie Madoff, sued its own auditors for not detecting the alleged fraud at Bernard Madoff Investment Securities. Apparently the Maxam Absolute Return Fund LP placed all of its $280 million in holdings with Madoff. That fund has now sued McGladrey & Pullen LLP and Goldstein Golub Kessler LLP for professional negligence on Jan. 30 in Connecticut state court. The case is Maxam Absolute Return Fund LP v. McGladrey & Pullen LLP, Connecticut Superior Court (Bridgeport).

According to the complaint, while the auditors issued opinions that Maxam’s financial statements conformed with general accounting principles, they “negligently relied solely on documents created by Madoff and sought no independent confirmation that trades had been executed or that assets existed.” The complaint continues “Assets were grossly overstated based on fraudulent trading tickets and fraudulent account statements provided by” Madoff.

From Bloomberg News, "Goldstein Golub, based in New York, did the Maxam fund’s 2006 audit, according to the complaint. McGladrey & Pullen, based in Bloomington, Minnesota, did its 2007 audit after Goldstein Golub partners joined that firm. McGladrey & Pullen General Counsel Richard Miller didn’t immediately return a call for comment. Two phone numbers for Goldstein Golub in New York ring through to RSM McGladrey Inc., a professional-services firm that “operates in an alternative practice structure with McGladrey & Pullen,” according to its Web site. Goldstein Golub no longer conducts audits, according to the complaint."

Darien, Connecticut-based Maxam Capital Management LLC was started in 2006 by Sandra Manzke after she left Tremont Capital which she founded in 1985. Tremont Capital suffered major losses due to the money that it had placed with Madoff. Ms. Manzke apparently started in investing almost exclusively with Madoff after she started her new firm. There are conflicting reports about how Maxam marketed itself and whether it highlighted itself as women and/or minority owned in order to attract investor funds as a start-up.

Visualization of Madoff Securities "Feeder Funds"


Based upon the recent sharp increase in website visitors and both the public and private feedback, Toomre Capital Markets LLC ("TCM") appears to have become one of the better resources for information regarding the Bernard L. Madoff Investment Securities, LLC fraud scandal. TCM's two principals, Lars Toomre and Aldon Hynes, are geeks at heart and tend to be better with numbers and technology than names and social relationships. Of course, though, the Madoff fraud abounds with so many investors, organizations, charities, lawyers and other entities that have names and relationships that cumulatively quickly become overwhelming.

Hence, Lars and Aldon thought that this website's readership might appreciate some visualization to assist in gaining a better understanding of some of the many principals and relationships that are a part of the Madoff fraud scandal. Most of the labels on the visualization below link back to other content on this website. This first graph (of what may become several) depicts what we acknowledge is incomplete information about the major "feeder funds" that contributed investor dollars to the Bernie Madoff's investment operation:

Visualization of Madoff Securities "Feeder Funds":



TCM would appreciate receiving comments in the section below about information that should be incorporated into the above graph. We will endeavor to update both this post and to produce additional social network graphs about other portions of the complex Madoff fraud social network map. Reader comments and thoughts are not only welcome, but also highly encouraged.

Investigators Work Backward On Madoff Fraud

The Friday January 23rd 2009 edition of The Wall Street Journal included an article entitled Probers Work Backward on Madoff written by Kara Scannell and Amir Efrati. This article summarizes the unusual case in the Bernie Madoff scandal where the principal figure was the first to confess to his criminal behavior. Normally, prosecutors and investigators work their way up the chain to the principle figure(s). In the Madoff case, they have been forced to work backwards to figure out who else could have helped Mr. Madoff, who said that he acted alone.

According to the article, the SEC recently issued subpoenas to a Madoff lieutenant, one JoAnn "Jodi" Crupi, and a brokerage firm affiliated with Mr. Madoff. Ms. Crupi is represented by lawyer Eric R. Breslin. Regulators are focused on documents about her compensation and her dealings with certain firm clients, including some charities. They also have asked for access to her personal computer. This last request makes Toomre Capital Markets LLC ("TCM") wonder whether regulators suspect that there were communications with clients from private e-mail accounts (as reportedly happened earlier in the timeline of this scandal).

Also, apparently regulators are preparing to issue a second subpoena to another Madoff associate, Frank DiPascali. He is represented by lawyer Marc Mukasey of the firm Bracewell & Giuliani LLP in New York. Mr. DiPascali has been reported to be Mr. Madoff's senior assistant (or even chief financial officer) and, according to Bloomberg News, investors' "Go-To" guy in the operation of the investment management business. According to investor Tim Murray of Minnesota, Mr. DiPascali was a “street-smart New Yorker” who fielded calls about the millions of dollars he entrusted to the firm. “To a Madoff customer with a discretionary account, he is the guy,” said Mr. Murray, 57, a real-estate developer. “There is nobody else.”

Ms. Crupi and Mr. DiPascali both worked on the now infamous 17th floor where the investment management portion of Bernie Madoff's business was kept separate from the broker/dealer market making operations. Like many who have learned of this fraud, authorities do not believe Mr. Madoff's assertion that he acted alone in pulling off such a large fraudulent scheme that seems to have stretched back at least three decades and involved literally thousands of investors. Those investors received monthly and quarterly account statements that are now believed to be fraudulent. One of the open questions is: Who helped Bernie Madoff prepare such detailed and ultimately fraudulent statements?

Bob Jaffe, Bernie Madoff's Man To See, Ducks Subpoena

Robert Jaffe in his vintage MG from the Palm Beach Daily News annual selection of stylish Palm Beachers. Toomre Capital Markets LLC ("TCM") has been rather amazed by both the number of and the sophistication of the various individuals, institutions and charities that have been victims of the Bernie Madoff fraud. (Yes, under American law, one is presumed innocent until one either pleads guilty or is convicted by a jury of one's peers. However, given that Bernie Madoff apparently confessed to his brother Peter Madoff, his two sons, Andy and Mark Madoff and the FBI agents on the morning of his arrest, TCM is this particular scandal will henceforth forgo using the term "alleged".) Like many in the finance industry, TCM has been surprised that a fraud of this magnitude could have been perpetuated against so many investors for so long by a firm that flew relatively below the radar.

As TCM has written about previously in the post Update on Bernie Madoff Scandal and Feeder Funds, one of the keys to Bernie Madoff's fraud were the various "feeder funds" that in essence bundled investment monies from multiple investors and then deposited much, if not all, of those funds with Bernie Madoff. Apparently the five largest of these "feeder funds" were Fairfield Greenwich, Tremont Capital, Banco Santander, Bank Medici and Ascot Partners. Other "gate keepers" who apparently funneled funds to Bernie Madoff included Jerry Breslauer, Richard Spring, Bramdean Alternatives, Prospect Capital, Stanley Chais, Cohmad Securities Corp. , and Robert M. Jaffee (pictured to right in picture by Greer Gattuso/Palm Beach Daily News).

According to a December 21st 2008 article in The Boston Globe entitled Bernie Madoff's Man To See, Robert M. Jaffe, 64, of both Weston, Massachusetts and Palm Beach, Florida cut quite the figure, even in the rarefied world of high society in Palm Beach. "With his impeccably coiffed hair, a golf game to envy, and a $17 million waterfront mansion, he was a man to be seen. He was also the man to see, if you wanted in on a sure thing - Bernard L. Madoff's investment." Apparently Mr. Jaffe "relished his access to wealthy friends and investors at country clubs and charity galas" and hence attracted "an A-list of the powerful and famous, as well as his closest friends, family - and himself" to Bernie Madoff's fraud.

Mr. Jaffe served as a Vice President of Cohmad Securities Corp., a broker/dealer that apparently was set up primarily to bring in investment management clients for Bernie Madoff. In Palm Beach and Boston, Mr. Jaffe offered coveted access to the now infamous New York investment firm and apparently this MBA dropout functioned more as a symbol of the extraordinary wealth and status Madoff clients could achieve. Driving "a green 1954 MG TF British convertible, [Jaffe] seemed to find more success doing business on the golf course than in the boardroom. And it showed in his game: Jaffe was the club champion earlier this year at Palm Beach Country Club."

The article continued, "Massachusetts investigators are looking into questions such as whether Jaffe or his firm failed to protect investors they steered to Madoff. In an interview, Massachusetts Secretary of State William F. Galvin said he had subpoenaed Jaffe to better understand Madoff's operations. 'Maybe Mr. Jaffe didn't know' about the alleged fraud, Galvin said, 'but he certainly was a key player in getting people to invest.'"

Update on Bernie Madoff Scandal and Feeder Funds

Four weeks ago, the alternative investment world was shocked by the arrest of Bernie Madoff after he allegedly confessed to running an investment Ponzi scheme that according to his own admission swindled investors out of close to $50 billion. In the days since, there has been daily news of this or that individual, family, foundation, organization or charity having suffered devastating losses because of Madoff's fraudulent behavior. In recent days, the receiver appointed by the courts to try to recover investor funds has sent out potential claim forms to more than 8,000 entities that had invested funds through Madoff in the last twelve months.

Before news of this scandal broke, Toomre Capital Markets LLC ("TCM") had tangentially heard of Bernard Madoff Investment Securities, primarily in connection with its market making in small illiquid NASDAQ common stocks and its early adoption of technology to support electronic trading. We had no sense, though, that Bernie Madoff was running an investment advisory business nor that he potentially had so many funds under management from such a wide and diverse group of entities.

Apparently, his annual registration statement filed in 2007 for the investment management subsidiary indicated that he had $17 plus billion under management from less than two dozen investors. While one never can be sure of what is truth with regard to what Bernie Madoff said or did, based on information that has come out since, both of these numbers appear to be wrong. TCM suspects that Madoff purposely understated both the amount of assets supposedly under management and the number of investors so as to reduce the chance of inspection from the SEC and FINRA.

The real numbers for his annual registration statement apparently should have been somewhere around $35 billion and (depending upon how one defines the term "customer") more than 5,000 investors. Had such numbers been reported to regulators on his investment advisor registration form, there is no doubt that Madoff's investment operation itself would have been subjected to a rigorous regulatory review, especially since there previously had been no review conducted and it only registered for the first time in 2006.

One of the curious items about the Madoff scandal is how there could be such a difference what he reported as customers and what the press has reported as victims of the Madoff fraud. The key lies in the various feeder funds that in essence bundled funds from multiple investors and then deposited most, if not all, of those funds with Bernie Madoff. These feeder organizations included Fairfield Greenwich, Tremont Capital, Banco Santander, Bank Medici and Ascot Partners. Most of these feeder funds have now been sued by one or more of their investors.