mcocPv - The New York Times

UNITEDSTA'rE~S SECURITIES AND EXCHANGE COMMISSION

In the Matter of:

File No. GIG-509

GIG-509

WITNESS: Number 1 mcocPv PAGES: 1 through 195

PLACE: Securities and Exchange Commission

100 F Street, N.W.

Washington, D.C. 20549

DATE: Thursday, Febr~~ary 5, 2009

The above-entitled matter came on for hearing, pursuant

to notice, at 9:42 a.m.

Diversified Reporting Services, Inc.

(202) 467-9200

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MADOFF EXHIBITS-00001

Page 2

1 APPEARANCES:

3 On behalf of the Securities and Exchange Commission:

5 H. DAVID KOTZ, ESQ. Inspector General

6 NOELLE FRANGIPANE, ESQ. Deputy Inspector General

7 HEIDI STEIBER, ESQ. Investigator

8 CHRISTOPHER WILSON, ESQ. Investigator

9 Office of Inspector General.

10 Securities and Exchange Commission

11 100 F Street, N.E.

12 Washington, D.C. 20549

13 202-551-6037

14

15 On behal~ of the Witness:

16

17 GAYTRI KACHROO, ESQ.

18 PHIL MICHAELS, ESQ.

19 McCarter & English

20 265 Franklin Street

21 Boston, MA 02110

22 617-607-9215

23

24

25

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1 CONTENTS

3 WITNESS EXAMINATION

4 Harry Markopolos S

6 EXHIBITS: DESCRIPTION IDENTIFIED

7 1 Markopolos' resume 8

8 2 Chart - Madoff Investment Scheme 11

9 3 Submission to SEC 15

10 4 Additional documents provided to

11 SEC on 10/1 33

12 5 H. Markopolos' schedule for trip

13 to Europe 43

14 6 Attachment 3 - list of money

15 managers and private banks 43

16 7 H. Markopolos' 10/25/05

17 presentation to SEC 55

18 8 E-mail string from M. Garrity,

19 dated 11/4/35 62

20 9 Document, Bates Mark-0073 67

21 10 E-mail from H. Markopolos to M.

22 Cheung, dated 12/16/05 67

23 11 Article by Michael Ocrant

24 Mark-0102 through Mark-0106 73

25 12 1/29/07 email to Meaghan Cheung 92

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1 C O N T E N T S (Cont.)

3 EXHIBITS: DESCRIPTION IDENTIF~ED

4 13 Erin Arvedlund article 98

5 14 E-mail between H. Markopolos and

6 J. Sokobin, dated 4/2/08 140

7 15 Fairfield Century performance data 146

8 16 Madoff portfolio transmittal cover

9 page 180

10 17 Greenwich Century's financial

11 statements 191

12 18 Testimony o~ H. Markopolos,

13 dated 2/5/09 191

14 19 Cover letter to Kotz, dated 2/3/09

15 with attachment 192

16

17

18

19

20

21

22

23

24

25

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1 PROCEEDINGS

2 MR. KOTZ: We are on the record at 9:42 on February

3 5, 2009. The United States Securities and Exchange

4 Commission Office of Inspector General. I'm going to swear

5 you in if that's okay.

6 MS. KACHROO: I thought we weren't doing this under

7 oath.

8 MR. KOTZ: But as I indicated, I think it would be

9 better because, you know, all the other witnesses are going

10 to be under oath.

11 MS. KACHROO: Oh, they are.

12 MR. KOTZ: That way there won't be the issue, you

13 know, oh, why wasn't he put under oath.

14 MS. KACHROO: Yeah.

15 MR. KOTZ: Okay?

1Q MS. KACHROO: Do you have a problem with it, or --

17 MR. KOTZ: Please raise your right hand.

18 Whereupon,

19 HARRY MARKOPOLOS

20 was called as a witness and, having been first duly sworn,

21 was examined and testified as follows:

22 EXAMINATION

23 BY MR. KOTZ:

24 Q Can you state and spell your full name for the

25 record?

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1 with the SEC prior to May 2000?

2 A Yes. I would have because Ed Manion, financial

3 analyst, with 25 years of industry experience, he was a

4 trader at the Boston company, portfolio manager at Fidelity

5 with Peter Lynch. He and Peter Lynch are very close friends.

6 They both went to Boston College undergraduate. Mr. Manion

7 served under me at the Boston Security Analyst Society.

8 Q Oh, you had worked with him?

9 A Yes.

10 Q Oh, okay.

11 A He was on my education committee and he was

12 co-chair of my ethics sub-committee and we would have

13 frequent and continual talks about industry ethics or lack

14 thereof .

15 Q And this is prior to May 2000?

16 A Yes, and he would ask me questicns about the

17 current state of fraud in the investment industry

18 specifically relating to New York and Boston. For New York,

19 he would ask questions about the sell-side firms and in

20 Boston, he would ask questions about the buy-side firms. He

21 realized that as a derivative portfolio manager, I had the

22 mathematical background to understand and take apart the

23 frauds that were taking place on Wall Street and also on the

24 buy side in the mutual fund industry in Boston.

25 So, we had a continual dialogue.

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1 Q Okay. For how long a period of time, generally, do

2 you think, prior to May of 2008, you had that dialogue with

3 Manion?

4 A My memory is going to be so fuzzy. So I'm going to

5 try to give you a time range and not any specific dates.

6 Q Okay. That's fine.

7 A I got my CFA Charter in 1996. I think I went on a

8 committee with the Boston Security Analyst Society in 1997 or

9 1998. So it would probably be in the '98 to '99 time range

10 where I first met Mr. Manion.

11 Q Okay.

12 A I may have met him prior to that. He may have come

13 in on an inspection visit. I'm not sure when he did.

14 Q Okay. Anybody else that you had a lot of contact

15 with from the SEC prior to bringing in your initial complaint

16 in May 2000?

17 A Mr. Madoff was my first case submission to the SEC.

18

19 Q Okay. Okay. So let's talk about that then. So

20 you submit an eight-page document to the SEC Boston regional

21 office's director of enforcement. Okay. And then what

happened?

23 A We had a meeting.

24 Q So who was in this meeting?

25 A It was the Boston regional office's director of

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1 enforcement.

2 Q That's Ward.

3 A Grant Ward.

4 Q Right.

5 A Myself and Mr. Manion.

6 Q Okay. Had you talked to Mr. Manion before to kind

7 of let him know this was coming since you had some

8 relationship with him?

9 A Yes, I did. He told me it sounded very serious and

10 I needed to prepare my report, make sure it was a good

11 report, make sure it was understandable, make sure it was

12 well written, and come in with it as soon as possible.

13 Q Okay. So you had that meeting. You, Ed Manion,

14 Grant Ward. Was it Jim Adelman also? Was he in that?

15 A He was. He came in, shook my hand, told me, "I

16 heard a lot about you. I would be attending this meeting. I

1: apologize. I've given my notice to the SEC. I am leaving to

18 go into private practice and I just wanted to shake your hand

19 and say thank you for coming in today."

20 It was just a meet and greet. He never participated in

21 the actual meeting.

22 Q So the meeting was just you, Manion and Ward?

23 A Yes.

24 Q Okay and did you provide documents to them in that

25 meeting?

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1 A I did. I gave them an eight-page submission with

2 some derivatives, math proofs.

3 Q Okay and I just want to put this into evidence to

4 show it to you and see if you recollect that this is the

5 submission that you gave them. So if you could take a look

6 at it.

7 A' That's a horrible copy. Do you want a better one?

8 Q Yeah.

9 MS. KACHROO: It's a scanned version.

10 MR. KOTZ: Yeah. I mean, we can read it. It's

11 fine.

12 THE WITNESS: You can read that? You have good

13 eyes. This is what I gave to the director of enforcement.

14 MR. KOTZ: Great. Okay. So this is Bates Stamps

15 Mark-005 throuyh Mark-0012 and we're going to mark this as

16 Exhibit 3.

17 (S~C Exhibit No. 3 was marked for

18 identification.)

19 BY MR. KOTZ:

20 Q Okay. So what happened exactly at the meeting?

21 What can you remember about the meeting?

A I explained the fraud to Grant Ward and hedid not

23 have an industry background that I was aware of. He had zero

24 comprehension of topics being discussed. He seemed very ill

25 trained, uninformed about industry practices, did not

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1 understand financial instruments. Didn't even have a basic

2 understanding of finance.

3 Q Okay. And so when you say you explained the fraud,

4 what were you saying was happening with Madoff? At that

5 point, what was your theory in terms of what Madoff was

6 doing?

7 A I just want to go to my Exhibit 2.

8 Q Sure, please. Feel free to use your documents.

9 A Under, "Objective" on page i, point 3 -- T'll start

10 with point 2.

11 "The returns are real but they are coming from some

12 process other than the one being advertised, in which case an

13 investigation is in order."

14 Here I'm referring to front-runniriy.

15 Q Right.

16 A I had two fraud theories regarding Mr.Madoff.

17 Fraud theory number 2 was the front-running and fraud theory

18 number 1 -- the entire fund is nothing more than a Ponzi

19 scheme. And at that point, all I knew was that

20 mathematically the returns that Mr. Madoff was reporting to

21 earn for investors were unachievable using the strategy that

22 he stated in his marketing literature. And I had to develop

23 two fraud hypothesis and those were the only two explanations

24 that I saw for it.

25 Front running, in which case the returns were real

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1 but they were generated from an illegal activity, and the

2 other hypothesis was that it was a Ponzi scheme, in which

3 casethere was no underlying investment activity, product or

4 service being provided to investors.

5 Q Right. So as of May of 2000 you had already

6 informed the SEC that you believed that Mr. Madoff may have

7 been engaging in a Ponzi scheme?

8 A Correct, but I had -- at that point, I had no

9 evidence to distinguish which was the higher or lower

10 probability fraud scenario.

11 Q Right.

12 A Only that there was fraud occurring. I couldn't

13 make any intelligent decision whether it was a Ponzi or

14 whether it was frontrunning. I just knew something illegal

15 was going on there.

16 Q Right. Okay. And you brought it to the SEC so

17 they would investigate it and determine which of those

18 theories was correct?

19 A That is true.

20 Q Okay. Now, you stated in the document that you

21 provided to them, "There's no way the SEC would uncover this

22 on their own. I have almost 13 years in the business. I've

23 traded similar type of strategies." What did you mean,

24 exactly? Why did you say at that point that you didn't think

25 the SEC could uncover that on its own?

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1 A Recause I had seen SEC examination team in the

2 past.

3 Q Okay.

4 A My firm was an equity derivatives firm managing

5 many billions of dollars. I'd seen the teams come in and I

6 saw how they were constituted and it was young, green people

7 who lacked industry expertise with no background in financial

8 mathematics and they didn't understand complex derivative

9 instruments. They typically were only lawyers.

10 Q Right.

11 A Once in a while you'd see an accountant. There

12 usually was a CPA on the team, but that didn't help with the

13 capital market mathematics. You really needed a good basis.

14 If you didn't understand calculus or linear algebra, every

15 firm in Boston would fool you all the time. You had no

16 ability to catch them whatsoever.

17 Q So because you were aware of some of the

18 shortcomings of the SEC, is it fair to say you went out of

19 your way to provide more information to them to help them

20 find evidence about Mr. Madoff's activities?

21 A Yes. i came in knowing what to expect as far as

22 the level of education and training of the SEC staff and

23 therefore, I didn't come in with any calculus. I didn't use

24 any interval calculus, no differential calculus, no linear

25 algebra. I came in with barebones English explanations. I

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1 tried to make it as simple as possible to understand for the

2 SEC staff.

3 Q Okay and so did you suggest any particular actions

4 that the SEC should have taken to follow up on the

5 information that you provided them at that point? In these

6 documents it talks about checking the math.

7 A Yes. Exhibit 1 exposed, page 2. I did a

8 mathematical modeling called a regression analyst.

9 Q Okay.

10 A Using -- I'm really bad at the math now. It's

11 been, like, four years and five months since I've left the

12 industry and there's two dif~erent types of regressions. I

13 used whatever the simplest one is. I can't remember the

14 specific type of terminology.

15 Q Okay. That's all right.

16 A R~t Mr. Madoff's returns were reportedly coming

7 from the OEX, Standard and Poor's 100 stock index.

18 Q Right.

19 A I did a correlation, but he was comparing himself

20 with the Standard and Poor's 500 stock index, so that my math

21 would foot to his math because I wanted to see if I could

22 catch him on a basic math error.

23 Q Right.

24 A I ran the same regression. I basically input Mr.

25 Madoff's monthly return screen for the years in question in

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1 Exhibit 1 in one column. To the column next to that for the

2 exact same month, I took the Standard & Poor's 500 stock

3 indexes returns for that month and then I ran the regression

q analysis and I proved that the correlation reported in Part D

5 of Exhibit 1 was, in fact, 6 percent correlation to the

6 index. And here --

7 MS. KACHROO: The last page.

8 THE WITNESS: Oh and so that part D math, the 6

g percent correlation to the S&P 500 data .06, that's a 6

10 percent correlation or a 6 percent similarity to the S&P 500.

11 However, given the options of the derivative strategy

12 surrounding Mr. Madoff's long stock portfolio of 30 to 35

13 stocks, I was looking and was prepared to accept a

14 correlation coefficient between 30 percent similarity and 60

15 percent similarity figuring it should hover around 50 percent

16 similarity and a 6 percent similarity was outsid~ the bounds

17 or rationality.

18 I3Y MR. KOTZ:

13 Q Okay. All right. So when you say Exhibit i, I

20 just want to make sure the record is clear. You're talking

21 about the document Mark-0012 which is part of our Exhibit 3.

22 A Is that right?

23 MS. KACHROO: 0012?

24 MR. KOTZ: Right.

25 THE WITNESS: Yes. I want to point out one thing

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1 here --

2 BY MK. KOTZ:

3 Q Yeah.

4 A -- Mr. Kotz. It says at the bottom, "Part B,

5 manager B, assets under management, $350 million." And

6 underneath that it says, "Brohill Asset Management, LLC."

7 Q Yeah.

8 A Srohill Asset Management has contacted the Wall

9 Street journal inregards to the article published about the

10 Madoff investigation on December 18, 2008, complaining about

I 11 the exhibit posted on the Wall Street journal's website

12 saying that no, Brohill Asset Management did not have $350

13 million with Mr. Madoff; it was only $1 million.

lil Q Okay.

15 A And I believe that this is a material misstatement

16 of ~act on this document. And I know that the SEC has

17 taken --

18 Q Where is that?

19 A -- action in the past against people who have

20 misstated assets under management.

21 Q Okay.

22 A This is an activity known as puffing where you're

23 pretending to be larger in size than you really are.

24 g Right. Okay. All right. Yeah. Thank you. So

25 what did you expect at that point that the Boston office

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1 would do with the information that you provided? I mean, you

2 went beyond just giving them a tip. You did all the math for

3 them. So what would you have expected them to do at that

4 point?

5 A Start an investigation.

6 Q And what kind -- any idea of what kind of steps

7 they would take in that investigation, typically?

8 A Yes. Yes. Specifically, you would make a

9 determination that the allegations were credible and

10 believable .

11 Q Right.

12 A And if they were, you'd send an inspection team in

13 the next business day or the next day that a team was

14 available. If they were already out on assiyriiiierit and

15 couldn't be back quickly enough, you liriould just wait until

16 that team came back into the of~ice and then send them out

17 into the field once again. If you thought the information

18 was very, very credible and very, very specific -- oftentimes

19 the SEC will send not only an examination team in but they'll

20 send in a team of enforcement attorneys --

21 Q Right.

22 A -- if they think it's really a good lead.

23 Q Right. Okay. And then in your view, based on the

24 information you provided, would you have considered that a

25 good lead such that they should send in the enforcement

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Page 23

1 attorneys as well?

2 A Yes. They should have sent in two teams, the

3 enforcement team and an examination team, so they could work

4 in conjunction since this was such a large -- this, at the

5 time, would have been considered the largest hedge fund in

6 the world, but it was also the most secretive hedge fund in

7 the world.

8 Q Right.

9 A So something of this size would have been

10 astounding to the SEC. This would have been a huge case in

11 2000 for the SEC.

12 Q And so, but what in fact did happen?

13 A I don't know.

14 Q Okay.

15 A I'm not privy to that. I walked out of the meeting

16 feeliny very dejecled.

17 Q And you were dejected because you felt Mr. Ward

18 didn't understand what you were talking about?

19 A That's correct. I didn't think he had a clue.

20 Q Okay and was there any other impression you got

21 from either Ward or Manion in that meeting about whether they

22 seemed interested in the case or did they say anything to

23 you?

24 A Mr. Manion thought the case was a great one. He

25 understood the math and he was expecting his agency to follow

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Page 24

1 up immediately. He thought that he had a big case brewing

2 and he thought it was going to be a coup for the SEC, and he

3 walked out equally dejected. He felt that the director of

4 enforcement for the New England region was totally clueless,

5 didn't know how he got his job and made some -- he didn't

6 have any confidence in this man's ability whatsoever.

7 Q And this, Manion told you after the meeting or --

8 A We had a debriefing, he and I.

9 Q Okay.

10 A And during the debriefing he said, "Harry, I don't

11 know. I don't think he got it. I don't think he understood

12 a single word that you said past your name."

13 Q How long was the meeting? Do you remember? Was it

14 several hours or --

15 A I can't recall. It was so long ago. I'm sorry.

16 Q Okay. That's fine. That was a long time ago. So

17 did you hear anything at all back from that meeting from the

1_8 Boston office?

19 A Through official channels, never got a letter. I

20 never got an official phone call. Unofficially, Mr. Manic,n

21 and I were in constant communication over this issue. He

22 thought it was a clear and present danger to the U.S. capital

23 markets.

24 Q Right.

25 A He thought that the largest hedge fund in the world

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1 was secretive, underneath the radar, not registered. He

2 thought these were damning facts and he was really concerned

3 and he told me I needed to keep investigating. He told me he

4 was going to be pressing for answers within his agency, but I

5 really -- all I got back was unofficial communication from

6 Mr. Manion.

7 Q Did Manion tell you why they weren't going to go

8 forward? Did he talk to you about discussions he had

9 internally about what to do?

10 A Yes, he did. He said that this case -- he said

11 that the SEC's Boston office, their jurisdiction extended

12 south only to Greenwich, Connecticut and once you crossed the

13 New York state line, you were in the New York regional

14 offices tur~, and so that this case would need to be

1~ transmitted to the New York regional office for action.

16 Boston could not send its inspection teams down there and it

17 could not send its enforcement teams down there. I was told

18 that the New York and Boston regional offices get along as

19 well as the Yankees and Red Sox do.

20 Q Right. And so Manion indicated to you that they

21 just didn't want to send something to New York? Is that kindl-

of what he said?

23 A No. No, he said that, "We'll have to forward this

24 to New York for action. We can't go down there."

25 Q Okay.

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1 A "That's not our turf. New York doesn't let us come

2 down to New York and do cases."

3 Q Okay. Did Manion indicate at any point at that

4 time why they didn't just send it to New York?

5 A It was up to the director of enforcement at the

6 time. I don't know what he did. It was his call.

7 Q Okay.

8 A Mr. Manion -- I don't know. You'll have to ask

9 your staff.

10 Q Okay. Okay. Okay. And so then in October 2001,

11 you went back to the SEC and made a second submission, right?

12 A I can't remember if I went back into the building

13 or if it was just a resubmission with a few extra pages

14 Q Okay and that was because Manion told you to

15 resubmit it?

16 A He did. He said that he felt that the;case had

17 dropped through the cracks and that the SEC was not pursuing

18 a Madoff investigation, and he felt that it was warranted

19 even more so now because the team that I had tracking him had

20 put his assets under management in the 12 to $20 billion

21 range. One of the team members, Frank Casey, had been over

22 to Europe and that's where he met Mr. Michael Ocrant.

23 Q Right.

24 A They met in a limousine in Barcelona, Spain, I

25 believe.

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Q Oh yeah?

2 A And Mr. Casey said to Mr. Ocrant, "I bet you can't

3 name the largest hedge fund in the world because it's so

4 secretive." And Mr. Ocrant said, "You're on. I'11 take that

5 bet." And then Mr. Casey revealed that it was Bernard Madoff

6 and the two of them compared notes in that limousine and the

7 totaled up assets and it was over 12 billion dollars.

8 So we figured the two of them couldn't know

9 everything and at that point, Mr. Ocrant was recruited into

10 the team by Mr. Casey who has a ~military background in

11 intelligence. He's a U.S. Army Airborne infantry or~icer,

12 former, and he had been an intelligence officer or served in

13 an intelligence officer's position in a line unit staff, a

14 command staff. And at that point, we realized this case was

15 a lot bigger than we previously had thought in May of 2000.

16 Q Okay.

17 A And Mr. Ocrant thought it was so serious. And at

18 that point he was an investigative reporter for institutional

19 investors, MAR Hedge, a leading -- at that time it was a

20 leading hedge fund industry news publication, a very

21 expensive publication that probably no one in the SEC ever

22 subscribed to because you don't have a budget for it, I

23 suspect, and you didn't have a mandate to regulate hedge

24 funds at the time.

25 Q Right.

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1 A And he started his investigation when he got back

2 into the United States. Mr. Ocrant met with Mr. Madoff in

3 April of 2000.

4 Q Right.

5 A And in May i, 2000, he published a very damning

6 expose of Mr. Madoff that the SEC apparently never read. A

7 week later Barrens, on May 7, 2000, published their expose.

8 Mr. Ocrant told me that he felt that it was -- that' Erin

9 Arvedlund had plagiarized his article without doing research,

10 like she said she did, and it was a copycat article.

11 Q Why do you say that the SEC apparently hadn't read

12 Ocrantls article?

13 A Because my understanding of the SEC is that it does

14 not get a publication budget, that most of your staff don't

15 even read the Wall Street Journal because you'd have to pay

16 for the subscription on your own, and apparently;a Barrens

17 subscription is rather expensive as well because all these

18 publications are coming out with exposes with red flags and

19 the SEC is continuing to ignore them.

20 Q Right .

21 A And it's the largest hedge fund in the world.

Q Right.

23 A So how obvious can it be before you bought it?

24 Q So even after you visited the SEC, spoke to them in

25 May 2000 and they essentially rebuffed you, you continued to

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Page 29

1 follow up and learn more about the Madoff case?

2 A Yes. We felt that it was such a serious matter to

3 the industry that the hedge fund industry -- it would be a

a major blow to the hedge fund industry and to investor

5 confidence when this game finally did come to light as all

6 quantity schemes eventually do.

7 Q Right. And then in that period, in between the

8 first submission and the second submission, with this article

9 that was published which gave -- raised concerns about

10 Madoff --

11 MS. STEIBER: Are you sure the article was in 2001?

12 THE WITNESS: I'm sorry, it's 2001. I'm sorry.

13 I'm very tired and I only had, like, two hours of sleep last

14 night. Thank you for that.

15 MS. STEIBER: Oh, sure.

16 MR. KOTZ: We're talking about the per`iod May 2000

17 to October 2001, right?

18 MS. STEIBER: Right. After the second

19 submission -- he had said the articles came out.

20 THE WITNESS: Let's see. No.

21 MR. KOTZ: He's saying they came out in May 2001.

22 THE WITNESS: No, the second submission -- let's

23 take a look at the chart here. Let's go here. So Mike

24 Ocrant and Frank Casey meet in a cab in Barcelona.

25 MR. KOTZ: Right.

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1 THE WITNESS: In April of 2001, he starts to -- he

2 meets Mr. Mado~~, but he started his investigation when he

3 gets back. May Ist, Michael Ocrant goes to the press or MAR

g Hedge with an article entitled "Don't Ask, Don't Tell" -- I'm

5 sorry. That would be the Barrens article. I'm sorry.

6 Michael Ocrant publishes an article called "Madoff Tops

7 Charts: Skeptics Ask How." A week later Barrens publishes

8 "Don't Ask, Don't Tell. B~rnie Madoff is so secretive he

9 even asked investors to keep mum." These are two articles

10 published within a week of each other and the SEC never

11 notices.

12 BY MR. KOTZ:

13 Q Right. Okay. All right. So Manion calls you and

14 asks you to resubmit it. Did he indicate to you why he

15 thought anything would be different? Was there any reason

16 that he gave as to why they might take it more s'eriously in

17 October 2001 than they did in May 2000?

18 A Yes. In May -- once those articles hit in May, my

19 team was convinced that Bernie Madoff would be shut down

20 within days, that an SEC investigation team would be in there

21 and shut him down.

Q Right.

23 A Those two articles were so damning

24 Q Right.

25 A -- that there was no way he was going to survive

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1 this.

2 g Right.

3 A We were prepared for a dramatic fall in the capital

4 market when the news was revealed, that there would be forced

5 selling in Europe and abroad --

6 Q Right.

7 A -- Europe and in the United States as a result of

8 this. It would be a huge catastrophe for the financial

9 markets worldwide. And when nothing happened, I think -- and

10 can I speculate here?

11 Q Sure.

12 A I'm going to speculate that Mr. Manion was

13 convinced New York was doing something at this time on the

14 basis of these two articles that -- both came out of the New

15 York press and the financial industry -- the SEC, for

16 certain, had to be inside there tearing his operation apart.

17 Q Right .

18 A And when nothing happened, after a few months, he

19 felt that that couldn't be the case because he knew how the

20 SEC operated. And he contacted me, in the September/October

21 timeframe of 2001, to resubmit and I did and I added a few

22 pages.

23 Q Okay. And so Manion was surprised that even after

24 these articles came out nothing happened?

25 A Shocked would probably be even a better word.

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1 Q Do you know if he indicated to you that he showed

2 anybody the articles in the office or said, "Look at this.

3 Harry came by months ago. Now we have these articles." Any

4 indication of what happened, you know, in the inner workings

5 there?

6 A No.

7 Q So, you come back --

8 A He might have, but I just don't recall. I'm

9 getting old. I've got Alzheimer's and amnesia. I'm tired.

10 I don't know.

11 0 For the record, that's a joke.

12 A For the record, I have a very weird sense of humor.

13 He understands it though.

14 Q Well, we'll talk to Manion on this and we've spoke

15 to --

16 MS. KACHROO: I thought you did speak to him.

17 MR. KOTZ: Not yet. We actually spoke with Ocrant

18 though. We went up to see him --

19 MS. KACHROO: Oh, okay.

20 MR. KOTZ: -- and talked to him in his office.

21 BY MR. KOTZ:

Q In October 2001, you said you provided more

23 documents. I want to just bring your attention to what we're

24 going to mark as Exhibit 4, which is Mark-0023, 0024 and

25 0025, and ask you if those are the documents that you

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1 submitted in October 2001 in addition to the previous

2 submission which you resubmitted.

3 (SEC Exhibit No. 4 was marked for

4 identification.)

5 THE WITNESS: Are you going to go by my Bates

6 Stamps?

7 BY MR. KOTZ:

8 Q Yeah.

9 A Mark -- Mark-15 to Mark --

10 Q Okay.

11 A -- probably to Mark-25?

12 Q Yeah, why don't we put the whole thing in there?

13 MS. KACHROO: Okay.

14 BY MR. KOTZ:

15 Q Okay. So we're going to mark these documents --

16 A Oh no, Mark-27. It goes Mark-15 Co Mark-27. I

17 believe that this is my submission here.

18 Q Okay. So we're going to put in Mark 15 to Mark 27

19 as Exhibit 4. And so what was the additional documentation

20 that you provided?

21 A I had a -- in Mark-23 I put in a flowchart of how I

22 thought his operation was running --

23 Q Okay.

24 A -- based on information collected by Mr. Ocrant,

25 Mr. Casey and Mr. Chelo and myself.

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1 Q Okay. And what else was additional that you

2 provided several other pages?

3 A There was a two-page fax transmittal, dated March

4 29, 2001 timed 3:57 p.m., and I was negligent in I never

5 wrote down where I got it from. And it said at the top, "Re:

6 Madoff Investment process explained." It was a two-page

7 explanation of Mr. Madoff's reported investment strategy.

8 Q Okay. And then in addition, if you look at

9 Mark-0025, you also said that you would be willing to provide

10 them detailed questions for their audit team and, in fact,

11 agree to accompany the team under certain conditions.

12 A I did. I knew that many government agencies use

13 outside consultants to assist them when expertise from the

14 outside is required to further an investigation and save the

15 government time and money.

16 Q Okay.

17 A And it can be a cost effective means to quickly

18 solving cases. I felt if I went in under the command and

19 control of the SEC with an inspection team, that in a half

20 hour I could crack Madoff open like an egg.

21 Q And you also said you can provide them with simple

22 mathematical formulas that value short team pre-options that

23 result when the party had access to order flow and that you

24 can prove that long term strategies that support the profit

25 from these really short term options will not meet the return

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1 supposedly generated?

2 A That is correct.

3 Q And so, but you don't believe that you had a

4 meeting with them. You provided this information at that

5 time, right?

6 A Yes. If there was a meeting, I just can't recall

7 it.

8 Q Okay.

9 A This was right after 9/11 and people were very

10 frightened in America at that point, and this may have been a

11 contributing factor to why that investigation did not move

12 forward. The SEC staff was basically forced out of their

13 building.

14 Q Right.

15 A Their building was structurally unsound.

16 Q Right.

17 A They were right near Ground Zero. Staff was

18 probably traumatized and I believe they were working out of

19 their homes on laptops because you had no office space to go

20 to·

21 Q Right. So did you receive any response to this

22 submission you made in October 2001?

23 A No. No response whatsoever other- than from Mr.

24 Manion saying I don't think they're doing anything.

25 Q Okay. Did Manion say at that time, again, why they

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1 weren't doing anything?

2 A No. He was just speculating that they don't

3 understand it, that the staff doesn't have the experience.

4 Q Okay. Did Manion, at all, ever speculate to you

5 that because Mr. Madoff was so well known, that perhaps they

6 were nervous about bringing a case?

7 A Yes.

8 Q When was that?

9 A I couldn't tell you.

10 Q What did he say generally?

11 A He's a powerful man. A big man. Has his own

12 broker-dealer. Has a lot of the percentage or volume that

13 trades daily on the stock exchanges and, you know, that --

14 the SEC typically does not do the big cases against the most

15 powerful people on Wall Street. They typically get three

16 passes.

Q Right. Okay. But you think that was around the

18 time that you were providingthese complaints in the

19 2000-2001 range that you had this conversation with Manion?

20 A There were so many conversations I can't tell you

21 what years they took place, but it was more along a line of

continuing frustration between Mr. Manion and myself about

23 the Agency's refusal to regulate.

24 Q Okay. And Manion indicated to you that it wasn't

25 just the Madoff case, that he was frustrated in general with

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1 the SEC's office?

2 A Yes, that it seemed like they were actively

3 avoiding cases and enforcement opportunities.

4 Q And those were the cases against the folks of a

5 higher stature?

6 A Yes, and confirmation -- several of the SEC staff

7 are my former students. I would teach them post-graduate

8 courses in derivative securities and they were students of

9 mine in the Chartered Financial Analyst program. And so they

10 would tell me what they thought of their agency, and they

11 were not·nice things because these people were among the most

12 highly qualified staff. They all went on to earn their

13 certified -- I'm sorry -- their chartered financial analyst

14 designation, which is considered the highest you can go on

15 Wall Street. It's considered better than a Ph.D.

16 Q So, what did they say specifically?

17 A Lame.

18 Q Did Manion ever mention any specific entity that --

19 like Madoff who was of high stature that the SEC had not gone

20 after?

21 A Yes.

22 Q Who was that?

23 A All the major investment banks.

24 Q Okay.

25 A I'd also say that I had a personal friend who was a

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Page 38

1 former branch chief in the Boston regional office.

2

3

4

5

6 Q Okay.

7 A And he told me about how bad he thought the

8 Division of Enforcement was, that they would never take on a

9 big case and that the big firms got special treatment and kid

10 gloves treatment because the SEC was afraid of political

11 repercussions if they try to enforce big cases.

12 Q Okay.

13 A And he said they wouldn't even do medium sized

14 cases, they'd only do small ones.

15 Q And so when these things were said -- let's go back

16 to Manion for a second. Was Manion talking about Boston

17 specifically or was he talking about the SEC overall or --

18 A Ove rall . He would say that the top two regional

19 offices were New York and Boston and that they had more

20 financial expertise than the rest of the regional offices and

21 certainly a hell of a lot more than Washington. He thought

22 that the Washington people were not financially astute.

33 Q Okay.

24 A He said the best and the brightest the SEC had were

25 in New York and Boston and he said that wasn't saying much.

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1 Q And then he mentioned both New York and Boston as

2 places where the SEC wouldn't bring the big cases?

3 A That's where they would not bring the big cases.

4 Q Okay. So following up, after you never heard

5 anything back you continued to look into Madoff, right?

6 A Yes. The investigation continued and I have to

7 apologize. I left the industry at the end of August 2004 and

8 I did not -- when I left, I did not keep or ask for an e-mail

9 archive. And if I had, then the stack of documents that are

10 currently -- that you currently have would be three times

11 higher because I assure you there was a continuing stream of

12 a-mails from late 1999 through the third quarter of 2005 and

13 evidence that was gathered that went into the October and

14 November and December 2005 SEC submission. And you would

15 have the evidence that we collected that went into those --

16 built those reports but I don't have the email trail of the

17 evidence any longer. I apologize for that.

18 MS. KACHROO: David, is there a room where we can

19 go briefly?

20 MR. KOTZ: Sure, you want to take a break?

21 MS. KACHROO: Yeah.

22 (A brief recess was taken.)

23 BY MR. KOTZ:

24 Q Back on the record. Okay. Before we went off the

25 record, you were talking about the fact that there were some

eflb3Za9-1866-4bll-a191-6aa2bed164ba


Page 40

1 e-mails that you don't have anymore, and it's referenced on

2 the chart which is Exhibit 2. Do you know, were there

3 particular people that you sent e-mails to around that time

4 that perhaps would have those e-mails? You know, in other

5 words, not necessarily from you, but whoever you communicated

6 with that maybe we'd be able to find? I mean, we could go to

7 Internet providers, et cetera. Do you have any sense of

8 that?

9 A Yes. It would be Neil Chelo.

10 Q Okay.

11 A Frank Casey and myself for sure.

12 Q Okay.

13 A And others as well but I don't know who they may be

14 from the industry.

15 Q And these were e-mails between the three of you

16 talking about your investigation of Madoff?

17 A Yes. It was internal team communication.

18 Q And then there came a time in June 2002 when you

19 went to Europe; is that right?

20 A Correct.

21 Q And what would happen there?

A This -- who has Attachment 3?

23 MS. KACHROO: I have it.

24 THE WITNESS: Can we go through it?

25 MS. KACHROO: I don't know. I think I put this in

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1 your documents.

2 THE WITNESS: Attachment 3.

3 MR. KOTZ: Okay. Why don't we --

4 MS. KACHROO: This, actually, is not in the

5 documents that we provided to Congress. This is only being

6 provided to you.

7 THE WITNESS: Okay. Do you have it?

8 MS. STEIBER: Are you talking about 0028 or are you

9 talking about --

10 MS. KACHROO: It's actually

11 MS. STEIBER: What number are you starting with?

12 MS. KACHROO: It's number -- oh boy. Wait. I can

13 tell you where it might be.

14 MS. STEIBER: I have your numbering.

15 MS. KACHROO: Yeah. One second. It would be

16 technically -- 7 don't think this one got Bates numbered --

17 0070. So it technically would have been 0071 but it's

18 missing.

19 THE WITNESS: Okay.

20 MS. KACHROO: From everybody's --


22 MS. STEIBER: Okay. 0071. Is that what you said?

23 THE WITNESS: Yeah, but it's not in that one.

24 MS- KACHROO: It's not in that one.

25 BY MR. KOTZ:

eflb32a9-1866-4bll-a~91-6aa2bed164ba


Page 42

1 Q Why don't you explain.

2 A If you go to Mark-31 through Mark-37 --

3 MR. MICHAELS: Wait a minute. I don't have a copy

4 of this, right? Do I?

5 THE WITNESS: No.

6 MS. KACHROO: No, it's not -- I took it out.

7 THE WITNESS: This is the special document that

8 only the SEC gets to see.

9 BY MR. KOTZ:

10 Q Okay.

11 A From -- Mark-31 to Mark-37 builds the basis for

12 this document. This is my itinerary with Access

13 International Advisors, Ltd. through Europe, through England,

14 France, Switzerland where I met a number of private client

15 banks, Madorf feeder funds and hedge fund, fund to funds.

16 And who I was with -- and let me explain who these people

17 were. These people were noblemen, European royalty.

18

19

20

21 Q Okay.

22 A And these are the people I met with. And not all

23 of them had Mr. Madoff. This Attachment 3 is a list of

24 fourteen of those private client banks, fund of funds, or

25 Madoff feeder funds --

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1 MS, ST~-EB~R: Let me just tell you, you do have it.

2 I did put it in your documents. It is right after 0070 in

3 your documents. It may not be Bates marked.

4 MR. KOTZ: Let's just put this into evidence.

5 Exhibit 5 is Mark-31 through Mark-37 and that is -- it says

6 on the top, "Access International Advisors Limited" and it is

7 Harry's schedule for his trip to Europe. So why don't we

8 mark this as Exhibit 5.


10 identification.)

11 MR. KOTZ: And then Exhibit 6 is -- states on the

12 top, "Attachment 3" and it says, "Partial list of French and

13 Swiss money managers/private banks invested with Bernie

14 Madoff who are likely to become insolvent. This is a Ponzi

15 scheme. More out there." And then it lists a variety of

16 names. So that one is ~xhibit 6.


18 identification.)

19 BY MR. KOTZ:

20 Q So just to be clear, Exhibit 6, Attachment 3, is a

21 list of Swiss and French money managers who have invested

22 with Madoff; is that right?


24 Q And they have not wanted this information to become

25 public that they invested with Madoff; is that correct?

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1 A That is correct. There are two of them that have

2 come public, Mr. Kotz, and that would be numbers 3 on the

3 list of -- under Geneva, Switzerland, Dexia Asset Management,

4 which I believe to be owned by Dexia, which is a bank that

5 was rescued, I believe, by the Dutch and Belgium governments

6 this past fall to keep it from becoming insolvent.

7 Q Right.

8 A And the Fix Family Office has also admitted to the

9 Madoff losses. Under the Paris and Paris suburbs list,

10 number 6, Odo Asset Management, I believe that to be the same

11 Odo Management that was referenced in the Bloomberg article

12 in January where they had a 35 million -- I don't know if it

13 was euros or dollars, I can't recall -- case in Liechtenstein

14 trying to recover some lost Madoff funds that I believe to be

1~ off shore.

16 Q Okay.

17 A Everybody else is lying low in the reeds and not

18 admitting Madoff exposure, and I felt we needed to withhold

19 that from Congress so that you could forward that I.ist to the

20 French and Swiss authorities so that they could go in there

21 because that list was current as of June of 2002. Those

22 people may not still be invested in Madoff.

23 Q Right.

24 A They may have pulled their funds.

25 Q Right.

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Page 45

1 A But those, as of June 2002, I believe them to be

2 invested with Madoff and to be feeder funds of his or

3 sub-feeder funds.

4 BY MS. STEIBER:

5 Q So to clarify, the ones that are now public and

6 don't need to be informed are number 3, did you say, of the

7 Geneva, Switzerland list, which is Dexia Asset Management?

8 A Correct.

9 Q And then under the Paris list, number 6. Are those

10 the only ones that are public?

11 A No.

12 Q Or did you have an additional one?

13 A No. I want to say that under the Geneva,

14 Switzerland list, it is going to be the Fix Family Office,

15 which is number 5. Dexia Asset Management was number 3. I

16 don't know that Odo Asset Management, which is number 6 on

17 the Paris and Paris suburb list, I don't know that they went

18 public in France. I know they went public in Liechtenstein.

19 I believe them to perhaps -- they may have larger assets

20 under management than what was revealed in the Liechtenstein

21 case.

22 BY MR. KOTZ:

23 Q Okay.

24 A And I think the proper procedure, given my

25 background and training, is that U.S. embassies have leg~

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Page 46

1 a tts -.-,-· -·l·eg-a--l--·-~~~··~-a-eh-;··s

2 Q Right.

3 A -- to interface with host nation law enforcement

4 and that they would probably want to receive this list from

5 the SEC.

6 Q Okay. All right. Well, we appreciate you

7 providing it to us. So tell me a little bit more about your

8 trip to Europe. What was the purpose of the trip and, you

9 know, not to go into specific detail, but just generally what

10 happened and what you found.

11 A The purpose of my trip was to market a derivatives

12 hedge ~und product I developed called Rampart Options

13 Statistical Arbitrage.

14 Q Okay.

15 A And it was a short volatility strateyy involving

16 short call spreads, short put spreads that were near dated,

17 near month -- and that is current month -- deep out o~ the

18 money call spreads, deep out of the money put spreads, to

19 generate income of anywhere from three-cluarter of a percent

20 to a percent and a half each month, and it was designed with

21 some risk controls in place that hopefully would allow you

22 not to lose more than 50 percent of your assets in any one

23 month less the option premium received.

24 Q Okay. And so what did you find when you went to

25 Europe?

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Page 47

1 A That the list of 14 private client banks and fund

2 of funds and feeder funds on that list in Attachment 3 had

3 Madoff -- that they bragged about their Madoff exposure, that

4 Mr. Madoff was their best manager. And I was pitched to them

5 by the managing partner at Access

6 International, as, just like Bernie Madoff, only higher

7 returns with higher risk.

8 Q Okay. And so as you were learning more information

9 about Madoff, did, at that point -- you know, you talked

10 previously about how you weren't sure. You had two theories,

11 front-running and Ponzi scheme. Did over time you come to

12 the conclusion that it was more likely to have been a Ponzi

13 scheme?

14 A At this point in time, as a result of this trip, I

15 was hearing information from these 14 managers that had

16 Madoff, that they all told me the same thing, that Madoff was

17 closed to new investors, he was not taking new money in, but

18 that each of those 14 had a very special relationship and

19 that Madoff would take their money and their money only.

20 Q Right.

21 A And when you hear the same thing once, you take it

22 at face value. When you hear it twice, you become

23 suspicious. After you have heard it 14 times, you become

24 deeply suspicious.

25 Q Okay.

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Page 48

1 A And that fit with the Ponzi theory and it increased

2 the probability that it was a Ponzi many fold. Let me

3 explain.

4 Q Yeah.

5 A If you are a Ponzi, you have a ferocious appetite

6 for new cash because you have to pay off old investors.

7 Q Right.

8 A So you need ever increasing amounts of new money

9 and new victims to come into your fund. Andthat was fitting

10 with the Ponzi scenario. And you also have to have a series

11 of lies. And it was clearly a lie that Mr. Madoff was

12 telling people that he was closed publicly, but in private,

13 was tellirig these 14 asset managers that they had special

14 access when, in fact, there was nothing special about their

15 access. He would take new money from anybody.

16 Q And also that information that you got~ did not mesh

17 with the front-running theory.

18 A It did not. If it was front-running, you would

I~ want to limit the amount of assets under management because

20 if you have too much money chasing too few investment

21 opportunities to front-run, then your returns would go down

from the front-running scheme --

23 Q Right.

24 A -- and your risk of detection would go way up; And

25 so front-running was making less and less sense as a broad

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Page 49

1 hypothesis. So I started to discount that one rather

2 dramatically and increasing the probabilities that it wasa

3 Ponzi scheme. And it was this trip that solidified that in

4 my mind and in my team's mind.

5 Although one of the team members thought that it

6 had to be front-running, it couldn't be a Ponzi, and that was

7 Frank Casey, where Mr. Chelo and I have more of a

8 mathematical background and we were fixated on the Ponzi

9 aspects. So we had a -- we were a little bit split on a team

10 on this issue. Two of us were clearly in the Ponzi camp and

11 that was the two of us with mathematical backgrounds. The

12 marketing person, Frank Casey, thought it was more of a

13 front-running.

14 BY MS. STEIBER:

15 Q Why?

16 A He didn't have the math background to understand

17 that if you place too much money into a front-running scheme,

18 the returns have to go down because you have a bigger pool of

19 assets that you have to start generating returns for and your

20 front-running has to become more and more egregious, which

21 increases the likelihood that it would become spotted by

broker-dealer customers of Madoff securities and that they

23 would complain to the SEC.

24 BY MR. KOTZ:

25 Q Right. Plus, I mean, isn't it fair to say that,

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Page 50

1 you know, the Ponzi scheme was kind of a more incredible

2 thing, that this would be a Ponzi scheme, and that, you know,

3 your normal reaction would be it might be something like

4 front-running rather than an entire Ponzi scheme?

5 A When I heard these people speak -- and I had to be

6 very careful when I was in Europe meeting these people that

7 had Madoff. These funds that were invested in Madoff, they

8 would, like, wink and -- it was almost like a wink and a nod.

9 "Well, of course, we don't believe he really is using

10 split-strike conversion." A few of them said that. "We

11 think he has access to order flow," which to me I thought was

12 code word for an illegal activity known as front-running.

13 Q Right.

14 A And that is how they justi~ied it. They thought

15 t~ie recurrence were real, but they were generated through an

16 illegal activity known as front-runniny.

17 Q Now those individuals and companies that you spoke

18 to, did they do any due diligence themselves?

19 A They all say they do due diligence and they all met

20 with me. A lot of the due diligence in Europe is below the

21 caliber that takes place in the United States. The level of

22 sophistication and financial education is a lot lower there.

23 g Right.

24 A So they were using things like a handwriting

25 analysis called graphology, which is discredited in the

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Page 51

1 United States, where the person -- the manager that they are

2 considering hiring submits a handwriting sample.

3 And I see the looks on your faces. I am going to

4 describe that because it is not admitted. I don't think this

5 is admissible. Yeah. Even my own legal team is looking at

6 me with looks or disbelief, but in Europe, they hired

7 graphologists who make a good living analyzing handwriting to

8 pick out who the fraudsters. And if you read the Wall Street

9 Journal earlier this week, one of the

10 partners at Access International, admitted that they never

11 had Mr. Madoff submit his handwriting sample because he was

12 beyond reproach.

13 Q Right.

14 A And of course, they would have caught him. I think

15 the inference was, of course they would have caught him if he

16 had submitted a handwriting sample.

17 Q Right. So the handwriting samples -- but they

18 didn't even ask him for a handwriting sample.


20 Q Okay. And was it your sense, also, that there may

21 have been some of these individuals or entities that had some

22 suspicion that there potentially was something illegal going

23 on and maybe didn't want to get too much information, were

24 just happy with the returns?

25 A It seemed like if you were willing to accept that

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1 Mr. Madoff was front-running his order flow, well, then he

2 clearly was a crook; he was violating American securities

3 laws. And they seemed to take great comfort for that because

4 everybody knows you can make higher returns if you cheat and

5 steal--

6 Q Right.

7 A -- it has a higher profit margin associated with

8 it --

9 Q Right.

10 A -- than i~ you are engaged in a legitimate

11 investment activity.

12 Q Right.

13 A And so they seemed to take comfort and really

14 seemed to be hoping that he was front-running because then

15 the returns were real and they were the beneficiary.

16 Q Right. Gotcha. Okay. And so -- and~after that,

17 the information you got in Europe and -- which seemed to

18 indicate to you it was more likely to be a Ponzi scheme, then

19 you went back to the SEC; is that right? Tell me about the

20 origins of the October 2005 complaint.

21 A And that is where I wish I had the e-mails.

22 Q Right. Okay. To the best of your recollection.

23 A And I would like to see those e-mails, too, if you

24 can get them.

25 Q Okay. Well, we will make an effort certainly.

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1 A And Rampart Investment Management in Boston, their

2 servers --

3 Q Okay.

4 A -- tended to be a very, very high speed.

5 Q Okay.

6 A The slowest server went to e-mail, but they had

7 more servers than people and they continually rotated in new

8 servers --

9 Q Okay.

10 A -- where the highest speed servers and computers

11 went into the portfolio management training area.

12 Q Okay.

13 A So I am hopeful that you can obtain them.

14 Q Okay. But so what led you to then make your third

15 complaint now to the SEC?

16 A I can't recall because I don't have th~ trail of

17 documents.

18 Q Okay.

19 A But there was something key that did happen in June

20 of 2005. Frank Casey, and I believe he was in Europe doing

21 some kind of a marketing trip -- and I substituted in the

22 letters A, B, C, D, E, Fl G, H for the name of an

23 individual -- and he had a meeting where it was clear that

24 Mr. Madoff was trying to borrow funds from French and other

25 European banks. And that was the first warning sign -- and

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Page 54

1 this is what we were looking for -- that he was running short

2 of cash to keep the operation going.

3 Q Right.

4 A And we took that as a clear warning sign that he

5 was in trouble and in danger of folding, but we had no inside

6 information to that. We were trying to solve it from the

7 outside using publicly available information and questions

8 being asked by my team members. So this was just a dinner

9 conversation --

10 Q Right.

11 A -- that took place, I believe, in Europe by

12 Mr. Casey. And I wish I had more information. I just

13 happened to save it -- save this information. And then as

14 the e-mails started to pick up in October of 2005 -- and I

15 have a document that I -- dated October 25, 2005, and that is

16 the document I used to meet with SEC Boston branch chief,

17 Mike Garrity.

18 Q Right. Okay. And so if you remember, did you send

19 in documents initially into the SEC or did you call them?

20 A I don't remember.

21 Q Okay. But you do know that you -- on October 25th,

22 there was a meeting you had with the SEC, right? I

23 A I believe it was October 25th. I dated this as a

24 presentation, October 25, 2005, presentation to the SEC. I

25 am going with Mark-51 and -- where does that one end. I

efl b32a9-i 866-4~311-ai 91-6aa2bedl 64ba


Page 55

1 believe it ends at Mark-70.

2 Q Okay. And we are going to mark, as Exhibit 7, the

3 document that says on the top, "The World's Largest Hedge

4 Fund is a Fraud, October 25, 2005, Presentation to the SEC."

5 And it is Bates stamped Mark-0051 to Mark-0070.


7 identification.)

8 MS. STEIBER: Right. So that Attachment 3 is a

9 part of that.

10 MR. KOTZ: Okay. Okay.

11 THE WITNESS: Yeah. I don't know that it was a

12 part of that one. It was part of, I believe, the November 7,

13 20051 submission. I can't recall i~ it was in the --

14 BY MR. KOTZ:

15 Q Okay.

16 A -- October 25th presentation. It may have been. I

17 just don't know.

18 Q But this Attachment 3, which we marked as

19 Exhibit 6, was provided to the SEC in 2005.

20 A Yes.

21 Q Okay. All right. So "October 25, 2005, made a

22 presentation to the SEC," that was in person?

23 A Yes, it was.

24 Q Okay. And do you remember who you met with at thatl:

25 point?

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Page 56

1 A It was SEC Boston branch chief Mike Garrity.

2 0 Okay.

3 A I believe he has since been promoted to assistant

4 regional administrator and he had other people in the room

5 and I can't recall their names.

6 Q Okay. Was Ed Manion in there?

7 A No.

8 Q Okay. Did you still have interactions with Ed

9 Manion at that point?

10 A Yes. He was the one that arranged this meeting.

11 Q Okay.

12 A He thought it was critically important that the

13 SEC -- because at this time, Mr. Madoff had gotten in new

14 victims and the fraud scheme was getting ever and ever larger

15 and he wanted to make sure his agency took Madoff down.

16 Q Okay. And so you provided more information in 2005

17 than you provided earlier and is that because you learned

18 more over the time based on your own investigation?

19 A Yes. The team had learned a lot. We had kept

20 busy. I suspect it was a similar level of activity and

21 intensity throughout the entire period of time. It is just

22 that the e-mails are missing.

23 Q Right. And then part of the information you

24 provided to the SEC in October 2005 was a list of 28 red

25 flags relating to Bernard Madoff, right?

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Page 57


2 Q And so what, if you can recall, happenedat the

3 meeting? What was the reaction?

4 A Mike Garrity took it very seriously; he thought it

5 was very credible. He thought I was very specific. He had a

6 whiteboard.

7 Q Okay.

8 A Anything he did not understand he had me go up to

9 the whiteboard until he understood the concept. So I was

10 drawing a lot of charts and walking him through the

11 mathematics and giving him picture diagrams of the moving

12 parts of this purported split-strike conversion strategy.

13 Q Right.

14 A And he never let me leave the whiteboard until he

15 understood everything. And he kept me there for a few hours.

16 Q Okay.

17 A He was thorough. He asked unbelievably great

18 questions. He is a skilled investigator. He and I discussed

19 the fraud theories. He said, "Well, you have two fraud

20 theories. What if his returns are real? Is there any

21 explanation for that?"

22 I mean, I thought for a bit and I said, "Yes. The

23 only way these returns are real is Bernard Madoff is an alien)l

24 from outer space that has perfect foreknowledge of what the

25 capital markets are about to do." And Mr. Garrity, to his

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Page 58

1 credit, took me very seriously and we had a discussion about

2 ·that and Mr. Garrity pointed out that if this is true and

3 Mr. Madoff is an alien, this would be very destabilizing to

q the U.S. capital markets.

5 Q Okay. I"

6 A Because investors would not like to be trading

7 against aliens.

8 Q Right. A

9 E It is not a level playing field. And he took it

10 seriously because the size of this hedge fund was beyond

11 belief. And so we were trying to think outside of the box,

12 as a good investigator would, and he was a very good

13 investigator, and he promised me that he would investigate

14 quickly and get back to me quickly with -- he took it very

15 seriously and he was true to his word.

16 Q Okay. But for the record, the discussion about the

17 aliens was in jest, right?

18 A It was half in jest.

19 Q Okay. Okay. Okay. So you were feeling

20 encouraged, is it fair to say, after that meeting you had in

21 October of 2005, that finally somebody at the SEC was

22 listening.

23 A Yes. I was highly encouraged. I felt good. I

24 knew Mr. Garrity understood it. r knew he saw the threat and

25 he saw the size and the complexity.

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Page 59

1 a Okay.

2 A He understood the math, he understood the complaint

3 that I had submitted and he was promising action, and then he

4 followed up and was true to his word.

5 a Okay. And so what did Garrity tell you he was

6 going to do?

7 A He was going to investigate quickly from his

8 office --

9 a Right.

10 A -- and get back to me and he did. It may have

11 taken him a week or so to get back to me. There are some

12 e-mails there, thank goodness. And he said, "I've discovered

13 some irregularities that are disturbing. I cannot" -- "but I

14 am not at liberty to share them with you, but we take them

15 seriously. I need to get you" -- "I need to get this case

16 submission to New York. I need New York to act on it because

17 we cannot."

18 a Right.

19 A And he gave me -- came back with contacts, of two

20 contacts at the SEC's New York regional office. I went to

21 Megan Cheung, who I thought was the highest ranking.

22 a Who was the other contact? Do you remember?

23 A Doria Backenhiemer.

24 a Okay. And so Megan was the higher level.

25 A Right. She was the branch chief.

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Page 60

1 Q She was the branch chief.

2 A And I knew branch chiefs were --

3 Q Higher.

4 A -- higher.

5 Q All right. So Garrity said he was going to send it

6 to the New York office and he gave you the name of the person

7 that he was sending it to, the names of the people he was

8 sending it to in the New York office, right?

9 A Yes.

10 Q Okay. And he indicated that he would follow up

11 with the New York office as well?

12 A He did.

13 Q And did he indicate to you that he would stress to

14 the New York office that he felt like it was an important,

15 credible case?

16 A Yes.

17 Q And did he indicate to you that he would also let

18 the New York office know that he felt you were credible?

19 A Yes. He vouched for my credentials with the New

20 York office and --

21 Q Now at that time -- is it also the case at that

22 time that you had mentioned that there were a couple other

23 people who could vouch for your credentials, higher level

24 people, Bresnan and Waiter Ricciardi?

25 A Yes.

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Page 61

1 Q Okay. And how would they be able to vouch for you,

2 do you remember?

3 MR. MICHAEL: I think we are treading into an --

4 MR. KOTZ: Okay.

5 MR. MICHAEL: -- area that is covered by a

6 confidential case.

7 BY MR. KOTZ:

8 Q Okay. But without talking about the specific case,

9 are you able to say that you had dealings with these two

10 individuals, Bresnan and Ricciardi?

11 A Yes, I did.

12 Q Okay. And so you identified them as individuals

13 who could vouch that you were a credible person coming

14 forward.

15 _4 Yes.

16 Q Okay. Okay. All right. And so -- and then

17 Garrity, he did send it to the New York office; is that

18 right?

19 A Yes, he did.

20 Q And so what happened then?

21 A When he -- I do not believe he -- at least he told

22 me he did not reveal my identity to the New York office, per

23 my request.

24 Q Right.

25 A He just let them know there was a Boston

efl b32a9-i 866-4b1 1 -a~ 9 i -6aa2 bedl 64ba


Page 62

1 whistleblower.

2 Q Right.

3 A And that I was to call one of these two

4 individuals, Doria Backenhiemer or Meaghan Cheung, identify

5 myself as the Boston whistleblower, which I did. I told them

6 my name. I told Meayhan Cheung my name and she was to be the

7 only person in the New York regional office to have -- know

8 who I was, along with the team leader leading the team into

9 Mr. Madoff's operation. Those are the only two people that

10 were to know my identity.

11 Q Okay. And so do ~ou recall your first conversation

12 with Meaghan Cheung? According to our documents, it occurred

13 on November 4th. I think if you look at Mark-0049 --

14 MS. STEIBER: I will get it.

15 THE WITNESS: Yes.

16 MR. KOTZ: Okay. I am reading Mark-0049. Okay.

17 And so why don't we mark that into evidence as Exhibit 8.

18 It's Mark-0049. It is an e-mail string, November 4, 2005,

19 from Garrity saying, "Glad you connect. Thanks again.

20 Mike." And then from Harry to Mike Garrity indicating that

21 he spoke with Meaghan Cheungand revealed his identity to

22 her.


24 identification.)

25 BY MR. KOTZ:

ef~ b32a9-~ 866~b11-al 91-6aa2 bedi 64ba


Page 63

1 Q Do you remember anything specific about that

2 conversation you had with Meaghan Cheung?

3 A Yes.

4 Q Okay. What do you remember?

5 A She did not seem to understand the report as it was

6 written.

7 Q Okay. And did she ask you questions to try to

8 understand it?

9 A No. That was what was shocking. Mike Garrity took

10 it seriously, asked lots of good questions, would not let me

11 leave the whiteboard until he understood every point, and she

12 was the hundred and eighty degree opposite, never asked a

13 question, intelligent or otherwise, told me that she had

14 received my report, had looked at it, and basically it was

15 her baby now and we don't -- I had the impression that they

16 don't deal with people like me.

17 BY MS. STEIBER:

18 Q Did she say anything at the meeting that gave you

19 that impression, anything specific that you remember?

20 A It was not a meeting. It was a telephone call.

21 She said that -- I need some time here. I need to go through

22 some documents here.

23 BY MR. KOTZ:

24 Q Sure. Take your time.

25 A Because I don't want to say a conversation took

ef~b32a9-1866-4bi~-a~91-6aa2bed164ba


Page 64

1 place in November if they might have taken place in December.

2 Q Okay.

3 A Or later in November or -- I mean, I can't --

4 Q Okay. I mean, we can just -- you know, in

5 general, in the conversations you had with Ms. Cheung --

6 forget about the specific date -- what do you recall her

7 saying specifically about thecase or about what she was

8 going to do?

9 A She was never volunteering any information to me

10 Q Okay.

11 A It was me asking questions of her, "Do you

12 understand my report?"

13 Q Yes.

14 A Me saying things like, "Really? Do you understand

15 derivatives?" And she goes, "Well, I did the Adelphia case."

16 And I probably would have commented, "Well, that was only

17 like, if I recall it correctly, a three or three-and-a-half

18 million dollar accounting fraud case from the Rigus family,

19 Adelphia Communications."

20 Q Right.

21 A And I said, "Well, that was just an accounting

22 fraud. That is much easier to understand than a complex

23 derivatives fraud, and it is a much smaller case. This case

24 is several times the size of the Adelphia case." And she

25 seemed offended by that saying that if she didn't understand

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Page 65

1 derivatives, that you had an office of economic analysts in

2 Washington staffed with Ph.D.'s who understood derivatives.

3 And I would have responded, "Yes, but they are only Ph.D.'s.

4 They have never traded derivatives."

5 Q Right.

6 A "They are academics only." And the formulas used

7 that the academics know for derivatives are not the ones

8 actually used by industry participants. They are totally two~

9 different sets of formulas. The math is different and the

10 understanding level is different and that I was someone that

11 could take these instruments apart backwards and forwards and

12 do it in my sleep, whereas the Office of Economic Analysis

13 would not have those caliber of people.

14 Q So is it fair to say that you asked if you could

15 provide assistance to her and she rebuffed you?

16 A She did rebuff me and she would never`follow up.

17 It was always me contacting her, me giving her new

18 information and me having unsatisfactory exchanges with her,

19 either verbally or by e-mail.

20 Q When you say unsatisfactory, what do you mean

21 specifically?

22 A If you were a trained investigator and you have a

23 whistleblower come in, you pump them for information. You

24 walk them through the case submission from every direction.

25 You ask lots of detailed questions. You ask lots of leading,

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Page 66

1 open-ended questions. You want to pick that person's brain

2 because that person has great knowledge and can save the

3 government thousands of man honrs. And she never followed up

4 and she showed a clear lack of training.

5 Q Did she kind of give you the impression that she

6 wanted to get you off the phone?

7 A Yes.

8 Q Okay. Okay. Did she ever indicate to you anything

9 about the fact that in her office, Ponzi scheme cases were

10 not favored?

11 A She never said anything like that

12 Q Okay. And did there also come a time when you

13 suggested to her that she contract -- contact Mike Ocrant and

14 talk to him?

15 A Yes. Yes.

16 Q Okay. And what was her response to that, do you 17 remember?

18 A No.

19 Q But, to your knowledge, did she ever contact Mike

20 Ocrant?

21 A I have spoken to Mike Ocrant and he said, "I am

22 prepared to take her call." And I didn't feel that she was

23 going to call him. So I urged him to call her and he did

24 not. He said, "I will take her call, but she has to call

25 me . "

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Page 1

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

In the Matter of:

File No. GIG-509

WITNESS: Number 4

PAGES: 1 through 112


100 F Street, N.E.

Washington, D.C.

DATE: Friday, February 13, 2009



""L


(202) 467-9200


Page 2

1 APPEARANCES:


3 DAVID KOTZ, Inspector General

4 HEIDI STEIBER, ES~.


6 100 F Street, NE

7 Washington, DC 20549

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 3

1 CONTENTS

3 WITNESS: EXAMINATION

4 Alex J. Sadowski 7


7 1 Draft letter, Easter to

8 Sadowski, 1/24/04 21

9 2 Draft letter, Easter to

10 Sadowski, 1/28/05 - 21

11 3 Document: "E-mail Search Order

12 Routing Project, 9/10/2004,

13 9:37 a.m."

14 4 Two e-mails, McCarthy to Swanson

15 and Nee to McCarthy, multiple cc's,

16 attaching Marhedge article, "Madoff

17 Tops Charts; Skeptics Ask How" by

18 Michael Ocrant, 5/26/05 31

19 5 Article, Barron's, re. B. Madoff,

20 May 2001 36

21 6 E-mail, McCarthy to Swanson,

22 2/28/06 41

23 7 E-mail, Sadowski to Swanson,

24 3/22/05 44

25


Page 4

1 C O N T E N T S (Continued)


4 8 E-mail series, S. Madoff/Swanson,

5 cc McCarthy, 3/22/05 45

6 9 E-mail, S. Madoff to Swanson,

7 re. document request, 5/2/03 49

8 10 E-mail series, S. Madoff to

9 Swanson, 8/12/2004; 5/22/2005;

10 8/12/2004; 8/15/2004, 8/18/2003 50

11 11 E-mail, McCarthy to Swanson,

12 3/1/06 54


14 3/24/06 57

15 13 E-mail, Swanson to Sadowski,

16 4/24/06 61

17 14 E-mail, McCarthy to Sadowski,

18 4/6/06 63


20 4/7/06, 12:17 p.m. 64


22 4/7/2006 65


24 4/7/2006, 12:21 p.m. 66

25


Page 5

1 CONT ENTS (Continued)


4 18 E-mail series, McCarthy to

5 Sadowski, 4/7/06, 12:21 p.m. 67

6 19 E-mail, Sadowski to McCarthy,

7 4/7/2006, 12:23 p.m. 72


9 4/7/2006, 12:24 p.m.


11 4/18/06, and e-mail string,

12 McCarthy/S. Madoff 74


14 4/21/06 76


16 4/21/06, 9:12 p.m. 78

17 24 E-mail, McCarthy to multiple

18 recipients, 4/21/06, 11:40 p.m. 79

19 25 E-mail, Swanson to McCarthy,

20 4/21/2006, 7:59 p.m. 79


22 4/22/2006, 11:42 a.m. 81


24 4/22/2006, 9:04 a.m. 85

25


Page 6

1 CO N T E N T S (Continued)


q 28 E-mail, McCarthy to Swanson,

5 4/27/06, 9:45 a.m. 89


7 4/27/06, 9:46 a.m. 90


9 4/27/06, 9:47 a.m. 90

10 31 Invitation, farewell reception

11 for Swanson, 8/21/06 93

12 32 Document, "Re. RSVP to farewell

13 reception for Eric Swanson,"

14 8/21/06 94


16 8/21/2006, 3:53 p.m. 95

17 34 E-mail, Song to Sadowski, 9/24/04 105

18

19

20

21

22

23

24

25


Page 7

1 PROCEEDINGS

2 MR. KOTZ: Okay, we are on the record at 10:15 a.m.

3 on February 13, 2009 at the United States Securities Exchange

4 Commission Office of Inspector General. I am going to give

5 you the oath if that is all right.

6 MR. SADOWSKI: Sure.

7 Whereupon,

8 ALEX JOSEPH SADOWSKI



11 EXAMINATION

12 BY MR. KOTZ:

13 g Could you state and spell your full name for the

14 record?

15 A My name is Alex Joseph Sadowski, A-l-e-x,

16 J-o-s-e-p-h, S-a-d-o-w-s-k-i.

17 Q My name is David Kotz. I am the Inspector General I

18 of the United States Securities and Exchange Commission.

19 This matter is being conducted pursuant to an investigation

20 by the Office of Inspector General, Case Number OIG-509.

21 1 am going to ask you certain questions and you

22 will provide answers under oath. The court reporter will

23 record and later transcribe everything that is said. Please

24 provide verbal answers to the questions. A nod of the head

25 or another non-verbal response won't be able to be picked up


Page 32

1 of did a front-running exam of Madoff, of kind of Madoff

2 Securities, which I think is here but not so much, again, I

3 think it was more front-running using the market maker,

4 right, because John did mention this me that he had a

5 conversation with Madoff but he wasn't sure about the time,

6 right, the exact time of when he had it, right.

7 BY MR. KOTZ:

8 Q He mentioned this to you recently?

9 A Yes, right.

10 Q But at the time you weren't aware of this?

11 A No, no, no. I mean because you have got to think

12 about this obviously when the story breaks, everyone talks

13 about it and then we run through what exams did we do. I

14 remember -- because we even said was he part of the pre-open

15 exams that we did, that is what we called the ones that we

16 were just referring to. F,nd then John had mentioned, he was

17 like, "Yes, I think I talked to him one time."

18 Q When you say "him," do you mean Bernie Madoff?

19 A Yes, I think so. Yes, yes, he said Bernie and then

20 but he said there was no mention of I guess the investment

21 advisor, and I think that is what prompted this

22 "front-running exam," and it was done in like '05. What is

23 the date here? Yes, this is '05, that makes sense. So then

24 that exam, that finding there was basically no front-running,

25 so now it makes more sense because John Nee, I think he is

MADOFF EXHIBI-TS-00068

Page 33

1 in -- they are in the New York office, right, so then they

2 shipped it up to the New York office.

3 Q Do you know how much involvement John McCarthy had

4 before it was shipped up?

5 A Probably not much. He was associate director, so

6 the day to day involvement, and as you canimagine people

7 talked to John in getting tips and things like that if that

8 is what this is considered, right.

9 Q What about Eri·e Swanson, do you know what

10 involvement he had in that front-running exam?

11 A I don't because I wasn't that involved. I wasn't

12 involved at all in that exam.

13 Q Do you know these guys: John Nee, William Ostrow,

14 Peter Lamore, Bob Sollazzo?

15 A I know Bob Sollazzo and I know John Nee. I don't

16 know them well but I have talked to them and dealt with them

17 on a variety, the other two I do not.

18 Q And Sollazzo and Nee are good examiners?

19 A Yes, Bob has been, he has kind of run the New York

20 office exam program forever. As you can imagine, there is a

21 lot of -- you try to coordinate as much as possible, and I

22 think that is why obviously there was this e-mail from John

23 Nee to John McCarthy, right. John did mention that this

24 conversation he had with~lee about this.

25 Q This is John you are talking about?


Page 34

1 A Yes, yes, he is like, "I remember talking with Nee

2 about it, that they were doing an examination of Madoff," and

3 he was like that, "We talked to him" because it is funny

4 because he said that at first that Madoff didn't even admit

5 or something because when he says here, "When he finally

6 admitted to executing trades for billions of dollars in

7 customers," he kind of said that -- John McCarthy told me

8 that, "I thought that was a red flag" in talking about it

9 kind of now in the sense of why wouldn't Madoff admit,

10 because apparently it took him -- when John Nee spoke to him,

11 it took him a loiig time to kind of I guess admit that he was

12 executing trades for hedge funds.

13 Q So in this conversation you were having with John

14 McCarthy about this thing that hit with Madoff and you were

15 talking about the front-running exam, did McCarthy ever say,

16 "Wow, how did those guys miss that" or "I wonder what

17 happened"?

18 A Well, again, revisionist history, we kind of said,

19 like we looked at the Markopolos memo and say, "Wow, if I

20 would have had this memo, it would have been a field day"

21 because, again, you have to put these things in context when

22 you talk about if you would have went in front of the

23 Commission in 2005 and said, "I want to do an enforcement

24 action potentially, I don't have any evidence of anything but ~

25 Bernard Madoff, I need to do an enforcement action because I


Page 46

1 doing these around thattime.

2 Q And at the time did he make any comments about her,

3 favorable comments?

4 A NO, no, he was.

5 Q Did he like her at the time?

6 A No, he was actually -- she was I think dating

7 someone. He was actually up until the end of '05, he was

8 actually engaged to be married to someone else. Kind of fate

9 stepped in if you will. He was supposed to get married in

10 Florida and then there was a hurricane in the place where

11 they were supposed to get married and it didn't happen. And

12 then --

13 Q Who was that that he was supposed to marry?

14

15

16

17

18

19

20 And from kind of the way I view

21 things, I think then, a couple of months later, I think that

is when he started dating Shana

23

24

25 And, again, as I


Personal Privacy

Personal Privacy

Personal Privacy

Personal Privacy

Personal Privacy

Page 48

1 be asked to speak at those events?

2 A "Prestigious" is probably a little strong of a

3 word. John McCarthy basically ran the exam program for

4 broker-dealers and Eric Swanson was kind of the number two,

5 so to listen -- so those are the natural people you are going

6 to have come and talk at those events just as you would have

7 Steve Luperello who kind of ran the exam program for NASD or

8 Tom Gero or Rick Ketchum, right.

9 Q Why were they motivated to spend their time doing

10 this?

11 A Oh, because you want to -- as a regulator, you want

12 to be perceived certainly as trying to help broker-dealers be

13 more compliant. It is an outreach type program in an effort

14 to facilitate compliance within the industry and to think

15 about issues. It is just like when a chairman or someone

16 goes to the Securities Trader's Association and gives a

17 speech or something like that. It is designed to talk about

18 things that are going on internally, here are the issues that

19 we care about, here is what we are going to look at when we

20 come in to do an examination. Make sure your AML policies

21 and procedures are updated if there are new rules, things

22 like that. So they were certainly designed to try to educate

23 and for them to ask questions related to obviously issues.

24 BY MR. KOTZ:

25 Q Was Shana effective at getting speakers?


Page 56

1 don't know.

2 Q You didn't hear anything about a tip that was

3 received about Madoff that Steve Cutler gave to Laurie

4 Richards?

5 A NO, never, never.

6 Q Okay, when did you understand that Shana and Eric

7 became romantically involved?

8 A I would say, it was probably, I remember I think it

9 was around this time.

10 Q Meaning March of 2006?

11 A Yes, like SEC Speaks was around that time because I

12 remember a bunch of people were out, and I think I remember

13 them two spending a lot of time talking to each other because

14 I remember even talking to him about it, I said, "What is

15 going on, you spent a lot of time talking to Shana?" And

16 that is when I think he kind of mentioned, yes, he is an easy

17 person to talk to, she was telling me about and

18 I was telling her about all my craziness and that is when you

19 got the sense that okay maybe something is going to happen

20 here.

21 Q So you think that occurred around March of 2006?

22 A I would say March or April. I don't know when they

23 kind of officially made it official dating but I would

24 probably put it, that is from what my observation, if it was

25 six months before that, I didn't know about it.


Personal Privacy

Page 57

1 Okay, so can I show you a couple of documents?

2 A Sure.

3 Q A 3/24/06 e-mail at 10:00 a.m. Okay, we will mark

4 this as Exhibit 11, this is an a-mail from you to Eric

5 Swanson, 3/24/06 10:50 a.m. I'm sorry, Exhibit 12. If you

6 could look at that all the way down to the bottom.

7 (Exhibit No. 12 was marked for

8 identification.)

9 THE WITNESS: Yes, I remember this e-mail.

10 BY MR. KOTZ:

11 Q Okay. What do you remember about the e-mail?

12 A We were out late, and that was the night -- that

13 was the night that he was talking to Shana, and that was a

14 joke, I was like, "Shana made off the evening" because i was

15 insinuating that they spent the night together.

16 Q So where were you out, or what was the event?

17 A It was SEC Speaks.

18 BY MS. STEIBER:

19 (S In D.C.?

20 A In D.C. and there were like hundreds of people.

21 They went to a bar.

22 Q What was going on that night that made you think

23 that they were --

24 Were they flirting?

25 A Like I said, they spent the whole night talking to


Page 77

1 BY MS. STEIBER:

2 Q Did she work at the SEC?

3 A I don't think so, no.

4 Q Did you learn who she was?

5 A It was someone that he knew, I think, for a long

6 time, so I can't remember her name.

7 BY MR. KOTZ:

8 Q And this thing about McCarthy saying, "You're

9 keeping secrets from me," did you find out about this

10 relationship before John did?

11 A I think I did, yes. Again, context matters right?

12 John and Eric I think were, they were -- they had a very good

13 working relationship, and I think at this point Eric was

14 getting ready to leave the Commission, John was getting ready

15 to leave the Commission, and I think t~ie relationship in one

16 sense was I don't want to say strained because that is

17 probably a strong word but it was you know, and I think this

18 is going on with Shana, and I was basically kind of put in

19 the middle. I kind of talked with both of them.

20 Q You were closer with Eric than John was?

21 A No, I wouldn't say that. I wouldn't say that at

all. I just think at that time, again going through the

23 things that I was going through, the things that Eric was

24 going through, it was just but, like I said, six months

35 before Eric was going to be married.


Page 95


2 identification.)

3 THE WITNESS: Probably joking with Eric because

4 again the way that the -- at that tLme that we were coing

5 through those e-mails before, there was significant tension.

6 BY MR. KOTZ:

7 Q Right.

8 A Now, we are past the tension.

9 Q But doesn't it seem to indicate that there is at

10 least some lingering tension even in August?

11 A Well, it is more of you know, yes, it is more, it

12 more in lightheartedness. I think it is an acknowledgment

13 that, hey, we went through a difficult time where there was

14 some tension, right. And I say, "Couldn't leavi well enough

15 alone," like basically we are past this, let's move on with

16 our lives and going to be happily married. We all went

17 to -- John went to the wedding, I went to the wedding, so

18 this wasn't a tension in the sense of -- it was in the grand

19 scheme of things, it was --

20 Q Right.

21 A -- relatively --

You said that you spoke to Eric after there was

23 information in the press about Bernie Madoff?

24 A Sure.

25 And what was his reaction at that time? Was he


Page 101

1 A Yes, I had three, I had people come in and I

2 interviewed them andthey are always a little quirky, you can

3 tell they are smart but they are disgruntled typically in

4 some way. It was, "I left this job because they were

5 engaging in fraud," when maybe that wasn't -- there was

6 always an ax to grind it seemed like.

7 Q And you didn't see that in the Markopolos'

8 complaint?

9 A When you listen to his testimony, again I think he

10 has a little bit of quirkiness about hirri but he seemed to

11 become obsessed with this not because of he lost money or got

12 fired from a job, he seemed to become obsessed with this

13 because he basically pretty convincingly proved that this was

14 a fraud, and he wanted to help bring it down.

15 · BY MS. STEIBER:

16 Q You said something that made it a credible

17 complaint were the names that he gave, the contacts. Was

18 there anything else about the complaint, the information in

19 the complaint?

20 A Just that it was detailed -- sorry. It was

21 detailed. It was very -- in my judgment, very methodical.

22 It just gave you a road map. It just gave you so many ways

23 to -- because that is what you need as an exaIniner, you need

24 to say all right, I now have this so I can go ask this person

25 for this piece of information. And it is, it is a connecting


Page 102

1 of the dots. That is what these types of things are and that

2 was certainly something that led you to at least start

3 connecting. But, again, I don't want to overstate this

4 because I'm viewing it in hindsight like everyone else and it

5 is easy to say.

6 BY MR. KOTZ:

7 Q You mentioned the possibility of incompetence. Did

8 you know of OCIE examiners or folks in OCIE that were

9 incompetent that might have missed this?

10 A Yes.

11 Q Yes?

12 A It is difficult, you don't want to disparage former

13 co-workers but the SEC is a large organization.

14 Q Right.

15 A Typically when people come in, it is difficult if

16 they are really not up to par to get rid of them. And there

17 is a mentality sometimes, it is very, okay, we have this

18 checklist, right, so we need to go by this checklist and if

19 everything happens on this checklist, it is okay. There was

20 not a lot of outside the box thinking. I think that is one

21 of the things that John was very good at because with the

22 specialists investigation, it was something that taken to a

33 3evel that wouldn't have been if he didn't do it because it

24 was also about a mentality, right. The analogy that we use

25 is that a typical SEC examiner walks into a room where there --


Page 103

1 are a bunch of dead bodies lying around and they notice that

2 the clocks are 10 minutes fast. And it really is. And,

3 again, it is not meaning to be disparaging but it becomes

4 difficult but you also have to factor in the restraints that

5 you have.

6 Q Now was that sort of the reputation of the New York

7 office of examiners?

8 A I think they, like other offices, I think they had

9 some very talented examiners but they also had their share of

10 people that probably weren't very strong.

11 Q What about the Enforcement lawyers, was there a

12 good relationship between OCIE and Enforcement in terms of

13 working together in a collaborative fashion?

14 A At times. As you probably have heard, there are

15 always those issues of turf battles. We obviously as

16 examiners we don't have enforcement authority, but if we find

17 something, we want to be involved in it, right, because we

18 were there. And there were times when things would go to

19 Enforcement and they would say, "Well, thanks for all your ;

20 hard work, we got it now. We will take it from here." And

21 then obviously if they needed stuff, they would come back.

22 There were times that there were some tension there, which

23 was typical.

24 Q Okay. Let me ask you another question, let's say

25 you did an examination and you didn't find anything or you


Page 104

1 found some suspicious things but in the end you couldn't

2 prove it so you just concluded that there was nothing

3 significant there. And then Enforcement is starting to look

4 at, this same case, would you try to work with Enforcement to

5 give information?

6 A Sure.

7 a Would you follow up?

8 A Sure. I was fortunate, I had several cases that I

9 worked on. I testified in a trial on behalf of the

10 Enforcement Division. Most of my work throughout my career

11 was cases that led to enforcement where I worked closely with

12 them.

13 a But do you think that it is possible that there

1/i might have been examiners who were working on an examination,

15 had suspicions but didn't find anythiny and then Enforcement

16 is picking something up and so they were potentially worried

17 that Enforcement would find something that would make them

18 look back?

19 A I think that is a very valid theory in the sense

20 that, and I think that potentially is one of the cultural

21 problems with the SEC is that there is the culture or fear

22 that I don't want to -- you see these people, this is the

23 worst case scenario for certain people, right. People's

24 pictures are in the New York Post. And there is some of that

25 culture I think of --


Page 105

1 Q Theculture being?

2 A Of I don't want to be proven to be incompetent and

3 so we are going to kind of -- not slide this under the rug

4 but it is just if I have already looked at something and it

5 is not there, it is not there because I am competent and you

6 don't need to go and look and question my judgment.

7 Q Right, so you might want to convince Enforcement

8 that there isn't something there to prove that you were right

9 in the first place?

10 A I could certainly see people doing that because it

II is obviously poor but people worry about reputations, and I

12 think that is probably one of the -- again, from a cultural

13 standpoint of the agency, that is probably a weakness in my

14 judgment.

15 Q I am going to show you another document, this goes

16 back to what we were talking about early on, maybe this will

17 refresh your recollection about that initial matter you were

18 involved in regarding Madoff, so why don't we mark this as

19 Exhibit 34. This is an e-mail from to you,

20 9/24/2004.


identification.)


24 BY MR. KOTZ:

25 Q Can you see were it says, "Question: Why does this


Personal Privacy

Page 1


In the Matter of:

File No. GIG-509

GIG-509

WITNESS: Number 3

PAGES: 1 through 61


100 F Street, N.E.


DATE: Thursday, February 19, 2009


to notice, at 2:20 p.m.


(202) 467-9200


Page 2

1 APPEARANCES:


4 H. DAVID KOTZ, ESQ., Inspector General

5 HEIDI STEIBER, ESQ. Investigator

6 CHRISTOPHER WILSON, ESQ. Investigator

7 Office of Inspector General


9 100.F Street, N.E.

10 · Washington, D.C. 20549

11 202-551-6037

12

13 On behalf of the Witness:

14 PRO SE

15

16

17

18

19

20

21

22

23

24

25


OCIE Staff Accountant

Page 3

1 CONTENTS

3 WITNESSES EXAMINATION

4 6

6 EXHIBITS

7 EXHIBITS: DESCRIPTION · IDENTIFIED

8 1 3/4/06 Sadowski/Swanson e-mails 23

9 2 4/7/06 Sadowski e-mail to Swanson 25

10 3 4/17(06 Swanson e-mail to 29

11 4 8/15/06 Swanson e-mail to 31

12 5 4/22/06 Swanson e-mail to Sadowski 34

13 6 8/21/06 invitation to

14 McCarthy for Swanson farewell reception 42

15 7 4/18/06 McCarthy e-mail to Sadowski 48

16 8 4/24/06 Swanson e-mail to Sadowski 49

17 9 3/1/07 McCarthy e-mail to Swanson 50

18

19

20

21

22

23

24

25





OCIE Branch Chief

Page 4

1 PROCEEDINGS

2 MR. KOTZ: We are on the record at on February 19,

3 2009 at the United States Securities and Exchange Commission

4 Office of Inspector General.

5 I'm going to give you the oath. Would you please

6 raise your right hand?

7 Whereupon,

8

9 was called as a witness herein, and after being first duly

10 sworn, was examined and testified as follows:

11 MR. KOTZ: Could you state and spell your full name

12 for the record?

13 THE WITNESS:

14

15 MR. KOTZ: Great. My name is David Kotz. I'm the

16 Inspector General of the United States Securities and

17 Exchange Commission. This is an investigation by the Office

18 of Inspector General, case No. OIG-509.

19 I'm going to ask you certain questions. You're

20 going to provide answers under oath. The court reporter will

21 record and later transcribe everything that is said.

22 Please provide verbal answers to your questions.

23 If you give a nod of the head or another nonverbal response,

24 it won't be able to be picked up by the court reporter.

25 Also, so the record will be clear, please let me





Page 17

1 Q Okay. Did he ever confide in you about romantic

2 relationships he was having?

3 A He did.

4 Okay. When you first met him in February 2001, was

5 he involved with somebody, do you remember?

6 A If I remember correctly, he was dating a girl from

7

8 · (Z And how long did that last?

9 A I don't have numbers on that, not that far back.

10 Q Do you know if he ever had a very serious

11 relationship with somebody other than Shana Madoff, who he

12 eventually married?

13 A Yes. As far as the serious nature of a

14 relationship, meaning like somebody I know he was with for a

~S period of time,

16

17

18

19

20

21

22

23

24

25


Jane Doe

Jane Doe

Personal Privacy

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Page 18

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24 Q Okay. Now, in the 2003 time period, around say

25 April to August 2003, we have some documents which I can show


Personal Privacy

Page 19

1 you which demonstrate some communications between Eric and

2 Shana Madoff.

3 A Okay.

4 Q Do you know if during that period of time he was

5 friendly with Shana?

6 A All I know is that I really never even heard of

7 Shana Madoff until he started dating her.

8 Q Okay.

9 A But I will -- but I do know that he was -- he and

10 John McCarthy used to go·and do these symposiums, these

11 speaking events. And as far -- and I did have a very -- I

12 had a ~ront-row seat with him and Shana as their relationship

13 grew once I -- you know.

14 But in my opinion, and this is -- I'm almost

15 certain of it, Eric's a very emotional guy, okay, to the

16 point to where he and I would really talk and he would you

17 know. He had -- things just sprang up between him and her.

18 And basically what happened was is somewhere between the

19 dissolving of his marriage, the marriage that was supposed to

20 happen, and I would probably say late spring/early summer --

21 Q And this is 2005?

A No. This is 2006.

23 Okay. Because October 2005 --

24 A October 2005 he was supposed to be marrying

25


Jane Doe

Page 20

1 Q Right.

2 A And they were in a very serious relationship.

3 Q Right.

4 A I never even heard of Shana probably -- and I'm

5 telling you what -- my dates could be off by two or three

6 months. I would say -- but I will say the earliest that I

7 probably heard of Shana was probably late spring 2006.

8 Now, once again, I would probably err to a month

9 before that. But it could have been -- I guess it couldn't

10 have been too far after that because basi-cally what happened,

11 it was just out of the blue, bam, all of a sudden, you know.

12 I know from his conversations with me that they had known

13 each other through the symposium, but that it was never

14 anything more than a working relationship for most of that

15 time.

16 After the dissolving of the relationship and

17 probably into the spring, it remained the same until at some

18 point during, 7 don't know, one of the dinners or something

19 afterwards, you know, I think it became a little more

20 personal. I think there was some kind of connection there.

21 Q And you think, given your relationship with Eric,

22 that if he had feelings for her prior, in the 2003/2004 time

23 frame, you would have known about it?

24 A Absolutely.

25 So when he first talked about the fact that


Page 22

1 A I can't -- I don't remember. I don't -- in my

2 mind, until this thing came up in the news, I had no idea

3 that she was compliance. He may have said it and I just

4 didn't -- I wasn't really paying attention to that part of it

5 because, you know, all I remember is being -- I always

6 thought it was kind of funny how she kind of did what I did

7 but she did it in the industry, you know.

8 Q And so when was the first time you heard that Eric

9 was interested in her?

10 A Once again, I think it was either late spring or

11 early summer. He kind of bemoaned his relationship with

12 for a period of time, to the point to where I was

13 almost kind of like, hey, Eric, you know, you've been broken

14 up with her almost as long as you were with her, you know,

15 like in my head.

16 So he really did go through a mourning period. So

17 let's just say November, December, January, February, March,

18 April, May. You know, now you're talking about six or seven

19 months. They might have been together for nine months before

20 things broke down with the wedding.

21 BY MS. STEIBER:

22 (Z Had he ever dated anyone during the time that he

23 met to the point where he met Shana? Do you know if he

24 ever saw any other women?

25 A No. Eric Swanson is a -- he's not the type of guy


Jane Doe

Jane Doe

Page 23

1 that plays the field. He's a relationship guy. When he gets

2 in a relationship, you know, he kind of -- just kind of sets

3 the tone. But he also gets very involved very quickly, you

4 know.

5 MR. KOTZ: Okay. I'm going to show you a couple of

6 documents.

7 This is an e-mail on March 4, 2006. And it's from

8 Alex Sadowski to Eric Swanson. And then --

9 THE WITNESS: This is it right here?

10 MR. KOTZ: Yeah. And then Eric Swanson to Alex

11 Sadowski. And we're going to mark this as Exhibit i.


13 identification.)

14 BY MR. KOTZ:

15 Q Take a look at this, and maybe this will give you a

16 better sense of the time frame in which the relationship

17 between Swanson and Shana Madoff started.

18 A Oh, okay. (Examining) This is Eric to Alex.

19 "There was an option. I took a pass."

20 SZ Then it says, "Quite an earful from last night

21 re Madoff. Apparently I'm a sycophant."

Do you have any idea what that refers to?

23 A Who's

24 Q Could it be

25 A It could be because I know was a branch chief


OCIE Branch Chief

PersonalPrivacy

Personal Privacy

PersonalPrivacy

Page 41

1 Eric truly did not want to lose John as a friend. He didn't

2 want to end the relationship with Shana because he was

3 falling in love with her.

4 Honestly, I'm not so sure how -- I think

5 eventually -- let's just say none of this stuff happened, and

6 let's say Jonn never mentioned any problems with Eric dating

7 Shana. I'm pretty sure that, down the road, Eric probably --

8 because she was firmly planted in New York. I'm sure he

9 would have left the SEC, taken a job in New York anyway. But

10 I think be left earlier because of the deteriorating

11 relationship with John McCarthy.

12 Q So did his relationship -- Eric's r~lationship with

13 John McCarthy ever recover from this situation?

14 14 I do believe so. John McCarthy was at the weddirig.

15 Q Okay. But there was -- how long of a time period

16 where John McCarthy and Eric Swanson were at odds, so to

17 speak, over this matter?

18 A Once again, I don't have a definitive time. But I

19 would say six weeks, maybe more. Can I ask, when did this

20 stu~~ start hitting the fan, and when did Eric leave? Do you 21 have those dates?

Q Yeah. Let me show you another document. This is a

23 farewell reception for Eric Swanson.

24 A Yes. And when did this stuff start?

25 (Z We'll mark this as Exhibit 6. And this is from


Page 46

1 met Shana. I don't remember the first time I've gone out, 2 on-e sgain, date-wise. But I do have specifics of when, yoU 3 know --

4 Q And was John McCarthy ever out as well?

5 A John McCarthy out? I was never -- I can't recall

6 ever being at a restaurant with Shjna, ~ric, and john at a 7 time that this was happening. I was at the wedding. I

8 can't -- I don't believe I was ever -- off Lhe top of my 9 head, I don't remember ever beiny with John, Shana, and Eric

10 during the time -- with all three together at a time that 11 this stuff was going on.

12 O Okay. As Eric and Shana's relarionshils got more

13 serious, di~ Eric ever talle to you abu~it Ihe iact that, you 14 know, Shana was from a well-todo farr~ilq~ or a rich fami~y:' 15 A Weli, yeah. He tcld me ~ho she was, you know. But

16 he didn't --

17 Q How did hedescribe that as who she was?

18 A You know, he didn't really go into detail. Eric -- 19 Q That she was the niece of Bernie Madoff?

20 A Yeah. I don't know if he caid the niece of Bernie

21 Madoff. He said -- let's put it this way. When the stuff

22 hit the fan, I didn't know whether her lather was Bernie cr the other guy. Okay? Honestly --

24 So Eric talked about the fact that Shana was in the 25 Madoff family?


Page 1


In the Matter of:

File No. GIG-509

GIG-509

f~ *c· WITNESS: Number 4


PLACE: U.S. Securities and Exchange Commission

100 F Street, NE

Washington, DC

DATE: Monday, February 23, 2009

The above-entitled matter came on ior hearing, pursuant



(202) 467-9200


Page 2

1 APPEARANCES:


4 DAVID KOTZ, ESQ., Inspector General

5 HEIDI STEIBER, ESQ.

6 CHRISTOPHER WILSON, ESQ.


8 100 F St., NE

9 Washington, DC

10

11 On behalf of the witness:

12 MAVIS KELLY, PRO SE

13

14

15

16

17

18

19

20

21

22

23

24

25


Page 3

1 . C ON T E N T S

3 WITNESS EXAMINATION

4 Mavis Kelly


7 1 E-mail to Edward R. Perkins;

8 e-mail to ~. Perkins, 5/13/03 15

9 2 Mavis Kelly not-etc with I · 10

17

11 3 E-mail 1 ' to Mavis 12 Kelly 5/21/03 24

13 4 Hedge/Mar article, "Madoff Tops Charts,

14 Skeptics Ask How," 5/2001 43

15 5 InvestorForce Performance Statistics 55

16 6 Momentum Asset Management Limited

17 Market Master Fund, October 2002 58

18 7 Mavis Kelly notes, 5/27/03 84

19 O Notes, phone call with · 20

84

21 9 Notes, Mado~~ conference call, 2/4/04 86

22 10 E-mail, Kelly to Ward, Snivley,

23 Stevenson, Rees, 4/16/04 92 24

25


Page 4

1 PROCEEDINGS

2 MR. KOTZ: Okay, we are on the record at

3 10:35 a.m. on February 23, 2009, at the United States

4 Securities and Exchange Commission Office of Inspector

5 General.

6 I am going to swear you in, ii that's all right.

7 Could you please raise your right hand?

8 Whereupon,

9 MAVIS KELLY



12 MK. KOTZ: Could you state and spell your full name

13 for the record?

14 TH~ ~ITNESS: Mavis Helene Addison Kelly.

15 M-A-V-I-S, H-E-L-E-N-E, A-D-D-I-S-O-N, K-E-L-L-Y.

1~ MK. KOTZ: My name is David Kotz. I'm the

17 Inspector General at the U.S. Securities and Exchange

18 Commission, 100 F Street, NE, Washington, DC.

19 This is an investigation by the Of~ice of Inspector

20 General, Case Number 509. I'm going to ask you certain

21 questions. You'll have to answer them under oath. The court

22 re~orter ~ill record and later transcribe everything that's

23 said. Please provide verbal answers to the questions. A nod

24 of the head or some other nonverbal response will not be able

25 to be picked up by the court reporter.


Page 14

1 there was a referral to your side?

2 A I can't think of one specifically, but I'm sure

3 that there has -- it has happened. But I can't think of one.

4 Q When did you first hear of Bernie Madoff or Madoff

5 Securities?

6 A It first came to my attention when we -- as part of

7 isited 8 I think is the full name. And some time

9 later --

io (Z What 's I 11 A Oh, they're a hedge fund -- they're a fund-to-fund

12 manager located in New York.

13 Q How come you looked at them, just part of your

14 general sweep?

15 A This is in 2002. We visited them in October, and

16 they weren't originally part of the plan to examine, but one

17 o~ the New York examiners that was participating on the sweep

18 with us was going to be -- he was finishing up the sweep with

19 us, and he was going to go back to his normal examination

20 program, and he was going t look at ~~ as his

21 next exam, and he thought we might want to talk to them, to

22 get a different perspective, because we were looking at

23 funds -- we'd heard that funds of hedge funds were how it was

24 becoming -- hedge fund access was becoming more retail

25 oriented.


Page 16

1 sent Tuesday, May 13th, 2003, 4:26 p.m.; we're going to mark

2 it as Exhibit 1. Dc you remember who I ~L ~i,?

3 A Yeah, he was the managing director at

4 __ I He was our primary contact.

5 Q And so, do you remember a communication with Ed

6 around this time that was reflected in this e-mail?

7 A Do I remember communicating with -- I don't

8 remember this e-mail.

9 Q But what do you remember about what happened?

10 A That I I~alled me, and I don't know how to

11 pronounce his last name, but he called me.

12 Q Do you remember when he called you?

13 A I didn't remember when he called me, but I think it

14 was shortly thereafter.

15 Q So around May 2003?

16 A ·Sure.

17 Q And do you remember what that conversation was all

18 about?

19 A Yes. He had concerns that there was a -- that

20 Bernard Madoff -- he couldn't understand how he was

21 maintaining his performance. And _ __ as a very

22 thorough firm, in terms of -- they were a fund of hedge fund

23 manager. They had all offshore funds. They are the only

24 place we've been to that had full transparency to their

25 underlying funds. I mean, they were very analytical, very


Page 17

1 experienced, very technically savvy firm. And he had

2 concerns and he couldn't fiyure out how he was -- how Bernard

3 Madoff was earning returns.

4 Q So would you consider - to be a credible 5 source of information?

6 A Highly.

7 MR. KOTZ: I'm going to show you another document.

8 It looks like their notes. It says on the top of the inside

9 1 and then it says on the left side, r 10 , and we're going to mark this as Exhibit 2.


12 identification.)

13 BY MR. KOTZ:

14 Q Why don't you take a look at this.

15 A These look like my notes. Okay.

16 Q These are your notes, Exhibit 2?

17 A They appear to be my notes.

18 Q And going back to Exhibit 1 for a se~~nd, it looks

19 like __ initially called Ed Perkins. 20 A Mm-hmm.

21 Q Is that what happened?

22 A Ed -- as i said earlier, Ed was going to be leading 23 an

24 exam and just talked to them, and then Ed completed the exam.

25 So Ed was his contact for the longer period of time.


Page 23

1 as quite a lot?

2 A It is a lot, but we had -- several of the hedge

3 fund managers we visited had billions in their management.

4 Q And then it says, "For volume, must see options on

5 Street yet never see them." What does that mean?

6 A In order to execute the strategy using -- as

7 described, you'd have to see son~e level of option

8 transactions on the Street.

9 Q And yet I was telling you that he wasn't 10 seeing that.

11 A Correct.

12 Q And you put that in a box, with an asterisk. Was

13 that because you Telt that was particularly important?

14 A Yes, tha~'s how I take it now.

15 iZ Do you r-emember if this was the only page of notes?

16 A Like I said, I think this was a very brief phone

17 call, extremely brief phone call.

18 Q Well, we appreciate that you took --

19 A I can't even find these notes, though, stumbling

20 over looking at them six years later.

21 Q Do you know at the time -- he mentioned the

22 articles. Did he attach any articles, or did you go and look

23 up the articles?

24 A I believe I was -- I can't find anything, so I

25 don't have anything more.


Page 32

1 for records?

2 A I assume that's what the SRO group does. I've

3 never done that.

4 Q And then a couple lines down, it says, "We actually

5 checked with some of the largest brokers, UBS, Merrill, ct

6 cetera, which told us they never traded with them OEX

7 options. What areOEX options?

8 Over the exchange -- they're exchange-traded

9 options.

10 Q And is the implication here, given that there's an

11 $8 billion to $10 billion in size, you must see the volume

12 but you don't, they check with the brokers and they never

13 traded with them the options, that Madoff is lying abnut his

14 option trading?

15 A That's why he was -- the question is, do they

16 really implement the full strategy, is what he is ~skinq or

17 what he's stating.

18 Q So _ lis implying that Mado~f Securities may 19 be lying about his option trading.

20 A Yes.

21 Q And then it says at the bottom, "There are no third

party brokers involved in the process. The auditor of the

23 firm is a related party to the principal." What would the

24 relevance of that be, that the auditor of the firm is a

25 related party to the principal?


Page 36

1 characteristics of a Ponzi scheme?

2 A I mean, a Ponzi scheme is where you just take new

3 money and you pay out old money, and obviously skim some off

4 the top for yourself. What are you askiny?

5 BY MR. KOTZ:

6 Q How would - in the regulator situation, what would

7 be brought to your attention, specifics, ~acts, about a

8 particular situation thaC would lead you to be concerned that 9 perhaps it was a Ponzi scheme?

10 A This lays out some concerns. dP-~

11 V So the - ?ust to get this clear, the e-mail from

12 QI~ on May 21st, 2003, laye out concerns that Madoff may 13 be engaged in a Ponzi scheme.

1~ A He is saying he doesn't understand how he could

15 keep those returns. So he is saying that there are concerns

16 tnat this is not - that he doesn't know how he could keep 17 them going.

18 Q Riyht, so does that mean that IIIL was Providing 13 information iri May 2003 that would lead one to.indicate that

20 this might have been a Ponzi scheme?

21 A He was laying out factors that said didn't make

sense, and needed to have answers to them.

23 8 And those factors that laid out that didn't 24 make sense and needed to have answers, would they be -- could

25 they be potentially a Ponzi scheme?


Page 37

1 A Well, they turned out to be a Ponzi scheme, so --

2 g Right, but I'm saying at the time, based upon the

3 iniormation that was provided by L _, was he giving yo~ 4 some indication that there may be a Ponzi scheme?

5 A He was giving indication that there are areas that

6 need to be answer-ed, and we needed to look into them more.

7 Q Okay. Was there arything specific in ·IIII 8 e-mails that would lead you to believe that perhaps it was a 9 Ponzi scheme?

10 A Other than the fact that he couldn't understand the

11 returns, the consistency of the returns, and the fact that he

12 believed the ret~rns hadn't been tested, in terms o~ getting

13 the money out -- that's what he laid out that the concerns

14 were that needed to be checked. I don't -- I mean, it's hard

15 to say, you know, hindsight, reading into -- of course it's

16 all laid out there. But at the time, that's what the issue

17 seemed to be, is he couldn't understand the strategy and how

18 he was implementing it.

19 MR. KOTZ: Okay so -- all right, go ahead.

20 BY MS. STEIBER:

21 Q Do you remember during this 2003 to 2005 time

22 period, were Ponzi schemes generally recognized by OC as an

23 area of concern?

24 A It's always been an area o~ concern. I mean, there

25 were several hedge funds that blew up during -- there was


Page 46

1 Madoff's status in the hedge fund worldare baffled by the

2 way the firm has obtained such consistent, nonvolatile

3 returns month after month and year after year."

4 A Yes.

5 Q And so this would -- is written by -- is this

6 publication generally well known?

7 A It is well known. It's not one we normally get, or

8 at least that I know we normally get here on the Commission,

9 but MAR/Hedge is a big hedge fund performance database.

10 So --

11 (Z Would you consider it a credible publication?

12 A Yes, it's long standing.

13 O Pnd in this cast, so then J-- this wasn't 14 only information was providing, but also sonethin~ 15 that this publication was saying, is that right?

16 A Correct.

17 (Z And then if you look at the next page, which is

18 page 16 of this --

19 A Correct.

20 Q And you see on the right side, about halfway down,

21 the paragraph starts, "Skeptics who express a mixture of

amazement, fascination and curiosity about the program

23 wonder, first, about the relative complete lack of volatility

24 in the reported monthly returns."

25 A Mm- hmm . Yes, this is --


Page 47

1 Q "But among other things, they also marvel at the

2 seemingly astonishing ability to time the market and move to

3 cash in the underlying securities before market conditions

4 turn negative; and the related ability to buy and sell the

5 underlying stocks without noticeably affecting the market.

6 "In addition, experts ask why no one has been able

7 to duplicate similar returns using the strategy and why other

8 firms on Wall Street haven't become aware of the fund and its

9 strategy and traded against it"

10 A Mm-hmm.

11 Q -- "as it has happened so often in other cases; why

12 Madoff Securities is willing to earn commissions off the

13 trades but not set up a separate asset management division to

14 offer hedge funds directly to investors and keep all the

15 incentives for itself."

16 So this information that is in this article, as a

17 regulator, what does this tell you?

18 A That other -- I'm sorry, I'11 let you finish.

19 Q What would be your reaction to this, just

20 generally? What is the concern that would come out of the

21 information in this article?

22 A That others can't seem to replicate the

23 information, as well.

24 Q And so what does that mean? As a regulator, what

25 does that mean to you?


Page 49

1 also the funds that he was -- that are iri here were part of

2 Tremont, and we were looking at Tremont and the due diligence

3 process. It's not as if I dismissed his concerns, and said,

4 ahh -- he was a very credible person.

t7 This is -I

6 A

7 (Z And thenis that credibility --

8 A Supported.

9 Q -- even supported by the article?

10 A Yes.

11 MR. KOTZ: Okay.

12 BY MS. STEIBER:

13 Q When you see the line and he talks about why other

14 firms on Wall Street haven't become aware of the fund and

15 traded against it, as has happened so often in other cases --

16 do you see that line -- "Experts ask why no one has been able

17 to duplicate similar returns using the strategy and why other

18 firms on Wall Street haven't become aware of the fund and

19 traded against it, as has happened so often in other cases."

20 Do you have any reaction to that? In this line is

21 he implying that Madoff really wasn't trading?

22 A No, it --

23 Q Why they're not aware --

24 A No, it says they haven't been able to replicate the

25 strategy, because part of what people try to do is reverse


Page 52

1 might be smoothing returns, the hedge fund manager might be

2 smoothing returns or misreporting returns?

3 A The lack of -- lack of volatility is what absolute

4 managers are trying to get at. The fact that he maintains it

5 with such consistency is what raises concerns about the

6 performance.

7 Q What are things that if you see consistent lack of

8 volatility over many years, as an examiner, what would you

9 wonder about? What would be some of your suspicions?

10 A Well, it depends on what type of investments they

11 are -- they're in. In this case, it's over the -- it's

12 exchange traded securities, so that's a different

13 perspective, but oftentimes what we find with smooth

14 performance it's in illiquid security holdings, and they're

15 not really using -- they're using a lot of fair value instead

16 of market quotations. It depends on what kind of portfolio

17 manager --

18 But in here, where he's trading what he claims to

19 be trading, using the strategy he claims to be using, what

20 would be something that you would -- as an examiner -- look

21 at when you see this lack of volatility for this long of a

22 period?

23 A I would look at the trading download; I would look

24 at the trading activity and we would compute the performance

25 ourselves.


Page 53

1 Q But just as an examiner, when you -- before you go

2 in and you are thinking about possible risks, what would

3 something that you would -- what would you think that it's a

4 possible indication of fraud or possibly an indication of

5 smoothing returns if you see this lack of volatility for this

6 long period of time using this trading strategy that Madoff

7 was claiming he was using?

8 A Lack of volatility in the market, or lack of

9 volatility in returns?

10 Q Volatility in his returns.

11 A That's one of the things we would look to validate,

12 is the performance returns.

13 Q I feel like we're talking about two different

14 things, and I just want to -- I do want to make it clear, and

15 then we can -- that when you see -- when you go into a hedge

16 fund, or you look at an advisor who is claiming to use the

17 strategy that Madoff was claiming to use, using equity

18 securities, and he claims to have had, for 10 years, very

19 smooth, unvolatile returns, what are some of the

20 possibilities that would go through your mind that you would

21 want to investigate?

A How is he getting those returns? What are some of

23 the things that I might think is happening?

24 Right, exactly.

25 A I would look for, now -- I would look for the


Page 54

1 misrepresentation of performance to see if he was just

2 falsifying the performance; I would look for the individual

3 accounts to see, is he using specific -- because a lot of

4 times they report performance from -- for a specific set of

5 clients, so is he manipulating the specific clients that he

6 was using in his composite, and only those highly profitable

7 accounts; I would look towards the population as a whole to

8 see -- we do a client account review, we do a performance

9 review. And in doing the client account review, I would

10 notice if the trades were there and activities reported, who

11 was the custodian, how -- is that what you're asking?

12 Q Yeah, exactly.

13 A Partially?

14 Q So there are many different things you as an

15 inspector -- I mean, not one thing in particular. You would

16 see these smooth returns over a long period of time, or these

17 unvolatile returns over a long period of time, and that would

18 be suspicious, correct?

19 A Correct.

20 Q And so then there would be many different

21 possibilities that you would think of --

22 A Mm-hmm.

23 Q -- maybe they're legitimate, but maybe they're not

24 legitimate, correct?

25 A Correct.


Page 60

1 A Depending on the strategy, I said it could be very

2 much higher.

3 Q Is there anything else in here that you -- as you

4 look through this document that would cause you to view it as

5 unusual or concern, in terms of tnis document that

6 provided you?

7 A It says 90 percent of the months are profitable, so

8 it's just letting you know more about the consistency of the

9 returns. The largest losing month was negligible. He

10 describes the strategy. It seems to be like a pitch book.

11 Q So is it fair to say that this information that

12 ~provided you gave ycu information about aery 13 remarkable returns that Madoff was getting?

14 A It supported his line of questioning, as to how he

15 could achieve the returns given what information he had. He

16 questioned it. This is backup for why he was questioning it.

17 Q And he was questioning how Madoff was able to

18 achieve such remarkable returns.

19 A Correct.

20 Q Was there anything in what provided you 21 that you looked at and thought, you know, he's wrong; he's

22 overly concerned about this; this is something that I just

23 don't agree with?

24 A No, there was nothing that we didn't -- that I

25 remember not agreeing with. I don't remember all these


Page 62

1 A I don't know.

2 BY MR. KOTZ:

3 Q Do you remember following up with at all

4 after you received the materials?

5 A I don't believe we did, I did, anyhow.

6 Q Did you believe that the information

7 provided gave red flags about Madoff's operations?

8 A I believe it provided information that raised

9 questions.

10 Q But you wouldn't say it was red flags?

11 A Well, the red flags are -- questions are red flags.

12 It raised concerns for information that we could not get.

13 Q So y~u would say that materials raised 14 red flags about Madoff's operations.

15 A materials raised a lot of questions that 16 should be answered.

17 Q Did you forward the information -provided 18 you to Enforcement?

19 A No, I gave it to our broker -- SRO group.

20 Q How come you didn't give it to Enforcement?

21 A Because, I believe -- I don't remember who I

22 talked -- I wouldn't have made the decision on my own. I

23 don't have any records as to who I talked to about this, but

24 I believe I talked to Gene Gohlke, because that makes sense.

25 And based on the fact that it was -- he was a market maker,


Page 63

1 and that this is something that you should see on certain

2 exchanges, thought it ma·de sense to give it to our

3 broker-dealer group.

4 And I think we made that decision in the fall. I I:

5 don't think it was -- I don't remember the exact date. I

6 don't remember how -- I remember making a phone call, and I

7 think it was to Mark Donohue, but I don't remember -- I don't

8 remember the details surrounding the timing.

9 Q But you think itwas a few months after you got the

10 e-mail from 11 A Correct, because we were looking at it from some of

12 the hedge funds, the fund of hedge funds. We were looking at

13 the due diligence process, and we were looking at, you know,

14 the information that they got and how they analyzed it,

15 whether they would get sufficient information to --

16 (Z So there were -- you said there were questions

17 raised by the information that ~provided. What was

18 your theory at that time about what Madoff was doing?

19 A I don't know that I had a theory at that time as to

20 what he was doing. I don't remember specifically anything

21 about -- other than doing research on the firm and the

22 parties raised in here, I don't know. I don't remember.

23 Do you remember if there was any discussion about

24 the possibility that Madoff was engaged in a Ponzi scheme

25


Page 69

1 Q So when you received --

2 A So I would say yes. I don't know if the others had

3 procedures. This is what we did in investment company

4 investment advisor group.

5 So could you walk through that process, of what you

6 were supposed to do with the tips in your group?

7 A If we received a complaint --

8 Q If you received it --

9 A Or an inquiry, who was my supervisor at

10 that time, would log it before we forwarded it on to another

11 office.

12 Q Log it where?

13 A He has a spreadsheet.

14 Q That he kept, or that everyone could look at?

15 A Now it's available on the website. At that time, I

16 don't know where -- you know, how he kept it.

17 Q And so he would keep this, he'd log it in, and then

18 it was forwarded somewhere else. Did you regularly check in

19 on the tip or the complaint that you received to make sure it

20 had been handled?

21 A No, once it was forwarded -- I don't think so.

22 Once it was forwarded on to the office, it was for whatever

23 action they deem appropriate, generally.

24 BY MR. KOTZ:

25 Q Do you know if anybody ever followed up with


OCIE Assistant Director

Page 64

1 A I don't remember that specifically.

2 Q Was there discussions with your boss about

3 referring it to Enforcement?

4 A I don't remember specifically. I might have -- I

5 don't know, I don't know. I do know that I gave it to the

6 broker-dealer -- SRO group. I don't know whom else it was

7 given to or why or when.

8 Q I assume over the years that you've been in the SEC

9 you've seen a number of tips that have come in, is that

10 right?

11 A Yes.

12 As compared to the other tips you've seen, would

13 the - tip be more credible and detailed than others?

14 How would you compare it?

15 A Not as credible -- I wouldn't say "credible." He

16 is a credible person, so -- his is using public information,

17 some of the other tips I have is using non-public

1~ information. So it was more targeted and more specific

19 because of the supporting documentation is right on.

20 Q But given that he was using non-public -- given

21 that I as using public information, as compared to

22 other tips, weren't there a larger number of questions that

23 were raised in -document then yo~ usually get in 24 tips?

25 A I I document, cr documents, his information


Page 67

1 to be doing an exam of anyway.

2 Q What about a situation where it wasn't a registered

3 advisor, what would be the way to look into what -- the

4 information that Iprovided? 5 A We would give it to Enforcement if there was no

6 regulated entity, like there's no registered advisor, no

7 registered broker-dealer, there's nobody that would give us

8 authority to go in and obtain the records.

9 Q And so you gave it to who again, in this case?

10 A I gave it to the SRO group. I believe, I'm not

11 positive, that I gave it to Mark Donohue.

12 Q And what was your sense of what Mark Donohue would

13 do at that point?

14 A That he would look into the trading volume

15 question, that they would look into how the activity took

16 place, because if he's a broker-dealer he would have the

17 trading volume, he would get the information about the

18 accounts, he would get the information necessary to

19 understand whether the performance was falsified.

20 Q And would you think that Mark Donohue would also

21 look into whether Madoff Securities should have been

22 registered as an investment advisor?

23 A Right. At this time, you could have discretionary

24 accounts, brokerage accounts, commission-based brokerage

25 accounts and not be registered as an advisor.


Page 68

1 Q But would there be aspects of theinvestor --

2 investment advisor operation that you would expect Mark

3 Donohue to look at?

4 A But it wouldn't be an investment advisor, it would

5 only be a broker-dealer, because it's discretionary brokerage

6 accounts, from what he says in here.

7 BY MS. STEIBER:

8 Q So you can look at everything to do with t'hose

9 accounts --

10 A Right.

11 Q -- correct?

12 A Right. Yeah, yeah, yes.

13 Q Can you talk about any procedures for handling tips

14 that OC might have had in the 2003 to 2005 time period?

15 A Okay.

16 Q Did they have any procedures that you were aware of

17 for handling tips in 2003 when you received this?

18 A OC as a whole?

19 CZ OC as a whole, or one that applied to you --

20 A In our group, if we have a tip that is being

21 forwarded on to another office. So if we're going to send it

22 out to New York or Boston or enforcement, then we log it.

23 (Z So did each group have their own procedures for

24 handling tips?

25 A I donst know what the other procedures might be.


Page 71

1 specific firm because there's liability concerns under

2 Section 210b of the Advisor's Act. So is it a policy --

3 there's no prohibition that you can't talk to anybody, but

4 there is a lot of concern about how you go about doing it and

5 whether it's appropriate.

6 Q So were you saying that your boss -- what was his

7 name, --

8 A

9 Q would be the best person to speak with

10 about how tips were handled ~rom 2003 to 2005 in your group?

11 A Yes, yes. He still handles the tips now.

12 BY MR. KOTZ:

13 Q Okay, so you sent it over to the SRO group.

14 A Correct.

15 Q And do you know what was done subsequent by the SRO

16 group --

17 A I followed up at one point, and they said that they

18 were thinking he might be using his market making business to

19 front run the accounts. That was their concern or area of

20 focus, and that's the last I heard.

21 (Z Who was that? Who did you follow up with?

22 A I think what happened is I called Mark Donohue,

23 said Eric was working on it, but I do not remember

24 specifically.

25 Would that be Eric Swanson?




OCIEAssistantDirector

Page 72

1 A Eric Swanson, yes.

2 Q Do you think you might have talked to Eric Swanson

3 about it?

4 A I don't think I talked to Eric. I think -- I got

5 an a-mail from him saying that he was following up on the

6 matter.

7 Q So was your sense that the decision to focus on the

8 front running was made by Eric and Mark?

9 A Was made by the SRO group. I don't know who --

10 whom specifically.

11 Q Do you know why they made the decision to focus on

12 front running?

13 A No, other than trying to make sense of the

14 performance, I don't know.

15 BY MS. STEIBER:

16 Q So after you forwarded the tip on, did anyone call

17 you to ask you abo~t your conversation with 18 A No, not that I remember, and actually I called Mark

19 at the time -- and this is why I think it was sometime around

20 September, because it was after market timing, and I was

21 trying to -- and I think it was Mark, I'm not positive who I

22 spoke to -- I was trying to impress upon them the importance

23 of following up on this, because I found this to be a very

24 credible source.

25 And he said, you know, especially in light of what


Page 73

1 was happening at the time, they would take it -- regardless

2 they would take a tip seriously, but especially in light of

3 what was happening at that time, they were taking it -- they

4 would take it very seriously.

5 BY MR. KOTZ:

6 a Based on the information that _ _ provided, 7 would you have focused on the front running exclusively?

8 A I wasn't focused on front running. I was focused

9 on doing the fund to funds. I did not look at the front

10 running.

11 Q So what did you look at?

12 A I looked at the fund to funds to see what

13 information they might have, like what type of information

14 they would get about the portfolio managers, what sort of due

15 diligence would they do; from that perspective. I wasn't

16 looking at --

17 Q So what did you do in that respect?

18 A We visited several fund to funds, and one of them

19 was among the group specifically mentioned. We weren't

20 looking at Madoff -- the due diligence that they'd done of

21 Madoff in particular, because what we had learned is that the

22 fund to funds don't really get a whole lot, they rely on what

23 the managers give them. So basically you could get

24 information, but it wouldnst say much.

25 Q So what did you -- when you did that review, what


Page 74

1 did you find?

2 A Not much. That's why we made the referral to the

3 SRO group after we had concluded our reviews of the

4 fund-to-fund managers.

5 BY MS. STEIBER:

6 Q But when you read tip, you did not think

7 it completely focused on front running. Did you -- that

8 isn't what it said to you, correct?

9 A No, he had said he didn't know how he could get the

10 performance results he was getting; he didn't understand why

11 he wasn't seeing the movement in the market. It didn't say,

12 you know, it's a Ponzi scheme, it didn't say -- it just said

13 things aren't making sense to him.

14 You thought there were many different things to

15 follow up on from the tip.

16 A I would say there -- he gave different angles from

17 which to pursue the matter.

18 BY MR. KOTZ:

19 Q Do you know whether the market oversight group or

20 the investment advisor group followed up on this tip? Or did

21 the broker-dealer side or the investment advisor side? What

22 was done by Donohue and Swanson?

23 A They did a review looking at the market making

24 activity for -- I believe that that's what they were looking

25 at.


Page 76

1 hedge fund -- I don't know specifically why. I don't

2 remember specifically why. But the information that we got

3 from the hedge fund fund-to-fund managers was not terribly

4 useful.

5 Q What about the information from -- that you got

6 from 7 A We only have access to what we have from the

8 advisor and the fund perspective, from our perspective.

9 That's all we can get.

10 Q Okay, but you said that in the past, where there

11 wasn't a registered advisor, and you only had access to

12 information if there was a registered advisor, it would be

13 forwarded to enforcement.

14 A Because I thought that they could get -- it wasn't

15 an advisor, but it was discretionary brokerage accounts, so I

16 thought that they could get it -- to it from the

17 broker-dealer standpoint. I didn't think I needed to refer

18 it to enforcement -- I don't remember.

19 But I'm guessing that I didn't think it was

20 necessary to refer it to enforcement, because if it's

21 executed through the discretionary brokerage accounts, you

22 would see all the information we would get from an advisor.

23 One of the things we would look at from an advisor exam is

24 all the trading download. Well, you get that from the

25 broker-dealer transactions. So there would be no need to go


Page 77

1 to enforcement if you have a registered broker-dealer that

2 would have all the same information. I'm assuming that

3 that's the basis.

4 Q Do you know what other actions or exams were taken

5 relating to Madoff as a result of this tip?

6 A No. I don't -- I think that the SRO gave it to New

7 York, but I don't know. I wasn't involved anymore.

8 Q So if you were doing an exam that came out of

9 information that he provided, and you were looking 10 for front running, and you didn't find evidence of front

11 running, what would you do, in your experience, at that

12 point?

13 A If I didn't find front running but I found

14 reasonable explanations for all of the areas of concern, I

15 might be willing to close it out.

16 Q Okay, what if you didn't find front running but you

17 didn't find reasonable explanations of the other issues that

18 _ _ raised, what would you do then?

19 A If it was because I didn't have access to that

20 i n f o rma t i o n, for whatever legal, structural, I don't know

21 what, then I would refer it to Enforcement. But if it's

22 something that is because there were -- I don't know, if

23 there were answers to it or if there was something that

24 helped resolve the issues, then I might be willing to close

25 it out.


Page 78

1 Q All right, but if you -- you got this information

2 from ~. and then later on there was an exam done that

3 focused entirely on front running, and once the front running

4 didn't materialize, nothing else was reviewed, would that --

5 would you consider that to be appropriate follow-up from

6 what -- the information - provided?

7 A And they didn't find an explanation for the --

8 you're just saying, just looking at it from a front running

9 angle, and didn't find answers based on that front running, I

10 might try a different angle.

11 Q What would that angle be?

12 A What we do from the investment advisor program is

13 we follow the trades. We look at the transactions, we follow

14 the assets, custodial arrangements, we look at it from a

15 portfolio manager perspective.

16 Q And those are the kinds of things you would do

17 based upon some information that provided?

18 A I would validate the performance -- is this

19 actually the performance derived. I would ask that accounts

20 were comprised of -- the Kingate, was it all of the -- the

21 whole fund, is it just -- actually, in this case, it's a fund

22 to fund, so it would just be Bernard Madoff.

23 But anyway, I would look to recreate the

24 performance to see if it made sense, because at that point

25 you would know, you know, were the trades real, would he have


Page 79

1 the ability to pay back cash, would he -- although that

2 wouldn't get at the auditor issue, but if everything added up

3 then --

4 BY MS. STEIBER:

5 (2 What if you didn't have an independent custodian?

6 You had just brought up d custodian issue.

7 A If there's a dual registrant that is often the case

8 that they use the affiliated custodian, and it's permitted

9 under the advisor's act.

10 Q So what would you do to trade the assets? You had

11 said you would trace the assets.

12 A Up until this point, what we've done is it's

13 believed that there are safeguards in place for the

14 broker-dealer. They have broker-dealer reviews that come in

15 and validate the existence of assets, so that would suffice

16 for purposes of custody. But if it's affiliated self

17 custodian, that doesn't -- you have to have a qualified

18 custodian.

19 Q So how -- I guess I'm getting a little confused

20 about that. You said, you used to do something, meaning you

21 do something else now. So talk about what you used to do,

22 and then talk about what contrast --

23 A What we're doing now? Well, what we're doing now

24 is we're doing custody verification reviews, where we're

25 actually sending confirmations directly to clients and


Page 83

1 Q So was there something the broker-dealer side could

2 do to determine whether Madoff was actually trading?

3 A Since it says that they were discretionary

4 accounts, felt that they could look at the trading activity

5 in the brokerage accounts, and could validate the information

6 from a brokerage level.

7 BY MS. STEIBER:

8 Q Can I just show you two sets of -- first, let me

9 back up. Do you know if these documents are from your file?

10 Was this part of the research you were doing after you had

11 your conversation withl _ ?

12 A It's possible. I do remember doing Internet

13 searches, trying to understand what was referenced. I see

14 momentum -- I don't know whose highlights these are, if

15 they're copied highlights. But I did -- timing wise, it

16 looks like it would have been around the time, but I don't

17 remember specifically.

18 MR. KOTZ: Okay, let's just put this document into

19 evidence

20 MS. STEIBER: Sorry.

21 MR. KOTZ: This is --

22 MS. STEIBER: Number 6, 1 think.

23 MR. KOTZ: We're going to mark this as Exhibit 6.

24 MS. STEIBER: No, I'm sorry, you already had 6.

25 MR. KOTZ: Wesre going to mark this as Exhibit 7,


Page 90

1 So I don't know that they needed to go to

2 management side, but if they weren't understanding how the

3 returns were achieved, we are used to doing that. That is

4 something we could have done, because I don't know that on

5 the broker-dealer side that they're really worried about

6 performance. That is a routine part of what we're doing. If

7 you're advertising performance or if that's your major

8 selling point, we're looking at it.

9 Q So if the broker-dealer side did an exam and even

10 after their exam there was still some questions unanswered,

11 would it have been appropriate at that point to bring in the

12 investment advisor side?

13 A Sure.

14 Q Do you have any idea --

15 A At least consulted with them.

16 Q And you're aware now, from what happened on

17 December Ilth, that it seems as though Mr. Madoff was running

18 a Ponzi scheme, is that right?

19 A Yeah, yes.

20 Q So how do you explain that this information came in

21 and, you know, you said you read through the broker-dealer

22 exam -- how do you explain that this was not revealed?

23 A I don't explain it, I don't know.

24 Q Do you think that if the broker-dealer side had

25 gone to the investment advisor side in New York, they would


Page 94

1 BY MR. KOTZ:

2 Q So what was your reaction when you heard that

3 Madoff admitted to conducting a Ponzi scheme, when you heard

4 in December of 2008?

5 A A little shocked. I mean, it's one of those

6 rememberable moments.

7 Q Were you surprised that OC didn't discover the

8 Ponzi scheme?

9 A Yes.

10 Q Do you have any -- why do you think OC didn't

11 discover the Ponzi scheme?

12 A I don't know enough about -- other than there was

13 no trading and it seemed to truly be just a flow of funds,

14 and that's only from reading news reports, not from anything

15 we perceived otherwise. I can't believe that we didn't see

16 anything that would indicate that there wasn't trading

17 activity in those accounts. Like, how could you generate the

18 returns if there weren't account trading activity? I don't

19 know.

20 (Z Did you at that point think back to the information

21 that - provided?

22 A No, I'd actually forgotten about the specific

23 e-mail.

24 (Z But now that youPve looked at the e-mail, and we've

25 gone over it, do you understand now that some of the issues


Page 95

1 that 'was raising had some indicia of a Ponzi scheme?

2 A Yes. I mean, I can see it 1 now. At the time, I

3 don't think I would have said, you know, red flag, Ponzi

4 scheme. I probably would have said, I wonder if he's fudging

5 his performance numbers, not, the money doesn't exist. That

6 wouldn't have been my first thought.

7 Q But it's fair to say that from the information at

8 the time that you received from there were

9 significant red flags provided about Madoff's operation.

10 A Correct. And that's why I felt it was -- I would

11 be -- forwarded it on anyway, but that's why I felt it was

12 particularly important to forward it on.

13 O Have you ever herd of Harry Markopolos?

14 A I have now, but at the time, no, I have not

15 not.

16 () Were you aware at the time of any further tips

17 being provided to the SEC about Madoff, other than the

18

19 A No.

20 Q Did you have an occasion to read what Harry

21 Markopolos provided?

22 A I have not read it. I watched some of his

23 testimony.

24 And what was your impression of that, in terms of

25 the information that Harry Markopolos provided?


Page 97

1 from and those attached materials if they were

2 forwarded to the New York exam staff?

3 A No. I think -- I don't even know that I ever

4 forwarded the e-mail on to anybody, I think -- because he

5 asked to keep it confidential. I think I was asked to make

6 photocopies of it and not actual e-mail, to limit the

7 distribution. I don't remember specifically though.

8 Q But do you recall making any photocopies?

9 A Yes, I did make photocopies.

10 Do you remember how many photocopies you made?

11 A No, I don't. But Brian Snivley I know had one.

12 Q And is there anyone else that you know had a copy?

13 A I don't know.

14 BY MR. KOTZ:

15 Q So you made a photocopy for Brian Snivley?

16 A I believe I did.

17 What's Brian Snivley's role?

18 A He at the -- he was on the team that did the hedge

19 fund exam, so he was on the~ _ I exam. He might

20 have been present for these; I don't know. I don't remember

21 him being physically present, but he had -- he came into my

22 office with a file when we were being responsive to your

23 review, and asked me what he should do with this file, and I

24 said give it to John Walsh.

25 Now was there a record showing this conversation


Page 1

UNITED STATES SECURITIES ANU EXCHANGE COMMISSION

I)

In the Matter of:

File No. GIG-509

GIG-509

D ORIGINAL WITNESS: Number ~

PAGES: 1 through 17


100 F Street, NE

Room 3365

Washington, DC 20549

DATE: Monday, March 2, 2009

The above-entitled matter came on~or hearing, pursuant


··; ·~-: · ··::-:·---::;· ·:


Page 2

1 APPEARANCES:


4 H. DAVID KOTZ, Inspector General

5 HEIDI STEIBER, Investigator

6 CHRISTOPHER WILSON, Investigator

7 O~fice of Inspector General


9 100 F Street, NE


11


13 , PRO SE (Via Telephone)

14

15

16

17

18

19

20

21

22

23

f 24

25


Jane Doe

Page 3

1 CONTENTS

i 2


4 4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


Jane Doe

Page 4

1 P R O C E E D I NG S

2 MR. KOTZ: We're on the record at 2:45 on March 2,

3 2009 at the United States Securities and Exchange Commission,

4 Office of Inspector General. We have who is

5 participating telephonically at 1-305-858-8284. And I'm

6 going to swear you in, over the phone.


8 Whereupon,

9



12 EXAMINATION

13 BY MR. KOTZ:

14 Q Could you state and spell your full name for the

15 record?

16 A It's

17 Q And how do you spell is that

18 A

19 Q My name is David Kotz, and I am the Inspector

20 General of the United States Securities and Exchange

21 Commission. This is an investigation by the Office of

22 Inspector General, Case Number OIG-509.

23 I'm going to ask you certain questions. You're

24 ' going to provide answers under oath. You can't see the court

25 report but she is here, and she will record and transcribe


Jane Doe

Jane Doe

Jane Doe Jane Doe

Jane Doe

Jane Doe

Jane Doe

Page 6

and misleading testimony under oath is a serious or~ense. If

the evidence shows that the testimony you've given is false,

13 we may refer it appropriately. Do you understand those

4 instructions?

5 A I do understand them.

6 Q .Okay. I think I'm going to just dive right into

7 the issues that we have. Let me also say for the record, my

8 colleagues Heidi Steiber and Chris Wilson are here with me

9 and may jump in as necessary.

10 Let me just start with asking you when the first

11 time you met Eric Swanson?

12 A We met end of January of '05.

13 Q And did there come a time when you developed a

14 romantic relationship with Mr. Swanson?

15 A Immediately, yeah.

16

17

18

19

20

21

22 Q And then did you become engaged to Mr. Swanson?

23 A We did. We were engaged.

24

25


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x3

q

5

6

7 Q So did you end up getting married to Mr. Swanson?

8 A No.

9

10

11

12

13

14 Q And do you remember when you guys decided to break

15 off the engagement?

16 A It was about maybe two to three weeks after the

17 wedding was canceled.

18

19

20

21

22 Q And then since you moved out have you kept in

23 contact with Mr. Swanson?

24 A No, we have not.

25 Q When was the first time you heard the name


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q Maybe this would refr-esh your recollection. Do YOU

recall~Eric saying anything about going to securities

industries breakfasts, like these get-toyethers of the

securities industries organized by Shana MadoTf? A No, I don't. I mean, he went to tons of these all

year long, you know, tons of these business trips. Sor no, I

7 don't recall any of them.

8 Q Was he excited about these business trips,

9 something he looked forward to?

io A Yeah, he liked the industry. He liked making

11 presentations- You know, he just really loved what he did. 12 Q And it's a bit of a delicate question, but I have

13 to ask, were there any a time where you suspected that Eric

14 Swanson was involved or interested in somebody else while you

15 guys were to4ether?

16 A No, not at all. We spent all our time together

17 when we were together.

18 Q So you think you would know if he was interested in

19 somebody else during that period of time?

20 A Yeah, absolutely.

21 Q What about ex-girlfriends? Did he ever mention

22 anything about an ex-girlfriend or a girl that he knew prior 23 to you guys, prior to January 2005, that might have been in,

24 you know, a prominent family like Shana Madoff? 25 A No. I do remember there was something serious with


Page 10

1 the ex-girlfriend who was but no, not with Shana 2 Madoff.

3 Q Did you ever meet John McCarthy?

4 'A His boss?

5 CZ Yeah.

6 A Once, I believe.

7 Q Did you have any impression of him?

8 A Just a regular guy. We went to his house. He was

9 showing us around his renovations. And that's about it

10 really.

11 Q And did Eric -- what did Eric say about him?

12 A He thought well of him. He respected him.

13 However, I think he felt he needed to get out of his shsdow

14 for his career purposes.

15 Q What about Alex Sadowsky? Does that name ring 16 familiar to you?

17 A It does, but I don't really know in what context.

18 I just kind of recall the name, but I don't really know why. 19 Q At any point did Eric talk about how he wanted to

20 leave the SEC, get a job in the securities industry, maybe 21 make a little more money?

22 A Yes, I think that is exactly what I was talking 23 about before. He just needed to get out of John's shadow.

24 You know, he went as far as he could with SEC and he needed a 25 new career.


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Page 14

1 A Yeah. And I knew how upset he was, and ~ was upset

2 myself because I think we both thought it was something that

3 it wasn't. And because of that I think we were able to

4 rebound faster than normal. So he dated shortly after that

5 from what I read, and I started dating shortly after that.

6 But immediately after the break-up we were both devastated.

7 Q So that information that --

8 A We both e-mailed back and forth regarding that, but

9 that's really the extent of our relationship afterward.

10 Q And then the information about him dating

11 afterward, that you just got from the newspaper or that's

12 from your own knowledge?

13 A No, that was from the newspaper.

14 Q All right. But you're pretty clear that at least

15 the time period that you knew Eric he couldn't have been

16 involve~ with Shana Madoff?

17 A Absolutely not. I knew exactly where he was and we

18 spent all of our time together except for his trips here and

19 there. And even then I knew where he was. I don't think he

20 was doing anything shady. I think a woman probably knows

21 when someone she's seeing is seeing somebody else. And

22 especially because our relationship was so new and really

23 didn't have any issues until the latter part of the

24 relationship.

25 Q And you think if prior to the time you met he had


Page 1


In the Matter of:

File No. GIG-509

GIG-509

WITNESS: Number 24



100 F Street, NE, Suite 4000


DATE: Tuesday, April 14, 2009




(202) 467-9200


Page 2

1 APPEARANCES:


4 H. DAVID KOTZ, ESQ., Inspector General

5 HEIDI STEIBER, ESQ., Investigator

6 CHRISTOPHER WILSON, ESQ., Investigator



9 100 F Street, N.E.


11 202-551-6037

12


14 MICHAEL L). WOLK, ESQ.

15 'I'IMOTHY B. NAGY, ESQ.

16 Bingham McCutchen, LLP

17 2020 K Street, NW

18 Washington, D.C. 20006-1806

19 (202)

20

21

23

211

25


Page 3

1 CONTENTS


3 Eric John Swanson 6


6 1 3 Confidentiality Agreements 8

7 2 8/3/03 Mene with Documents 16

8 3 3/03/2003 Planning Memo 19

9 4 5/2/2003 S Madoff-Swanson E-mail 23

10 5 to Daugherty E-mail 24

11 6 8/18/2003 Swanson-McCarthy E-mail 2~

12 7 10/29/2003 McCarthy-Swanson E-mail 26

13 8 10/20/2003 anson E-mail 28

14 9 10/31/2003 anson E-mail 30

15 10 11/10/2003 anson ~-mail 31

16 11 5/21/2003 · 0-m-L! 34

17 12 5/6/2005 E-mail 43


19 14 12/16/2003 Wood-Walker E-mail 50

20 15 12/28/2003 Richards-McCarthy E-mail 55

21 16 12/18/2003 Richards-McCarthy E-mail 56

17 12/19/2003 Donohue-Daugherty E-mail 58

23 18 Document Requests 59

24 19 Bernie Madoff to Eric Swanson 64

25 20 1/23/2004 Donohue-Walker/Wood E-mail 67


OCIE StaffAttorney

OCIE StaffAttorney

OCIE StaffAttorney

OCIE StaffAttorney

Page 4

1 CONTENTS


3 21 1/29/2004 Walker-Donohue/Wood E-mail 68

4 22 1/29/2004 Handwritten Notes 70

5 23 23/2004 Wood-Donohue E-mail 74

6 24 2/2/2004 Conference Call w/Bernie Madoff 76

7 25 Undated Notes 77

8 26 8/23/2004 Swanson-Donohue E-mail 79

9 27 Document Requests 84

10 28 Supplemental Document Request 85

11 29 2/2004 Handwritten Notes 86

12 30 3/1/2004 B Madoff Ltr to Swanson 88

13 31 3/10/2004 Walker-Donohue E-mail 91

14 32 3/18/2004 Conference Call w/Bernie Madoff 92


16 34 3/4/2004 Donohue-Walker E-mail 93


18 36 3/23/2004 B Madoff Ltr to Donohue 94

19 37 3/4/2004 Donohue E-mail to Himself 95

20 38 4/6/2004 Walker-Sadowski E-mail 96


22 40 4/16/2004 Kelly-War E-mail 100

23 41 4/16/2004 Donohue-Swanson E-mail 104

24 42 3/16/2005 Swanson-Shana Madoff E-mail 107

25 43 5/26/2005 Swanson-Donohue E-mail 115

26


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1 CONTENTS




5 46 3/1/2006 Swanson-McCarthy E-mail 121




9 50 3/04/2004 E-mail 133

10 51 3/04/2006 Shana Mado~~-Swanson E-mail 135


12 53 E-mail 147

13 54 4/06/2006 McCarthy-Sadowski E-mail 147

14 55 Swanson-Sadowski E-mail 149

15 56 4/27/2006 Swanson-McCarthy E-mail 150

16 57 6/29/2006 Shana Madoff-Swanson E-mail 152

17

18

19

20

21

23

24

25

26


Page 6

1 PROCEEDINGS

2 MR. KOTZ: All right. We are on the record at 9:25

3 a.m. on April 14th, 2009, at the United States Securities and

4 Exchange Commission.

5 I'm going to swear you in now. All right? Would

6 you please raise your right hand?

7 Whereupon,

8 ERIC JOHN SWANSON



11 EXAMINATION

12 BY MR. KOTZ:

13 Q Okay. Could you state and spell your full name for

14 the record?

15 A Eric John Swanson, E-r-i-c j-o-h-n S-w-a-n-s-o-n.

16 Q Mr. Swanson, my name is David Kotz. I'm the


18 Exchange Commission.

19 This is an investigati~n by the Of~ice of Inspector

20 General, Case Number OIG-509.

21 I'm going to ask you certain questions. You

provide answers under oath. The court reporter will record

23 and later transcribe everything that is said. Please provide

24 verbal answers to the questions. A nod of the head or

25 another non-verbal response ~ill not be picked up by the

26 court reporter.


Page 8

1 we may refer your testimony as appropriate

2 I have colleagues with me, Heidi Steiber and Chris

3 Wilson, and for the record, Eric has Michael Wolk and Timothy

4 Nagy representing him.

5 I've given all three individuals, Mr. Swanson, Mr.

6 Wolk and Mr. Nagy copies of Confidentiality Agreements, and I

7 would ask them if they cbuld just write their names and then

8 sign it, just to ensure that any information or documents

9 that are provided to them today will be kept confidential.

10 MR. KOTZ: Okay. So why don't we put in the

11 record -- we can just put it all in as Exhibit i, the three

12 Confidentiality Agreements that are signed and dated as of

13 today's date. Please mark that as Exhibit i.

14 (SEC Exhibit No. I was marked for

15 identification.

16 RY MR. KOTZ:

17 Q Okay. I'm going to start with a little bit of

18 background and then get into some specific issues. ~ have

19 lots of documents to show you. I know that the documents in

20 many cases are from many years ago, but, you know, do your

21 best in terms of what you recollect.

22 F, Sure.

23 (;' Could you describe yo~r education, beginning with

24 college?

25 A Sure. 7 started off my college going to a

26 community college in Bloomington, Minneapolis, Normandale


Page 9

1 Community College. After about a year and a half, I

2 transferred to the University of Minnesota, completed my

3 Bachelor's degree with a major in Economics in the Spring of 4 1990.

5 1 then attended Hamlin University School of Law in

6 St. Paul, Minnesota, from 1990 to 1993, and graduated with a

7 JD thereafter with Honors. That's it.

8 (L And wha~ was -- what was your first job after

9 graduating law school?

10 A Well, while I was in law school, 7 was a law clerk

11 for the Hennepin County Public Uefender's Office in

12 Minneapolis, and I continued my employment there after I

13 graduated law school and while I was sitting for the Bar.

14 I supervised a team of law clerks over the course

~5 of that period of time, working on criminal matters, and left

16 that job after passing the Bar some time in March of 1994.

17 O Okay. And what did you do after that?

18 A I moved to Richmnnd, Virginia, and I took a job as

19 staff counsel in the Office of Staff Counsel for the United

20 States Board of Appeals, 4th Circuit.

21 Q Okay. Wh~t kind of things did you do there for the

22 Court of Appeals?

33 A ~t was predominantly writing opinions on pro se

24 appeals. So it was a lot of prisoners' righrs i~sues and

25 some other matters, as well

26 Q Okay. Anything related to securities?


Page 10

1 A No, I don't think while I was in the -- in the

2 Staff Counsel's Office, I don't think I saw any securities.

3 Q Okay. How long did you work for the U.S. Court of

4 Appeals?

5 A Well, I worked in Richmond for the Staff Counsel's

6 Office from April of 1994 until August of 1995, at which

7 point I was hired by one of the judges on the Court to work

8 in his chambers as a staff law clerk or an elbow clerk, as

9 they're referred to.

10 Q Okay. And that was 1995 till?

11 A That would have been -- well, it would have start~d

12 right after Labor Day in 1995 and that was in Spartanburg,

13 South Carolina, until I came to the SEC in August of 1996.

14 Q Okay. You didn't have much in the way of

15 securities experience when you came to the SEC?

16 A No. I think I worked on one matter that involved

17 an insider trading case while I was working for judge

18 Russell, but it was -- I had -- it's fair to say I had

19 little, very little experience in securities matters.

20 Q Okay. So in August 1996, what was your first

21 position at the SEC?

A I came in as a staff attorney, hired into OCIE, in

23 the SKO -- I think it was called the SR02 Group at the time

24 within OC -- I'm sorry.

25 Q And how long were you a staff attorney for?

26 A I don't know the exact dates, but I believe some


Page 11

1 time in 1998, I was promoted to branch chief.

2 Q Okay. Who was your supervisor as a staff attorney?

3 A was my direct branch chief, I believe.

4 Okay. And going up?

5 A was the -- well, no. At the time

6 I believe, was a branch chief, as well. When I first

7 started was the assistant director in that

8 group because I think I reported directly to and then

9 reported to

10 Q Okay. What were your duties generally as a staff

11 attorney for the SR02 Group?

12 A We would do oversight inspections of the SROs for

13 specific program areas. Sales practice, arbitration,

14 disciplinary programs, and listings programs are the four

15 that jump out at me, but there probably some others, as well.

16 It was primarily focused on the retail` side of the

17 business, so the interaction between brokers selling

18 securities directly to customers and the regulatory programs

19 that the SROs would have to examine for compliance with the

20 laws. We were another layer of oversight on top of that

21 process by reviewing the regulatory programs at the SROs.

22 Q Okay. And how long were you a branch chief for?

23 A I think maybe two years

24 Q Okay. So around 2000 you were promoted again?

25 A Yeah.

26 (S What was your promotion?


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1 A There were two quick promotions. One was, I think,

2 early Summer of 2000, I was promoted within the same group to

3 the position of I don't know what they called it -- senior

4 counsel. It was a non-supervisory position but it was a

5 promotion in terms of pay and grade, and then very shortly

6 thereafter I was promoted to assistant director in what was

7 then called the SRO1 Group. It was a completely different

8 group.

9 When you say very shortly thereafter, you mean a

10 few months?

11 A I think a few months. Yeah. It may have been even

12 a few weeks. It was a short period of time.

13 Q And who was your supervisor when you were a branch

14 chief?

15 A When I was a branch chief, my supervisor was

16 I think by that time had -- well, I don't know

17 if he left the agency. I think he had left the agency and

18 Helena had been promoted to assistant director.

19 Q Okay. And who was your supervisor as an assistant

20 director?

21 A John McCarthy.

22 Q Okay. What were your duties as a branch chief?

23 A You know, very similar to my duties as a staff

24 counsel, only now I was responsible for supervising three to

25 five other individuals who were performing the same tasks.

26 Q Okay. And how long did you serve as an assistant


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1 director?

2 A Up until my departure from the SEC in August of

3 2006.

4 Q Were you reporting to John McCarthy during that

5 entire time period from 2000 to 2006?

6 A i was.

7 Q Okay. And who was your secondlevel supervisor at

8 that time? Who was above McCarthy?

9 A Above McCarthy, it was Lori Richards.

10 Q And so in that period, 2000 to 2006, Lori Richards

11 was your second-level supervisor the entire time period?

12 A Yes.

13 Q What about Mark Donohue, did you have any reporting

14 relationship with him?

15 A Well, when he was hired, he would have been hired

16 first as a s-~aff attorney and I don't recall whether he was

17 in my -- well, no. Yes, I definitely would have because I

18 was an assistant director. So he would have reported

19 initially -- I would have been his second-level supervisor

20 and at some point I believe he became a branch chief and I

21 would have been his first-level supervisor.

How many people were under you when you were an

23 assistant director?

24 A It varied. Maybe anywhere from, on the low end,

25 10, eight or 10, up to maybe 15 to 18 and maybe more. I'm

26 not -- I'm not completely certain.


Page 14

1 MR. WOLK: You're asking about Mark Donohue and

2 reporting responsibilities and you -- you went through him

3 being promoted to branch chief. Was there a period of time

4 where he didn't -- had no reporting responsibilities to you

5 after that?

6 THE WITNESS: Yeah. There was. I mean, there was

7 a point in time and I don't remember exactly when it was, but

8 there was a point in tiIne where he was promoted to assistant

9 director.

10 BY MR. KOTZ:

11 Q Okay. Do you remember what year that was?

12 A I don't. I mean, I would say '04-05 time frame,

13 but I don't know for certain.

14 Q And that time period he was sort of in a lateral

15 relationship with you because you were the assistant

16 director?

17 H That's right, yeah.

18 Q Okay. What were your responsibilities asan

19 assistant director?

20 A Again, you know, within that particular SRO Group,

21 OC had undergone a little bit of a restructuring, so the SRO

22 Group, the name of it was changed to Market Oversight and it

23 was -- it was responsible for overseeing the regulatory

24 programs at the exchanges that were directly related to

25 -rading activity.

26 (Z Mm-hmm.


Page 15

1 A So that primarily involved surveillance systems to

2 monitor trading on the exchanges, but it was also -- it was

3 also related to -- I'm sorry. This -- it -- it's the pieces

4 or the -- it's distracting me.

5 Q I'm sorry.

6 A It was also any -- any sort of trading activity,

7 monitoring market-making and proprietary trading, regardless

8 of whether it was at an exchange. So it could have been at a

9 proprietary trading firm, et. cetera.

10 So I- was -- to directly answer your question, I was

11 supervising people who were conducting those reviews, exams,

12 and inquiries, whatever.

13 Q Okay. When did you first hear of Bernie Madoff or

14 Madoff Securities?

15 A Some time within the first few years that I was at

16 the SEC, I became aware generally of the firm Madoff

17 Securities --

18 Q Okay.

19 A -- arid that it was a market-maker

20 Q Mm-hmm. What was Bernie Madoff's reputation at

21 that time? Were you aware of any particular reputation it

22 had?

A I was not aware of any -- the only -- I was aware

24 of a reputation. I didn't know anythiiiy aboui Bernie Madoff.

25 I was aware of a reputation of the firm and that was just

26 that it was a large market-maker in the over-the-counter


Page 16

1 space.

2 Q Okay. Was there any sense at that time that Bernie

3 Madoff himself was a powerful or important figure in the

4 industry?

5 A No. In fact, I -- at that time, I don't think I

6 knew the name Bernie Madoff. I just knew the name Madoff

7 Securities.

8 Q Okay. Okay. Yeah. I.want to show you a document

9 and ask you about the first matter you may have been involved

10 in that related to Madoff Securities, and this is a

11 document -- there are three documents that are put together,

12 dated August 3, 2000, and there is a memo -- that's a memo

13 from Lori Richards and John McCarthy to Richard Walker and

14 Steven Cutler and then the second document is a letter, dated

15 December 20th, 2000, from Lori Richards to Shana Madoff

16 Skuller, and the third document is a memo from Jbhn McCarthy

17 to Arthur Richardson, dated March 8th, 2001.

18 MR. KOTZ: we're going to mark these documents as

19 ~xhibit 2.


21 identification.)

22 By MR. KOTZ:

23 Q If you could take a look at these documents, you

24 see or! the third document your name is listed as a contact

25 person, one of the contact people.

26 (The witriess examined the document.)


Page 17


2 BY MR. KOTZ:

3 Q Okay. Do you -- does this refresh your

4 recollection that this was the first matter that was related

5 to Madoff Securities that you had any involvement with?

6 A Not really. I think there were -- there were

7 examinations that were done by the SR02 Group that predated

8 my joining the group, and I do have a recollection of a

9 limited order display sweep that was conducted by that group

10 and of the fact that it was likely that Madoff would have

11 been involved in that, but I don't believe I had any direct

12 involvement in the examination itself, beyond perhaps editing

13 a report or a memorandum or something to the effect, but I

14 certainly never, you know, went onsite to the firm or I don't

15 recall ever having reviewed trading data or being responsible

16 for any o~ the conclusions about any of these examinations,

17 not just Madoff.

18 Okay. But at least from the third document, the

19 March 8th, 2001, you were a contact person.

20 A Well, I think at that point I was working for John,

21 so, you know, it would have made sense to have me as a

22 contact person, but I don't recall anything specific about

23 these examinations.

24 Q Okay. And if you can see on the second document,

25 it's directed to Ms. Shana Madoff Skuller,

26 A Mm-hmm.


Page 18

1 Q -- that's your current wife?

2 A That's correct.

3 Q Did you meet her at that time, do you think?

4 A No. I don't believe I've ever seen this letter

5 before. I'm not positive, but it doesn't -- doesn't look

6 familiar to me at all.

7 Q Okay. Our information tells us that you were at

8 least somewhat involved in consultations with Enforcement

9 regarding the resolution of this matter. Do you have any

10 recollection of that?

II A The matter related specifically to Madoff?

12 Q Yeah.

13 A You know, I -- I don't have a recollection of it,

14 and I can't tell you for sure that I didn't, but it's

15 possible and it would have been not uncommon during this time

16 period when I first started working with John th.at I would

17 have been with him constantly in meetings and learning

18 because this is an area that I didn't know very well.

19 So I -- although I don't remember that happening,

20 it's not -- it's not beyond the realm of possibility by any

21 stretch.

Q Okay. We understand, I guess, from the information

we have that Lher-e was an enforcement action recommended

24 against Madoff in this case, but it wasn't brought. The

25 decision was made to send a deficiency letter instead.

26 A Recommendation made by OC to bring an enforcement


Page 19

1 action?

2 Q Yes.

3 A Yeah. I -- I have no recollection of that.

4 Q Did that happen, though, from time to time where

5 there was a recommendation to bring an action and in the end

6 they brought a deficiency letter?

7 A Oh, yeah, yeah. I think -- you know, it wouldn't

8 have been uncommon for us to refer something to Enforcement

9 and action would not have been taken on it.

10 Q Okay, okay. And then there was a later Madoff

11 matter, a 000 examination. Do you remember anything about

12 that?

13 A I have some recollection of that.

14 Q Okay. I'11 show you some documents. Maybe that

15 will help.

16 MR. KOTZ: This document we're going to mark as

7 Exhibit 3, and this is an e-mail from Matthew Daugherty to

18 Tina Barry, dated 5/29/2003, 5:09:03 p.m., with an attached

19 memorandum, dated March 3rd, 2003, from John McCarthy, Eric

20 Swanson, Matt Daugherty, to Lori Richards, and an attached

21 letter, dated April 8th, 2003, unsigned, from Eric Swanson to

22 Peter Madoff.


24 identification.)

25 (The witness examined the document.)



Page 20

1 BY MR. KOTZ:

2 Q Do you remember either drafting or being involved

3 in the drafting of this planning memo, dated March 3rd, 2003?

4 A I don't specifically recall it, but I'm sure I

5 would have been.

6 Q What about the letter to Peter Madoff, dated April

7 8th, 2003?

8 A Again, I don't specifically recall it, but it makes

9 sense that I would have been, and I believe this was part of

10 the sweep of more than one firm, but I don't know that for

11 certain.

12 Q Okay. Do you remember how this examination or

13 sweep was initiated, what led to it? Was there a tip or a

14 complaint?

15 A No. You know, I know there were a lot o~ issues

16 with the Qs back during this time period, and as I just

17 skimmed through the letter,

18 MR. WOLK: Well, before you skimmed through the

19 letter, do you know as you're sitting?

20 THE WLTNESS: No, I don't recall this.

21 BY MR. KOTZ:

Q If you could take a look at the third page of the

23 planning memo, and it says, third paragraph, "The staff is

24 concerned that market-makers and exchange specialists may not

25 be honoring their quoted market during a locked or crossed

26 market and may not be fulfilling fiduciary obligations to


Page 21

1 obtain execution for customers' orders."

2 And then if you could also look on the first page

3 of that memo, it says, "The staff is concerned that when the

4 market is locked or crossed, market-makers and exchange

5 specialists may be handling customer orders in violation of

6 their fiduciary best execution obligations."

7 What does that mean exactly? What is the concern

8 there?

9 A Well, I think the issue is that -- and again, I

10 don't have a recollection, outside of looking at this right

11 now, but I do know generally what we would have been

12 concerned about here.

13 A lot of the exchanges and the firms that conducted

14 market-making would have auto execution guarantees that would

15 trade at the NBBL or perhaps at a price slightly improved

16 over 7~he NBBL. Those auto-ex systems would tend' to shut doi~in

i: if a market was locked or crossed. So if the bid crossed the

18 ask, they wouldn't auto-ex because they wouldn't know exactly

19 what price to give it and so they would manually handle the

20 order for execution.

21 And I think what we were concerned about, and this

22 goes back to a time period where we were generally concerned,

and this is pre-Reyulalion NMS, we were generally concerned

24 about the frequency of locked and crossed markets and - and

25 trades that wbuld trade through a better- price on an away

26 market.


Page 22

1 The Qs was, if not the most actively-traded

2 security, one of the most actively-traded security. So

3 that's probably why we focused on the Qs and I think what we

4 were concerned about is, okay, there's -- it's not obvious

5 from the way the systems are programmed and what they would

6 generally guarantee to their customers how they would trade

7 during a locked and crossed market, so let's find out in fact

8 what they are doing because there are ways that someone who

9 is trading proprietarily against customer order flow could

10 gain the scenario when a locked and crossed market occurred

11 to do an arbitrage and profit which, you know, would not be

12 considered in my view giving best execution to a client.

13 So -- but I -- I'm going -- I'm not goiny off my

14 specific recollection of what we were doing here, but that

15 just makes sense to me, given the time frame and what we were

16 asking for

17 Q Okay. But do you -- you do remember that you were

18 involved in the triple Q exams?

19 A Yeah. Mm-hmm.

20 Q Okay. And do you remember who else was on that

21 team?

22 A No, not beyond the name, you know, Matt Daugherty,

23 and I think Matt may have been a branch chief at that time.

24 So my guess is there was staff under him.

25 Q

26 A Yeah. sure.


OCIE Staff Attorney

OCIE Staff Attorney

Page 23

1 Q Okay. And what would have been your role and your

2 position with respect to this?

3 A Just I -- I likely wouldn't have been involved in

4 the day to day review of any files related to this, just

5 getting updates on the status from -- probably from Matt or

6 maybe directly from if he was the staff attorne-y that

7 was working it.

8 Q Okay. Okay. During the triple Q exam, did you

9 have contact with anyone at Madoff Securities? Let me show

10 you a document.

11 MR. KOTZ: Okay. This is a document we're going to

12 mark as Exhibit 4, and this is an e-mail from S. Madoff to

13 Eric Swanson, dated 5/2/2003, 3:27:06 p.m.


15 identification.)

16 THE WITNESS: I don't recall specifically having

17 contact, but it seems likely, based on this e-mail, that

18 there must have been something, a phone call or something,

19 with the firm.

20 BY MR. KOTZ:

21 Q Okay. Do you think this e-rnail, Exhibit 4, might

have been the first contact you had with Shana Madoff?

23 A I'm reasonably certain, given the fact that I've

24 misspelled her first name, and I -- I -- I didn't recall

25 having had any contact with her prior to when I actually met

26 her later that year. So, yeah, this is probably it.


OCIE StaffAttorney

Page 24

1 (Z Okay. So this would have been just an e-mail

2 communication, not a meeting in person?

3 A Oh, no. I know I didn't have a meeting in person.

4 It's possible that this was preceded by a telephone call.

5 The contacts, if this all there is by a-mail, it seems to

6 suggest that there was some telephone contact.

7 Q Okay. Let me show you another document, and this

8 document is somewhat later. This is August 27, 2003.

9 MR. KOTZ: We'll mark this as Exhibit 5, and this

10 is an e-mail from to Matt Daugherty. I'11 give you

11 a second to read it.

12 (SEC Exhibit No. S was marked for

13 identification.)


15 BY MR. KOTZ:

16 Q As you carl see, it says, "We had a second call with

17 Madoff and we think we understand these trades a lot better."

18 Do you know if you were on either this second call

19 or the first call?"

20 A I don't know for certain. This -- this is nothing

21 that makes any sense to me. I mean, I don't - I don't have

any recollection of discussion around these trades. So it

23 seems likely to me that I was not on this call and whether r

24 was on the first call, it's -- again, as I said with respect

25 to the Frier document, it does seem like I was involved in an

26 earlier call.


OCIE Staff Attorney

Page 25

1 Q Okay. Do you have any idea when they say, "We had

2 a second call with Madoff," which MadoEf they were talking 3 about?

4 A I assume they're talking specifically about the

5 firm. That's kind of how we would use the lingo, but --

6 Q Okay.

7 A -- not -- not an individual. But at the same time,

8 it would have been likely that at least somebody on that call

9 would have been a Madoff.

10 Q Okay. But would Shana as the compliance counsel

11 have been on the call, do you think?

12 A It's possible.

13 Q Okay, okay. Okay. I show you -- show the next.

14 I'm going to show you another document.

15 MR. KOTZ: Mark this as Exhibit 6. This is an

16 Auy~st 18th, 2003, e-mail rrom Eric Swanson to John McCarthy.

17 (SEC Exhibit No. 6 was marked ~or

18 identification.)

19 (The witness examined the document.


21 BY MR. KOTZ:

Q Okay. Do you recall if this e-mail referenced this

23 breakfast meeting which was the first time that you met Sharla

34 Madoff?

25 A Well, I don't -- I don't recall the e-mail, but i,

26 absolutely does reference that breakfast meeting.


Page 26

1 Q Okay. And that breakfast meeting would have been

2 when?

3 A I have no independent recollection of exactly when

4 it is, but I did have an opportunity to look at some of the

5 documents that I think Mike has sent over to you --

6 Q Okay.

7 A -- in the aftermath of when all this happened, and

8 I want to know when that was. So I believe it was in October

9 of 2003.

10 Q Okay. So you -- you had e-mail communication with

11 Shana Madoff prior to that and perhaps phone calls, but you

12 hadn't met her in person?

13 A That's correct.

14 Q Okay. Okay. I'm going to show you another

15 document.

16 MR. KOTZ: Mark this as Exhibit 7. Th;is is an

17 e-mail from john McCarthy to Eric Swanson, dated 10/29/2003,

18 3:52 p.m.


20 identification.)

21 THE WITNESS: No clue.

22 BY MR. KOTZ:

23 Q Okay. So you don't know what the reference was

24 "call Madoff re Fleet ASAP"? Do you know what "Fleet" might

25 be?

26 A I'm trying to think. Fleet. It seems like there


Page 27

1 may have been a firm called Fleet, but I

2 Q Okay. And you don't know when it says, "Call

3 Madoff," does it refer to the firm, a particular person?

4 A I -- I -- I will -- I'm almost certain that any

5 time there's a reference to just Madoff, it means call the

6 firm, but I -- I don't know.

7 Q And you don't remember if you did call the firm

8 ASAP as John asked you to do?

9 A I don't know. I mean, it -- I usually did what,

10 you know, John told me to do. So -- but I -- I would have --

11 I wouldn't have just called based on this e-mail. I would

12 have had to have gotten more information from John.

13 Q Okay. So you probably would have known what he was

14 talking about?

15 A I may have back at the time, but it doesn't ring a

16 bell with me at all right now.

Uo you know if he or anyone else on the triple ~

18 team ever spoke to Bernie Madoff in connection with that

19 examination?

20 A I don't know.

21 (1 Okay.

A 7 certainly -- I don't believe I did.

23 Q Okay.

24 A I don't know if anybody else did.

25 Q Do you know if you or anybody else spoke to Peter

26 Mado~f or any of the other folks in the Madoff family?


Page 28

1 A Peter would have been more possible.

2 Q Do you have a recollection as to whether you spoke

3 to Peter Madoff at that time?

4 A No.

5 Q Okay. I'11 show you another document.

6 MR. KOTZ: Mark this as Exhibit 8. This is an

7 e-mail from dated Monday, October 20th, 2003,

8 2:09 p.m., to Eric Swanson, with an attachment.


10 identification.)

11 MR. KOTZ: If you could just take a minute to look

12 at this?



15 BY MR. KOTZ:

16 Okay. Does this look to you like some kind of

17 final document on at least the Madoff side of the QQQ exam?

18 A It does. It looks like a summary of the findings

19 Q Okay. And you can see in the first page of the

20 memo, he says, "I've come to the conclusion that

21 MADF," referring to Bernard L. Madoff Investment Securities,

LLC, "specifically has violated their duty of best execution

23 for a number of trades, although perhaps not with the

24 frequency that was expected." Do you see that?

25 A I do.

26 Okay. And does that -- does that seem to be the


OCIE Staff Attorney

OCIE Staff Attorney

Page 29

1 conclusion of the -- at least the Madoff side of the QQQ

2 exam?

3 A Well, it seems to be the conclusion of the

4 individual who was responsible for doing the examination.

5 Whether or not there's some subsequent document or deficiency

6 letter that went out to the firm, I don't know.

7 Q Okay. Do you remember if, you know, this was just

8 opinion and that was not necessarily accepted by

9 others or --

10 A I don't recall that, no

11 Q Okay.

12 BY MS. STEIBER:

13 Q Would you have made the decision whether or not to

14 send the deficiency letter?

15 A It would -- well, I would have been involved in the

16 decision. I think, you know, john McCarthy woul'd have been

17 involved in the decision. Tom, it looks like he was probably

18 branch chief to at that time, would have been involved,

19 as well. So it wouldn't have just been me.

20 BY MR. KOTZ:

21 Q Where there was a firiding that a company had

22 violated their duty of best execution for a number of trades,

23 would that -- would the result of that be a deficiency

24 letter?

25 A Frobably, yeah.

26 Q Okay. Let me ~how you the next document.


OCIE Staff Attorney

OCIE StaffAttorney

Page 30

1 MR. KOTZ: Mark this as Exhibit. 9, and this is an

2 e-mail, dated 10/31/2003, 4:42 p.m., from to

3 Eric Swanson.


5 identification.)



8 BY MR. KOTZ:

9 Q Okay. You can see there's communication back and

10 forth between and you. "I was wond~ring if you

11 had a chance to look at the memo I wrote on Madoff on the QQQ

12 project," and he says, "Should I look again at Madoff

13 concentrating on best X?" and you said, "I assume what you're

14 asking is whether to look at Madoff's trades against the

15 yuotes? The answer is yes

16 What -- what does he -- what does he me~n exacily

17 when he says, "Should I look ayain at Madc~~, concentra~ing

18 on best X?" Do you know?

19 A Perhaps without goingback to the prior exhibit, he

20 maybe was not looking at the Madoff trading against the

21 quotes that were actually in the actually being

disseminated at the time arid so I thirik what ~e's .suggesCiriy

23 is -- and I don't -- I don't remember this dialogue, but I

24 think what he's suggesting is, okay, I looked and I found

25 situations where there appear to be executions that Madoff

26 bene~itted from that a client maybe should and could have


OCIE Staff Attorney

OCIE Staff Attorney

Page 31

1 gotten, but I didn't compare times of sales -- times of sales

2 against what the quotes were in the market at the time and so

3 he's asking me should I look at that and I'm saying yes, you

4 should look at that.

5 Q So this was after the October 20th, 2003, e-mail to

6 you that's attached to the September 12th, 2003, memo.

7 Does -- does it appear that -- that Brad was

8 looking to expand on the examination somewhat?

9 A It does.

10 Q Okay. Do you know if there was an expansion of the

11 examination that was done?

12 A I don't know.

13 Q Okay. I'11 show you another document.

14 MR. KOTZ: This we're going to mark as Exhibit ;O.

15 This is a memo from o Eric Swanson, dated November

16 10th, 2003.


18 identification.)


20 THE WITNESS: This appears to be an update to the

21 prior memo.

22 BY MR. KOTZ:

23 Q Okay. So in the top, "BE-Final," do you see that

24 on the first page? Is that your handwriting, by any chance?

25 A No, I don't think so.

26 (Z Okay. Do you know what that means, "BE-~inal?"


OCIE Staff Attorney

Page 32

1 A Best Execution-Final.

2 Q Okay.

3 A But it's just a final draft of the memo, maybe.

4 I'm not sure.

5 Q If you could see on the -- if you look on the third

6 page of the document, at the Conclusion, it says, "Based on

7 the activity outlined in this memo, the staff believes

8 there's a best execution problem with MADF. The staff

9 further believes that MADF and its broker customers have thus

10 far failed to adequately monitor this behavior. Based on

11 these conclusions, the staff recommends that a deficiency

12 letter be sent outlining the problem areas as well as

13 recommending that MADF execute customer orders at ECNs when

14 it is able to do so rather than proprietarily taking that

15 price while executing the customer at a worse ITS price."

16 It seems as though is making a

17 recommendation to you to send a deficiency letter, is that

Iti right?

19 A That's what it appears to be.

20 Q Okay. Do you remember what your opinion on that

21 was in terms of whether you agreed with his recommendation to

22 send a deficiency letter?

23 A I don't.

24 Q Do you know if a deficiency letter was ever sent?

25 A I don't.

26 Q We have not found any evidence Lhat a deficiency


OCIE Staff Attorney

Page

1 letter was sent and one person testified, and I'11 tell you

2 what this person said and you tell me what your comment on it

3 is, at the time there were a lot of projects that would sort

4 of die off, you'll do some initial review and go up the

5 chain, other issues would come up, old projects kind of

6 languished, it was a pretty common occurrence, I don't know

7 if we ever heard back.

8 I guess what we're trying to come up with some

9 understanding of why, if there was a recommendation made for

10 a deficiency letter, why it wasn't sent out, and this

11 individual said it was, you know, not any particular decision

12 not to send it, it just wasn't -- there was a lot of matters

13 going on and it might have gotten lost in the shu'ffle

14 A Well, I -- yeah. I definitely -- I agree with

1~ that -- with that testimony, ahd I don't know whether a

16 deficiency letter was sent on this, and, ~rankly', I -- I can

17 tell you that since I have -- I don't recall even this

18 d o c uin e ri t . It -- it's likely to me that we were inundated

19 with a lot of projects. This is over the same period of time

20 when we were pushing hard on the exchange trading ahead cases

21 and so I was very distracted by that at the time.

22 So I don't know, you know, the extent to which this

23 died on the vine, as it were, but there were situations where

24 we opened inquiries and, you know, to my knowledge, they may

25 never have gotten completely resolved because we-were busy

26 with other more high-priority matters and this -- it's very


Page 34

1 possible that this is one of those situations.

2 Q Okay. Do you know if you would have spoken to John

3 McCarthy or Lori Richards about whether to send out a

4 deficiency letter?

5 A I don't know that I would have spoken to Lori. I

6 assume I would have had conversations with John. John and I

7 spoke all day long every day.

8 Q Okay, okay. I'm going to move on to another matter

9 and show you another document.

10 MR. WOLK: Just to be clear, you don't have an

11 actual recollection that that's what occurred?

12 THE WITNESS: I'm sorry?

13 MR. WOLK: You don't have an actual recollection

14 that that's what occurred?

15 THE WITNESS: No, I don't.

16 MR. WOLK: Okay.

17 MR. KOTZ: Okay. I'm going to show you this next

18 document we're going to mark as Exhibit 11. This is an

19 e-majl from , dated wednesday, May 21, 2003,

20 at 5:47 p.m., and it's a two-page e-mail with a number of

21 attachments.

(SEC Exhibit No. 11 was marked for

23 identification.)


25 THE WITNESS: I've never seen this document.

26 BY MR. KOTZ:


Page 35

1 Q Okay. Were you aware at any time of a complaint

2 that came in from -- that -- that made these kinds of

3 allegations in the -- in the two-page e-mail of Exhibit 11?

4 A No, I was never aware of a complaint.

5 Q Okay. Okay. I would just ask you a couple

6 questions about the document, even though you weren't aware

7 of it, just kind of generally. Okay?

8 If you look on -- kind of halfway down, it says,

9 "According to EMS," I think that refers to Bernie Madoff

10 Securities, "the options are traded with a number of traders

11 and crossed on the CBOE. With an eight to 10 billion size,

12 he must see the volume but, unfortunately, you don't. We

13 actually checked with some of the largest brokers, UBS,

14 Merrill, et. cetera, which told us they never traded with

15 them OEX options."

16 Do you know what that was referring to in terms of

i7 what was being said there, what was the point?

18 A I do now, but I only understand it now. So it's

19 the newspaper articles that I've read since all this

20 happened.

21 Q Okay. But divorcing the newspaper articles for a

22 second, just what is your understanding of what is meant by

23 that paragraph or those sentences? What -- what are they

getting at?

25 A I think what they're saying --

26 MR. WOLK: Hold on. There's -- he's never seen the


Page 36

1 document before and doesn't know the writers. How would he

2 know what they meant?

3 MR. KOTZ: Well, I'm just asking him to tell me if

4 he understands what was being said.

5 MR. WOLK: Okay. That's fine.

6 THE WITNESS: Okay. What I understand from this is

7 that the firm, Bernard Madoff Securities, has told this

8 individual that they're executing a particular strategy

9 involving options and that they're trading or crossing the

10 option, effectively trading the option on the CBOE and that

11 given the size of the transactions, you would see the volume

12 on the tape or in OCC information, but it's saying here,

13 unfortunately, you don't.

14 And it's further saying that they checked, this

15 person checked with some of the largest brokers, these are

16 probably the brokers who would be trading, takin.g the other

17 side of these trades on the CBOE, and they said they never

18 traded the OEX options with them, with the firm, I would

19 guess.

20 And so that the question is, the last sentence of

21 that bullet, the question is, is Bernard Madoff Securities

really implementing the full strategy that they're saying

23 that they're implementing.

24 BY MR. KOTZ:

25 Q So would that indicate to you that what they're

26 saying is maybe Bernard Madoff is lying about whether he's


Page 37

1 doing option trading at all?

2 A Well, I think what it would indicate to me is that

3 there may be not being -- there may be not trading· as much in

4 options as they're saying they're doing and so yeah.

5 Q Then above a little bit in this e-mail, it says,

6 "The firm does not charge any management or performance fees

7 to these accounts but rather brokerage commissions. We

8 estimate the amount of money managed under this strategy by

9 EMS somewhere between USD eight to 10 billion."

10 What would be the relevance of -- of the fact that

11 the firm doesn't charge management or performance fees?

12 A The typical -- from what I understandof how hedge

13 funds typically operate, they charge, you know, I think it's

14 called 2 and 20, which is two percent on the assets under

15 management and then 20 percent of profits and so this is

16 saying that they don't do that, but instead they~ execute

17 trades and make money off of charging brokerage commissions.

18 Q So would that be surprising that they wouldn't

19 charge management and performance fees?

20 A I think if somebody understood the hedge fund

21 world, that would probably be a little surprising, yeah.

22 Q Okay. Okay. And then, if you go further down, it

23 has a reference to "accounts are typically in cash at

24 month-end." Do you know what the relevance of that would be,

25 that "accounts are typically in cash at month-end?"

26 A Well, again, I -- I only understand the relevance


Page 38

1 now from having read articles in the press since this

2 happened. I didn't understand the relevance of that. If you

3 showed me this back on December 10th, I would not have

4 understood the relevance of that.

5 (2 Okay.

6 MR. WOLK: And again, you've never seen that

7 document before, correct?

8 THE WITNESS: That's correct.

9 BY MR. KOTZ:

10 Q Okay. Then it also says there, "No third party

11 brokers involved in the process. The auditor of the firm is

12 a related party to the principal."

13 Divorcing yourself from the newspaper articles but,

14 you know, as a regulator in OC,

15 A Dilmhmm.

16 Q -- what would you understand the relevance of to

17 be?

18 A That would have been a red flag.

19 Q Yeah. How come?

20 A Well, because I think it -- it would signal some

21 level of independence or -- I'm sorry -- some level of a lack

of independence with respect to the auditor.

23 Q Okay. And then later on, it says, "RMS never had

24 to face redemption. In fact, given the fact that the

25 different feeders are closed for new investments, there's

26 always replacement capital, 1:5 ratio, according to some


Page 39

1 . people."

2 Again, divorcing yourself from the newspaper

3 articles, ?ust as an OC examiner, head of examiners, what

4 does that mean?

5 A Well, I want to just back up a second.

6 12 Sure.

7 A You know, my responsibility was for trading and

8 market-making. I didn't -- I didn't know anything, very

9 little anyway, about hedge funds and mutual funds and how

10 they operated.

11 Q Okay.

12 A So this specific -- this would have not meant

13 anything to me, actually.

14 Q Okay.

15 A I'm not sure I completely understand it sitting

16 here today.

17 Cr Okay. And then you could see that there are

18 attachments to this e-mail. One's on Performance Statistics

19 and then there's an article from Hedge Mar. Do you see that?

20 A I do.

21 Q Have you ever seen this article before?

A I have not.

23 Q Okay.

24 A Not to my knowledge.

25 (Z Do you know the publication at all?

26 A No, I do not.


Page 40

1 Q Okay, okay. If you could just take a quick look

2 through the article?


4 MR. WOLK: As he does that, I just want to ask, you

5 know, kind of where we're going with this. He's testified he

6 didn't see the memo. He hasn't seen the article. I know

7 he's not here as an expert to express his opinions. So we

8 want to be cooperative.

9 ?'m just trying to figure out where you're going

10 with this in terms of questioning him about these documents

11 that he hasn't seen.

12 MR. KOTZ: Well, I think it';l be clear soon. I

13 don't have a tremendous amount more but I do want to ask him

14 some more questions about this.


16 BY MR. KOTZ:

17 g If you'll look at the second page of the Hedge Mar

18 article, 16 at the bottom, it says, "Skeptics who express a

19 mixture of amazen~ent, fascination and curiosity about the

20 program wonder first about the relative complete lack of

21 volatility in the reported monthly returns."

Again, going back in as an OC examiner leading

23 examiners, would that raise any concerns with you, the

24 complete lack of volatility?

25 MR. WOLK: And also, as assistant director, as he

26 explained, he focused on tradiriy and market-making.


Page 41

1 THE WITNESS: You know, I was not -- I was not an

2 investment expert and I'm not today.

3 MR. KOTZ: Okay.

4 THE WITNESS: I understand how securities are

5 traded and I understand how people can, you know, violate the

6 law in terms of individual securities transactions, but in

7 terms of investment strategies and the type of returns that

8 they might generate, that's not my background.

9 BY MR. KOTZ:

10 So were there people in OC at that time who did

11 have that expertise that you could have shown this

12 information to and asked about what it means?

13 A Well, yeah, I think the -- the Investment Advisor,

14 Investment Company Examination Group within OCIE would have

15 been the -- and that's -- I see the cover e-mail, the name is

16 Kelly. That's the team she was in under Gene Goelke. I

17 think that would have been their area of expertise, certainly

18 much more than the market oversight.

19 Q Okay. So if a complaint like this ~iad come in in

20 that period of time, what - what would -- what would you

21 have suggested happen as a result of the complaint?

A If it came to me?

Q Yeah.

24 A You know, I probably would have handed it up to

25 John and there would have been a conversation with Lori about

26 who was going to handle it and, you know, it wouldn't


Page 42

1 surprise me if there was -- because it does involve a trading

2 firm, that there would have been some joint effort between

3 the two disciplines within OC to -- to review it.

4 Q Okay. And would there have been a capacity within

5 OC to look at some of the issues that are raised by

6 1 I in the attachments about whether they actually

7 implement -- about whether Madoff was actually implementing

8 the full strategy?

9 A It's hard for me to say. I can -- I -- because I

10 -- I don't know, you know, what the capacity in Gene

11 Goelke's group was. I don't know the science of it. You

12 know, I can tell you that they were probably not unlike our

13 group which, you know, we always had too much to do and it

14 wasalways a matter of triaging and prioritizations.

15 So if it was deemed to be a high priority, I'm

16 guessing that they would have looked at 1~.

17 MR. WOLK: But again wait. Now, you have no

18 specific recollection of this document?

19 THE WITNESS: I don't have any recollection.

20 MR. WOLK: And like you said, this is a guess.

21 This is the concern I'm having. We're asking him questions

22 as if he's an expert. He's here as a fact witness. He's

23 testified that he hasn't seen the document. I just don't see

24 where we're going on this.

25 MR. KOTZ: All right. Well, we'll -- we can show

26 you e-mails that seem to indicate the opposite.


Page 43

1 MR. WOLK: That -- well, let's get there.

2 MR. KOTZ: All right. Well, don't push me, please.

3 You want to cooperate but don't push me.

4 MR. WOLK: I do, and I'm not trying be

5 obstructionist.

6 MR. KOTZ: Don't push me. I'm feeling like you're

7 pushing and don't push me. Okay?

8 Can you show me the e-mail that shows you sent this

9 article?

10 MS. STEIBER: Do you want to mark it?

11 MR. KOTZ: Yeah. Mark as Exhibit 12. This is an

12 e-mail, dated 5/6/2005, 5:06 p.m.


14 identification.)



17 BY MR. KOTZ:

18 Q Does this refresh your recollection that you may

19 have actually received a copy of this article and that this

20 article might have been part of an examination you were

21 working on?

22 A No. I -- what it does refresh my recollection on

23 is that we were doing an examination, but my recollection is

24 it w3s based or~ or a Barren's article.

25 (Z Okay.

26 A Not this particular article, and I'm not -- I'm


Page 44

1 still not sure I ever read this particular article. It was

2 obviously an attachment. It appears to have been an

3 attachment to this e-mail, but I read the e-mail in my

4 Blackberry and responded to it. So I don't know that I would

5 have read the attachment.

6 Q Okay. Let me show you the other article then.

7 MR. KOTZ: We're going to mark this as Exhibit 13.

8 This is an e-mail from John~McCarthy to you, dated Thursday,

9 December Ilth, 2003, 1:53 p.m.


11 identification.)

12 THE WITNESS: This is the article I remember.

13 BY MR. KOTZ:

14 (Z Okay. So what do you remember about this article?

15 A I remember that this article raised a question

16 about whether or not the Madoff firm was using information

17 gleaned off of its Market-Making Desk to trade ahead or

18 front-run customer orders on behalf of some hedge fund

19 activity that it was engaged in. That's what I recall.

20 Q And this -- this article, Exhibit 13, precipitated

21 an examination?

22 A It did precipitate a letter being sent to the firm,

23 yes. It precipitated an examination.

24 Okay. And you're sure that it wasn't the complaint

25 that 'sent in May 21, 2003, to Mavis KeLly 26 that actually precipitated the examination?


Page 45

1 A Well, I was not -- I'm sure I was not aware of that

2 complaint, but whether or not, you know, Lori or John,

3 whether that was the reason why we ullimately did this, I

4 don't know, but I know that I was asked to look at this and

5 to initiate some type of review.

6 BY MS. STEIBER:

7 Q Do you see that that article references the Mar

8 Hedge article that had preceded it by a few months?

9 A I do see that.

10 BY MR. KOTZ:

11 Q But you don't think that even though you were going

12 to conduct an exam, based on this Earron's article, that you

13 would have looked at the other article that came out that's

14 referenced in the Barren's article?

15 ~ It's possible I did, but I just don't recall ir,

16 and, you know, T can tell you that the idea of fron--r~nninq

17 seemed very plausible, based on in~ormation that I knew in

1~ the past, plus it was within my -- much mor-e in my ri!bric of

19 what I understood about the securities world, and it seemed

20 very plsuc;ible, yiven what I knew about some activity that

21 appeared to have occurred at Knight Securities earlier where

22 they -- and there was a big article in the Wall Street

23 Journal about it maybe a year well, a couple of years 24 before this.

25 So iC made sense to me that they may have good

26 access to information about retail order flow and


Page 46

1 front-running.

2 Q Okay. Now, the article, the Barren's article, was

3 dated May 7, 2001.

4 A Right.

5 Q But the examination as a result of the article

6 didn't occur till several years later?

7 A Yeah. And I don't know exactly when it was

8 initiated. It makes sense to me that it was December of '03,

9 but, frankly, reading press articles, it sounded like '04, so

10 I wasn't sure, but '03 sounds more likely.

11 But yeah, I can't explain that. I don't -- I

12 hadn't seen the Barren's articleprior to it being brought to

13 my attention at this ;ime in 2003, to the best of my

14 recollection.

15 Q Okay. Now, would you consider Barren's to be a

16 credible source?

17 A Credible? You know, 7 don't know that I -- I -- I

18 wouldn't view them as incred~ble, but I don't think I would

19 take what they wrote as gospel.

20 BY MS. STEIBER:

21 Q How about reputable?

22 A Yeah.

Q Their reputation?

24 A Yeah.

25 BY MR. KOTZ:

26 Q Okay. Okay. So looking at this Barren's article


Page 47

1 that you did see, it says, "Everyone the Street knows that

2 Bernie Madoff also manages more than six billion for wealthy

3 individuals. That's enough to rank Madoff's operations" --

4 top of the second page -- "among the world's five largest

5 hedge funds, according to a May 2001 report in Mar Hedge

6 trade publication. What's more,these private accounts have

I produced compound average annual returns of 15 percent for

8 more than a decade. Remarkably, some of the larger billion

9 dollar Madoff-run funds have never had a down year."

10 So in -- you looked at this article. The decision

11 was made to have an exam.

12 A Mm-hmm.

13 Q . What was -- was there a concern about this

14 statement that "some of the larger billion dollar Madoff-run

15 funds had never a down year?"

16 A I don't remember a Particular concern;about that,

17 except in the context of perhaps their front-running their

18 retail customer orders

19 Q Okay. And if you'd go to the next page of this

20 document, it says, "Adding further mystery to Madoff's

21 motives is the fact that he charges no fees for his money

22 management services. Indeed, while fund marketers like

23 Fairfield Greenwich offer a one percent from investors, none

24 of that goes back to Madoff nor does he charge a fee on money

25 he manages in private accounts. Why not? We're perfectly

26 happy to just turn commissions on the trade, he says."


Page 48

1 What was the relevance of this in terms of the exam

2 you conducted based on this article?

3 A Again, I don't think that that would have hit me as

4 a particular red flag. I was focused predominantly on

5 whether or not there was front-running going on.

6 Q Okay. How come you were focused predominantly on

7 whether there was front-running?

8 A It just was a theory that seemed to make sense to

9 me, you know. I -- I -- my theory was, and I think I've

10 since learned or come to understand, that it's not a very

11 good theory, but what I understood about Madoff is that they

12 had cultivated a very successful market-making operation by

13 deve3oping relationships around the country with mid-sized

14 regional broker-dealers, and I thought, you know, if there's

15 a move in, you know, a particular security, you know, where

16 all of a sudden they get an influx from a nationwide retail

17 constituency or customer base, that would be very valuable

18 information to have and they would see it in there real-time

19 and so -- and I was thinking back to a Wall Street Journal

20 article that had been written about Ken Pasternak from Knight

21 Securities. This is maybe 2000. I can't remember exactly,

although I remember it came out on a day that I was sitting

23 in S~C space because I remember sitting there reading it and

24 he was essentially bragging about the fact that at the open,

25 he had -- before the market opened, he had such a huge influx

26 of information about where the market was going to go from


Page 49

1 the retail customer order flow that he was getting, that he

2 was able to position the firm proprietarily in the preopen to

3 trade profitably against that order flow.

4 So although this was not -- I wasn't thinking that

5 they were doing this -- this sort of preopen strategy, it --

6 it did seem likely to me that having access to that type of

7 retail order flow could be very valuable and that you could

8 profitably trade ahead of it and make money.

9 Q So was it your decision to focus the examination on

10 front-running based on that theory?

11 A No. It would have been a decision that john and I

12 made in conjunction with each other and having a conversation

13 about it.

14 Q Okay. And you were starting or looking to start an

15 examination based on the article, and our records show that

16 in May 2003, a complaint had come in that I showed you from

17

18 Would that complaint have been useful to you in

19 determining the scope of your examination?

20 A I think if I had gotten more information from

21 people in the Investment Advisor, Investment Company Exam

22 Group, it probably would have been useful, but I still think,

23 based on the information in that article, I would have been

24 thinking front-running.

25 ~ But do you think if yo~ had seer, tl-ie 26 I _ complaint o~ May 21, 2003, you would have focused


Page 50

1 on front-running and on other possibilities?

2 A I can't say for certain. I can say that the

3 auditor issue, I probably would have wanted to look into a

4 little bit.

5 Q What about whether Madoff was implementing the full

6 strategy and the options issue?

7 A You know, if he was front-running trades, I think

8 that that would have -- that would have been a reason why he

9 wasn't implementing the full strategy. He was saying he was

10 implementing because he wouldn't have needed to be. He was

11 doing something completely different. So I think the

12 front-running would have gotten at that issue potentially.

13 (Z Okay. But was -- is it a concern that while you

14 were going forward, opening an examination, you hadn't been

15 privy to a complaint that was given several months earlier on

16 the same subject?

17 A Yeah. I mean, it -- it -- I think that is a

18 concern, yes.

19 Q Okay. Okay. Let's talk about the exam a little

20 bit.

21 A Okay.

MR. KOTZ: This is Exhibit 14. This is an a-mail

from Jacqueline Wood to Genevievette Walker, dated

24 12/16/2003, 3:25 p.m., and you can see there's several

25 attachments to this. Mark this as Exhibit 14

26 (SEC Exhibit No. 14 was marked ~or


Page 51

1 identification,)



4 BY MR. KOTZ:

5 (Z Okay. Do you recognize these documents?

6 A I don't recognize them, but -- I don't recognize

7 them specifically, but it seems to be the sort of thing we

8 would have done in the normal course of planning for an

9 examination.

10 Q Would you have been involved in the preparing of

11 these documents?

12 A Certainly in the review of them. It appears --

13 yeah. I would have been involved in okaying, you know, the

14 initial drafts for preparation to give to Lori, as with John,

15 I would assume.

16 Q Okay. And if you can see in -- in the Background

17 Section, there are various versions of the same memo, but in

18 the Background Section of the second and third versions, it

19 says, "The staff recently received information from an

20 outside source alleging that Bernard Madoff, through Bernard

21 L. Madoff Securities, LLC, one of the leading market-makers

of NASDAQ Securities, was assisting affiliated hedge fund and

investment advisor firms in committing front-running

24 violations."

25 So what was that outside source?

26 A The only outside source that I'm aware of is the


Page 52

1 Barren's article itself.

2 Q Okay.

3 A l'm not aware of some other source.

4 Q Would that have been referred to as an outside

5 source, an article?

6 A It's possible, yeah. Yeah. It's possible, and,

7 frankly, there may have been another outside source, but I'm

8 not aware of it.

9 Q Okay. And then if you could see on the next

10 version of that planning memo, it says, "According to the

11 information received."

12 Do you still think that "recently received

13 information from an outside source," and it says,

14 to the information received," that would have been referring

15 to a Barren's article?

16 A Well, I don't know for certain. What 'I do know for

17 certain is that I did not get any information from an outside

18 source individually. So --

19 O Okay.

20 A -- i-t somebody else did, then that would have been,

21 you know, I would assume, either John or Lori. That was not

shared with me.

23 B Okay. And you never heard the name 24

25 F. Dlo.

26 Q Okay.


Page 53

1 A Not to my knowledge, no.

2 Q Okay. Okay. If you would look at this document,

3 it --

4 MR. WOLK: Is this the last one?

5 MS. STEIBER: The last draft, yeah.

6 MR. KOTZ: Yeah.

7 BY MR. KOTZ:

8 Q Under Course of Action, it says, "The staff intends

9 to send a letter to NASD requesting execution'data from

10 Madoff Securities for the time period of January i, 2001,

11 through December 31, 2002."

12 Do you know why would t~ie staff do that?

13 A Yeah. I think the NASD was oftentimes the best

14 source to get accurate, timely sales data. So what we would

15 have been doing is getting information about the

16 market-making trades that were reported to I\I'ASD from Madoff

17 during that time period.

18 Q And that would be consistent with looking into

19 front-running?

20 A Yes.

21 Q Okay. But if you were looking into the other

22 allegations that _ raised about no options

23 trading, trading not seen in the market,

24 A Mm-hmm.

25 Q -- would that request get to that issue?

26 A No.


Page 54

1 Q Okay. Do you know if any trading data from the

2 NASD was ever sought?

3 A I don't know. I assume so, but I'm not certain.

4 Q Would it surprise you to learn that we have no

5 records of any letter ever going out to NASD requesting

6 execution data?

7 A It's possible that we got the information directly

8 from Madoff Securities.

9 Q Okay.

10 A I don't know for certain -- for sure. We would

II not -- we would not have had to go to the NASD to get that

12 information.

13 Q Would there be any concerns about getting the

14 information directly from the entity that you're examining

15 rather than going to the NASD?

16 A As a general proposition, no. We, you know,

17 routinely requested trading information from registrants

18 directlV.

19 Q Okay. Okay. I'm going to show you another

20 document.

21 You dori't -- I'm sorry. You don't know who made

22 the decision to not send a letter to the NASD?

23 A Dlo.

24 g And you're not awar-e of, you know, what happened

25 there in terms of that decision?

26 A No. I mean, if you have a copy of the letter that


Page 55

1 went to the firm, that may shed some light on it.

2 (Z Okay, okay.

3 MR. WOLK: Do you actually have a recollection of

4 whether or not a letter was sent to the NASD?

5 THE WITNESS: I do not.

6 MR. KOTZ: Okay.

7 MS. STEIBER: But he also said he wouldn't be

8 surprised if the letter never went to the NASD.

9 THE WITNESS: Well, I think what I'm saying is that

10 the NASD would have been one source for getting the

11 information, but getting the information from the firm

12 directly would have been another -- another way of doing it.

13 MR. KOTZ: Okay. Let me show you another document.

14 This is dated 12/18/200_3, 6:31 ~.m. Mark this as Exhibit 15.

15 This is an e-mail from Lori Richards to john McCarthy with a

16 cc to you and then lower down there's an e-mail from John

17 McCarthy to Lori Richards, dated December 18th, 2003, 6:13

18 p.m.

19 (SEC Exhibit Mo. 15 was marked for

20 identification.)

21 THE WITNESS: I apologize. I just don't -- I just

don't recall this, but I -- you know, I look at it now and

obviously I must have been aware of it.

24 BY MR. KOTZ:

25 O It does seem as this re~erences the 26 complaint to Mavis Kelly?


Page 56

1 A Absolutely does, yes.

2 Q Okay. So is it possible that the complaint came in

3 but for whatever reason, you weren't made aware of it or you

4 didn't focus on it?

5 A It's possible, yes.

6 Q Okay.

7 MR. KOTZ: Let me show you another document, dated

8 12/18/2 003, from Lori Richards to John McCarthy, 4:25:43 p.m.

9 We're going to mark this Exhibit 16.


1~ identification.)

12 BY MR. KOTZ:

13 Q Do you see it references "can we try to put a call

14 in to them today?" This is referring back to the previous

15 e-mail that's Exhibit 15.

16 A Okay.

17 Q Our records show that there were -- was a call put

18

19 okay.

20 Do -- do you -- do you remember anything about any

21 conversation, any reports of any conversation back with

22 somebody who provided a tip or complaint?

23 A I do not.

24 Q Okay. What about a call that was put in to Hernard

25 Madoff's operations? Do you remember that?

%6 A I recall having a telephone conversation directly


Page 57

1 with Bernard Madoff, but my recollection is that it was in

2 response to a letter that we sent to him. It could have been

3 on the front end of that letter, but it was --

4 Q Okay. Who else was on that call?

5 A From the SEC, it could have just been me. I'm not

6 sure if anybody else was with me. If somebody else with me,

7 it would have likely have been Mark Donohue and on their

8 side, I'm not sure if anybody else was on the call.

9 Q Okay. What happened in that call?

10 A Well, again, my recollection is a little fuzzy, but

II the substance of the call, it was either we had sent the

12 letter or right before sending the letter, and the substance

13 of the call was that we wanted to take a look at how they

14 were handling, you know, the separation between whatever this

15 other, you know, ~edge fund business was and the -- the

16 retail customer orders, and he said that there was a Chinese

17 wall in place, he being Bernie Madoff, and that, you know,

18 there wasn't anything there and that, you know, I think he

19 also -- I think he also explained that he himself was not

20 actually a hedge fund, that he had some black box execution

21 strategy that he utilized for hedge funds that wanted to make

22 use of it and HR sent a commission for executing trades

23 through it, and, you know, I told him, you know, this

24 shouldn't be a problem for you, send us the data that we're

25 looking for.

26 Q Getting back to the -- prior to the document


Page 58

1 request going out,

2 MR. KOTZ: Let me show you another document, dated

3 12/19/2303, 2:13 p.m., from Mark Donchue to Matt Daugherty. 4 Mark this as Exhibit 17.


6 identification.)

7 BY MR. KOTZ:

8 Q You can see this references "Lori and John talked

9 with Madoff last night. I'11 explain over that beer."

10 A ~m-hmm. Okay.

11 C2 And -- and we found later several references to the

12 conversation that Lori and John had with Madoff. Do you

13 recall anything about a conversation that occurred at this

14 time period, tl-iis would be bc~ore the document requeste went

15 out, where Lori and John talked to Madoff? It seemed to have

16 been kind of a critical conversation that was referenced

17 several times later in terms of decisions that were made.

18 A No, I don't recall. In fact, you know, I recall a

19 conversation -- the conversation I mentioned that I had with

20 Madoff and then I recall a subsequent conversation with Lori

21 Richards and Madoff, but I don't recall -- you know,

22 basicallytracked exactly the conversation I just told you 23 about.

24 Q The second call was after the first call?

25 A Yeah..

26 Q And who was on that call?


Page 59

1 A Lori and I and Bernie Madoff and I'm not sure

2 whether anybody else from the firm.

3 Q John McCarthy wasn't on that call?

4 A I don't think so.

5 Q Okay. And so you don't know -- Matt Daugherty is

6 talking in this e-mail to Mark Donohue about Madoff. He

7 says, "I need a drink now." And then Mark Donohue says,

8 "Lori and ~ohn talked to Madoff last night. I'11 explain

9 over that beer." You don't have any idea what the

10 explanation was that was given based on the conversation with

11 Madoff?

12 A No.

13 Q Okay, okay.

14 MR. KOTZ: I'm going to show you another document.

15 These are dra~ts of document requests, and this we're going

16 to mark as Exhibit 18. An e-mail from Jacqueline Wood to

17 Eric Swanson, Mark Donohue, dated 12/19/2003, 3:13 p.m., with

18 attachments.


20 identification.)

21 MS. STEIBER: There should be eight drafts.

(The witness examined the document


24 BY MR. KOTZ:

25 O Okay. Do you remember having some involvement in

26 these draft document requests to Bernard Madoff Securities?


Page 60

1 A I don't have a specific recollection of it, but I'm 2 sure I did.

3 Q Your role, you think, would have been more in the

4 editing rather than the drafting?

5 A Most likely, yeah .

6 Q Okay. Tf you'll look at the third draft, there's

7 an e-mail, dated 12/24/2003, 4:03 p.m., and then on the

8 second page of that draft, right after that, under Number 2,

9 it says, "Describe in detail the hedging model or investment

10 strategy identified as split strike forward conversion and

11 the telephone conversation between Lori Richards, John

12 McCarthy and Bernie Madoff on December 19th, 2003."

13 Then the next one, Number 3 says, "Id~nt~~y the

14 four hedge funds discussed in Lhe telephone conversiori," I

15 assume means conversation, "between lori Richards, John

16 Mcearthy and Bernard Madc~~ on December 19~~-1, i003, include

17 ihe identi~ication of all advisors and managers ot the funds,

18 all af~iliat~d entities of the funds and all investors or

19 owners of the funds since january 1, 2001."

2e And then if you look at later drafts, you'll see

21 that that question was deleted or that part of the questicn

22 that referred to a telephone conversation between Lori

23 Richards, John McCarthy and Bernie Madoff.

24 Q I

21 Right. Do you have any idea why that reference

26 would have been dropped?


Page 61

1 A I assume it's not relevant. I don't know, you

2 know, who -- who edited it out, but, you know, looking at it

3 fresh today, I would say what the relevance of it having been

4 discussed in a telephone conversation is.

5 Q Do you think you might have been aware of this

6 conversation at the time but you don't remember it now years

7 ago or do you think you might not have been aware of it at

8 all?

9 A It's possible. It's also possible that I was not

10 aware of the conversation at all. I just don't know.

Il Q Okay. Okay. There's another change in the

12 document I wanted to show you. Do you see the e-mail, dated

13 1/6/2004, 4:53 p.m.? It's from Mark Donohue. Tt says, "John

14 and Eric, attached is a document request for the revisions we

15 just discussed."

16 If you could see the next page is a draft, dated

17 January 6th, 2004. I'm sorry. Do you know where I am?

18 A Yeah.

19 Q Okay. And i~ you could see on the draft, January

20 6th, 2004, under Number 1, it says, "For the time period of

21 January 1, 2001, through the present, provide the following

22 monthly profit and loss statements by security and monthly

23 comn~ission revenues."

24 A Mm-hmm.

25 Q Previous versions has it as daily profit and lo c, ,,

26 statements, daily commission revenues. Do you have any idea


Page 62

1 why a change would be made from daily to monthly?

2 A The only thing I can think would have been just for

3 ease of absorbing the information. To get this type of

4 information on a daily basis would have been fairly onerous

5 to go through, but I -- I'm just speculating.

6 Q Okay. And then if you could see the last document,

7 your name is on the signature line. Do you know if you did

8 sign this document request that went to Bernard Madoff

9 Securities?

10 A I -- I don't know for certain, but I assume I did.

11 Q Was there any request made for a specific audit

12 trail trading data?

13 A Not in this request.

14 Q Okay. Any idea why that wouldn't have been done?

15 A No. I mean, I'm -- I'm a little perplexed. I -- I

16 believe we would have gotten trading data. It's possible

17 that we just called up NASD and asked them for it and they

18 sent it over, but --

19 Q Okay. But you don't know -- you don't remember if

20 that happened, actually happened?

21 A I don't, but I'm not sure how we would have done

the review of -- for front-running if we didn't have that.

23 Q If you could look at Version 4, which was the

24 version after the 1/6/2004 1:32 p.m. -- 1:31 p.m., do you see

25 that -- those requests in that version?

26 A I'm sorry.


Page 63

1 Q I'm sorry. ~t's January 6th, 2004, 1:31 p.m., is

2 the e-mail attaching the version.

3 A 1:31:32 p.m.?

4 O Yeah.

5 A And then the next letter starts December blank,

6 2004?

7 Q Right, right, right.

8 A Okay.

9 Q Were those -- were there more specific requests in

10 there?

11 A With respect to audit trail?

12 Q Yeah.

13 A No.

14 Q Okay. Do you have any recollection in general

15 about decisions made to modify the requests?

16 A No, but as a matter of standard practi;ce, we

17 frequently modify the requests

18 Q Okay. But do you know if - if perhaps because of

19 the phon~ conversation with Lori Richards, John McCarthy and

20 Bernie Madoff, decisions were made to modify requests because

21 perhaps he gave t~-en information over t~-ie phone or he allayed

22 their concerns in some way?

23 A I don't know. It's possible.

24 Q Okay.

25 A I don't know.

26 Q Okay, okay. I'm going to show you the response.


Page 64

1 It's dated January 16th, 2004.

2 MR. KOTZ: We're going to mark this as Exhibit 19,

3 from Bernard Madoff to you, Eric J. Swanson.


5 identification.)



8 BY MR. KOTZ:

9 Q Do you remember getting a letter from Bernard

10 Madoff?

11 A I remember receiving the response. I don't

12 specifically remember this letter, but I do remember that the

13 response came in.

14 Q Okay. It certainly looks like this is the letter?

15 n Yeah.

16 Q Okay. Do you see, he says in here, "Also, please

17 note we have no communication or disclosures from customers

18 using this strategy to investors, owners or prospective

19 investors or owners?" Did that raise any concerns, that

20 response?

21 A Communications or disclosures from customers using

22 this strategy.

23 Q He's referencing his split strike conversion

24 strategy.

25 A Right. Well, I think, given what I understood at

26 the time, which was that they were not actually an investment


Page 65

1 manager but were in fact providing execution services for

2 hedge funds, I don't know that that would have raised a red

3 flag for me. Again, I was focused on front-running.

4 Q Okay. And then it says later on in this letter,

5 "Neither Madoff Securities nor any person or entity

6 affiliated with Madoff Securities manages or advises hedge

7 funds." Do you see that?

8 A I do.

9 Q Okay. Now, the Barren's article that you say led

10 to the examination referenced the fact that Madoff manages

11 more than six billion for wealthy individuals. That's enough

12 to rank Madoff's operations among the world's five largest

13 hedge funds. Given that article, wouldn't this statement by

14 Bernard Madoff that Mado~f Securities nor other person or

15 entity affiliated with Madoff Securities manages or advises

16 hedge funds, wouldn't that contract the article?

17 A It would appear to, certainly. I know that, as

18 I've stated, you know, I had a conversation and it now sounds

19 as though John and Lori may have had a conversation wi~h

20 Bernard Madoff in which to me he explains that he was not

21 managing money, that he had a black box strategy that he ran,

22 that the hedge funds actually selected within some parameters

23 options for how it would operate, and that the black box

24 would run under those parameters, and that he wasn't in fact

25 managing money. ? didn't test that. My concern was

26 front-runniny.


Page 66

1 (Z But was that what led to the conversation, this

2 statement in the letter, do you think?

3 A No. I think -- I think the conversation came

4 before this letter. It either came before we sent the

5 document request or it came shortly after we sent the

6 document request.

7 (Z Okay.

8 BY MS. STEIBER:

9 Q Would you take notes o~ conversations yo~ had with

10 registrants?

11 A Not often. I would frequently -- you know, if

12 there was something noteworthy, I would send an e-mail to

13 John about it, but _ ~asn't - I wasn't always great abuut

14 taking notes.

15 BY MR. KOTZ:

16 Q So at the time this statement that "ne·ither Madoff

17 Securities nor any person or entity affiliated with Madoff

18 Securities manages or advises hedge funds," would not have

19 been a concern?

20 A Z don'; think it would have raised a red flag for 21 me at this point in time.

Q Okay.

23 MR. KOTZ: i'rn goiny to show you another document.

24 This docunent is d?ted 1/2~/2004. We'll mark it as Exhibit

25 213. It's an email from Mark Donohue to Genevievette Wal~er,

26 Jacqueline Wood, with a cc to you.


Page 67


2 identification.)



5 BY MR. KOTZ:

6 Q Do you have any recollection of these spreadsheets

7 or looking at the Madoff info that's referenced in this

8 e-mail?

9 A No, I don't. I'm not sure what these spreadsheets

10 are referring to.

11 g Okay. Do you have any recollections specifically

12 about reviewing matters or, you know, what work was done in

13 connection with this exam?

14 A When the -- the recollection I do have is that when

15 the response came in, much of the r-esponse was in hard copy

16 format, physical spreadsheets, physical printer paper, and I

17 recall wanting to -- I was busy with something else, but I do

18 recall wanting to look because I was interested, look to see

19 what the executions were for these hedge funds, just to see

20 what they looked like, and I do recall doing that and seeing

21 infrequent trading but then huge positions and then trading

out of the positions and then nothing and then some period of

23 time later trading. That's as far as I took it.

24 BY MS. STEIBER:

25 Q ~as it unusual to get trading data in hard copy

26 format?


Page 68

1 A Back in this time period, it was starting to be

2 unusual. You would typically get things electronically, but

3 it wasn't so uncommon in this time period that that would

4 have in itself raised a red flag.

5 MR. KOTZ: Okay. Show you another document. This

6 is dated January 29, 2004. Mark this Exhibit 21. This is an

7 e-mail ~rom Genevievette Walker to Mark Donohue and

8 Jacqueline Wood.


10 identification.)



13 BY MR. KOTZ:

14 Q Okay. Co you have any recollection of a concern

15 that Genevievette Walker raised about these collars?

16 A I do not.

17 O Do you have recollection generally of particular

18 concerns that Genevievette Walker had on going during the

19 examination?

20 A I do not.

21 (Z Okay. Anyone else? Jacqueline Wood or Mark

22 Donohue have specific concerns?

23 A I mean, I think everybody was a little bit

24 concerned that there might be something going on here.

25 Q Okay. Were you aware of any problems between

26 Genevievette Walker and Mark Donohue?


Page 69

1 A Now that you mention it, I do recall there were

2 some issues, yeah.

3 Q Okay. What kind of issues?

4 A I think Mark was dissatisfied with her performance

5 and I think, if I recall correctly, he had confronted her at

6 some point in a somewhat aggressive way, but I don't recall

7 the specifics or the timing of that.

8 Q Do you recall if Genevievette Walker filed a

9 complaint against Mark Donohue?

10 A I think she may have, yeah.

11 Q Okay. Do you know what happened with that

12 complaint?

13 A I don't.

14 Q Okay. Do you have any sense of, you know, who was

15 correct in this dispute or, you know, whether the complaint

16 had any merit or Mark was too aggressive?

17 A I don't remember exactly what was in the complaint

18 However, I -- I do recall that there were some performance

19 issues with Genevievette and I also recall that Mark was

20 definitely too aggressive, in my opinion, was too aggressive

21 in dealing with her.

Q And the performance issues with Genevievette, were

23 they more in terms of work effort or competence of work?

24 A I believe predominantly the former, although there

25 may have been some of the latter, but I think it was mainly

26 work effort.


Page 70

1 Q Okay.

2 MR. KOTZ: Let me show you another document. These

3 are some handwritten notes, dated 1/29/2004. We're going to 4 mark as Exhibit 22.


6 identification.)

7 BY MR. KOTZ:

8 U If you could first just look and see if you

9 recognize any of the handwriting. There's a variety oi

10 handwriting on these notes.


12 TNE W~TNESS: This looks like John's handwriting. 13 BY MR. KOTZ:

14 Q john McCarthy? What page is that?

15 A I can't say for certain.

16 Q That's the fourth page?

17 A Yeah.

18 Q Okay.

19 A I don't know for sure.

20 Q Any of the handwritiny look -ike yours?

21 A I -- it's possible. It's hard for me to say.

Q ~hich -- which part do you think it's possible?

23 A The second page seems, but maybe I'm just

24 because it's the neatest one, but my handwriting's really not 25 this neat.

~6 Q This seems to refer to a call January 29th, 2004,


Page 71

I with _, who's the complaint in the May 2003 2 complaint?

3 A Yeah.

4 Q So, I mean, ~ guess I'm just trying to -- I know

5 this happened some time ago, but do you think it is that you

6 just don't recollect today that you may have been aware of

7 this complaint or that you may have had -- the team had

8 communications with _I or do you think it's possible 9 that the team did have these communications but -- and saw

10 the complaint but you just weren't made aware of it?

11 A I think either one o~ those is possible, but you

12 have to also understand, and I don't know the timing of all

13 this, but there was over this time period, some of my work,

14 the direcl projects that I was -esponsible ~or were being

15 reassigned to Mark and so there was a point in time where I

16 was no longer directly involved in this matter and I don't

17 know how quickly that happened, but it seems to have

18 happened, in my recollection, fairly quickly after the letter

19 was sent out and Mark was t~king day to day resporisibility 20 for it.

21 So, you know, did I participate on a phone call

with L I~ I don't recall it. It's certainly possible,

23 but it's also in my opinion just as possible that I did not

24 and wasn't part of this dialogue.

25 Q Okay.

26 · BY MS. STEIBER:


Page 72

1 Q And what did you think of the level of Mark

2 Donohue's expertise?

3 A You know, he was -- he was learning. He was no

4 expert, but at the same time he was a diligent worker and,

5 you know, very -- what's the word I'm looking for --

6 ambitious. So I -- I -- you know, I _- I thought he was

7 capable.

8 BY MR. KOTZ:

9 Q Do you think it's possible if you had been more

10 involved with the communications that might have

11 changed the focus of the examination?

12 A With 20/20 hindsight, it's an easy thing for me to

13 say, but I -- I don't -- I don't know for sure. I -- I -- I

14 don't want to make that statement. It's possible. I do --

15 you know, look, I -- I do think I had more experience just in

16 general than -- than Mark did, but I thought Mark was

17 capable, as well, and certainly with john's oversight.

18 (2 Okay.

19 MR. WOLK: Were you saying in your description of

20 alli these notes that i~ jusi~ the iirst page?

21 MR. KOTZ: No. We -- we understand they're all

22

23 MR. WOLK: Okay.

24 MR. KOTZ: We are trying to validate that by

25 figuring out whose notes they are.

26 MR. WOLK: Okay.


Page 73

1 BY MR. KOTZ:

2 (Z But I guess what I'm trying to understand is, you

3 know, the _ complaint seems to relate to issues beyond

4 front-running. The phone call -tollowing 'seemed to

5 relate to issues beyond front-running.

6 So do you think it's -- that may -- what may have

7 happened here is the individuals who were involved in the

8 decision to focus on front-running may not have been privy

9 because of workload or whatever to all the different issues

10 that were available at that time and maybe that was why the

II focus was somewhat limited?

12 A It's possible. I mean, my recollection of this

13 time frame and my involvement in sort or helping develop a

14 theory of what might be yoing on here was solely focused on

15 frontrunning.

16 In other words, I had no recollection of -- of any

17 other focus or -- or -- or, you know, issue in my head about,

18 you know, Ponzi scheme or anything else.

19 BY MS. STEIBER:

20 Q Do you remember just developing that front-running

21 theory just from Yeading the Barren's article?

A I don't recall specifically. I mean, it would have

23 been most likely an iterative process with John, and I don't

24 even remember exactly how, you know, I was asked to sort of

25 look at this or whether I was asked to look at it in the

26 context of front-running or whether I was given the article


Page 74

1 to read and I said to mysel~ I bet he's ~ront-running. I

2 don't remember exactly, but I do recall in my nind settling

3 on the issue, if there's something here, it's nest likely 4 front-running.

5 BY MR. KOTZ:

6 Okay. And you don't recall at any point anybody

7 talking about having a conversation with a person who

8 provided a complaint?

9 A I do not, no.

10 MR. KOTZ: Okay. Why don't we show the next

11 document;? This is an e-mail ~rom Jacqueline Wood to Mark

12 Donohue ~ith a cc:Lo Genevievette Walker, Tuesday, Fejruary 13 3rd, 2004. Mark as Exhibit 23.

14 (S~C Exhibit No. 23 was marked for

15 identification.)

16 BY MR. KOTZ:

17 Q You can certainly feel free to read the whole

18 thing. My question is about Page 2.

19 [The witness examined the document.)


21 BY MR. KOTZ:

22 Do you see it says, "The commission revenues

generated from these foreign institutional clients account

24 for the overwhelming majority of commission revenues

25 generated for the ~irm since 2001. Obvioiisly, this tradiriy

26 strategy has yielded Ma~c~f unbelievable protits which would


Page 75

1 explain why the strategy is well guarded by Mado~~."

2 Do you have any recollection of a concern about

3 Madoff's profits being unbelievable?

4 A I do not.

5 Q Was there ever any disc~ss.ion r the fact that, you

6 know, this black box strategy seemed to be producing kind of

7 profits that were not possible?

8 A Well, again, at the time the operative theory that

9 I had, and actually I think by this point I was probably not

10 involved much ~t all in this exam, but, you kno~, the

11 operative thenrry was front-running. I don't recall any other

12 specific conversations about, you know, how they might be

13 generating whatever pro~its they were yenerating. I don't

14 recall ever seeing this memorandum.

15 Q Okay. If you can see on Page 3, it references

16 "rollow-u~ questions.'' Do you recall having - .there was a

17 list of follow-up questions that they wanted to ask Bernard


19 A No, I don't recall this.

20 Q Okay. Do you recall if any follow-up questions 21 were ever asked?

22 A I do not.

23 (Z Okay.

24 MR. KOTZ: I'11 show you another set of notes

25 IC's 2/4/04, Conierence Call with Madoff. I'~ going to mark 26 this as Exhibit 24.


Page 76


2 identification.)

3 BY MR. KOTZ:

4 Q These may be too messy for your notes?

5 A Well, this de~initely is not my notes.

6 Q Okay. Have any idea whose notes they were?

7 A They could be Lori's.

8 Q Lori Richards?

9 A They could be, but I'm not -- I really don't know

10 for sure.

11 Q Okay. Do you know if this was the conference call

12 you were talking about that you were on with Madoff 2/4/04?

13 A The timing doesn't seem right

14 Q Okay. Do you know when they had con~erence calls

15 with Madoff who they talked to? Did they talk to Bernie

16 Madoff or Peter Madoff?

17 A I don't know. I know that when I participated in

18 the call, it was directly with Bernie.

19 Q And you don't know if he had -- was he on a

20 speaker? Do you know if he had anybody else on the line?

21 A I don't. I don't recall.

22 Q And you had -- did you have any conversations with

23 Shana Mado~f during this time period?

24 A Not outside the scope of the work she was doing for

25 SAI, but I -- I don't recall.

26 Q But you don't recall any conversations with her as


Page 77

1 a part of the exam?

2 A No.

3 MR. KOTZ: All right. I'11 show you another

4 document. This is another series of notes. We're going to

5 mark this as Exhibit 25, undated, six pages.


7 identification.)

8 BY MR. KOTZ:

9 Q Would these perhaps be yours?

10 A I don't believe so, no.

11 Q Okay. Sec on the first page, it says, "Followup

12 with Madoff re inputs. Two black box." Do you remember if

13 there was any follow-up on that issue?

14 A I just don't. I don't know.

15 O Was there any concern at that time about his black

16 box operation, any suspicions about it?

17 A Well, again, I mean at a certain point in time, I

18 was not directly involved in the examination. I was working

19 on other things.

20 Q Okay.

21 A But I -- but no, I don't recall a specific concern

being articulated to me about the black box, as it were.

23 Q Okay. If you look at the second page,

24 A Well, actually,

25 Q I'm sorry.

26 k -- can I pause on that for a second?


Page 78

1 Q Please.

2 A No. The inputs regarding the black box, I do -- I

3 do recall that one of the concerns in the context of

4 front-running was that there was inputs from the

5 Market-Making Desk into the black box. ~t was -- in other

6 words, there was an electronic communication potentially

7 going into the black box that would tell the black box now

8 trade, but that was --

9 Q Okay.

10 A I remember that being discussed.

11 Q Okay. If you look at the second page, at the top

12 it says, "Mavis," and then it says, "Few stocks on a few days

13 with critical get OATS from NASD Act all Madoff orders." Do

14 you know what that means, "get OATS?"

15 A OATS is an acronym for the Order Audit Trail. It's

16 a unique creature oi~ the NASD. A number of firms that trade

17 in the over-the-counter market, that at each stage in the

18 life of an order, as it's routed through, you know, the

19 various stages of an execution process, the firm that has

20 that handles it has to submit an OATS report to the NASD.

21 The memos are all linked together to form one complete sort

22 of history of the order.

23 Q Okay. And why would one get OATS from NASD?

24 A Why would one get OATS? In this context, you know,

25 because it was available for one. If you were askiny for Act

26 data, which was -- excuse me -- time in sales, it would be


Page 79

1 pretty typical to get the OATS data, as well, so that you'd

2 have a little picture of, you know, where the order started,

3 which firm it started from, where it went to, how it got

4 ultimately in this case, I assume, to Madoff, but, you know,

5 probably primarily because it was available.

6 MR. KOTZ: Okay. Let me show you another e-mail

7 that we have, as well. Mark this Exhibit 26. This is an

8 e-mail, 8/23/2004, 10:02 a.m., from Eric Swanson to Mark

9 Donohue, cc John McCarthy.


11 identification.)


13 THE WITNESS: Mm-hmm.

14 BY MR. KOTZ:

15 Q So at this point in time, you were at least

16 somewhat involved in the exam, it seems?

17 A I don't think -- this is -- this is probably

18 unrelated to the exam.

19 (Z Okay.

20 A There were a lot of issues around OATS during this

21 time period.

22 Q Okay. You don't think that was related to the

23 exam?

24 A I don't, no.

25 Q Okay.

26 A I don't know for sure, but I doubt it.


Page 80

1 Q Okay. And did you know if the OATS data was

2 ever -- did they ever get the OATS data?

3 MS. STEIBER: Referred to in the notes.

4 MR. KOTZ: Referred to in the previous document.

5 MS. STEIBER: That second page.

6 THE WITNESS: I don't know. I don't know.

7 MR. KOTZ: Exhibit 25.

8 THE WITNESS: I -- but again, I want to stress I'd

9 be very surprised if this was related to this exam --

10 MR. KOTZ: Okay.

11 THE WITNESS: -- because there were a lot of issues

12 with OATS.

13 MR. KOTZ: Okay.

14 BY MR. KOTZ:

15 Q But in connection with the Madoff exam, you don't

16 rememhe~ whether they ever got the OATS data from NASD as

17 reference?

18 A I don't know if I ever knew one way or another.

19 (Z Okay. And do you think that -- what would that

20 OATS data have shown in this case, do you think?

21 A You know, OATS -- OATS, as I said, what OATS would

22 show, it would show, you know, the firm that received the

order initially and it would have shown size, stock, price,

24 side, and then it would have, ycu know, had a time of receipt

25 by the receiving broker-dealer and if that broker-dealer then

26 routed it on to a wholesaler or sent it to an exchange for


Page 81

1 execution, it would have indicated that and if it did go to

2 another broker-dealer, that broker-dealer would have picked

3 it up and executed the order or sent it some place, it would

4 have sent in an OATS report, and there was supposed to be a

5 unique identifier that would then enable the NASD to tie all

6 these OATS reports together to see the lifetime of the -- of

7 the order.

8 Why we would have asked for it or why in the

9 context of a front-running review, again I can only suspect

10 that because it was available. NASD was the only entity that

11 really had something like OATS and so it was just information

12 and you would get it.

13 But I will tell you OATS has -- I think maybe the

14 kinks have finally been worked out, but for years OATS was a

15 huge problem. There were mismatched orders within OATS all

16 the time because of the unique codes. The way that you coded

17 to it was a complete mess and so, you know, FINRA, NASD at

18 the time, had established a regulatory program that it was

19 trying to use to use OATS for surveillance purposes.

20 You may get offended because I think you worked

21 there during this time period, but my recollection is that

they had developed about eight surveillances. The idea was

23 to use OATS, you know, as a regulatory tool and about six of

24 those surveillances were designed to ensure the integrity of

25 OATS because there were so many problems with mismatched

26 trades or orders


Page 82

1 So, I'm sorry, that's my spiel.

2 (Z That's okay.

3 BY MS. STEIBER:

4 Q So do you think that if they had gotten the OATS or

5 Act data, that they wouldn't have been able to tell that

6 Madoff potentially wasn't trading at all?

7 A Well, the OATS data would have been relevant only

8 as it related to the retail customer orders that they were

9 trading and I think the Act data would have been the most

10 important data.

11 No, you know what? I'm sorry. There is a reason

12 why you'd want OATS. It's because it would show the time

13 that the order arrived at Madoff, and I'm not convinced Act

14 -- I don't believe the Act data would have shown that. So

15 that is why we would have wanted to see the OATS data.

16 But thiswas -- again, this would have shown the

17 time that a retail order arrived at Madoff and then the, you

18 know, the options trades or whatever were happening through

19 the black box would not have been reported into OATS or Act.

20 That would have been --

21 Q So it would have just been the equity trades?

A Yes.

23 MR. KOTZ: Okay.

24 MR. WOLK: We've been going for about two hours.

25 Can we take a break?

26 MR. KOTZ: Sure, sure, sure.


Page 83

1 MR. WOLK: Let's do that.

2 MR. KOTZ: Off the record.


4 MR. KOTZ: Continuing, 11:30.

5 MR. WOLK: Short break. I appreciate that. Making

6 progress, though.

7 MR. KOTZ: The most recent notes, do we still have

8 that in front of him?

9 MR. WOLK: No. We returned that.

10 MR. KOTZ: Okay. The most recent exhibit which was

11 Exhibit 26, which was the notes. I'm sorry. Go back to

12 that.

13 BY MR. KOTZ:

14 Q If you could look on the --

15 MR. WOLK: This is 25.

16 MR. KOTZ: I'm sorry. I'm sorry. Oka`y. Yeah.

17 I'm sorry. Exhibit 25. I'm sorry. It's a series of notes.

18 BY MR. KOTZ:

19 Q If you could look at the last page of those notes,

20 it says on it, "Questions, Continued Statements, Execution

21 Date, Settlement Date." There's a series of -- of points

there with question marks.

23 "Do you have any other statements or account does,

24 signed options, wash trades?"

25 Do -- do you recal: that there were kind of ongoing

26 questions that remained regarding this examination, Madoff


Page 84

1 examination?

2 A I recall that it was open for awhile.

3 (Z Okay.

4 A But I wasn't involved in the day to day of what

5 those questions or open issues might have been.

6 Q Okay. So you were generally aware that there were

I questions throughout the process?

8 A Yeah. I mean, well, I knew -- I knew that it was

9 open and it was still being worked. That's what I knew.

10 Q Okay, okay.

11 MR. KOTZ: All right. I'11 show you the next

12 document, which is an e-mail, dated February 4, 2004. We'll

13 mark this Exhibit 27. This is an e-mail from Genevievette

14 Walker to Mark Donohue and jacqueline Wood.


16 identification.)



19 BY MR. KOTZ:

20 Q Do you remember this issue that arose about Madoff

21 disclaiming himself to be an investment advisor and whether

22 he should register as an investment advisor?

23 A Not specifically, but, I mean, I recall him telling

24 me when I called him that he was not an investment advisor.

25 O Do you recall part or the exam that the team was

26 working on this issue of whether heshouid register or not


Page 85

1 doing research memoranda about this issue?

2 H I don't recall specifically, no.

3 Q Okay. But this would have been beyond just a

4 front-running exam, wouldn't it have been?

5 A No question, yeah.

6 Q So in some way the exam was expanded beyond what

7 you and John originally conceived?

8 A It appears to be thecase, yeah.

9 Q Okay, okay. There was a second document request.

10 I don't know how much you were involved in this, but we're

11 going to give you an exhibit that has all the supplemental

12 Madoff document requests together and that we're going to

13 mark as Exhibit 28.


15 identification.)

16 BY MR. KOTZ:

17 Q If you can just take a quick look through these. I

18 don't think I have that many questions about them

19 specifically, but I just wanted to get a sense of, you know,

20 your name obviously still appears onall of them, but I

21 wanted to get a sense of how involved you were in these.

22 (The witness examined the documents.)

23 THE WITNESS: Okay. This is audit trail, drafts.

24 BY MR. KOTZ:

25 Q It's a series of drafts

26 A Okay. This would appear to be the document request


Page 86

1 where we would have gotten the audit trail directly from the

2 firm.

3 Q Now, instead of getting it from the NASD?

4 A That's correct.

5 Q And how involved were you in this?

6 A My name's on it, so I probably -- I don't know

7 whether I would have drafted the letter. I would have

8 obviously seen it and potentially commented on it and signed

9 it.

10 Q Would you have made -- would you have been the one

11 to make the decision to go to Madoff Securities to get the

12 audit trail information as opposed to the NASD?

13 A That I'm not sure of, how that decision was made.

14 It was more common, by the way, to get the informat~on frcm

15 the firm and not from the NASD. So I'm not sure why the

16 initial thought was to get it from the NASD, to be honest.

17 Q Okay. A couple documents --

18 MR. KOTZ: You want to mark this 29?


20 identification.)

21 BY MR. KOTZ:

Q So I'm going to show you a dra~t, marked as a

23 separate document, as Exhibit 29. It's dated February 2004,

24 and there's some handwritten notes on it. I was wondering if

25 you know whose notes these are.

26 (The witness Pxamined the document.)


Page 87

1 THE WITNESS: Again, I don't believe this is my

2 handwriting, but I don't know whose notes these are.

3 BY MR. KOTZ:

4 Q Okay. Do you see on this the references you made

5 previously to the audit trail are X'd out and it says, "Save

6 for next letter?" Do you see that?

7 A I do.

8 Q Okay. And if you go back to the previous document

9 and you look at the final draft, dated Februaryl8th, 2004,

10 that would be Exhibit 28, you see that the audit trail was

11 not included, is that right?

12 A Mm-hmm.

13 Q Is that -- I'm sorry. Is that yes?

14 A Yes.

15 Q Okay. So does it appear here that in fact the

16 audit trail was never requested from Madoff eith~r, NASD or

17 Madoff?

18 A Well, it certainly appears that it was not

19 requested in this February 18th, 2004, letter, but I got -- I

20 gotta tell you, there's no -- it doesn't make sense that we

21 wouldn't have -- if we were looking at front-running, it

doesn't make sense that we wouldn't have gotten the audit

23 trail from somewhere.

24 So I don't -- I can't account for this, but it

25 would have been, frankly, asinine for- us to not get the audit

26 trail. I don't understand that.


Page 88

1 Q Okay. Do you know if there was a next letter, to

2 save for next letter?

3 A I don't know.

4 Q Okay. Okay.

5 MR. KOTZ: So now we have the response from Bernard

6 Mado~~, dated March Ist, 2004, whichwe're going to mark as

7 Exhibit 30. That's again a letter from Bernard L. Madoff to

8 you.


10 identification.)



13 BY MR. KOTZ:

14 Q Okay. Do you recall receiving this letter?

15 A I do not, no

16 O Do you see in the letter, Bernard Madoff says, "We

17 do not charge expenses or fees to clients nor do we prepare

18 any reports of client profit and loss or any other related

19 information?" Again, this is that same issue, but you don't

20 think this would have been a concern at the time?

21 A Well, in the context of, you know, what I

22 understood about the firm at the time, it was just executing

23 on behalf of hedge funds and not acting as an advisor, I

24 don't think it would have raised a red flag.

25 Q Okay. What about the last paragraph where it says,

26 "Madoff Securities does not communicate or correspond with


Page 89

1 the investors or owners of its clients?" Would there have

2 been any concern about that, books or records requirements or

3 anything?

4 A No. Excuse me. Again, no, because, I mean, its

5 clients in this context would have been these hedge funds and

6 I -- you know, given what I understood about what the firm

7 was doing, I don't think I would have expected direct

8 communication between the executing broker and the clients of

9 the hedge funds.

10 () Okay. Do you recall in these document requests

11 that were sent out, Madoff was sending responses, do you

12 recall that generally you felt like answers were being given,

13 things were being clarified?

14 A I don't recall actually spending -- certainly by

15 this point in time, I don't recall spending a lot of time

16 reviewing the responses at all.

17 Q Okay.

18 A My recollection is that in response to the initial

19 document request, I did a quick and by quick, I mean maybe 30

20 minute look at some of the trading records related to the

21 hedge fund activity, and then, you know, it went down to Mark

Donohue's office and I didn't look directly at any of the

23 information ever again.

24 Q Okay. What was the time period you think where you

25 were becoming less involved?

26 A I think it was some time in this time period,


Page 90

1 February-March, late January-February-March. I'm not sure

2 exactly.

3 Q Okay. Going back to the previous document, Exhibit

4 29, do you see it says, "SEC Speaker?" Do you know what that

5 refers to?

6 A I do not.

7 Q Is it possible that Bernie Madoff was an SEC

8 speaker?

9 A I don't even know what that would mean.

10 (Z Okay. At this time, later on in the early 2004

11 period, were you more aware of Bernie Madoff's reputation?

12 A Maybe a little bit but not -- not significantly.

13 Q Okay. So do you think that, I mean, the team was

14 aware of it at all in terms of, you know, that -- that, you

15 know, they were examining someone who was, you know, very

16 well-thought-of and kind of a very well-known fi.gure?

17 A I -- I think the team -- I think -- I doubt it. I

18 mean, I think the team would have understood that Madoff was

19 a powerhouse as a market-maker and had played some important

20 role in the development of what's referred to as the "third

21 market."

22 I think the team would have kind of understood that

23 historically about the firm, but to be honest with you, I

24 didn't completely understand the reputation of Bernard Madoff

25 myself or the role he played, for example, as whatever,

26 non-executive chairman of NASDAQ, until after all this


Page 91

1 happened.

2 Q Okay. So you think maybe that the other folks on

3 the team might have not also --

4 A No. I -- I definitely think they would have just

S understood that this was a big market-making firm.

6 (Z Right. Okay, okay, okay.

7 MR. KOTZ: I show you another document and this is

8 dated March 10th, 2004. Mark it as Exhibit 31. From

9 Genevievette Walker to Mark Donohue.


11 identification.)



14 BY MR. KOTZ:

15 g Do you recall at this point kind of lingering

16 questions still from Genevievette Walker after the document

17 production?

18 A You know, it's starting to ring a bell a little bit

19 but not really. I mean, these questions here, no. That

20 almost seems to track to some or the notes that you showed me

21 earlier, but I -- I don't recall specific questions.

Q Okay. All right.

23 MR. KOTZ: Why don't we show you the next document?

24 We'll mark this Exhibit 32. That is Official Notes,

25 3/18/2004. Conference Call with Bernard Madoff. It's a

26 two-page document.


Page 92


2 identification.)

3 BY MR. KOTZ:

4 Q I assume these are not your notes?

5 A They are not.

6 Q Okay. Were you aware of this particular conference

7 call in March 2004?

8 A Not to my recollection, no.

9 Q Were you aware generally that, you know, there were

10 these ongoing calls with Bernard Madoff talking about issues

11 as the examination was going forward?

12 A I may have been during the time, but I don't

13 remember it now, but it's possible.

14 iZ Okay.

15 MR. KOTZ: All right. Why don't we go to the next

16 one? We'll mark this as Exhibit 33, and this is; an e-mail

17 from Genevievette Walker to Mark Donohue, cc to Jacqueline

18 Wood, Tuesday, March 23rd, 200'4, 7:35 p.m.


20 identification.)



23 BY MR. KOTZ:

24 Q Do you remember the concerns about the trade dates

25 varying, inconsistencies in Madoff's trading data?

26 A No.


Page 93

1 Q Okay. But at this point you might not have been

2 aware of specific concerns as they were ongoing?

3 A I don't believe I was, no.

4 Q Okay.

5 MR.~ KOTZ: Okay. Why don't I show you another

6 document? We can quickly look through them. We'll mark this

7 Exhibit 34. This is an e-mail from Mark Donohue to

8 Genevievette Walker, 3/4/2004, 12:14 p.m., and I guess

9 whatever recollection you have about these particular issues

10 that Genevievette was raising at this point.


12 identification.)


14 THE WITNESS: I don't know anything about this.

15 BY MR. KOTZ:

16 Q Okay. You don't know anything about Genevievette

17 suggesting they do their own independent analysis?

18 A No.

19 g Okay.

20 MR. KOTZ: I show you another document just in

21 case. Mark this as Exhibit 35. This is an e-mail from

Genevievette to Mark Donohue, cc Jacqueline Wood, 3/4/2004,

23 5:02 p.m., and again anything about this issue about the

24 collar position,~the volatility factor of the trading seemed

25 to have been raised at that time.

26 ISEC Exhibit No. 35 was marked for


Page 94

1 identification.)


3 THE WITNESS: No. There's one thing I will note,

4 though. There's reference to looking at the equity trades

5 which leads me to believe that at some point equity trading

6 datawas obtained, but I don't -- you know, I don't recall

7 anything about concerns about how the collar works.

8 BY MS. STEIBER:

9 Q Is that different than audit trail data? Would you

10 think just having equity trade information --

11 A It'd be the same, yeah.

12 Q Would construe it the same

13 A Yeah.

14 BY MR. KOTZ:

15 Q Okay. Anything else from that Document 35 that you

16 recollect?

17 A I mean, I don't actually recollect anything about

18 the document. I just am noting, though, that there's a

19 reference to equity trading.

20 Q Okay, okay.

21 MR. KOTZ: Next document is marked as Exhibit 36.

22 This is a letter from Bernie Madoff to Mark Donohue, March

23 23rd, 2004.


25 identification.)

26 THE WITNESS: Floppy disks.


Page 95



3 BY MR. KOTZ:

4 (2 Do you remember Bernie Madoff providing additional

5 information?

6 A I do not.

7 Q Okay. You laughed a little bit when you saw floppy

8 disks.

9 A ~t just seems arcane.

10 Q Okay. Was it arcane at the time, though, in 2004?

11 A Probably, yeah. I mean, you know, it could have

12 been used to reference those non-floppy, you know, disks that

13 people used, but it sounds arcane to me.

14 Q Okay. And you don't remember anything about these

15 supplemental information that Bernie Madoff provided?

16 A No, I don't think I was involved at th~is point.

17 Q Okay, okay.

18 MR. KOTZ: Okay. Next document, marked as Exhibit

19 37, 3/4/2004, to Mark Donohue. This seems to be an e-mail

20 from Mark to himself.


22 identification.)


24 BY MR. KOTZ:

25 Q If you look at -- he has issues about the sway and

26 then if you look on the second page, it says, "Although


Page 96

1 Madoffi executes the strategy, does thai mean he also executes

2 any assignments that may occur? Would he consider these type

3 of transactions part of the strategy? I think we can assume

4 in some instances that an option trade can be assigned after

5 the position is transferred to the custodial bank account,

6 right? The trades in the fund accounts seem to reflect that

7 all executions are transferred to the custodial bank on

8 settlement date. What broker would handle that assignment?"

9 A Okay.

10 Q Anything that you recall about Mark Donohue having

11 these particular concerns in this time period, March of 2004?

12 A No.

13 MK. KOTZ: Okay. The next document we're going to

iii mark as Exhibi; 38- '~his is an e-maii, dated 4/6/2004, from

75 Genevievette Walker to Alex Sadowski.


17 identification.)

18 BY MR. KOTZ:

19 Q Zf you could take a look at this, reference from

20 Genevievette to Alex about what projects should be a

21 priority, and you see Alex says, "Get the mutual fund work

22 completed first."

23 A Mm-hmm.

24 Q Do you know what the mutual fund work was?

2~ A Probably market timing, just based on the date.

26 Q Rnd was the market timing work conaidered a


Page 97

1 priority at that time period?

2 A Very high priority.

3 Q How come?

4 A I think that the SEC had gotten a lot of bad

5 publicity around market timing and it turned out that it was

6 prevalent in the industry and I think that we wanted to get

7 on top of it.

8 Q And do you remember Elliot Spitzer had brought some

9 cases?

10 A Right. That sounds right, but, you know,

11 Q Okay. So it was a very significant priority at

12 that time?

13 A No doubt, yes.

14 MR. KOTZ: All right. Let me show you the next

15 document we're going to mark as Exhibit 39. That's an e-mail

16 from Mark Donohue to Genevievette Walker, cc Jacqueline Wood,

17 4/7/2004.


19 identification.)

20 BY MR. KOTZ:

21 Q Do you see in this e-mail Genevievette Walker says,

"Hi, Mark. I know you have Mike working on the Madoff

23 project with us now. I'm not sure you what wani Jackie and I

24 to do concerning Madoff, but I'm focusing on the mutual fund

25 project as requested. Should we just focus on mutual funds

26 and return to ~adoff when we're done? Gen." The answer is,


Page 98

1 "Concentrate on mutual funds for the time being."

2 A Yeah.

3 Q Do you recall at a certain point in time that the

4 decision was made to have the team working on this Madoff

5 exam focused on market timing cases?

6 A You know, was the decision made? It was

7 know, this type of thing was not uncommon where there would

8 all of a sudden be, you know, high priority and other things

9 had to get set aside. So I doubt that there was anyone, you

10 know, who was specifically saying, all right, everybody drop

11 everything you're doing and just work on market timing, but I

12 think when there was a priority, like market timing, it was

13 fairly obvious and clear to everybody that that-was what you

14 had to focus your time on.

15 Q Okay. So you do, though, remember that this Madoff

16 examination was set aside because of other priorities?

17 A I don't recall that. I'm just saying I'm not

18 surprised that that would happen.

19 Q Okay. What do you recall about the Madoff exam?

20 You say you don't recall that it was set aside.

21 A I don't -- I don't -- I don't recall exactly how it

was ever resolved, except for that at some point the

23 documents were shipped up to NERO. That's -- that's as much

24 as I recall.

25 Q And do you recall if it ever was resolved?

26 A I -- I don't.


Page 99

1 Q Okay.

2 BY MS. STEIBER:

3 Q But Donohue was reporting to you at that time?

4 A I don't believe so. I think he was reporting to

5 John. Yeah.

6 (Z So you were both reporting to John?

7 A Yes.

8 BY MR. KOTZ:

9 Q Okay. So you wouldn't have -- you don't remember

10 being involved at all in discussions with Genevievette at

11 that time about what our priorities should be?

12 A No. There was a point in time, again I don't know

13 exactly when it was, when Mark was promoted and several

14 projects, this being one of them, was -- and I think it is

15 whatever projects Mark was working on with me, were directly

16 assigned to him.

17 RY MS. STEIBER:

18 Q But prior to that, was he reporting to you? Is it

19 possible right now he's -- at this point he's a branch chief

20 reporting to you on this?

21 A It's possible, but I -- I don't -- like I said, I

22 don't remember the time period, but yes, prior to -- prior to

23 him being promoted, he was a branch chief and he would have

24 reported to me,

25 MR. KOTZ: Okay.

26 THE WITNESS: -- I believe.


Page 100

1 MR. KOTZ: Let me show you the next document. This

2 is a document we're going to mark as Exhibit 40. This is an

3 e-mail from Mavis Kelly, Friday, April 16th, 2004, to

4 Brian Snively or Snively, and

5


7 identification.)


9 THE WITNESS: I do kind of remember this.

10 BY MR. KOTZ:

11 Q Okay.

12 A I was in New York. I think this was in New York.

13 Let me see what it says. Yeah. It was in New York. He was

14 testifying on a public hearing on NMS

15 Q You see Mavis Kelly is asking, Mavis Kelly being

16 the one who got the I complaint' 17 A Mm-hmm.

18 Q Okay. Does this refresh your recollection at all

19 of having communications with Mavis Kelly? She states that

20 she provided copies of this - complaint to -- 21 A To me?

22 Q To you and the team --

23 A But to me specifically?

24 MS. STEIBER: To the team.

25 MR. KOTZ: Yeah. I don't know if she mentioned

26 your name specifically.


Personal Privacy Personal Privacy

Personal Privacy

Personal Privacy

Page 101

1 THE WITNESS: I mean, look, it's possible that she

2 did. I -- I honestly just don't recall.

3 MR. KOTZ: Okay, okay.

4 MS. STEIBER: She said she circulated it in a paper

5 because of a confidentiality concern and that's what's

6 referenced by the file.

7 THE WITNESS: Yeah. I -- I mean, it's possible

8 that I got it. I just don't recall.

9 BY MR. KOTZ:

10 Q Okay. Now, I guess one question I have from this

11 is you, in responding back to her, say, "The examination is

12 ongoing. We're in the process of reviewing trading on the

13 NMS Desk and comparing it against the trades in the hedge

14 funds," but it seems, though, about nine days earlier, the

15 project was kind of put on hold in favor of the market timing

16 cases.

17 Do you think you might not have been aware that it

18 was put on hold?

19 A Well, I mean, it's entirely possible that I -- I --

20 I wouldn't have been known. However, it would have still

21 been considered ongoing.

22 Q So you might still have said it's ongoing, even

23 though it had been kind of temporarily put on hold?

24 A Right.

25 Q Okay. Now, you say in here, "Preliminarily, we are

26 fairly suspicious that something is going on simply because


Page 102

1 we've always known the industry is in MM," I assume that's

2 market-maker. "It is clear he makes the vast majority of his

3 money from commissions earned on executing trades on behalf

4 of the hedge funds."

5 Do you recall at that point you were fairly

6 s~spicious? That's kind of where you were with the exam?

7 A I -- I don't recall, but it would appear that I

8 was.

9 (Z Okay.

10 A Yeah. It would definitely appear that I was. I

11 know there -- there were points in time I thought, based on

12 the timing of the letter being sent out, that it would have

13 been earlier, January-February, -- well, actually, no. Yeah.

14 I mean, from day one, before we event sent the letter, I

15 think I was fairly sus~icious that something might be going

16 on, but again front-running.

17 Q Right. And you say, "We don't know for a few more

18 weeks, however. I'11 keep you posted."

19 A Right.

20 Q But it doesn't seem like there was anything going

21 on with the exam at that point because the team was now

working on market timing. There's just a bit of a disconnect

23 here in that I don't know how you ~ould know in a few more

24 weeks because nobody was doing anything at that point

25 A Well, two things. First of all, I'm not sure it's

26 right to say that the Madoff thing was completely on hold. I


Page 103

1 mean, it was just -- it was prioritized and your first

2 priority is market timing. I'm not sure that I knew at the

3 time that --

4 Q Okay.

5 A -- communication was made.

6 Q Okay. I mean, in reviewing records, you know,

7 we're reviewing e-mails, we -- there's a lot, as you can see,

8 of e-mail communication back and forth about the Madoff

9 examination up until that point.

10 A Right. Mm-hmm.

11 Q There's nothing after that, and I'11 show you an

12 e-mail a year later, almost a year later about it, but we

13 don't have any record of anything happening on the case

14 subsequent to this e-mail and really, you know, your e-mail.

15 A Mm-hmm.

16 O So could it have been that either you were kind of

17 out of the loop a little bit because it was Mark Donohue's

18 matter, Madoff went back to you because you were involved

19 originally, and you may not have been aware of how -- how

20 much work they were doing at that point?

21 A Well, I think -- I think you're right, that I was

22 somewhat out of the loop at this point because Mark was

23 working on it, that I may not have known the exact status and

24 probably didn't know the exact status of where things were

25 going on the examination, and I would add that I very iikely

26 gave Madoff -- Mavis a response that would please her a


Page 104

1 little bit, to let her know that, you know, it was still

2 being looked at and --

3 Q All right. So you may have --

4 A -- might have overstated my case a little bit.

5 Okay. I gotcha. Okay. So you don't know whether

6 something happened in a few more weeks or whether you ever

7 got back to her?

8 A I don't.

9 And you don't know if you ever provided an update

10 to her subsequent to that?

11 A I don't know.

12 Q Okay.

13 MR. KOTZ: So then the next document that we have

14 is a document, dated 3/16/2005. So this was April 16th,

15 2004. This is 3/16/2005. We're going to mark this as

16 Exhibit 41. This is an e-mail from Mark Donohue to Eric

17 Swanson.


19 identification.)

20 THE WITNESS: This is a year later?

21 MR. KOTZ: Yeah. Well, 11 months.

22 BY MR. KOTZ:

23 Q And in this you say, "What is the status o~ the

24 Madoff hedge fund thingie?" The response is "deadie." I

25 assume it means dead in some reference to "thingie" and

26 "deadie. We never found any real problems. Does it need to


Page 105

1 be revised?"

2 A Okay.

3 Q Do you have any idea what -- what needed to be

4 revised? What that would refer to?

5 A I wonder if he's not saying revisited and just

6 mistyped it.

7 Q Mm-hmm.

8 A But I don't know.

9 Q Okay. And so what we -- we're trying to understand

10 here is in April 16th, 2004, you're saying we're fairly

11 suspicious, doesn't seem there was much, if any, work that

12 occurred between April 16th, 2004, and March 16th, 2005, and

13 then the response from Mark Donohue at that point is "we

14 never found any real problems."

15 A Mm-hmm.

16 Q Any idea?

17 A All I -- all I can tell you is that at this point,

18 it was clearly -- and the last thing I want to do is cast any

19 aspersions towards Mark Donohue, but it was reassigned to him

20 and it's my belief that he and I'm not sure whomever else

21 would have been working on it with him but was -- there was

work that continued on it and that, you know, they didn't

23 find any -- any front-running problems, as it were.

24 (Z Why do you believe that there was continuous work

25 and there was actually some determination of a finding of no

26 front-running?


Page 106

1 A I guess in part because I find it hard to believe

2 that Mark would have concluded that it was dead and say that

3 we never found any real problems without having actually done

4 some work to see if there were real problems.

5 Q Okay. But other than that, do you have any other

6 independent knowledge that there was any decision made, any

7 further work done?

8 A No. No, I do not.

9 Q Okay. I mean, isn't it possible that there were

10 other priorities in the office, those priorities took

11 precedence, the matter was held in abeyance, nothing was done

12 on it, a year later they get a question, maybe they hadn't

13 found anything up to that point, and the response would be we

14 never found any real problems?

15 A That's possible, but I would have thought that if

16 that was the case, the de~-initive statement would have been

17 it's still open and to this date we haven't found any

18 problems, not that it was dead, but --

19 Q Okay. But you don't know that from your

20 independent knowledge?

21 A I do not.

22 Q Okay. All right. Okay. Do you -- do you have any

23 idea why this Madoff hedge fund was triggered in your mind

24 when you sent this e-mail?

25 MR. KOTZ: Let me show you a document before you

26 answer. I'm not trying to trip you up, but I just want to


Page 107

1 show you the document. This document we're going to mark as

2 Exhibit 42. This is an e-mail between you and Shana Madoff,

3 3/16/2005.


5 identification.)

6 THE WITNESS: I think I was probably just

7 concerned. My guess is, and I don't know because I don't

8 have all the timelines, but there may have been some period

9 of time where we didn't do one of these breakfasts and then I

10 was doing another one and I was probably just concerned.

11 I will tell you definitively right now I never once

12 had a conversation with Shana Madoff about this review that

13 was going on.

14 MR. KOTZ: Okay. I mean that's just what I to

15 get --

16 THE WITNESS: I wan~ to --

17 MR. KOTZ: -- ~or the record.

18 THE WITNESS: -- get that clear.

19 BY MR. KOTZ:

20 Q So you think it's possible, though, that because

21 you were meeting with her, it kind of struck in your head

22 whatever happened with that Madoff thing?

23 A Yeah. And given the time on here.

24 Q Yes, one is, you know, several hours later.

25 A This would have been -- we would have been gone and

36 have left wherever we were, still at the Hyatt. I don't know


Page 108

1 where this would have been.

2 SIAB Conference in St. Louis?

3 A St. Louis, yeah, probably. But we would have been

4 gone and -- and not with Shana at this time.

5 Q Okay. So did Shana ever ask you about the status

6 of an examination?

7 A No. In fact, I don't believe she ever knew about

8 this examination.

9 BY MS. STEIBER:

10 Q I'm sorry. Did you say we would have been gone and

11 not with Shana at this time at that conference?

12 A No. At this -- well, if this -- I should probably

13 be a little less definitive, but if this is what I think it

14 is, this would have been one of those compliance breakfast

15 meetings. They usually ran from 8:30 to 10:30 and then we'd

16 go our separate ways and fly back to D.C

17 BY MR. KOTZ:

18 Q Oh. So you think that you might have actually seen

19 Shana around the 8:42 a.m. time period but then by the time

20 this second e-mail occurred on 2:34, you were back in

21 Washington?

22 A Well, if in fact this is tied to a conference, one

23 of the SLAB break-tast thiriys we did in St. Louis, then yeah,

24 that would be the typical pattern.

25 Q Okay. Although you sent it frorn your Blackberry,

26 so you might have been on the road when you sent all these


Page 109

1 a-mails?

2 A Well, no, I would have been on the road. What I'm

3 saying is I would have been in St. Louis. This would have

4 been a communication at Starbucks. Yeah, okay. So this

5 would have just been a communication. I was probably with,

6 you know, the other speakers, et. cetera, and

7 letting her know -- she's letting me know, I guess, that

8 she's at the Starbucks in the Mall. There was a mall

9 attached to that hotel, and I don't know why I writing back

10 "still at the Hyatt waiting," but in any event, we would have

11 been done the breakfast and by this point in the day, in this

12 second e-mail, we would not have been with Shana Madoff.

13 Q Okay.

14 MR. WOLK: Exhibit 41?

15 THE WITNESS: Yeah. In Exhibit 41.

16 BY MR. KOTZ:

17 Q Okay. But it's possible that because you had just

18 been with Shana Madoff at this conference, that triggered in

19 your mind whatever happened with the Madoff hedge fund?

20 A It's likely.

21 Q Okay. But again, Shana never asked you about the

22 status of the exam?

23 A Shana never once asked me about the status or an

24 exam.

25 (Z And you never talked to her about the status of the

26 exam?


Personal Privacy

Page 110

1 A Never talked to her about the status of the exam,

2 and I will add that I don't believe she even knewabout this

3 particular examination.

4 Q Okay. So just to be clear, so we have it for the

5 record, you weren't -- you didn't report back to Shana what

6 Mark Donohue said about what they found in the exam?

7 A I want to be 100 percent clear on that point.

8 Q Okay.

9 A I did not report back to Shana --

10 Q Okay.

11 A -- what Mark Donohue told me.

12 Q Okay, okay. Good. That's what I wanted to

13 clarify.

14 Okay. Okay. Yes, this is a document we previously

15 marked as Exhibit 12, but I wanted to bring it to your

16 attention again. This is a document, dated 5/26~/2005, from

17 you to John Nee, cc McCarthy and Donohue.

18 A Mm-hmm.

19 Q As you see in this document, John Nee is saying to

20 you, "John" -- I'm sorry. He's saying to John McCarthy, it's

21 then eventually forwarded to you by John McCarthy, but he's

saying to John McCarthy, "We're currently conducting an exam

23 on Madoff," and some specifics about the exam and McCarthy

24 forwards it to you and you say to john, "Johii, we should

25 discuss. OC has an open exam with Madoff on this issue. I'm

26 on the road today but available tomorrow a.m."


Page 111

1 A Right.

2 (Z Okay. And so what do you recall about this in

3 terms of John Nee coming forward and saying that the New York 4 office was doing an exam?

5 A Well, I don't know it it was prompted by this

6 particular e-mail or if John Nee was the person that I spoke

7 to, but I do know thst at some point around this time period 8 1 had a conversation with NERO, it could have been John Nee,

9 at which point, you know, I told him about the review that we

10 had -- that we had done and that was open, and he told me

11 that '-heY were doing a review that touch-d on the sanne 12 issues.

13 I -- again, I don't remember if it was John Nec

14 that I spoke to, but it -- it could have beenl and I

15 remember - I remenber having a discussion about whether he

16 was a hedye -tund or wasn't s hedye fund and, you, know, what

17 Bernie had told me way back when I had firt spoken with him

18 about how he was - had this black ~ox and was an executing 19 broker for these other hedge funds.

20 But I recall at some point, and whether it was this

21 conversation or a snbsequent one, but J recall, you know, 22 teliing him we'll send him all of our riles, the ones that

23 they haven't.

24 Q Okay. And if you sec at the bottom or this page, 25 John Net's e-mail to ~cCarthy, he says, "when he ~ina~ly 26 admitted to cxccctjng trades Tor- billions of dollar-s of


Page 112

1 customers' hedge fund money using specific proprietary

2 trading algorithm, he said we should know about this, as he

3 told Lori Richards and John McCarthy about this 1.5 years

4 ago. We are hoping that if what he is saying has any truth

5 at all to it, you might have some info related to his hedge

6 fund-related activities that you could send us."

7 It seems again to go back to this phone call

8 between Lori, John McCarthy and Bernie Mador~ --

9 A Mm-hmm.

10 Q -- and that that phone call provided some

11 information. Does that refresh any of your recollections?

12 A I'm just -- I'm not aware of that particular phone

13 call.

14 Q Okay. Okay. So let's show --

15 BY MS. STEIRER:

16 Q Should the New York team have been aware that there

17 was an examination, an open examination, as you've described

18 it, in the home office on Bernie Madoff?

19 A You know, there was -- there was no actual policy

20 on this, but -- and I think it actually came up in -- in this

21 context, this particular review.

22 Bob Sollazzo was particularly protective of, you

23 know, his territory and -- and was -- was very political

24 about how he would approach this if he found out that we had

25 some into New York and done a trading exam, but he really did

26 want to know in advance when we had done it and we were not


Page 113

1 always good about -- about telling him.

2 Again, there was no rule or policy about it, but I

3 think the information-sharing at that level between offices

4 was not always great. I can elaborate if you want.

5 MR. KOTZ: Sure.

6 THE WITNESS: I sometimes sensed at the SEC that

7 there was a bit of eat what you kill kind of -- a bit of

8 competitiveness between the offices. I'm sure we were that

9 way and I know some of the regional offices were that way.

10 So it felt a little bit like Corporate coming in

11 when Washington would come in and do something without

12 telling the regional offices, and I think, you know, I think

13 on some level rightfully so, they didn't like it.

?4 So should they have known? I assume, but after

15 this process you're going through, there may be a more

16 formalized way that that information f~lows, but there wasn't

17 back then.

18 BY MR. KOTZ:

19 g So given the culture at that time, you're not

20 surprised that the New York office wouldn't know that you

21 guys were doing the same exam as them?

22 A No, I'm not surprised.

g Okay. And in fact, given the competitiveness, that

24 information might not have been shared with the New York

25 office?

26 A It wasn't -- you know, my recollection, it --- we


Page 114

1 wouldn't have just -- we just wouldn't have even thought to

2 call them, which is, I think, bad. I think they probably

3 should have been made aware.

4 BY MS. STEIBER:

5 Q But were there -- I guess it's called the STARS

6 System that would -- you would put the exam in and when they

7 start an exam, they would have searched the STARS System, is

8 that incorrect?

9 A No. You're right. There -- there is a STARS

10 System or there was that was for use by the actual

11 broker-dealer examination groups that wou3d do the routine

12 broker-dealer examinations and the group that I was in that

13 John and I were running was -- you know, we didn't use it.

14 We did more sort of very targeted, focused kind of reviews

15 that were not part of a routine exam program.

16 CZ Would you call those cause exams?

17 A I mean, they were cause or, I guess I might call

18 them, special purpose exams, but the simple fact o~ the

19 matter is, to my knowledge, I never used STARS. We did

20 not -- we did not log things into STARS

21 Q Okay.

MR. KOTZ: Let me show you the next document. Mark

23 tlriaL as Exhibit 43. This is an e-rnail, daled 5/26/2005, 5:41

24 p.m., from you to Mark Donohue. This is a continuation of

25 the previous e-mail where, after you say to John Nee, "We

26 should discuss, OC has an open exam," you then say to Mark


Page 115

1 Donohue, "Can you refresh my recollection about what we did

2 on the exam? I know we talked about the other month, but I

3 forget." Mark Donohue replies, "Nothing's happened since we

4 last spoke. I'11 gather the stuff and figure out what we

5 have. The article's from 2001, so they probably have the

6 same intel we have." And then you say, "I thought we had

7 formed some conclusions about this."


9 identification.)

10 BY MR. KOTZ:

11 I guess the question is do you remember what the

12 conclusions you thought were formed?

13 A I -- I don't remember, but I'm guessing, based on

14 the other information, exhibits that you've shown me, that

15 I'm referring back to the "deadie" e-mail.

16 Q Okay. Even though when you communicated with Mavis

17 Kelly, you were saying you were fairly suspicious?

18 A That e-mail, I guess, comes after.

19 Q That's -- that's April 16th. So I guess that's

20 about a month before. Yeah. If you recall -- oh, I'm sorry.

21 Yeah. That's - that's -- well, that's the last kind of

22 substantive e-mail.

23 A Right.

24 Q And then a year later, you had the communication

25 about the "deadie" issue.

26 A Ri9hC. So I'm guessing in this e-rnail, I'm


Page 116

1 referring back to, you know, Mark having told me that they

2 didn't -- they had completed their review or some stage of

3 the review and hadn't found anything.

4 Q Okay, okay. But that was based on what, you know,

5 Mark had done that you hadn't really been involved in the

6 specifics?

7 A Absolutely.

8 (r! Okay, okay. Now, let me ask you this question.

9 The focus was on front-running. An exam -- if an exam had

10 been done and it was "deadie"in terms of, you know, Donohue

11 determining there was no front-running, would that have

12 answered all the potential issues that were raised?

13 Then I refer you back to the - complaint 14 which you don't recall but seems to think was distributed at

15 that time.

16 A Yeah. Would have answered all the questions that

17 were raised. I mean that's -- I would have to spend some

18 more time thinking about that to be able to answer that

19 question completely, but to the extent that the complaint

20 alleges outsized returns and, you know, we operate under a

21 theory that they may be getting outsized returns from

22 front-running and we failed to find front-running, does it

23 answer all the concerns? I guess not, because you still have

opened the question of whether or not the returns are

25 outsized. I don't know. I think -- I'm not sure. l'rn 7ust

26 not sure.


Page 117

1 Q Okay. So do you remember then discussing or

2 engaging in any discussions with John Nee or the folks in New

3 York about what you were doing, what you guys were doing?

4 A I remember having a couple of calls and, you know,

5 one was -- I think one was just to tell them what we have

6 done or explain it a little bit and what we had or hadn't

7 found, and then the next one, if there was another one, and I

8 think there may have been, was just to tell them we were

9 shipping all the documents up to New York. It's possible

10 even that I had Mark make that call, but I -- I don't recall.

11 Okay. All right. Let me see that June 1

12 BY MS. STEIBER:

13 Q Let me ask you.

14 MR. KOTZ: You had a question?

15 BY MS. STEIBER:

16 Q So you said you had reached some conclusion in that

17 "deadie" e-mail. At that point should there be a closing

18 report that we see in the workpapers?

19 A It would be good practice, but there wasn't. That

20 wasn't always the case

21 Q And do you recall in this case if you ever saw any

22 type of closing report?

23 A No.

24 MR. KOTZ: Okay. Let me show you this document

25 we're going to mark as Exhibit 44. This is an e-mail from

26 Genevievette Walker to Mark Donohue, dated 6/?/3005, 9:42


Page 118

1 a.m.


3 identification.)

4 BY MR. KOTZ:

5 Q And you can see kind of halfway down -- you can go

6 back to the first one where Jacqueline Wood says to

7 Genevievette Walker, "Mark is looking for the Madoff junk. I

8 remember giving them to you so that we would have all the

9 Madoff stuff in one central location. Mark's saying we need

10 to send the stuff to New York ASAP. Then may

11 have some items

12 Then on the second paye, says, "Hello,

13 Gen. Can you remember if the boxes marked Madoff are in the

14 hallway near your office or if not which hallway?" And then

15 Genevievette Walker responds, "It was the top box at my eye

16 level which is why I noticed it, but they were boxes, not

17 file folders. I remember seeing them because I thought to

18 myself, I never heard anything more about that case, but

19 it's going to storage." Do you see that, the first page?

20 A I do, yeah.

21 Q So, I mean given this, isn't it -- doesn't it seem

22 as though there was no work done on this and in fact the

23 boxes, the Madoff boxes were -- they were then kind of

24 searching for them and in fact they might have been sent to

25 storage?

26 A Yeah. It's possible. I don't believe they were


Former OCIE Attorney Advisor

Personal Privacy

Page 119

1 sent to storage, but it is possible that there was not a

2 significant amount of work done on it over that time period.

3 Q Right. I mean that seems to be what Genevievette

4 Walker is saying, that I never heard anything more about that

5 case. We don't show anything substantive done from the time

6 that she was told to concentrate on mutual funds --

7 A Right.

8 Q -- to this time period, is that fair?

9 A It appears that way, yes.

10 Q Okay. So given that, given that there was no

11 closing report, it -- it's at least possible that there was

12 no conclusions really formed in connection with that

13 examination?

14 A Well, I don't take the lack of a closing report as

15 the most definitive on that, but this e-mail is suggestive of

16 that for sure.

17 Q Okay. Okay. Yeah. We haven't been showing you

18 any records of requests to Madoff past February 2004, any

19 further document requests or any communications at all.

20 MR. KOTZ: All right. Let me -- why don't we go to

21 that 2/26 e-mail? Okay. The next exhibit we'll mark as

22 Exhibit 45. This is an e-mail, dated 2/28/2006. Okay. So

23 again, this is many months later. This is an e-mail from

24 McCarthy to you at the bottom there saying, "Any news on that

25 NREO," I assume that refers to New York, "exam of Madorf?"



Page 120

1 identification.)



4 BY MR. KOTZ:

5 Q All right. So as you can see in this document

6 which we've marked as Exhibit 45, there's a couple of

7 e-mails. There's a second e-mail, dated 2/28/2006, 11:53

8 a.m., from you to John Nee, a third e-mail, dated 2/28/2006,

9 2:06 p.m., from you to John McCarthy with some attachments.

10 A Okay.

11 Q Okay. So do you remember any point following up on

12 the New York regional exam that was done of Madoff?

13 A I don't specifically recall it, but I'm looking at

14 this e-mail and it seems as though I did send an e-mail to

15 John Nee in response to McCarthy asking me about it.

16 Q Okay. If you see on the third page of this

17 document, John Nee says to you, "Eric, we closed the

18 examination after looking for and not finding any evidence of

19 front-running. See attached report. However, shortly

20 thereafterour Enforcement people got an anonymous complaint

21 alleging Madoff is either front-running or is the biggest

22 Ponzi scheme ever."

23 Do you remember becoming aware that there was a

24 complairit that Madoff was running the biggest Ponzi scheme

25 ever?

26 A Absolutely don't recall being aware that there was


Page 121

i this complaint.

2 12 And you don't remember anything about a complaint

3 about him running a Ponzi scheme?

4 A No.

5 Q Okay. Now I want to ask you about a couple

6 e-mails, give you an opportunity to kind of see whether

7 there's any connection or explain it. I just want to put

8 that out there.

9 MR. KOTZ: This is an e-mail, dated 3/1/2006.

10 We're going to mark this as Exhibit 46. From you to John

11 McCarthy, and there's a reference below from an e-mail from

12 McCarthy to Swanson. This is the day after John Nee e-mails

13 you to tell you that, "Thereafter our Enforcement peuple got

14 an anonymous complaint alleging Madoff is either

15 front-running or is the biggest Ponzi scheme ever."


17 identification.)


19 BY MR. KOTZ:

20 Q You can see ,ohn McCarthy says two things. One,

21 "Put the squeeze on Shana. Two, Cutler gave Lori a tip we

should follow up on."

23 A Mm-hmm.

24 Okay. You respond, "I will call her tomorrow.

25 What's the tip? Remind her we I-iavl a meeting scheduled with

26 NYSE tomorrow p.m."


Page 122

1 Do you know what that squeeze was?

2 A Yes.

3 Q Okay.

4 A John -- John wanted me to get him on a panel at

5 SIFMA or SIA CNL and I don't know if I had reached out to

6 Shana prior to this or not, but Shana was the avenue to get

7 him on that panel.

8 Q Okay. So just for the record to be clear, there

9 was no connection between you finding out that Madoff was

10 allegedly the bigger Ponzi scheme ever and putting the

11 squeeze on Shana?

12 A No connection whatsoever.

13 Q Okay.

14 A Yeah.

15 Q And do you know what this tip was?

16 A T do -- I don't -- I will remember this because

17 I -- this was after Steve left the SEC and

18 Q Because there was a tip that Cutler gave Lori about

19 Madoff. Was this the tip about Madoff?

20 A Oh, I don't know. I don't --

21 Q I mean, we don't know necessarily that was it, but

22 there was a tip out there. Do you know whether that tip --

A It seems unlikely that this would be it because

24 there's no way in hell John would be wanting me to use Shana

25 to get him on a panel if he 3lso had a tip from Cutler about

26 something at Madoff, jut --


Page 123

1 BY MS. STEIBER:

2 Q But what about the prior day, he said that there's

3 this Enforcement investigation that you find out about

4 involving Madoff Securities and a Ponzi scheme and then the

5 next day he sends this e-mail trying to get on a panel?

6 A Yeah. I don't know. You're right. I mean, but

7 the only thing I can say is that there was, you know, lots of

8 open inquiries and investigations o~ lots of different things

9 and, you know, that e-mail about the Ponzi scheme does not

10 resonate with me right now, having read it, digested it and

11 thought a whole lot about it at that point in time.

12 Q Did you and John discuss the e-mail that you got

13 from John Nee?

14 A I don't believe so. I don't -- I don't recall

15 naving discussion with him about it.

16 Q You weren't concerned that you -- you had an

17 investigation of the same issues that were open in New York?

18 A No. I mean, I think I was glad that we had

19 Lorwarded our riles to NERO. I'hat's all 31 recall thinking

20 about.

21 BY MR. KOTZ:

22 Q And there was no concern that the fact that there

23 was an allegation out there that Madof~ was potentially

24 running the biggest Ponzi scheme ever and here there were

25 communications or efforts to get on a panel arranged bL

26 somebody in his family?


Page 124

1 A You know, John had asked me to help him get on the

2 panel and I was trying to be helpful to him. So I don't

3 recall, you know, the timing of this. I don't recall

4 being -- having a heightened concern about a Ponzi scheme at

5 Bernie Madoff. It just doesn't -- I just don't recall it.

6 Q Okay. Did you ever learn that there was a

7 complaint that Enforcement was looking at related to Bernie

8 Madoff prior to, you know, December 2008?

9 A Well, I think, had I not seen this e-mail right

10 here, I would have said no, but I think there's an e-mail

11 from John Nee that says they got an anonymous tip.

12 Q Right. But, I mean, anything else that you can

13 recall about being aware of that?

14 A No

15 Q Did you ever hear the name Harry Markopolos before

16 December 2008?

17 A No.

18 Q And you never learned the results of the

19 Enforcement investigation?

20 A No, not until after everything was all over.

21 g And you didn't have any concerns really about

Bernie Madoff at that time? You eventually got involved with

23 somebody in his family.

24 A Yeah. No, I -- but no, I didn't, and I can't

25 explain to you exactly why. I mean, I could tell you

26 personally what was going on in my life at this point that,


Page 125

1 you know, probably helps to explain some of it, but -- but

2 no, I -- I really didn't. It wasn't even -- you know, when

3 Shana and I started dating, it wasn't even remotely on my

4 mind that there might be some major fraud going on at the

5 firm.

6 Q And it never kind of harkened back to the fact that

7 you had done this front-running exam or started a

8 front-running exam about --

9 A No.

10 (Z Okay. We're into the next stage which is the

II eelaCioilship. So, I mean, you know, I'm happy to keep going.

12 If you want to take a few minutes, it's probably, you know, I

13 don't know, hal~ an hour, 45 minutes left. So it's up to you

14 what you want to do.

15 A Intentionally not taking a bio break to kind of

16 keep up my level of discomfort. Just kidding. I'm okay

17 continuing.

18 MR. WOLK: We are okay.

19 MR. KOTZ: Okay.

20 BY MR. KOTZ:

21 Okay. Okay. We've already established this, but

22 let me just get this again. When was the ~irst time that you

23 met Shana personally, in person?

24 A I believe it was in October of 2003.

25 Q Okay. But you had had communications with her

26 previously, just not in person?


Page 126

1 A Yeah. I didn't recall that, but I've seen the

2 e-mails here today as exhibits, yes.

3 Q Okay. Were there -- do you recall whether there

4 were kind of ongoing e-mails back and forth in that time

5 period, 2003-2004-2005, between you andShana?

6 A I think they would have been sporadic and probably

7 more frequently involving her assistant than Shana

8 directly,

9 Q Okay.

10 A -- but I don't really recall.

11 Q But some of the e-mails that you had during that

12 time period were friendly with Shana, right?

13 A Sure. But, I mean, you know, e-mails that I had

14 with many people in the industry --

15 Q Right.

16 A -- would have been friendly.

17 Q And is it fair to say that she was a friendly

18 person where she would send e-mails that seemed kind of

19 friendly, even though there wasn't anything actually going

20 on?

21 A Yeah. I think sometimes disproportionate to the

22 nature of the relationship, yeah.

23 Q Okay. You guys were discussing appearing on

24 panels, is t hat right?

25 A Yeah.

26 And she wanted to get you on these panels?


Page 127

1 A Correct.

2 Q So she wanted to keep some kind of relationship

3 with you, you know, work relationship in order to, you know,

4 be friendly and get you to appear on these things?

5 A I mean, I guess that's accurate.

6 Q All right.

7 MR. WOLK: Just to be clear, you weren't the only

8 one on the panels?

9 THE WITNESS: Right. No, and there were other

10 regulators.

11 MR. KOTZ: Okay. So let me just show you an e-mail

12 just to kind of explain a little bit about this. Exhibit 47,

13 we're going to mark an e-mail from you to Shana, 8/15/2004,

14 9:39 a.m.


16 identification.)



19 BY MR. KOTZ:

20 Q Okay. So it seems in this e-mail that you're --

21 you're kind of talking about non-work-related issues,

22 A Mm-hmm.

23 Q -- is that right? Sorry. Could you say yes?

24 A Oh, yes. I'm sorry. Yes.

25 Q But you weren't involved in a relationship, a

26 romantic relationship with her at that time, is that right?


Page 128

1 A No.

2 9 So how would you describe it? If you could just

3 kind of explain, you know, why you were talking about moving

4 and things like that?

5 A Well, I mean, we would go to these conferences and,

6 you know, typically the gaggle of us who were speaking at

7 these things would end up having coffee together or something

8 and so there was definitely a rapport that developed and so

9 that we were friendly and I could have had a very similar

10 e-mail dialogue with

11 It wouldn't have been that unusual, and, you know, this

12 particular e-mail, I don't -- I don't recall what the context

13 was for the telephone call, but nothing's surprising in it to

14 me.

15 B Okay.

16 MR. KOTZ: Let me show you another one, just to

17 give you an opportunity to talk about that, as well. We're

18 going to mark this as Exhibit 48.


20 identification.)

21 THE WITNESS: I should say this is titled Sale of

22 Topical Breakfast. So it's probably in the context of

23 scheduling that breakfast that we needed to talk.

24 MR. KOTZ: Okay. This is from Shana Madoff to you

25 and the date below here is 10/7/2004. Take a look at this

26 one.


Personal Privacy Personal Privacy Personal Privacy

Page 129

1 iThe witness examined the document.)


3 BY MR. KOTZ:

4 Q So she's saying here, "You're so great. No matter

5 what, you and John will always be my A-team players. You are

6 my first round draft picks."

7 A Mm-hmm.

8 Q So, I mean, if you could just talk a little bit

9 about, you know, this kind of communication back and forth?

10 A Sure. I mean, you know, we had -- we had

11 established this program, you know, that SIA was sponsoring

12 and the people that were participating in the program,

13 including myself and John, and I think and

14 and I think we all developed a bit of a

15 rapport and I think the con~ext ~or this was whatever

16 conference it was, I was not going to be able to attend and

17 nor was John, I believe. Yeah. So I -- I had helped her get

18 Mark and to speak at the event.

19 Q So when she's saying, "Eric, you're so great," she

20 must mean in terms of your participation in this -- in these

21 panels?

22 A No. T think she's saying for helping her line up

23 additional speakers.

24 Q Okay.

25 MR. KOTZ: Okay. L,et me show you another document.

26 Mark this as




PersonalPrivacy

Page 130

1 THE WITNESS: This is actually for Dallas, I think,

2 not that it matters.

3 MR. KOTZ: Mark this as Exhibit 49. This is dated

4 8/12/2004, 4:21 p.m., from you to Shana Madoff.


6 identification.)



9 BY MR. KOTZ:

10 Q Do you recall having conversations with Shana about

11 industry-related issues?

12 A Mm-hmm. Sure.

13 Q Okay. And you say, "Question. In acknowledging

14 that Madoff is the exception to the above, do you think this

15 L~ieory is plausible?"

16 A I'm being cute.

17 Q Okay. You're saying that kind of because she's

18 involved, so you don't want to, you know,

19 A Right.

20 Q Okay.

21 A I remember this. I was -- I was an occasional

speaker for an NASD-Wharton session and I was -- this was

23 coming on the heels of a lot of scandals, like one after

24 another, about market analysts and market timing and there

25 were others in there, as well, and I was trying to

26 understand -- the audience was compliance officers and I was


Page 131

1 trying to understand if there was a cultural problem and how

2 to address it and I was looking for some guidance, some help

3 from somebody, you know, that I knew worked in this space and

4 that I had dealt with through the SAI Program.

5 g But there's no connection between this statement

6 and ongoing examinations?

7 A Zero, absolutely none.

8 Q Okay. Okay. And isn't it the case that during

9 this time period, 2003-2004-2005, you actually were involved

10 with other people, is that right, romantically?

11 A Yes

12 Q Okay. And, you know, we don't need to go into too

13 much detail, but I do think it's helpful for that point if

14 you could just kind of sketch out brie~ly, you know, without

15 going into detail the fact that you were involved with other

16 women during that time period.

17 A Okay. Want me to just --

18 g Yeah.

19 A Okay. So I had an on-again/off-again relationship

20 with a woman named She's an in 21 that was -- I'm sorry. What time period do you want me

22 to span? '03 to --

23 Q '06.

24 A '03 to '06. Okay. I'm not sure. There was a

35 period ot time probably in '04 -- yeah. I mean, I -- I dated

26 a couple of different women, but I don't think I was in any


Personal Privacy

Personal Privacy

Page 132

1 serious relationship at that point and then I was in a very

2 serious relationship with a woman named

3 (2 And you were engaged to her, is that right?

4 A I was.

5 Q Okay. Was a wedding date set up?

6 A There was.

7 Q But eventually you didn't get married?

8 A That's correct.

9 MR. WOLK: What time period was that?

10 THE WITNESS: Late '04 through late '05. The

11 wedding was scheduled in October of '05 and we split up in

12 November, maybe.

13 BY MR. KOTZ:

14 Q Okay. So during this time period, prior to the

15 early part of 2006, although you had friendly communications

16 with Shana Madoff, you were involved with other women, didn't

17 have any romantic interest in her?

18 A Right. That's exactly right.

19 Q Okay. So it wasn't a situation even of, you know,

20 you meet somebody, you kind of like them but then you never

21 get back to them. The romantic feelings didn't start until

later?

23 A That's exactly right.

24 Q Okay. And -- and -- and Shana Madoff was married,

25 as well'?

26 A Not during that time period.


Jane Doe

Page 133

1 Q Okay. Prior?

2 A Prior.

3 Q Okay. And just again to clear the record, the --

4 the fact that your engagement broke off had nothing to do

5 with Shana Madoff?

6 A Absolutely not.

7 Q Okay, okay. Now we'll talk about a -- a little bit

8 about when you did start having a romantic relationship with

9 Shana Madoff.

10 A Mm-hmm.

11 Q Okay. And, you know, there's some e-mails.

12 A Hight.

13 Q Okay.

14 MS. STEIBER: What number are we on?

15 MR. KOT2: 50. So this e-mail is 3/4/20()4. Okay,

16 okay. So why don't I show you this email ~irst and have you 17 look at it?


19 identification.)



22 BY MR. KOTZ:

23 Q Could it be something?

24 A Ye ah . So, yeah, I recall this.

25 So this was the Friday night of SEC Speaks. I had arrived to

26 the cocktail reception at Speaks at the Ronald Reagan Trade


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1 Center and pretty quickly after arriving there, I ran into

2 Shana and we started talking and at that particular event,

3 there's obviously a lot of former SEC people, current SEC

4 people, people that I just know from industry. So it's a

5 fairly social event in terms of, you know, shaking hands and

6 small talk with people, and Shana and I continued to talk

7 throughout the evening at that event while -- while I was

8 there.

9 Q So would you say that this was the kind of

10 beginning of the romantic feelings?

11 A Little bit less so, I think, for me, to be honest

12 with you. I -- I -- I had a sense from that night that --

13 and I was having a good time hanging out with her. I found

14 her to be a lot funnier than I had -- than I thought she was

15 and we were ou~ with a big group of people and we went from

16 SEC Speaks to a bar across the street to yet another bar and

17 was there, Alex was there, and I got the distinct sense

18 that she was kind of flirting with me that night.

19 But, you know, I also felt like if I had wanted to

20 take it further that night, I could have, but I didn't.

21 Q Okay. And what was this about "caught an earful

22 about apparently I'm a sycophant?"

23 A Oh, I don't know. I'm not sure. I think was

24 giving me a hard time because T was being maybe a little too

25 nice to Shana or I -- I actually don't know for sure.

26 Q Okay. Was there any concern that -- that because


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1 this was -- she worked for an entity that the SEC was

2 regulating, that there would be concern about developing a

3 relationship with her?

4 A I don't think that was the context for the comment.

5 But no, not a particular concern about that. I mean, those

6 things happen.

7 Q Okay. And again just to make this clear for the

8 record, you know, this is March 4th. 2/28 was when you

9 learned in that e-mail about Madoff Securities being one of

10 the largest Ponzi schemes and 3/1 was when McCarthy said to

11 put the squeeze on her, butthat has nothing to do with the

12 3/4 e-mail here and your developing a relationship?

13 A I swear to you, I mean I know I'm already under

14 oath, b~t I'11 swear it under oath again, there is no way

15 that that put the squeeze ori Shana and the tip comment are

16 connected. The "put the squeeze" on was Lo get John on a

17 panel.

18 Q Okay, okay. I just want to get that on the record.

19 A Yeah.

20 Q Okay. Okay.

21 MR. KOTZ: So these are a couple e-mails we'll put

22 in together as Exhibit 51. Oh, okay. We can do the first

23 one as Exhibit 51, which is 3/4/2006, 11:54 a.m., from Shana

24 Madoff to Eric Swanson, and then 52 is 3/4/2006, 2:45 a.m.,

25 from Eric Swanson to Shana Madoff.

26 (SEC Exhibit Nos. 51 and 52 were marked


Page 136

1 for identification.)


3 THE WITNESS: Okay. So -- yep. Okay. So this is

4 Shana went back to her hotel a~ter being out with us SEC

5 folks and other industry people. She sent me this -- this

6 e-mail, "made it home." I got it. I was obviously already

7 asleep. It got it the next morning, and I sent this e-mail

8 saying, "I had a great time. You're a riot," and telling her

9 that I'm too old for this essentially.

10 Shana writes me back, "Did you get your car back?"

11 She's asking me that because John McCarthy had borrowed my

12 car that night because I had it in the city and rather than

13 take a cab, be borrowed my car and I respond, "No, but I have

14 spoken to John." So by this point in the morning I have

15 spoken to him and, you know, ~ make he comment that "he's

16 shocked to hear that you were the ringleader·of ~last night's

17 debauchery," meaning the let's go to this bar and whatever.

18 MR. KOTZ: Right. Okay.

19 THE WITNESS: And it was a karaoke bar. So she was

20 responds, "You can't knock a girl for wanting to have a

21 little karaoke."

BY MR. KOTZ:

23 Q And then you made plans to see her on Thursday?

24 Look at the second e-mail.

25 A That's this one. No, I don't think so. Maybe we

26 had -- maybe we had -- we must have had a thing. One of the


Page 137

1 compliance dinners.

2 Q Okay. It was another compliance thing in St.

3 Louis --

4 A Yes.

5 Q -- you would have seen her at?

6 A Yes.

7 g Okay. Okay. Now, do you remember later that month

8 there was a conference in Florida?

9 A I assume --

10 Q March 19th to 20th?

11 A ~ assume that's the SIFMA Non-Compliance and Legal

12 Conference in Hollywood, Florida?

13 (Z Yeah.

14 A Yeah. That's the conference where John wanted to

15 get on a panel

16 Q Okay. So John did go to that conference?

17 A Yes.

18 Q Okay. That was the panel you set him up?

19 A Yes.

20 Q Okay.

21 BY MS. STEIBER:

Q Did you attend that conference?

23 A I did not.

24 MR. KOTZ: Okay.

25 BY MS. STEIBER:

26 Did Shana go to that conference?


Page 138

1 A She did.

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13

14 A Okay. So -- and I'm sure you'll go through this,

15 but as we move into April then, there's a clear point in time

16 where Shana and I enter into a relationship. There's alsoa

17 point in time shortly therea~ter where John is indic~ting

18 some fairly extreme displeasure with me datine Shana and, you

19 know, he explains rio me that he's worried about me, you know.

20 He saw me go through a really painful period the

21 prior tall, doesn't believe th~t Shana's a good perscn on

22 some level, relates a story to me about a woman that he

likens to Shana from his past that broke his heart, and he is

24 being, you know, fairly paternalistic towards me, which was

25 not an unusual aspect of my relationship with John. I mean,

26 we were very close and in some ways it felt to me sometimes


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1 father and son-like, but I'11 set that aside for now. He

2 didn't want me dating Shana and I was -- I got fairly upset

3 about it because, you know, I found somebody that I really

4 liked and I wanted her to be accepted by John.

5 I mean, I wanted that relationship to be accepted

6 by John,

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1 Q Okay.

2 A So I don't know. I maybe am not privy to all the

3 communications that you have on this.

4 Q Okay. Yeah. I don't know that we need to go

5 through -- there's, you know, a whole series o~ a-mails with

6 John and Alex Sadowski and you and Alex Sadowski and John and

7 you back and forth.

8 A Yeah.

9 Q You know, I guess what we were trying to understand

10 is whether there was any concern on the part o~ John in his

11 capacity as your boss that you were dating somebody who, you

12 know, was involved in the industry. Was that ever raised at

13 all?

14 A He didn't raise that directly with me. ?t's

15 entirely possible that that was part of his concern but

16 that's not -- that's not what he raised to me. It was all

17 very much of a personal nature what he raised to me.

18 BY MS. STEIBER:

19 Q And there's a certain period of time where the

20 relationship was being hidden from your supervisor?

21 A You know, hidden, you know, I made the decision

that, you know, the day to day around the office was tense

23 and if John -- john had this reputation. I mean, if he

24 didn't like you, it was like you didn't exist and for someone

25 like me who like it's so hard, had worked so hard to gain his

26 approval and, you know, wanted that, and knowing that I was


Page 143

1 going to be leaving the SEC in a few months, I wanted to

2 continue and have a peaceful exit from the SEC.

3 I wouldn't say I made the decision exactly to hide

4 it. I just made the decision not to talk about it and there

5 were other people at the SEC who knew about it. Yeah. I

6 didn't really want John to know the details of if and when I

7 saw Shana and, frankly, he never asked me either. Had he

8 asked me, I would have told him and I wasn't going to lie to

9 him about it, and, you know, I felt like that was not in

10 appropriate because, you know, I wasn't working on anything

II related to Mado~r.

12 Had I been asked to, I mean, I would have been

13 recused anyway, you know. I mean, he -- he -- he didn't need

14 to know all the details.

15

16 Q Within a few weeks before you were found out and

17 john McCarthy found dut, there was an Enforcement

18 investigation of Madoff Securities for possible Ponzi scheme

19 and this is just within a couple of weeks that he has this

20 reaction, this really strong reaction to that you should not

21 be dating Shana and then you're -- for other reasons, you're

22 keeping this relationship hidden from John McCarthy or you're

not disclosing it to John McCarthy.

24 MR. WOLK: Well, I t~ink he said he just wasn't

25 discussing it.

%6 MS. STEIBER: He wasn't -- yea~. He wasn't


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Page 144

1 disclosing it or discussing it.

2 BY MS. STEIBER:

3 Q And when he finds out, he's pretty angry, but at no

4 time did he discuss with you the fact that he felt like there

5 was a conflict of interest?

6 A No, I don't recall ever having a discussion like

7 that with him and, frankly, you know, you've shown me the

8 evidence within a few weeks or days or whatever it is that I

9 was on an e-mail chain and had a conversation by e-mail with

10 John Nee, the word "Ponzi scheme" being used. I don't know

11 where my head was during that time period, but it was not on

12 Ponzi scheme at Madoff or fraud at Madof-t because I don't

13 have a recollection of being concerned about that at the --

14 in the least.

15 BY MR. KOTZ:

16 1! And John McCarthy never expressed conc`erns about

1~ Shana Madoff in terms of the fact that the company she worked

18 for had been examined, there was an investigation, or

19 anything in terms of concern about you being involved with

20 somebody who may be involved in a company that was doing

21 improper things?

22 A I don't recall any conversation like that with

23 John. Now, it's possible that he, you know, maybe it was

24 something that he was worried about or knew about that he

25 didn't divulge to me because I would have been recused by

26 that point. You kiiow, we were in a romantic relationship at


Page 146

1 or it did it have to do with the family that, you know, she

2 was with or the crowd she kept? Did you --

3 A It was predominantly personal

4

5

6

7

8

9

10 BY MR. KOTZ:

11 Q Okay. Yeah. I have no need to go through all

12 these e-mails. Do you have any sense of, you know, specific

13 timing on when you feel your -- your relationship began in a

14 romantic way with Shana? I mean, you said you had that, you

15 know, friendly evening with a bunch of people. When do you

16 think that the relationship began, just so we can have a

17 specific date?

18 A Well, I think it's April 4th because I think that's

19 when, you know, Shana knows I'm in New York and I think it's

20 April 4th, I may be wrong, but I -- I sent her -- we were

21 talking about maybe getting together and having a drink and I

sent her an e-mail saying -- I think I said something like

23 I'm tired, I'm just finishing dinner and she writes me

24 back -- she writes me back with just an avenue, a place and

25 an address, ~rid it made me smile and I went and met her there

26 and I think, you know, it was Chat -- that was the niglrit that


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Page 147

1 we spent together and that's in my opinion when it started.

2 Q Okay.

3 MR. KOTZ: So let's just for the record put this

4 e-mail into evidence. Exhibit 53. This is the incident

5 you're speaking about.


7 identification.)


9 THE WITNESS: Yeah. Yep. Okay. I recall

10 BY MR. KOTZ:

11 Q All right. So just to confirm, based on Exhibit

12 53, you believe the relationship started on 4/4/2006?

13 A That's correct.

14 MR. KOTZ: Okay. I'm going to show you one more

15 document and this is again just so you can -- give you the

16 opportunity to ask -- to state your perspective' on it. J'm

17 not going to editorialize it in any way.


19 MR. KOTZ: But it's Exhibit 54, and it's an e-mail

20 from John McCarthy to Alex Sadowski, Thursday, April 6th,

21 2006, 2:01 p.m.


23 identification.)

24 iThe witness examined the document.

25 THE WITNESS: I --

26 MK. WOLK: We've never seen it before.


Page 148

1 THE WITNESS: I don't believe I've ever seen this

2 before, but I guess he's making note of the fact that we're

3 recused.

4 BY MR. KOTZ:

5 Q Okay. So you don't have any idea what this might

6 refer to?

7 A Well, I mean, it's two days after the night that --

8 that we were out. So, and he knows because I told him the

9 next day

10 Q So because of the recusal, his group and you would

11 not be able to do an inspection o~ Madoff, is that, do you

12 think, the point?

13 A That n~ay be the way I-ie's feeling, yeah.

14 Q Okay. And -- but nobody ever said ariyilriing to you

15 about bccsuse of your involvement with her, we can't do X or

16

17 A No.

18 Q Okay. There's e-mails in there about going in

19 communicado. I mean, there's e-mails that reflect the

20 decision not to divulge information to John about your

21 ongoing relationship with Shana, but you acknowledge that?

22 A I do, yeah.

23 Q We don't need to show you every e-mail.

24 MR. KOTZ: Yeah. I just wanted to ask. This is

25 Exhibit 55. This is an e-mail from you ~o Alex Sadowski



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1 identification.)


3 BY MR. KOTZ:

4 Q I assume you are Hip Hop?

5 A I am assuming I am Hip Hop, yes.

6 Q I guess the other point here is to understand, I

7 mean "I need to cut it off or lose my relationship with John

8 which I may have done already. He went nuts. I mean the

9 idea that because you are involved with somebody that he

10 didn't like you can lose your relationship with him?"

II A Yeah. It was -- this refers back to -- yeah. So

12 John -- john came to my house this night. This was -- this

13 must be tile night -- do you want me to continue?

14 Q Yes

15 A I'm assuming, I believe that this would be the

16 night that John came to my house and told me that he didn't

17 want me to date Shana.

18 Q Okay.

19 A The story that I told you already.

20 Q Right.

21 A And, you know, it seemed clear for me from that

22 conversation that my choices in the matter were to cut it off

23 with Shana or lose my relationship with John.

24 O Okay.

25 A It was quite upsetting to me.

26 Q You think he was just so protective of you that he


Page 150

1 didn't want anything bad to happen to you and so he couldn't

2 stand you being with somebody that he didn't like? Just

3 seems very extreme.

4 A I -- I can't disagree with that. I don't know. It

5 seemed extreme at the time. It seemed very extreme at the

6 time.

7 Q Okay. Let's move on. I want to ask you about

8 another matter.

9 MR. KOTZ: Exhibit 56 is an e-mail, 4/27/2006, from

10 you to John McCarthy. Take a look at this for me, please.


12 identification.)

13 (The witness examined the document

14 THE WITNESS: Yeah. I have a brief recollection of

15 this e-~ail, and I -- I recall being confused by the red flag

16 indication from John.

17 BY MR. KOTZ:

18 Q And at one point, and I can show you this, if you

19 want, john had e-mailed Shana that you were going to have to

20 back out of the hedge fund breakfast. Do you remember at a

21 certain point where there was a decision made -- what

22 decision was made vis a vis ongoing breakfasts, given that

23 this relationship was ongoing?

24 A I don't remember. I do remember that they had to

25 reschedule the hedge fund breakfast and we did ultimately do

26 that breakfast, but I don't recall -- I don't recall


Page 151

1 specifically a decision not to do them anymore because of my

2 relationship with Shana.

3 Q Okay. You're not aware of anything that changed in

4 terms of breakfasts or appearing at any of these events that

5 Shana made as a result of the relationship?

6 A I think -- no. I mean, I think John might have

7 been a little less comfortable going to do them, but we still

8 did them. I think we did two or three after -- after all

9 this.

10 Q Okay. And then your relationship with John did

11 recover, as you said?

12 A Absolutely.

13 Q Okay. And then you and Shana became engaged, is

14 that right?

15 A That's right.

16 Q Okay. ~hat was in December?

17 A December 8th, on her birthday.

18 Q Okay. And then when did you and Shana get married?

19 A September 29th, 2007.

20 Q Okay. Now, you mentioned before that you were at

21 that point thinking about leaving the SEC. When did you

22 first consider leaving the SEC?

23 A Late 2005.

24 Q Okay.

25 MR. KOTZ: Okay. We're going to mark this as

26 Exhibit 56. This is just an e-mail from Shana to you, dated


Page 152

1 6/29/2006. I'm sorry. 57.


3 identification.)

4 BY MR. KOTZ:

5 Q It seems that she's referring to you as her f:---- IdllLt

6 there.

7 A Yeah, yeah. We got -- I called it engaged to be

8 engaged earlier in that month.

9

10

11

12

13 So, yes,

14 she did reler to me as her fiance but we did not o~ficially

15 yet engaged until December 8th. That's when I presented her

16 the ring.

17 Okay. So did Shana help you with employment

18 outside the SEC?

19 A She put me in contact with a -- what do you call --

20 CZ Head hunter?

21 A Head hunter, yeah.

22 Q Okay. And then you got some kind of opportunity

23 with Rr~dgewater?

24 A I did, yeah. They made me a job offer

25 C) But you didn't accept it?

26 A I did not.


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1 Q How come?

2 A The job was interesting, but two reasons, really.

3 I was going to be moving to New York and the job was up in

4 Westport. It was quite a commute from New York, although

5 they went to great lengths to make it easy. But the job was

6 as chief compliance officer for an advisor and as I spent

7 some time meeting the people and they were all great, the job

8 seemed a little boring to me and I like more fast-paced

9 active sort of jobs and I still wanted to be involved in the

10 industry, and oddly right -- right around the time when I was

11 considering the offer ~rom Bridgewater, I had another head

12 hunter reach out to me from and was representing Ameriprise

13 Financial and very quickly, in the course of about a week,

14 worked out a position, a deal

15 It was you know, it wasn't as much money as Che

16 job with Bridgewatcr, but it was - to me, it was much more

17 interesting.

18 Q Okay. Is Bridgewater a Madoff feeder fund?

19 A I don't think so, but I don't know. T'd be shocked

20 if they were.

(3! Okay.

22 A Don't shock me.

23 Q I'm not going to put this into evidence, but I'I1

24 just show it to you.

25 A Are they really? Oh, my goodness. I -- T am

26 stunned, I am literally stunned. Honestly, to this day, I --


Page 154

1 I really wonder. I -- I find it hard to believe, but --

2 Q Just for the record, you're stunned that

3 Bridgewater appears on this document to be a Madoff feeder

4 fund?

5 A Yeah. I mean, I'II be honest, when -- when this

6 thing broke, I kind of wondered. I wondered if Bridgewater

7 is, you know, one of the funds and I've never seen their name

8 listed anywhere in the public press. Wow!

9 Q Okay.

10 A I think -- I think what's their name from NERO

11 ultimately ended up taking that job, too.

~2 (Z Oh, really? Who's that?

13 A Who was the head of -- one of the deputy --

n4 MS. STEIBER: Brockenheimer.

15 THE WITNESS: Who?

16 MS. STEIBER: Gloria Brockenheimer.

17 THE WITNESS: No. It's a woman, though.

18 MR. KOTZ: Is she in OC?

19 THE WITNESS: No, no. I don't think so. She was

20 in Enforcement. Was there a

21 MR. WILSON:

22 THE WITNESS: Yeah. I'm pretty sure that's who it

23 is, yeah.

MK. KOTZ: Oh, so she took the job. Okay.

25 BY MR. KOTZ:

26 So you're not accepting the job with Bridgewater


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1 had nothing to do with Madoff?

2 A No. It just -- it just didn't seem like the right

3 job.

4 Q Okay. And the job you got with Ameriprise, was

5 that -- that you got with Shana's help?

6 A No.

7 Q And what was the reason that you decided to leave

8 the SEC?

9 A It's varied. 7 mean, you know, in coming out of

10 2005 and my failed relationship with I was starting

II I was very frustrated and restle,, and I was looking ,,

12 forward -- I was looking back at the last 10 years of my

13 career and I realized it was giving me an opportunity to do

14 kind of -- I'II give you a lot here.

15 Q Flease, please, please.

16 A I have looked back at my 10 years at the SEC and in

17 opinion, I had never found balance between my career and --

18 and my personal life and I had really, in my opinion,

19 hard-core devoted 10 years of my life to this agency and I

20 was at this stage in my life in 2005 where I thought I had

21 found balance with the right woman and I turned out to be

wrong and I was disillusioned and I realized that I needed to

23 do something dramatically different to shake up my life and,

24 you know, I had let 10 years go by and then for a great long

25 period of time doing something that I absolutely loved but my

26 love -tor it had decreased dramatically and I -- I almost felt


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Page 156

1 bitter that, I don't know why exactly, that I devoted so much

2 to the agency and my personal life had been a complete

3 disaster and -- and I just wanted to change.

4 I wanted to change. I wanted to, you know, sell my

5 house, leave D.C., do something completely different. So

6 this is my mindset as of probably late 2005, and then I

7 thought 10 years, that's a nice number to stop on. I started

8 in August of '96 and got finished in August of 2006.

9 BY MS. STEIBER:

10 Q So this is before you met Shana -- sorry. Not

11 before you met Shana but before --

12 A Yeah.

13 Q -- you started your romant'ic relationship with

14 Shana, you had already started thin~ing o~ leavirig the SEC

15 be·tore --

16 A Yeah.

17 Q -- the tension with John?

18 A No question.

19 BY MR. KOT2,.

20 Q So it wasn't related to -- to tension with John per

21 se?

-A No, no. No, although, I mean, there were times

23 where i thought my relationship with john maybe wasn't real

24 healthy for my long-term career because I was so much -- so

25 much tied to him --

26 (Z Right.


Page 157

1 A -- and I thought I really need to get out on my own

2 and -- and so there was an aspect to my relationship with

3 John that factored into the equation.

4 Q Okay. And in the course of your relationship with

5 Shana, did you ever talk about, hey, remember, you know, we

6 did an examination of you back in the day? Did you ever have

7 communications with her about that?

8 A Not while we were dating and at the SEC. I think

9 after I -- alter I left the SEC, you know, there was one

10 time maybe where I can remember talking about, you know,

11 yeah, I remember doing an exam because she didn't know.

12 She's like -- I think she had made a comment but you've never

13 done an exam of us and I said, "No, I did. I sent the letter

14 on the ~ront-running thing."

15 Q But you never shared any information that yoii

16 learned at the SEC about Madoff and the exam with Shana?

17 A NO, never.

18 Q Okay. And then when you heard in December 2008

19 that Bernie Madoff had admitted to a Ponzi scheme, what was

20 your reaction in terms of the SEC involvement? That's

21 primarily all I'm interested in. I'm interested in your

reaction in terms of the fact that, you know, there were

23 exams done.

24 A Well, my -- my initial reaction and really

25 reaction that has stuck with me is that, you know, I knew

26 that we had looked at some aspect of this in terms of


Page 158

1 front-running but not at whether or not it was a Ponzi scheme

2 and then it was only after I, you know, started getting

3 access to documents that had been leaked to the Wall Street

4 Journal in the days and weeks after Bernie was arrested that

5 I saw the full scope of what NERO had done and I thought it's

6 a major~problem here.

7 Q Were you surprised that NERO seemed to have done so

8 much and never found this out?

9 A I was, yeah.

10 Q Is there -- do you have any explanation as to how

11 that could happen?

12 A You know, up until the other week when Galvin filed

13 the action against the feeder fund Fairfield, I was perplexed

14 by it. That helped clarify things a little bit for me

15 because that contained that transcript o-t Bernie sort of

16 coaching them on how to respond to the SEC which, I think in

17 the absence of that kind of coaching, my guess is that the

18 SEC would have -- would have gotten to the issue.

19 T don't know for sure, but

20 Q Did you ever talk to anybody at the SEC about what

21 happened subsequent to December 3008, other than my office?

A About what happened?

Q You know, did you ever talk to anybody at the SEC

24 about, you know, we had done an exam, this investigation was

25 done?

26 A No, no. I mean, I've had numerous conversations


Page 159

1 with people from the SEC in the normal course of my business

2 where I get a lot of people saying I'm really sorry about

3 what's happening to you, et. cetera. Maybe there was a time

4 where I said, well, yeah, I, you know, did participate in a

5 couple of exams, but no -- no detail about it.

6 Okay. So you never found out any information about

7 how possibly the SEC could have missed it or what was going

8 on?

9 A No. Certainly as it relates to NERO, I've had no

10 contact with anybody who was involved in any of that

11 investigation.

12 BY MS. STEIBER:

13 You had said that earlier Sollazzo was very

14 protective of his exams, his ~rograms. Do you know anything

15 about Sollazzo's technical expertise or

16 A Not really.

17 Q -- his reputation?

18 A Not really. I think -- I mean, he's been there for

19 a long time. I assume he's still there. 3

20 BY MR. KOTZ:

21 Q What is your feeling generally about the overall

22 expertise of the folks at the SEC, you know? You've been now

23 in industry.

24 A Well, I think -- I think it's probably like a lot

25 of other places, you know. You have pockets of really

26 talented people who have, you know, good expertise and you


Page 160

1 have a lot of people who probably don't. You know, I've

2 listened to Markopolos testify about the, you know, rio hair,

3 gray hair, and that kind of thing, and I don't know that I

4 necessarily agree with it, but I suppose there's room for

5 better training by people who are qualified to do the

6 training, but I don't know what all the answers are.

7 Q Do you think that perhaps, you know, in OC there

8 are some folks who are doing work where they're too junior to

9 and they're just not -- they're kind of over-m~tched hy, say,

10 somebody like Bernie Madoff?

11 A It's possible. It shouldn't happen that way

12 because that junior person should be well supervised.

13 (Z But, T mean, yiven the number of matters that you

14 dll were working on ar Chat time, given the fact that junior

15 peo~le are involved and, you know, there's so many people

16 beiriy pulled in di~'ereriC directions, do you t~ink that maybe

17 the fol;(s at the SEC and the OC Unit are just not able to

18 keep up and, you know, when you have a situation where

19 somebody's tryiny to mislead them, they just -- they're

20 unable to figure it out?

21 A I -- I do think that -- I do think that's true and

one of the things, as painful as this was for me duriny my

23 stint at Flmeriprise, we were regulated by the Office of the

24 Comptroller of t_ie Currency, is tha~ right? The OCC. 9Uy3.

25 nnd they were there and they were a pain in the ass, yo~

26 know, five days a week, every si~gle day, and they would


Page 161

1 constantly be, you know, getting documents and getting a

2 wholesale, you know, a real holistic view of the firm and the

3 activities within the company, and as much as, you know,

4 individually, I guess, they were liked okay, but they were on

5 some level despised by, you know, senior people at the

6 company, I think that having that type of presence in a firm,

7 there's sort of no substitute for it.

8 1 mean, when you're -- when you're working from

9 your, you know, office here in D.C. or New York or Atlanta or

10 wherever and you're just getting, you know, documents and

11 then you go in for a week or a few days, the culture is not

12 to spend, you know, months onsite or essentially establish a

13 permanent office onsite.

14 I think you're going to have a hard time ultimately

15 developing the sort of depth of expertise. I'm not

16 suggesting necessarily that that's the only way to get it,

17 but it has occurred to me that, you know, the OCC has had its

18 share of problems, as well, but it does -- it does strike me

19 as, you know, that may be a better way than the way it is.

20 Q And so that OCC exam was in contrast to the way OC

21 did their exam?

A Yeah. Because they were there -- they were there

23 -- they actually had an office with their own separate lock

on it that we couldn't get into and they had their own

25 dedicated lines for them to have secure telecommunications

26 out of the buildiny and they -- they were constantly there


Page 162

1 and they would schedule out months in advance interviews with

3 people and document productions and this was -- it's an

3 ongoing process yearlong.

4 Q So looking back, do you think there's some

5 deficiencies in the way OC conducts their exams?

6 A Yeah. I mean, I think -- I think that it could

7 be -- I think it could be handled better. 7 think that maybe

8 a different -- a completely -- a complete rethinking of the

9 way examinations are done would be appropriate because right

10 now -- I don't know how much it's changed since I've left,

11 but right now you've got dedicated people who do

12 broker-dealer almost always routine examinations. You've got

13 a group of people who are doing investment advisor,

14 investment company exams, and then you ~iave kind of rhe SRO

15 Group and this sort of special whatever we were doiny, sort

16 of dipping into different arcss where trading issues were

17 involved, and these groups were not communicating all that

18 well, and I definitely -- and they're spread out

19 geographically.

20 1 -- I -- there's gotta be a better way of doing

21 it, you know. There just has to be a better way where we are

pulling in expertise from different disciplines, the

investment advisor and the broker-dealer together, the

24 trading and the sales practices somehow together and putting

25 it all on under one roof and having it work more cohesively.

26 I don't think it has necessarily in the past.


Page 163

1 7 don't want to say it was all bad because I think

2 we did some really good work and I think OC has done some

3 really good work over the years, but there's obviously room

4 for some improvement and, you know, maybe some of that --

5 maybe there's room for dramatic improvement.

6 Q Okay. What about this allegation about special

7 treatment? What do you think about the allegation that

8 Madoff may have been treated differently because he was well

9 known and they maybe didn't push as hard?

10 A I think that's norisense. Just -- it doesn't

11 know, in my experience, in my experience, if you thought you

12 were on to a big fish, I mean, you know, you -- you pushed,

13 you know. It would be -- you know, the way -- the way your

14 career -- the way your career develops at the SEC for better

15 or worse Is to, you know, fry big fish. So I don't -- I

16 don't -- I don't put much stock in that.

17 Q Did you ever see people getting special treatment

18 at the SEC while you there?

19 A I -- off the top of my head, not that I'm aware,

20 no.

21 Q Was Madoff considered a big fish at that time?

22 A Not to my knowledge. I don't -- I actually -- I

23 don't really believe so. I think, you know, I think people

24 respected and recognized Madoff for what the firm had done

25 over the years but certainly by -- in the 2000s, I think that

26 was -- you know, that was -- that was back in the '90s, '80s


Page 164

1 and '90s, when they were probably even more well known on

2 some level than they were in the 2000s.

3 Q And did you learn anything by virtue of marrying

4 into the farriilp·-that would provide any information about how

5 the SEC missed this Ponzi scheme?

6 A Not really, beyond sort of what I've read in the

7 paper. I mean, I kind of have a better understanding of who

8 Bernie is and the way he kind of manipulates people and

9 information, but I didn't learn that by virtue of being

10 married into the family.

11 Q Okay, okay. Did you talk to anybody about the fact

12 that you were testifying today?

13 A I did.

14 Q Okay. Any former SEC people?

15 A Yes, John McCarthy knows I'm testi~ying today.

3_6 Q Okay.

17 H Alex knows I'm testifying but he probably doesn't

18 know it's today.

19 Q Did Alex tell you that he has testified?

20 A He did.

21 Q Did he tell you what he said in his testimony?

22 A No. In fact, he specifically told me he could not,

although he did say there was a lot of e-mail. He did say

24 that.

25 Q Okay. And did John McCarthy indicate whether he

26 was testifying?


Page 165

1 A He did, yeah. He said he was testifying at some

2 point.

3 (Z Okay. All right. Well, I'11 tell you what I told

4 Alex Sadowski, which is it is very important that you not

5 share -- I mean you signed a Confidentiality Agreement, but

6 even beyond that that you not share any specific information

7 about what we talked about with John or anybody else.

8 A Okay. I will not.

9 Q Okay.

10 A Absolutely.

11 Q Now, one other thing. I don't know whether you can

12 help us with this. There's this series of events,

13 Securities Industries Association events. I just wanted to

14 see if you could confirm that these were events that you were

15 at.

16 A Do these relate to the break~asts or these are

17 other things

18 Q Yeah. I think they're the breakfasts.

19 MR. KOTZ: Right?

20 THE WITNESS: I may need -- without having some

21 other -- I'd have to reference --

MR. KOTZ: All right. Well, let me just go through

23 them and whichever ones you remember --


25 BY MR. KOTZ:

26 Q So there was this October 2nd, 2003, in St. Louis.


Page 166

1 That one you do remember?

2 A I was there.

3 Q And Shana was there?

4 A Yes.

5 MR. WILSON: Can we go off the record a minute?

6 MR. KOTZ: Sure.

7 (Off the record.)

8 BY MR. KOTZ:

9 Q Okay. There was one November 12th, 2003, in

10 Minneapolis.

11 A Well, there was at least two in Minneapolis and one

12 1 did not attend. I don't recall if that was the one. I

13 think that may be the one I did not attend.

14 Q Okay. There was one june 15th, 2005, in

15 Minneapolis, and one july 21st, 2006, in Minneapolis.

16 n So the July '06 I did attend and then;between the

17 November one and the -- I'm sorry -- the second one.

18 Q November 12th, 2003, and there's June 15th, 2005.

19 A Yeah. One of those two I did not attend but I

20 don't know which one.

21 Q Atlanta 4/29/2004.

33 A Yes

Q And Shana was at all these?

24 A I have a recollection that there may have been one

25 or two that Shana didn't go to that I attended but I'm not

26 positive.


Page 167

1 Q Seattle June 10th, 2004.

2 A Is there any other Seattle on there?

3 Q No.

4 A Yes, I went and Shana was there.

5 Q Okay. Boston 3/9/2005.

6 A There was at least two Bostons and one of them I

7 missed because we had a terrible snowstorm trying to fly out

8 into Boston. That's probably the one I missed.

9 Q Okay. Another St. Louis 3/16/2005.

10 A Yes.

11 Q And Shana was there, too?

12 A Yes.

13 Q Okay. Los Angeles 5/23/2005.

14 A No.

15 Q Charlotte 9/29/2005.

16 A Yes

17 Q And Shana was there, too?

18 A I believe so, yes.

19 Q Richmond 11/2/2005.

20 A Yes, in which case I think we also paid our own way

21 down there, yes

Q And that one Shana was at, too?

23 A Yes.

24 Q And then Miami 1/30/2006?

25 A Yes.

26 Q And Shana was at that one, too?


Paye 168 1 A Yes.

2 a Another St. Louis 3/10/2006?

3 A Probably, yes. I don't remember for certain, but I

4 probably was there, i assume there's records elsewhere 5 that --

6 They're a little bit incomplete. 7 A Okay.

8 Q And you think Shana was at that one, too, in St

9 Louis?

io A I jus~don't renember Tpecifically that break~ast. 11 I do know there was one or two that for whacever reason she 12 didn't make.

13 Okay. What about New Orleans 5/lfi/2006? 1.4 A Yes.

15 O And Shana was ihere, -oo~

16 A Yes.

17 Q Phoenix 9/26/2006?

18 A I don't think I went to that one.

13 (Z What about Memphis 11 --

20 MR. WOLK: Wait a minute. What was it again?

21 MR. KOTZ: Phoenix 9/26/2006.

33 ~RE WZTNESS: Ob~ I did go, actuaily, and I went as

an employee of Arneriprise Financial

24 MR. KOTZ: Oh, okav.

35 THE WZTNESS: Thank you. 26 BY MR. KOTZ:


Page 169

1 Q And then 11/1/2006 Memphis.

2 A No.

3 C2 Okay.

4 BY MS. STEIBER:

5 Q I want to go back and ask you just a couple of

6 questions about what records the SEC has access to.

7 We had talked before about Madoff producing some

8 sor~t of data in hard copy that you had looked at and then

9 later some floppy disks

10 How could the SEC have verified the trading

11 activity that -- that was in -- that he had produced in those

12 records to verify that the trades had actually taken place?

13 A How could the SEC have veri~ied it? I guess the --

14 one o-t the ways would be to go to the counter parties on the

15 trsnsactions and see if they had data that matched up, but I

16 think in that case, my r-ecollection is the counter Parties

17 were in Europe. ? don't remember for sure.

18 Okay. And so we're talking about equity trades to

19 the counter parties. Would there be any other way that you'd

20 be able to verify claimed equity trades?

21 A Sure. Equity trades were easy, you know, because

you could -- you could go -- you could go to the NASD and get

23 trade data. You could go to the NSCC and get records of

24 cleared trades.

25 Q The what?

26 A NSCC and get records of cleared trades. You could


Page 170

1 go to the brokers who routed orders to Madoff for execution

2 and look at the bills that their records would have of

3 trading. So there were multiple ways you could do it.

4 Q What about DTC?

5 A NSCC, same thing.

6 Q Okay. And what about the options trading, do you 7 know what CBOE is?

8 A Sure.

9 And have you ever requested records from CBOE?

10 A I have in the context ot doing oversight

11 inspections of the CBOE Dut iiot -- noc in this coritext.

12 C) And what types of records would yoii Pxpect CBOE to

13 have kept if, you know, Madoff said that he was trading 14 options on CBOE?

is ,", siire. Wel;, they would ~~ve had -- they would ave

16 had records of the CBOE nember- firm tna', traded on each side

17 o-t the trade drid the time, price and all of that. They might 18 not have the information about ;he bro~er that had sent that

19 order to the CBOE member tirm for execution. You'd have to

20 get thsC information from eithe_ the CBOE member directly or 21 possibly trom the OCC, biit I'm not sure the OCC would have

that inrormati-in either. I ~~in~ you'd have to go the CBOE 23 member

211 Q Ckay. And the prior -- iri earlier testimony, you

35 had ralked about looking at the tape. Could you clarify what 26 you were talking about?


Page 171

1 A I don't remembei my exact comment, but the tape -

2 I was probably talking about quotes on the tape. The tape is

3 the National Quote and Last Sale that make up the -- make ~p 4 the inside market put out the CTA. They're put out by the 5 CTA, CQS ~ssociation, but these are -- these are SEC

6 securities iniorrr.ation processors and they -- all the

7 exchanges have to ~eed their quotation information into the 8 system.

9 If you watch, you know, CNBC, which I don't watch

10 anymore because of Charles -- because ii you were to watch

11 CNBC, you'd see the ticker running across the bottom. That

12 information is typically coming off ot the tape about the 13 price of stocks trading.

14 Q Okay.

;s MR. KOT%: Ckay. We don't have anything further. 16 Do you have any q~estions'

17 MR. WOLK: Nothing.

18 MR. KOT7,. Okay. All right. Thank you.

19 THI~ WITNESS: 'I'hank you very much.

20 ~~hereupcn, at 1:34 p.m., the examination was 21 concluded.)

22 * **J;*

23

24

25

26


Page 1


In the Matter of:

File No. bIG-509-000

GIG-509-000

WITNESS: Number 25 11 ORIGINAL



100 F Street, N.E.

3rd Floor Conference Room

Washington, D.C.

DATE: Friday, April 17, 2009




(202) 467-9200


Page 2

1 APPEARANCES:


4 H. DAVID KOTZ, ESQ.

5 HEIDI STEIBER, ESQ

6 CHRISTOPHER WILSON, ESQ.

7 Office of the Inspector General


9 100 F Street, NE


11 (202) 551-6037

12


14 WILLIAM W. TAYLOR, III, ES~.

15 Zuckerman Spaeder LLP

16 1800 M Street, NW

17 Washington, DC 20036-5802

18 (202) 778-1800

19

20

21

22

23

24

25


Page 3

1 CONTENTS


4 Lori Ann Richards 7


7 1 Voluntary Notice of Rights 7

8 2 Non-Disclosure Forms 7

9 3 Letter to Madoff, 2/6/98 30

10 4 Barren's Article (2 documents) 33

11 5 E-mail, to Kelly, 5/21/03 44

12 b E-mail, McCarthy to Richards,

13 cc: Swanson, 12/18/03 44

14 7 E-mail, Richards to McCarthy, 12/10/03 59

15 8 E-mail, Barry to Richards/McCarthy,

16 12/11/03 61

17 9 E-mail, Richards to Nazareth, 12/16/03 63

18 10 E-mail, Richards to McCarthy, 12/18/03 64

19 11 E-mail, Donohue to Daugherty, 12/19/03 64

20 12 Draft letter, Swanson to P. Madoff,

21 12/2003 67

22 13 Handwritten notes

23 14 Planning memo, 12/2003

24 15 Handwritten notes 77



Page 4



4 17 Memo to Gray, 3/4/04 78

5 18 Draft memo 79


7 30 E-mail, Walker to Sadowski, 4/6/04 83

8 21 E-mail, Donohue to Walker, 4/7/04 83

9 22 E-mail, Swanson to Donohue, 5/26/04 85

10 23 Memo, Eschwie to Sollazzo/Lee, 89

11 24 E-mail, Eschwie to Sollazzo, 5/11/04 99

12 25 E-mail, Swanson to McCarthy, 2/28/06 101


14

15

16

17

18

19

20

21

22

23

24

25



jr' aae

1 PROCEEDINGS

2 COURT REPORTER. We are on the record at 10:04 a.m.

3 on April 17, 2009, the United States Securities and Exchange

4 Commission. I'm going to swear you in now. Would you please

5 raise your right hand?

6 Whereupon,

7 Whereupon,

8 LORI ANN RICHARDS



MR. KOT7,. Could you state and spell your full name

12 for the record?

13 T~IZ rl311TNESS: Lori Ann Richard, Lo-ri An-n

14 R-i-c-hards.

15 MR. KOTZ: Okay. My name is David Kotz. I'm the


%7 Exchange Commission.

18 This is an investigation by the Office of Inspector

19 General, case number OIG-509. I have with me my colleagues

20 Heidi Steiber and Chris Wilson. And you have your counsel

21 Mr. Taylor.

22 MR. TAYLOR: William Taylor.

23 MR. KOTZ: Wj.lliam Taylor. I'm going to ask you

24 certain questions; you're going to provide answers under

25 oath. Court reporter will record and later transcribe


Page 6

1 everything that is said. Please p~ovide verbal answers to

2 the questions, a not o~ the head or another non-verbal

3 response won't be picked up by the court reporter.


; ~inish my question before you provide your response and I'11

6 try to let you finish your response before I ask my next

7 question.

8 In addition, it is important that you understand

9 the questions and give accurate answers. I~ there's anything

10 you don't understand or anything you do not know or are not

11 sure about, please let rrie know, other wise I will assume that

1.2 you heard and understood t~-le questiori. Do you understand

33 those instructioris?

14 THE WITNESS: I do.

%5 MK. KOTZ: Okay, great. Let me give you the

16 standard perjury language. As you can see, your responses

17 and statements given today are provided after you've sworn an

18 oath and will be taken down verbatim by the court reporter.

19 This is an official U.S. Government law enforcement

20 investigation. Claims asserted in this case are serious

21 ones. It is important that you tell me everything you know

2% ahout i7he matter at hand and are completely forthcoming and

23 truthful with me.

24 I'm formally advising you that you're testimony

25 toda~ is subject to the 3aws o~ perjury. Providing false or


i'; ci yp 7

1 Inisleading testimony under oath is a very serious offense.

2 If the evidence shows that the testimony you have given is

3 false, we may refer it as appropriate. Do you understand

4 those instructions?


6 MR. KOTZ: Okay, great. Okay. So, let's just put

7 into evidence two documents. The first document we're going

8 to mark as Exhibit 1 and that is Voluntary Notice o~ Rights

9 that -- tell me i~ it's true you signed this todav.

10 THE WITNESS: I did.

11 MR. KOTZ: Okay. That we're going to mark as

12 Exhibit i. And then as Exhibit % is a Con~identiality and

13 Non-Uisclosure Agreement signed by William Taylor. Is that

14 right?

15 (SEC Exhibits No. 1 and 2 were marked


17 MR. TAYLOR~' Yes.

18 EXAMINATION

19 BY MR. KOTZ:

20 Q Okay, great. So, let's get started. Could you

21 describe your education beginning with college?

22 A I graduated with a BA degree from Northern Illinois

23 Uriivessity, Political Science, in 1982.

24 Q Okay.

25 A I went to American University Washington College of


Page 8

1 Law and graduated with a JD in 1985.

2 Q Okay. And can you give me your, kind of, general

3 employment after law school?

4 A I started work with the SEC as a staff attorney in

5 the Division of Enforcement in 1985 in the SEC's Los Angeles

6 office. r became a branch chief and an assistant director

7 and then an associate director in the Los Angeles Regional

8 office, the Enforcement Division of the SEC.

9 I then became executive assistant to Chairman

10 Arthur Levitt and moved back to Washington, D.C. in 1994, I

11 believe.

12 Q Okay.

13 A And in 1995 I became the director of the Office of

14 Compliance, Inspections and Examination, a position I've held

15 since then.

16 Q Okay. And that was your position between the

17 period 2003 and 2005?

18 A Yes.

19 Q Okay. Okay. Tell me, how is an inspection

20 different from an examination, if it is.

21 A It's nomenclature, largely.

22 Q Okay.

23 A Examinations is the -- are the -- it's a term i

24 that's used generally to apply to compliance reviews,

25 examinations of broker-dealers, investment advisors,


Page 9

1 investment companies. The term inspection is historically

2 used to refer to the same type of a review at a

3 self-regulatory organization.

4 O Okay. So, in terms of the type of review there's

5 no difference?

6 A In terms of the nomenclature -- in terms of

7 the -- the examinations, obviously, are governed by different

8 laws with respect to the entity under review, different staff

9 people. But the -- they're very similar. An examination and

10 an inspection are very similar.

11 Q Are examinations considered more thorough and more

12 involved than inspections?

13 A No.

14 Q Okay. What about -- what is the difference between

15 a cause exam and a routine exam?

36 A A cause examination is conducted when the staff

17 have "cause" to believe there may be a problem or a

18 violation. A cause exam is conducted when the staff learns

19 of information from a press article, for example, a complaint

20 or a tip. Other information comes to our attention that

21 indicates there's a possible problem or violation and the

22 staff will go in and really focus discreetly on that issue.

23 Routine examination, we conduct routine

24 examinations of investment advisors and investment companies

25 on a cycle. And in those examinations we're looking at the


Page 10

1 firm's compliance with the law in generally a specified

2 number of areas. They're conducted based on the passage of

3 time rather than based on a particular incident or complaint.

4 Q Okay. So, is there a difference in terms of

5 urgency vis-a-vis a cause exam versus a routine exam?

6 A Yes, cause exams take priority in the program. If

7 we learn of something that indicates a violation of the law,

8 in particular if it's an ongoing violation of the law, those

9 take priority.

10 Q Okay. So, the cause exam would be more urgent than

11 a routine exam in terms of --

12 A Yes, in terms of priority. If staff is in the

13 middle of a routine examination and they get information

14 about another firm that indicates a problem, the cause exam

15 has priority.

16 Q Okay. All right, let's talk a little bit about

17 tips and complaints, okay? Are there formal policies and

18 procedures for handling tips and complaints in OC?

19 A I don't know. There may be, I just am not aware of

20 them.

21 Q Okay, okay. Were you aware -- in the period 2003

and 2004, do you know if there were formal policies in place

23 about tips and complaints?

24 A I don't know.

25 Q Okay. Do you know how generally tips were handled


Page 15

1 A I don't recall.

2 Q Okay. But I mean, in -- generally, in OC are they

3 supposed to follow up, are they supposed to document? I mean

4 are there some kind of general guidelines that they're

5 supposed to follow?

6 A I don't know if there are --

7 (S Okay.

8 A -- written guidelines. I can tell you clearly that

9 cause examinations are a priority for us because if we've

10 already received information that indicates a violation, you

11 know, that's information that the staff should follow up on

12 guickly.

13 Q Okay.

14 BY MS. STEIBER:

15 Q You said they're urgent or they're a priority. How

16 long would you expect it to take between the time you receive

17 a tip or complaint and the cause examination begins if the

18 allegations in the complaint are serious?

19 A Well, it depends on the nature of the allegations.

20 It might be that the staff -- this is hypothetically, this is

21 just my opinion -- that the staff would want to do some

research before jumping in. We'd want to do a LexisNexis

23 search, look at the firm's filings, look at the firm's

24 examination history, the results of the last exam, maybe

25 communicate with other regulators. But all that said, you


Page 16

1 know, there's a fair amount of urgency, as I said, around

2 cause exams, so you would expect it to be very quickly that

3 they would --

4 (Z Like what would that be, like a month, two months?

5 A No, days, hours, weeks perhaps.

6 BY MR. KOTZ:

7 Q And let's say you get a tip or complaint in and you

8 decide that it is registered, right? So, you can do a cause

9 exam. How would you make the determination for OC to do a

10 cause exam or perhaps to send it to enforcement for an

11 enforcement investigation?

12 A Well, if it's a registered entity, registered with

?3 the SEC, and we have exam authority, our preference -- I mean

14 my -- speaking from my personal opinion -- is that an exam is

15 a good way to go because we can obtain documents quickly.

16 For unregistered entities it definitely goes to enforcement,

17 assuming the allegation in the complaint is serious, because

18 we don't have that authority.

19 Q Okay. So, if it's a registered entity you would

20 just assume do an exam rather than send it to enforcement?

21 A Yes, and it -- I mean, it's hypothetical, but if

22- the conduct implicates the federal securities laws and it

23 appears that it's an allegation with respect to the

24 registered entity, yes. But, there -- you know, there are

25 other, you know, there are other criteria. If enforcement


Page 17

1 had a preexisting enforcement investigation, that's a

2 situation that we wouldn't do an exam, we would ask

3 enforcement If they wanted to include it in their ongoing

4 enforcement investigation.

5 Q Okay. And how would you determine the focus of a

6 cause exam? Let's say you had a complaint came in and it

7 kind of related to a few different issues, how would you

8 determine what to focus on?

9 A if the complaint implicated violations of the

10 federal securities laws and they were serious, yeah, and they

11 seemed to be serious violations, then we would -- I think the

12 expectation would be we'd focus on the most serious

13 allegations in the complaint.

14 Q Okay.

15 A But as well, we would want to be careful and make

16 sure that we were reviewing all possible violations of the

17 law as implicated in the complaint.

18 Q Okay. And how are these decisions to start a cause

19 exam monitored? In other words, let's say a complaint comes

20 in, you're saying that, you know, cause exam should be

21 started very soon, you know, hours, days, weeks. How would

that -- how would you ensure -- how would your office ensure

that that actually happens and that a cause exam does start

24 right away?

25 A In the regional offices?


Page 21

1 of completes the exam?

2 A Yes, generally.

3 BY MS. STEIBER:

4 Q Do you expect that all examinations are logged into

5 Start?

6 A All of them should be

7 Q Okay. We've had testimony that the Market

8 Oversight Group didn't usually log their exams into the Start

9 System; would that surprise you?

10 A I'm aware of that. When they -- I'm aware of that.

11 They -- when the office was -- the office, its function was

12 for a long time, examining stock exchanges, the

13 self-regulatory organizations and in those inspections they

14 didn't use Start. When they then shifted and began to do

15 more broker-dealer exams, I think there was a lack of

16 understanding of the Start System. So, I think that that

17 would explain why some of their examinations weren't always

18 logged into Start.

19 Q Has that changed? Do they now log them into the

20 system?

21 A I don't know. I hope so.

BY MR. KOTZ:

23 Q Is there a method to kind of track an exam as it's

24 ongoing so that to ensure that if there is a cause exam that

25 was initiated it's worked on continuously and it isn't kind


Page 22

1 of shelved or put on the back burner?

2 A Examinations in Washington and in the regional

3 offices are supervised.

4 Q Okay.

5 A There is at the first level, a branch chief, at the

6 second level an assistant director, at the third level an

7 associate director, who are responsible for managing all

8 examinations underway at any one time within the program and

9 responsible for making sure that they're conducted

10 appropriately and in a timely way.

11 Q Okay. So, the monitoring takes place on

12 that -- with those individuals?

13 A They're the management officials who are

14 responsible for managing and overseeing the conduct of

15 individual examinations.

16 Q Okay. We had a witness who worked on one of the

17 Madoff exams and he said the following, I wanted your

18 thoughts on it, okay? "Frankly, there was --" and this is

19 the period of time 2003 to 2005 -- "Frankly, there were a lot

20 of projects that would just kind of die off. I mean, you do

21 some initial review, you go up the chain, I think the

superiors had determined, "Well, I got other things to worry

23 about." Those other projects just kind of languished. I had

24 a lot of projects like that. We do our fact-finding and say,

25 like, "Okay, what do we do next?" And there was never any


Page 23

1 further direction. We'd write a memo summarizing whatever

2 we'd thought we'd found. So, that was a pretty common

3 occurrence, I don't know if I ever heard back from them."

4 What is your response to that? Did that happen?

Are you aware of that happening kind of in a regular

6 occurrence?

7 A No, I'm not aware of it as a regular occurrence.

8 Q Okay, but from time to time it might have happened?

9 A Without knowing more specifically --

10 Q Okay.

11 A It may be that the management officials in that

12 case didn't place priority on that -- those particular

13 projects that person was speaking about and there were other

14 priority projects in the office at the time. We are

15 constantly prioritizing and triaging given the nature of the

16 inspection responsibilities, so it's possible that person was

17 speaking about a project that wasn't considered to have

18 priority at that point in time.

19 Q Okay. How would -- if a complaint came in about a

20 particular company, how would they be able to tell whether

21 there was another part of OC also doing an exam about that

22 same company at the same time? Is there a mechanism in place

23 for that?

24 A The Start System. They would log into the Start

25 system and identify past examination history. First they


Page 24

1 would identify whether it was a registered entity and then

2 identify past examination history. In addition, there's a

3 geographical assumption that firms located in a particular

4 region of the country are subject to examination by that

5 regional office so that staff would likely call the exam

6 leaders in the particular regional office and ask about any

7 examination history.

8 Q So, there shouldn't be two cause exams that are

9 going on at the same the same entity at the same time without

10 two people -- the two groups who are doing the exams talking

11 to each other?

12 A Without knowledge -- there should certainly be

13 knowledge

14 Q Okay. Let me ask you some questions about Bernie

15 Madoff, okay? When did you first hear of Bernie Madoff?

16 A I don't know specifically. I became aware of the

17 Madoff firm in the 90's.

18 Q Okay. And what was the reputation of the Madoff

19 firm in the 90's?

20 A Best of my recollection, a market-maker. A

21 successful market-maker seeking to challenge the business of

the New York Stock Exchange. At some point that -- it's a

23 firm that began to pay for order flow from other

24 broker-dealers, a practice that was legal at the time. It's

25 still legal. Reputation was a competitor of the large exchanges.


Page 25

1 Q Okay. What about closer to early 2000, were there

2 any -- do you have any other knowledge about the Madoff

3 firm's reputation at that point that was different than what

4 you understood in the 90's?

5 A No.

6 Q And were there any whispers that you were aware of

7 of Madoff getting returns that were very strong, very

8 consistent? were there any -- did you -- were you aware of

9 any whispers about Madoff, the Madoff firm, being kind of too

10 good to be true?

11 A At some point there were press articles that

12 suggested that the firm's returns in its investment advisory

13 business were, perhaps, too good to be true. And there

14 was -- there were allegations that the rationale for that was

15 that the investment advisory firm was front-running its

16 market-making orders in order to generate those returns.

17 Q And that information you got from the press

18 articles?

19 A I don't recall where I got that, but I was aware

20 that there was this issue.

21 Q What time period was that do you think?

22 A I don't recall specifically.

23 Q Okay. But sometime in the 2000 range? The

24 year --the decade of 2000?

25 A I'm sorry I can't be more specific. I don't know.


Page 26

1 Q Okay. Have you ever spoken to Bernie Madoff?

2 A Yes.

3 Q Okay. When was the first time you spoke to him?

4 A I recall specifically two conversations with him.

5 Q Okay.

6 A And those are just the conversations I recall.

7 Q Okay.

8 A I recall telephoning him in advance of an exam that

9 we were going to perform to tell him that we expected full

10 cooperation of the firm, that the examiners would be

11 conducting the exam and it -- and to notify him of it. Was

12 one conversation.

13 Q Do you remember when that was?

14 A I don't remember specifically.

15 (Z Okay.

16 A It -- I don't remember specifically.

17 Q All right. Well, we may have some documents that

18 will help --

19 A Okay.

20 Q And what was the other one you remember?

21 A I remember running into him in a lobby of a hotel

22 at a industry conference and having a brief conversation with

23 him.

24 Q When was that?

25 A I'm sorry, I don't recall.


Page 27

1 Q Was in the last couple years or was it --

2 A It would have been within the last five years.

3 Q Okay. And so what was that conversation like?

q What did you guys talk about?

5 A How's the conference going? Going well.

6 (Z Okay.

7 A When are you speaking? Tomorrow. You know --

8 Q But you didn't --

9 A -- five minutes maximum.

10 Q Okay. And you didn't talk in that conversation

11 about any exams or investigations?

12 A Oh, no.

13 Q Okay. What about other members of Bernie Madoff's

14 family? Have you spoken to other members of Bernie Madoff's

15 family?

16 A Yes.

17 Q Okay. Who were those and when were those?

18 A Peter Madoff I have talked with twice that I

19 remember.

20 Q Okay.

21 A The first time at the SEC's CCO Outreach Program.

22 we -- the SEC sponsors a program for chief compliance

23 officers to communicate about strong compliance practices and

24 deficiencies. He was at the CCO Outreach Program for

25 broker-dealer CCOs, I believe last year and I said hello to him.


Page 28

1 Q Do you remember when last year?

2 A To the best of my recollection, February or March.

3 Q 2008?

4 A 2008.

5 Q And that was also a brief conversation?

6 A Yes

7 Q And you didn't talk anything about the exams or

8 investigations?

9 A No.

10 Q Okay. You said there was another time I think you

11 talked to him?

12 A I attended Eric Swanson's wedding when he married

13 Shana Madoff --

14 12 Okay.

15 A -- and had a conversation at the wedding with Peter

16 Madoff.

17 Q Okay. What was that conversation about?

18 A The -- we spoke about the Immigrant Museum in New

19 York City.

20 Q Okay. Nothing to do with SEC business?

21 A No.

22 Q Okay. When was that wedding?

23 A To the best of my recollection, September 2007.

24 Q Any other conversations with people in Bernie

25 Madoff's family?


Page 29

1 A Yes.

2 Q Okay. Do you -- can you tell me what they were?

3 A That was Peter Madoff. Shana Madoff is the

4 daughter of Peter Madoff.

5 Q Right.

6 A To the best of my recollection I've talked with her

7 maybe five times.

8 Q What were the context there?

9 A The CCO Outreach Program that I mentioned before;

10 SEC Speaks -- she was at SEC Speaks, one of the events; I

11 recall that she came to a SIA committee meeting, meeting of

12 Compliance Officers in the SEC, to talk about compliance

13 issues, issues we were finding in exams; at the wedding -- at

14 her wedding to Eric Swanson; and finally, at Eric Swanson's

15 going-away party, she was there.

16 Q And in any of those conversations did you talk

17 about any exams or investigations or any regulated activities

18 of the SEC?

19 A No.

20 Q Okay.

21 A To the best of my recollection.

22 Q Okay. Any other members of the family, Bernie

23 Madoff's family, that you spoke to?

24 A I -- to the best of my recollection, I believe I

25 met Peter's wife, Peter Madoff's wife, at the


Page 30

1 wedding -- but -- introduced to her.

2 Q Okay. Anybody else that you can remember in Bernie

3 Madoff's family that you talked to?

4 A Shana has a daughter who's five years old. I was

5 introduced to her at the wedding.

6 Q Okay. Anyone else?

7 A Not that I recall.

8 Q Okay. Were you involved in any examinations of

9 Madoff securities in Bernie Madoff's firm?

10 A Examinations of the firm were conducted by staff

11 who report to me.

12 Q Okay. So, let me show you a document, we're going

13 to mark this as Exhibit 3. This is a letter from you to

14 Bernie Madoff dated February 6, 1998. If you could take a

15 look at this?


17 identification.)

18 A Okay.

19 Q Okay. So, what do you remember about this letter

20 or this examination?

21 A I don't specifically remember this particular

22 letter. I remember generally the examinations.

23 Q Okay, but what about specifically related to this

24 one that -- you say in your letter in February 6, 1998, "The

25 staff completed an examination of your firm's order-handling


Page 31

1 practices." What do you remember about that one?

2 A Well, this examination was part of a larger series

3 of examinations. And I remember the series of examinations

4 and the issues raised by those examinations collectively.

5 Q Okay.

6 A This -- the Madoff firm was one of many firms that

7 wasexamined as part of an exam sweep.

8 Q Right. What do you remember about the exam sweep

9 generally?

10 A Immediately following or soon after the commission

11 adopted new order-handling rules that were designed to

12 protect the execution quality of securities transactions for

13 retail investors, my staff commenced a series of exams of

14 many firms to look at how they were implementing those new

15 rules and whether they were provjdjng the best prices on

16 transactions that were routed to those firms.

17 Q Okay. And from your recollection and from this

18 letter, what was the finding with respect to Bernie Madoff's

19 firm?

20 A From my recollection, we found many -- we found

21 that firms were not generally providing execution quality

22 that they should and that resulted in a series of follow-up

23 examinations of the broker-dealers that were routing orders

24 to these firms.

25 With respect to the Madoff firm specifically, I


Page 32

1 have no recollection of the particular findings or issues

2 raised.

3 MS. STEIBER: I think the second page --

4 MR. KOTZ: Yeah, it does -- you do in say in your

5 letter, "The staff recommends that Bernard L. Madoff

6 Investment Securities inform its customers of any relevant

7 execution practices that could affect price improvement

8 statistics or execution quality.

9 MS. STEIBER: So, was this a deficiency letter?

10 THE WITNESS: Yes. And this was -- this reflects

11 generally -- other -- the findings of this firm and other

12 firms in the examination.

13 MR. KOTZ: Okay. Was this examination onsite, do

14 you know?

15 THE WITNESS: I don't know.

16 MS. STEIB~R: But you didn't travel onsite?

17 THE WITNESS: No.

18 MR. KOTZ: Okay. I'm going to show you another

19 document. This -- you mentioned previously articles. I'm

20 going to show you a couple of articles, why don't we start --

21 MS. STEIBER: This is the same article but this is

22 a clean copy so she can see above the highlights.

23 MR. KOTZ: Okay, great. So, this is a -- an

24 article -- a Barren's article -- "Don't ask, don't tell.

25 Bernie Madoff is so secretive he even asks his investors to


Page 33

1 keep mum."

2 And there's another version of that article with

3 some handwriting on it, so we want to show you both the

4 version with the handwriting and the cleaner version and

5 we're going to mark them together as Exhibit 4.

6 If you could, you know, you can use this version to

7 read it a little better and then we can ask you a couple of

8 questions about the notes on the other version.


10 identification.)

11 MR. TAYLOR: This is Exhibit 4?

12 MS. STEIBER: Four.

13 MR. KOTZ: Four, yeah. Both of them are

14 collectively Exhibit 4.

15 MR. TAYLOR: Okay.


17 BY MR. KOTZ:

18 Q Okay. If you could see on the document with the

19 hand-written notes, could you take a look at that? Is that

20 your notes?

21 A It looks like my handwriting.

22 Q Okay. So, you say, "John, she is very good. This

23 is a great exam for us. Lori." Is that -- that's your

24 handwriting?

25 A It looks like it, yes


PaBe 34

1 Q Okay. If you can take a look at the bottom of that

2 document, the footer says -- it's hard to read a little bit,

3 but it's listed as 2001. 5/15/2001. You can see the date of

4 the article is 5/7/2001. Do you think that you would have

5 read this article in 2001?

6 A I have no idea.

7 MS. STEIBER: Do you regularly read Barron's?

8 THE WITNESS: No.

9 BY MR. KOTZ:

10 Q Okay. Is Barren's considered a reputable

11 publication?

12 A Yes.

13 Q Okay. So, what do you remember about the notes you

14 made or reviewing this article?

15 A I don't remember.

16 Q Okay. But it does seem to indicate in your notes

17 that you -- what would you mean by "she is very good. This

18 is a great exam for us?"

19 A The reporter, Erin Arvedlund, I respect.

20 Q Okay. So, she's credible?

21 A I believe she is. I -- she's written great

articles; I think she's very good.

23 Q Okay. When you say "this is a great exam for us,"

24 would you be referring to a cause exam do you think or

25 routine exam?


Page 35

1 A I don't know.

2 Q And you don't know whether you would have -- you

3 read this article, you know, shortly after it came out or

4 maybe years after it came out?

5 A I have no recollection. I have no recollection of

6 this document, I don't know when I would have read it.

7 Q Okay. But you did have a recollection that you had

8 read articles about Madoff. Is this the article that you

9 were talking about that you recollected reading?

10 A The allegations in this article are the ones I was

11 referring to.

12 Q Okay. Tn this article it references another

13 article, a May 2001 report in something called MarHedge, do

14 you know if you ever read that article in MarHedge?

15 A I don't know. I may have -- I don't subscribe to

16 MarHedge, I may have seen it more recently but at the time I

17 don't know.

18 MS. STEIBER: Is John -- are you referring to John

19 McCarthy do you think? Would there be any other John that

20 you would be referring to?

21 THE WITNESS: Likely it would be John McCarthy.

22 BY MR. KOTZ:

23 Q Is MarHedge a reputable publication?

24 A I don't know.

25 Q Okay. Now, if you look at the document there's


Page 45

1 compliant officer as an investment advisor notified Mavis

2 that he was concerned about the returns Fairfield was

3 posting? Do you know if this e-mail refers to Exhibit 5,

4 which is the - campLaint that went to Mavis

5 Kelly during that same time period?

6 A I don't know.

7 Q Okay. But it's possible that you did actually see

8 the complaint at the time?

9 A No, I did not see -- I do not recall seeing this --

10 Q Okay.

11 A -- complaint at the time.

12 Q But it's possible you were aware of the complaint

13 of the time, judging from Exhibit 6, the e-mail?

14 A This e-mail is addressed to me.

15 Q Okay.

16 A But other than what's in this e-mail I have no

17 other recollection of seeing the actual -- assuming this is

18 it -- the actual Exhibit 5.

19 Q Okay. Were you aware in that time period of a

20 complaint that came in, maybe not seeing that exact complain

21 but a complaint that came in from an investment advisor about

22 Madoff?

23 A No, other than this -- what's -- the information

24 that's in this e-mail --

25 Q Okay.


Page 46

1 A -- Exhibit 6.

2 Q So, you don't know whether a cause exam was

3 initiated as a result of Exhibit 5, 4 complaint?

5 A Of Madoff?

6 Q Yeah.

7 A I don't know.

8 Q Just a couple of things I wanted to ask you about

9 with respect to Exhibit 5. It says, "According to EMS,"

10 which is Bernie Madoff Securities, "the options are traded

11 with a number of traders and crossed on the CBOE. With an

12 8- to 10 billion size you must see the volume, but

13 unfortunately you don't. We actually check with some of the

14 largest brokers, UBX, Merrill, et cetera, which told us they

15 never traded with them OEX options."

16 Do you remember, at any point, OC looking into this

17 guestion of -- in the 2003 time frame, of how it could be

18 that Madoff was trading this amount of options but they

19 weren't able to find people who actually traded with them?

20 Do you remember that issue being something that OC was

21 looking at in their cause exam?

22 A No. No, I don't remember.

23 Q Okay. Would you have expected that a firm who

24 would have been that kind of size, 8 to 10 billion, would

25 have registered as an investment advisor if it had assets


Page 58

1 Then separate from that, a routine part of an

2 investment advisor exam is to seek confirmation or -- in a

3 sample basis -- of particular trades from an independent

4 party. So, a routine practice is to ask DTC or another

5 counter-party if they can confirm the accuracy of particular

6 trades. And that's intended to obtain some third party from

7 outside the firm, some third party verification that the

8 trade, the transaction was real.

9 Q And that has always been a routine part of an OC

10 investment advisor exam, going to DTC? Or is that something

11 new?

12 A It was -- I don't know if it's always been a

13 routine part, it has been -- it's been done in the past.

14 Going forward it's clearly going to be a part of examination

15 protocol and already it for investment advisor and

16 broker-dealer exams.

17 Q Okay.

18 BY MR. KOTZ:

19 Q Do you recall in 2003 receiving a tip about Madoff

20 from Steve Cutler?

21 A No.

22 Q All right, let me just show you a document. This

23 is -- ~xhibit 7. This is an e-mail from you to John

24 McCarthy, 12/10/2003, 7:13 p.m. You see at the bottom

25 there's a e-mail exchange between you and John McCarthy about


Page 63

1 not proof. They're allegations that then should be

2 investigated to determine if they have merit and to determine

3 if we can create evidence that would be used, potentially, in

4 court.

5 BY MR. KOTZ:

6 Q Okay. All right, let me show you another document.

7 This is 12/16/2003. I'm going to mark this as Exhibit 9.

8 this is an e-mail from you to Annette Nazareth.


10 identification.)

11 A Okay.

12 Q You see -- you say in there, "Remind me to tell you

13 what we're looking at too with Madoff." Do you remember

14 talking to Annette Nazareth about Madoff?

15 A No.

16 11 Okay. Do you know why you would be communicating

17 with Annette Nazareth about what you were looking at -- I

18 assume it refers to some kind of exam?

19 MR. TAYLOR: Was that a question or a --

20 MR. KOTZ: Yeah. I mean, do you have any idea --

21 MR. TAYLOR: The last participle in the question

22 makes it confusing.

23 BY MR. KOTZ:

24 Q Okay. Do you have any idea why you would be

25 talking to Annette Nazareth about what you're looking at too


Page 64

1 with Madoff?

2 A I would generally communicate with the director of

3 Trading and Markets about matters that we were examining.

4 This e-mail reflects, you know, other issues that are of

5 mutual interest so I would likely have just told her what we

6 were looking at.

7 g And you don't remember what -- if you did tell her

8 what you're looking at with Madoff or what that was about?

9 A I don't remember any conversation with her, no.

10 a Okay. All right, I'm going to show you another

11 document. This is dated 12/18/2003, also in that same time

12 period. It's from you to John McCarthy, 4:25 p.m. We'll

13 mark it as Exhibit 10.


15 identification.)

1G; A Okay.

17 Q And then I think I'm going to show you the next

18 document as well, which is a 12/19/2003 e-mail, the next day.

19 And that's from Mark Donohue to Matt Daugherty, 12/19/2003 at

20 2:13 p.m., and we'll mark that as Exhibit 11.


22 identification.)

23 A Okay.

24 Q Okay. So, in the first e-mail John says to you,

25 "Can we try to put a call to them today?" You say, "Sure,


Page 66

1 cooperation. And that's the purpose for the call is to make

2 sure that heads of firms or, you know, management at firms

3 knows they shouldn't -- they should cooperate with the

4 examination, we expect that they will do so, they won't jerk

5 us around. And the purpose for the call is to make sure that

6 they know it's important.

7 Q Do you remember -- were there any substantive

8 discussions about the issues in that call?

9 A I don't recall specifically. I recall generally

10 saying what we would be looking at.

11 Q Go ahead.

12 A I don't recall specifically but it would likely

13 have been we're looking at allegations of front-running.

14 Q And do you remember if Bernie Madoff ever provided

15 any information in response to that in that call?

16 A I don't recall. And it wouldn't have mattered,

17 really.

18 Q Okay.

19 A Because we were there to do an examination whether

20 he said we didn't -- you know, the allegations are inaccurate

21 or unfounded, it wouldn't have mattered.

Q Well, although if he had said the allegations are

23 true it would have mattered, right? I mean, on some level it

24 was relevant what his response would be, you know, to the

25 allegations, don't you think?


Page 68

1 BY MS. STEIBER:

2 Q Do you usually take notes of your conversations

3 with registrants?

4 A It depends on the context. Calls like this where

5 I'm really just calling to tell them we're doing an exam, get

6 prepared, cooperate. No. But I would be doing the speaking

7 so John McCarthy might have.

8 Q And is it normally you that would make a call prior

9 to a cause exam to let the registrant know that you'll be

10 performing a cause exam?

11 A It's -- in situations where it's important, where

12 we want their cooperation and expect it promptly -- so I do

13 many of those calls, yes, because the message is best

14 communicated from the director of the exam program in those

15 instances. It doesn't happen all the time, but where the

16 exam, it could be a cause exam, it could be a sweep exam,

17 where it's important and where I really want them not to jerk

18 around the staff --

19 (2 Right.

20 A -- in those cases I do.

21 Q So, even when there are allegations of fraud you

22 give the registrant notice that you'll be --

23 A It would depend.

24 Q What would it depend on?

25 A If there's a possibility that documents would be


Page 69

1 destroyed or if there's -- then we would send examiners in

2 without notice. If we're asking for the production of

3 documents and it's going to take some time then I might call.

4 And at the call, then there would be a document request that

5 would come immediately after that so any destruction of

6 documents following that would be, you know, obstruction.

7 Q So, how often have you had it where you send a

8 cause exam team in without giving this notice to the --

9 A I don't know off the top of my head. It's

10 sometimes effective, it's sometimes not effective because

11 you're just sitting in a reception area waiting for them to

12 pull documents.

13 Q I'm just wondering how serious the allegations have

14 to be in order for you to take that step, you know, rather

15 than the steps that you took, by calling and giving them

16 notice to prepare their documents.

17 A It depends. It very much depends on the particular

18 situation.

19 BY MR. KOTZ:

20 Q Did you take any notes of that conversation?


Q Okay. Do you know if John McCarthy did?

23 A I don't know.

24 Q Okay. Did you have any involvement in Exhibit 12,

25 in the drafting of this letter to Peter Madoff?


Page 96

1 front-running, yes.

2 Q Is there a difference between cherry-picking and

3 front-running?

4 A Yes.

5 Q What is the difference?

6 A Cherry-picking is trading and then deciding which

7 account to allocate the trade to after it's done. After you

8 know whether it's profitable then you decide which account

9 gets it. So, you cherry pick the profitable trades and put

10 them in a favored account and leave other accounts with

11 losing trades. It's a violation of the law if it's not

12 disclosed as such.

13 Q Okay. So, would you consider the allegations in

14 these e-mails attached to the April 22, 2004, should there

15 have been an immediate cause exam as a result of these

16 a-mails or not necessarily?

17 A I would want this -- I would want us to look at it

18 but I would want to know what else -- what other cause exams

19 are going on in the office at that moment. I would, you

20 know, I would want to know what else is happening in the

21 office and how it fit within the priorities. But allegations

22 of cherry-picking are not unusual.

23 Q Okay.

24 A Cherry-picking is a type of violation that we

25 investigate in examinations and that we bring enforcement


Page 97

1 cases against.

2 Q You don't see anything else in these e-mails other

3 than cherry-picking allegations?

4 A Well, I -- I only read it for the first time just

5 now and I read it very quickly. But --

6 MS. STEIBER: What about the last e-mail? There's

7 nothing else except for cherry-picking?

8 THE WITNESS: Well, as I said, it looked like what

9 this person was trying to do is to understand where the

10 trading took place and they couldn't come to a conclusion

11 about where it occurred.

12 MR. KOTZ: So, would that be something that OC

13 would look at?

14 THE WITNESS: Yes, I mean, as part of the e-mails

15 that the examiners identified as being suspicious and brought

16 to the attention of the broker-dealer exam team is an

17 indication that they should follow up.

18 MS. STEIBER: So, based on this you would expect

19 that they followed up on where there was -- based on these

20 a-mails you would have expected that they would have followed

21 up on whether or not Madoff was actually trading option?


23 MR. KOTZ: Okay. If you look at the second e-mail,

24 it says at the -- on the second page, "We at

25 have totally independent evidence that Madoff's executions


Investment Adviser #1

Page 110

1 previously. Did you encourage your employees to attend those

2 events?

3 THE WITNESS: Depended -- depends on what they

4 were.

5 MR. KOTZ: Okay, so explain, what ones would be

6 encouraged -- they would be encouraged to attend?

7 THE WITNESS: There's a legal and compliance annual

8 meeting sponsored by the SIA, now SIFMA. My staff spoke on

9 panels at that meeting. There were other meetings that the

10 SIA sponsored that -- here in Washington and other locations

11 in the country, about compliance and other issues that I

12 encouraged my staff to attend.

13 MR. KOTZ: Okay. And you were saying that that was

14 where you had conversations with Shana Madoff?

15 THE WITNESS: I remember speci~ically an event in

16 New York, a meeting of -- I think it was the legal and

17 compliance committee of the SIA with -- widely attended by

18 representatives of lots of firms, I recall she was one of

19 them.

20 MR. KOTZ: Okay. Other than at Eric Swanson and

21 Shana Madoff's wedding have you ever seen the two of them

22 together? I guess the going-away party was the second one,

23 but other than those two?

24 THE WITNESS: At SEC Speaks last year.

25 MR. KOTZ: Okay. Anything else? Any of these SIA


Page 112

1 THE WITNESS: Well, there's a ethics policy that

2 applies to OC employees that stricter than the policy that

3 exists for other SEC employees. Generally, if there could be

4 an appearance of impropri.ety or bias we would encourage

5 employees to communicate with the ethics office about whether

6 they should recuse themselves from any ongoing examination.

7 And then more specifically, OC employees can't

8 participate in an examination where a family member is

9 employed at the firm or where they have a financial interest,

10 where they hold an account with the firm. And there are

11 other specific situations where there is specific guidance

12 provided to OC employees with the goal of ensuring that there

13 is the appearance and the actuality of examiners performing

14 their functions without bias.

15 MS. STEIBER: So, if you become involved with a

16 registrant, you don't have -- do you have to say anything to

17 your superior affirmatively until you've been assigned a

18 matter that deals with that registrant?

19 THE WITNESS: You would -- hopefully, if you think

20 that there's a possible ethics issue as an employee, you

21 would communicate with the ethics office and get specific

guidance about the situation. But employees could not

23 examine the firm where -- if they had a family member

24 employed by the firm. In other situations, other

25 relationships, I would want the employees to communicate with


Page 113

1 the ethics office.

2 MS. STEIBER: What if like in this case you

3 have -- you find out that there is enforcement investigation

4 of a registrant, and you become involved with that registrant

5 while you know there is an enforcement investigation. Would

6 there be any reason why you would need to, you know, tell

7 your supervisor or contact the ethics office or could you

8 just -- could you keep that a secret?

9 THE WITNESS: I don't know. I mean there's no

10 general disclosure obligation to disclose people you're

11 dating to your supervisor. But, certainly, if it was a firm

12 that the examiner was going to examine or was examining, that

13 would be very clear that in that situation you could -- you

14 should not have a personal relationship with someone you're

15 examining.

16 Another process in the agency, outside of the exam

17 process, disclosure review process, enforcement

18 investigation, I don't know what the ethics counsel would say

19 about that. I don't -- I just don't know.

20 BY MR. KOTZ:

21 Q Do you know if Eric Swanson ever informed the

ethics office about his relationship with Shana Madoff?

23 A I don't know.

24 Q Okay. Do you know if there was any connection

25 between the Eric Swanson relationship with Shana Madoff and


Page 116

1 phone book kept by Bernie Madoff in their exam?

2 A Yes.

3 Q Okay. Are you aware of whether your name and

4 telephone number was in that book?

5 A I was told in the last couple of weeks that it is.

6 Q Do you have any idea why your name and number would

7 be in that book?

8 A I was also told it had an inaccurate phone number

9 associated with it --

10 cZ Okay.

11 A -- and that there were -- as I understand

12 it -- lot's of other SEC people in the phone book. But other

13 than that I don't know.

14 Q Okay. Now, you have recused from the Madoff work

15 post December 2008, is that right?

16 A Yes, December 17th.

17 Q Okay. And why -- did you choose to recuse

18 yourself?

19 A Yes.

20 Q Why?

21 A Because I attended the wedding and because --

22 Q Of Eric Swanson and Shana Madoff?

23 A Of Eric Swanson and Shana Madoff. And Eric Swanson

24 was an employee of mine in my chain of command.

25 Q Okay. Any other reason?


Page 117

1 A No.

2 Q Okay. Did you ever place a phone call to or inform

3 any examiner to back off of a Bernie Madoff examination?

4 A Never

5 Q Okay. Did you ever communicate with anyone with

6 respect to what actions they should take in an investigation

7 of Bernie Madoff?

8 A Investigation?

9 Q In an examination of Bernie Madoff. Did you ever

10 indicate anything to a OC examiner about how much they should

11 push in a Bernie Madoff examination?

12 A I don't recall having conversations about specific

13 tactics or strategies. I never would have said, "Go light on

14 this firm. Back off this firm." I never would have said

15 that. In fact, the -- my writing on this document you showed

16 me earlier indicates, "Go get them."

17 Q Okay.

18 MS. STEIBER: Were you ever told to back off on

19 Bernie Madoff by anyone in a powerful position?

20 THE WITNESS: Never.

21 MR. KOTZ: Okay.

22 THE WITNESS: I would never have received any

23 suggestion -- it would be highly inappropriate for anyone

24 senior to me to suggest that we back off in any way, in any

25 matter.


Page 118

1 MR. KOTZ: And you never heard any words from

2 somebody in Congress suggesting that you back off or

3 your -- the agency back off of a matter involving Bernie

4 Madoff?

5 THE WITNESS: No.

6 MR. KOTZ: And you're not aware of any such

7 communication occurring?

8 THE WITNESS: No.

9 MR. KOTZ: Okay. What was your reaction when you

10 did hear in December that Madoff had admitted tb conducting a

11 Ponzi scheme?

12 THE WITNESS: I was very surprised.

13 MR. KOTZ: How come?

14 THE WITNESS: He stated that it was $50 billion;

15 it's a significant sum of money.

16 MR. KOTZ: Do you think Bernie Madoff got special

17 treatment at the SEC because he was a well-known entity?

18 THE WITNESS: I can only speak for examinations, I

19 can't speak about any other office or division in the SEC.

20 But categorically, no.

21 MR. KOTZ: Okay.

22 THE WITNESS: Because we examine well-known

23 entities and we find violations and make enforcement

24 referrals involving well-known entities and not-so-well-known

25 entities everyday. It's what we do.


Page 1

UNITED ST~TES SECURITIES AND EXCHANGE COMMISSION

In the Matter o~:

File No. GIG-509

GIG-509

WITNESS: Number 26

·~I ~-~~d ~J ~iU I

PAGES: I through 113


100 F Street, N.E.

Washington, D.C.

DATE: Thursday, April 23, 2009

The above-entitled matter came on ~or hearing, pursuant


Diversified Reporting Services, Inc

(202) 467-9200


Page 2

1 APP~ARANCES:

3 On behalf o~ the Securities and Exchange Commission:

4 DAVID KOTZ, ESQ.

S HEIDI STEIBER, ESQ.

6 CHRIS WILSON, ES(Z.



9 100 F Street, NE, Room 2264


11 202-551-6061

12

13

14

15

16

17

18

19

20

3-

22

23

24

25


Page 3

1 CONTENTS


4 Mark Donohue 6

6 F.XHTRITS : DESCRIPTION I DENTIFIED

7 1 Notice o~ rights 8

8 2 E-mail, Wood to Walker, 12/16/03 28

9 3 Draft e-mail, Donohue to Walker,

10 12/17/03 30

11 4 E-mail, Hachemian to Kelly, 5/21/03 31

12 s E-mail, McCarthy to Swanson, 12/11/03 49

13 6 E-mall, Donohue ,o Daugherty,

14 12/19/03 54

15 7 OC headquarte*s document request

16 drafts 1 through 7 56

17 8 Letter, B. Madoff to E. Swanson,

18 1/16/04 61

19 9 E-mail, Walker to Donohue/Wood,

20 1/29/04 66

21 10 Notes, Hachemian, 1/29/04 67

11 E-mail, Wood to Donohue, 2/3/04 73

23 12 B. Madoff conference call notes,

24 2/4/04 74

2~ 13 Meeting r-iotes, Donol-iue 76


Page 4



4 14 E-mail, Walker to Donohue/Wood,

5 2/4/04 78

6 15 Document request drafts 1 through

7 10, 2/11/04 80

8 16 Dra~t letter, E. Swanson to

9 P. Madoff, 2/04 83

10 17 Siyned letter, E. Swanson to

13. P. Madoff, 2/18/04 84

12 18 Letter, B. Madoff, to ~. Swanson,

13 3/1/04 85

14 19 Customer coniirmation statements,

15 Madofr Securities 86

16 20 E-mail, Walker to Donohue, 3/10/04 87

17 21 Conference call notes, 3/18/04 88

18 22 Letter, B. Madof~ to M. Donohue,

19 3/23/04 89

20 23 E-mail, Walker to Donohue, 3/23/04 90

21 24 Draft e-mail, Donohue, 3/24/04 91

25 ~mail, Walker to Donohue, 3/31/04 92

23 26 E-mail, Walker to Sadowsky, 4/6/04 92

24 27 E-mail, Donohue to Walker, 4/7/04 93

25 28 E-mail, Dcnohue to Swanson, 3/%6/05 96


Page 5


3 EXHIBITS: DESCRIPTION IDENTIFIF,D

4 29 E-mail, Walker to Davis, cc Donohue,

5 6/2/05 98


10

11

12

13

14

15

16

17

1. 8

19

20

31

22

23

24

25


Page 6

1 PKOCEEDINGS

2 MR. KOTZ: It is 10:06 a.m. on April 23, 2009 at

3 the United States Securities and Exchange Commission Office

4 of Inspector General. I am going to swear you in.

5 Whereupon,

6 MARK DONOHUE

: was called as a witness and, having been first duly sworn,

8 was examined and testified as follows

9 ~XAMINATION

10 BY MR. KOTZ:


12 record?

13 A Mark Donohue, D-o-il-o-h-u-e.

14 MR. KOTZ: Mr. Donohue, my name is David Kotz. I

15 am the Inspector general ~or the United States Securities and

16 Exchange Commission. I have my colleagues here with me,

17 Heidi Steiber and Chris Wilson. This is an investigation by

18 the Office of Inspector General, case number OIG-509.

19 I am going to ask you certain questions and you

20 will have to provide answer under oath. The court reporter

21 will record and later transcribe everything that is said.

22 Please provide verbal answers to the questions. A nod of the

23 head or other non-verbal responses will not be able to be

24 picked up by the court reporter. So the record will be

2' clear, let me ~ini~h Iny yuestion before you provide your


Page 7

1 response, and I will let you finish your response before I

2 ask the next question.

3 It is important that you understand the questions

4 and give accurate answers. If there is anything you do not

5 understand, or anything you do not know or are not sure

6 about, please let me know. Otherwise, I will assume that you

7 heard and understood the question.

8 Do you understand those instructions?


10 MR. KOTZ: As you can see, your responses and

11 statements given today are provided after you have sworn an

12 oath and will be taken down verbatim by the court reporter.

13 This is an of~icial U.S. government law en~orcement

14 investigation. The claims asserted in this case are serious

15 ones. It Is very important that you tell me everything you

16 know about the matter at hand and are completely forthcoming

17 and truthful with me.

18 I am formally advising you that your testimony

19 today is subject to the laws of perjury. Providing false or

20 misleading testimony under oath is a very serious offense

31 If the evidence shows the testimony you have given is false,

22 we may refer it as appropriate.



25 EY MR. KOTZ:


Page 8

1 Q I want to ~irst put into the record that this is a

2 notice of rights. It says on the top ~nited States

3 securities and Exchange Commission Office of Inspector

4 General. Warning. Employee voluntarily to provide

5 information. Is it correct that you signed and dated this

6 .document today?

i A It is.


9 identification.)

10 MR. KOTZ: Let's put this in as Exhibit i. I am

11 going to start with some background questions.

12 THE WITNESS: Can I just get on the record a

13 request that 7 get a copy of the transcript and also if

14 possible if my name could be kept out of the public report.

15 MH. KOTZ: We will certainly give you a copy of the

16 transcript. In terms o-t your name in the public report, we

17 will give that consideration. That decision may not be made

18 entirely by us. We will provide a copy oi~ ~he report in full

19 with everybody's names to the chairman. We will not release

20 the document to the public.

The agency may release it to the public or to

22 Congress. We will apprise them of concerns by you and others

23 abo~t their names. Again, at the end of the day I will not

24 have the final say about what happens with respect to that.

25 From what I understand of the inten~ions of the agency, I


Page 9

1 think the intention is to take out names.

3 BY MR. KOTZ:

3 Q Could you describe for me your education beginning

q with college please?

5 A I went to Loyola College in Baltimore. I graduated

in 1991. I went to the University of Baltimore School of

7 Law. I graduated in 1995.

8 O Did you work between college and law school?

9 A I did. I worked during law school at Arinc

10 Research. I took a year off between the two and worked at

11 Arine Research. I continued at Arinc for the first two years

12 o~ law school.

13 Q How do you speli Arinc?

14 A A-r-i-n-c. It ~s in nnnapolis.

15 Q What is Arine Research?

16 A They do work -tor airlines. I think they are

17 actually owned by airlines. Sort of defense contracting kind

18 of things. Defense is the wrong word. Airline contracting

19 kind of things. I do not know if they nad stuff with the FAA

20 or not.

21 Q What kind of things did you do for them?

22 k I worked on RFPs -- request for proposals. I

23 actually sat down and spent a bunch of time -- Quatro Fro,

24 which was a predecessor to ~xcel. I inputted man hours times

25 rate equals so on and so forth. That kind of stuff.


Page 10

1 Q What was your degree from college in?

2 A It was in business marketing.

3 O What was your first job after graduating from law

4 school?

5 A I clerked for Montgomery County Circuit Court.

6 Q What kind of things did youdo there?

7 A Law clerk for a judge -- Judge Miller. I sat in

8 court, helped out the judge with anything that he wanted.

9 Q Any opinions?

10 a Opinions that he would write.

11 Q And securities-related or business-related issues

12 that came up there?

13 A It was a court or general jurisdiction, so we did

14 everything from criminal stuff to business stu~~ to whatever

15 needed a jury in Montgomery County. It was a state court.

16 (; So you clerked from 1991 to 1992?

17 A 1995

18 Q 1995 to 1996?

19 F. Yes.

20 Q What did you do after your clerkship?

21 A I went to work at a law firm -- Miles and

22 Stockridge.

Q In Baltimore?

24 A The firm is based in Baltimore. We had a Rockville

25 office. I worked out o~ the Rockville office


Page 11

1 Q You worked there as an associate?

2 A Yes

3 Q How long did you work at Miles and Stockridge?

4 A Until I came to the commission.

5 Q Which was in?

6 A That would have been 2000.

7 Q So approximately four years?

8 A Yes.

9 BY MS. STEIBER:

10 Q Did you have other friends from Miles and

II Stockridge that were at the commission? Did Alex Sadowsky

12 work there?

13 A Alex did not work at Miles.

14 O What about jackie Wood?

15 A Jackie Wood worked at Miles in the Baltimore

6 office. She came to the commission after I did.

17 BY MR. KOTZ:

18 B Did you know her from your Miles days?

19 A I knew of her more than I knew her. I would say

20 hi. Our paths did not cross very often. She was a mentoree

21 of someone in their Rockville office who 7 was good friends

with.

23 Q What kind of work did you do for Miles and

24 Stockridge in those tour-and-a-half years?

25 A Litiyation was the major focus. With that focus we


Page 12

1 worked on everything that came in the door. It was general

2 litigation including business stuf-t, corporate stuff. We did

3 not do securities trading kinds o~ things, but corporate

4 disagreements I would say. I was also the town attorney =or

5 the town of Kensington. Working at Miles, they were one of

6 my clients. We did la~or disputes. We did all kinds of

7 things. As ari associate, I worked on whatever the partners

8 wanted me to work on.

9 Q In that time period prior coming to the SEC, did

10 you have any particular broker-dealer or investment advisor

11 experience?

12 A I had not worked on broker-dealer or investment

13 advisor work.

14 () In around 2000, you began work at the SEC.

lj BY MR. WILSON:

16 O What is the name of the mentor to Jackie Wood?

17 A

18 gy MR. KOTZ:

19 Q You began working at the SEC in 2000, you said.


21 Q What was your initial position?

22 n staf~ attorney.

Q In what office?

24 A Or~ice of Market Oversight. Same otfice I am

25 currpntly in.


Personal Privacy

Page 13

1 Q What was the larger office?

2 A Office of Compliance Inspections and Examinations.

3 OCIE, as it is more commonly called.

4 Q And who was your initial supervisor as a staff

5 attorney in 2000?

6 A My branch chie~ changed a few times.

7 I believe, was my first branch chief. I may have

8 reported to Tina Berry.

9 Q And the branch chief was your direct supervisor?

10 A That was my direct supervisor.

11 Q How long were you a staff attorney for?

12 A I do not remember exactly. A year or a

13 year-and-a-half. Something along those lines.

%4 Q So you are thinking approximately sometime in 2001

15 you became a branch chief?

16 A It could have been %003. 1 am sorry. J just do

17 not remember.

18 g So either 2001 or early 2002?

19 A Most likely.

20 Q Who did you report to when you became a branch

21 chief?

22 A Eric Swanson.

23 Q How long did you report to Mr. Swanson?

24 A Until I became an assistant director.

25 Q When did you become an assistant director?


Personal Privacy

Personal Privacy

Page 14

1 A Probably a year after I became a branch chief.

2 Q So sometime in 2002 or early 20037

3 A I think I became an assistant director -- it was

4 during the exam that we are talking about. I think that

5 would have been February 2004. The initial part of 2004.

6 All the dates should go back to reflect that.

7 Q You think you became an assistant director in

8 February 2004 and you became a branch chief --

9 A Probably a year preceding that.

10 Q So either the beginning of 2003 or end of 2002?

11 A That is probably right.

12 Q What were your duties as a branch chie~?

13 A To manage protects, staff.

14 O What kind oi projects?

15 A Anything that came in the office. Our o·t~-ice

16 focused on SROs, but we do broker-dealer work, investment

17 advisor work. We focus on trading issues. Anything that I

18 was directed to do or came in the door from our standpoint we

19 would work on. It was a wide variety of information.

20 Q Were you involved in examinations in that time

%1 period?

A Yes. As opposed to inspections? We have a

terminology issue. Sometimes SRO inspections -- those are

24 what we call inspec~ions. It is misused all the time

25 internally by us. Hroker-dealer and Investment advisors are


Page 15

1 examinations. They are used interchangeably.

2 Q How many examinations or inspections would you say

3 you worked on as a staff attorney?

4 A I have no idea.

5 Q Was it 10? 100? 500?

6 A Ten. It certainly was not 100 or 500.

7 Q Somewhere in ~he range of ten?

8 A Probably.

9 Q And then as a branch chief how many would you say

10 you worked on?

11 A Some continued from when I was a staff attorney.

3.2 Probably more than that then. Ten, fifteen, twenty. I am

13 sorry. I just do not know.

14 Q When you became an assista~t director who did you

15 then report to?

16 A John McCarthy.

17 Q So that was from February 2004 until what time

18 period?

19 A That I reported to John McCarthy?

20 Q Yes

21 A Until he left. i think he left in 2006 or 2007.

Q Who did you report to after John McCarthy left?

23 A After John McCarthy left there were two assistant

24 directors at that time: myself and Tom Edit. We had no

25 associate director as our director was trying to find a


Page 1~6

1 replacement. We both reported to Laurie Kichards, our

2 director.

Q Is that your current title as well?

4 A Assistant director. And that associate director

5 position has been filled by

6 Q When did you start reporting to

7 A A year-and-a-half or two years ago, maybe. I

8 apologize for the dates. They are going to be a problem

throughout.

10 Q So just for some clarity, from February 2003 to

11 February 2004 you were branc~i chie~ reporting to Eric

12 Swanson. From February 2004 to sometime in 2006 or 2007 you

113 were an assistant director reporting to John McCarthy.

14 A Those dates sound about right. The reporting lines

1~ are clear. I am certain about those.

16 Q When did you first hear of Bernard Madoff or Mado~~

17 Securities?

18 BY MS. STEIBER:

19 Q Can ? go back for a second? How did your duties

20 change from branch chief to assistant director?

21 A The simplest answer to that is I became in charge

o~ more staff and more projects.

23 BY MR. KOTZ:

24 Q Did it a~fect t~ie level of involvement that you had

25 in examinations or inspections?


Personal Privacy

Personal Privacy

Page 17

1 A Of course.

2 Q In what way?

3 A Because you could not be as involved as you had

4 many more inspections. You could not be as involved in each

5 of the details of each of the inspections or examinations.

6 Again, I use those interchangeably. As assistant director

7 with the branch chief reporting to you, they were the ones

8 who were mainly in charge o-t the inspection or examination.

9 Then typically, but not always, there was a lead staff person

10 in charge. As a manager, you certainly want to develop staff

and give them responsibilities.

12 BY MS. STEIBER:

13 Q So i~ you had a project that you were the branch

14 chief on, and then you became an assistant director on the

15 project but there was no new branch chief, would your role

16 have changed on the project then or would you still assume

17 all the branch chief duties when you were an assistant

18 director?

19 A The role in each project is whatever -- it changes

20 with each project. It is not necessarily consistent.

21 Without a branch chief you really more heavily as an

assistant director on staff to take more of a stronger role.

23 In each project you try to work with what you have. Each

24 staif is different and each branch chief is different.

21 Q Wer-e you ever given a description of what, your


Page 18

1 duties were as far as branch chief and an assistant director

2 in oc? was there a job description?

3 A Possibly. 7 do not recall

4 BY MR. KOTZ:

5 a When did you first hear of Bernard Madoff or Madoff

6 securities?

7 A I have no idea when I first heard about Madoff,

8 either the firm or the individual. He is certainly somebody

9 in the securities industry so --

10 Q Do you think you knew about it before you ever

II worked on an exam relating to Bernie Madoff?

12 A I was certainly aware of the existence of the firm

13 as a market maker.

14 y Were you aware o~ Bernie Madoff's existence as

35 well?

16 A I imagine I was, but I do not have a clear

17 recollection of what I knew about him.

18 a Have you ever met Bernie Madoff?

19 A I believe I have. If I have not met him -- and I

20 apologize for being unclear about this. I remember

21 distinctly seeing him in a conference somewhere. Either

somebody pointed it out to me that this is who it is or --

23 a Do you remember when that was?

24 A I do not.

25 Q Prior to your exam?


Page 19

1 A I actually do not remember if it was prior to the

2 exam or after the exam.

3 BY MS. STEIBER:

4 Q Have you met anybody else in Madoff's family?

5 A I have met Shana Madoff.

6 Q When?

7 A I met Shana at Eric Swanson's going-away party.

8 O Was that the first time?

9 A I think so, but I am not certain.

10 Q Did you go to hiswedding?

11 A I did not.

12 BY MK. KO'i'Z:

13 Q Have you seen Shana other than at Eric's going away

14 party?

35 A Yes, but I do not know when. It could have been at

16 an SEC Speaks. I have seen her more than once. A few times

17 and I do not remember each time.

18 Q What about other people in the Mado~~ family?

19 Peter Madoif?

20 A I do not believe I have met anybody else.

21 Q You said you were aware generally of Bernie Madoff

22 and Madof~ Securities as a market maker. Were there any

23 whispers about his operations? At that time were you aware

o~ any concerns about his returns?

25 A Until the examinations started, ? had no real


Page 20

1 information about the firm I knew of that raised concerns.

2 Q When you generally were aware of Bernie Madorf,

3 what was his reputation? Was he considered an important

4 figure in the industry?

5 A I do not know that I had an impression of his

6 reputation that would distinguish that from anybody else in

7 the industry that has got a last name associated with a firm.

8 BY MR. WILSON:

9 Q Were you excited to maybe do the examination in

10 terms of Madoff Securities?

11 A Not particularly. I do not recall being excited

12 about it. Most things that we do -- we work on important

13 stuff. That is what we do every day. ; do not know ,hat any

14 one name would distinguish itself from any other name. At

15 least at the time, I do not remember being any more excited

16 about working on the Madofr examination as I would any of the

17 other examinations that we do.

18 BY MR. KOTZ:

19 Q What was the first OC matter involving Madoff that

30 you were aware of?

21 A At the actual time of the matter itself?

22 Q Yes.

23 A Do you mean am I aware of other OC matters that

24 have involved Madof~?

25 Q ~ am not talking about post-December 200ti. I am


Page 21

1 talking about at the time.

2 BY MS. STEIBER:

3 Q Be~ore you worked on one, were you aware of other

4 Madof~ matters?

5 A I do not think so. I do not think I worked on any

6 other Madoff matters other than the one that we are

7 discussing. I was generally aware of things in the office,

8 so I could have been aware of or even had conversations with

9 people about other ongoing exams. We did that often. I just

10 do not have a specific recollection.

11 By MR. KOTZ:

12 Q Were you aware of that Triple-~ sweep that was

13 done?

14 A I am aware of it now. 7 have no recollection if I

15 was aware of it then. Again, I would say T was likely aware

16 of it because I was likely aware of things that were going on

17 in the office.

18 Q But you did become involved in a cause exam

19 involving Madoff, right?

20 A I did become involved

21 Q When was that?

22 A In the December 2003, January 2004 time period.

23 Q What was your role on that examinalion?

24 A It beuan as the branch chie~.

25 Q As a branch chief what was your role in terms of


Page

1 the examination?

2 A To run the examination.

3 Q So you were responsible for giving assignn~ents to

4 staff members?

5 A I was responsible for giving assignments to staff

6 members that reported to me on that project under the

7 direction of the assistant director.

Q Were you responsible for following up with staff

9 members to make sure that they did their work?

10 A I thirlk that is a typical branch chief~ duty.

11 O Is that yes?

12 A Yes.

13 C What about determining the scope o~ the

14 exa~ination? Would that be something that the hranch chief

15 did?

16 A That would be something that the branch chief would

17 be involved in. I would say as a group on projects, we

18 worked in teams. That team would include staff, the branch

19 chief, assistant director, associate director. Depending on

20 any one project, people would have opinions, insight, and

21 guidance.

22 C) Let's talk about this particular project, the

23 Madoff cause exam that you said started in December 2003.

24 Who made that decision about what the scope of the exam would

25 be?


Page 23

1 A I do not recall who made a decision. There were

2 discussions with myself, with Eric Swanson, with John

3 McCarthy about what it is we were doing.

4 Q So you were involved in that decision?

5 A Likely I had an opinion. I do not know i~ my

6 opinion carried the day. I would voice an opinion as to how

7 things should --

8 Q You would say the final decision as to what the

9 scope o~ the exam would not have been made by you? Would

10 that be your position?

11 A I do not know what a final decision would be in

12 that context. Generally we came to an agreement about how

13 things were done. I~ someone above me -- i~ my assi.stanl_

14 director or associate director disagreed with the any

15 decision or with the way an exam was going, we would go with

16 the way that the assistant director or associate director or

17 director wanted us to go. There is a chain of command we

18 would work with.

19 Q Do you remember the context of the 2004 cause exam

20 of Madoff and whether there was any disagreement about what

21 the ~ocus should be?

22 k I do not remember disagreement.

23 Q Is it fair to say the determination o-t what the

24 scope o-l ihe exam would be was some kind of joint decision

25 that everyone agreed on involving you, Eric Swanson, and John


Page 24

1 McCarthy?

2 A That is likely.

3 Q Who were the staff members that worked on that

4 exam?

5 A I believe it was Jackie Wood, Genevievette Walker.

6 I think.Matt Daugherty had some involvement with it.

7 got invo3ved some time after it- started. T think that

8 was it.

9 Q Who made the decision as to who would be the team

10 put together on that?

11 A I do not recall. T would not distinguish that

12 decision process from the focus decision process.

13 ~ So it would be a ioint decision''

14 A It would likely be a -- yes. It is possible I

15 could have gone to Eric or John or both o~ t~-iem and said, "I

16 would like to have these two staff members or these people

17 involved on it." It is possible that one of them said they

18 wanted these two involved on it. ? do not know that there is

19 a clear decision tree.

20 BY MS. STELBER:

21 Q Do you think that you and Eric and McCarthy chose

22 the staff members before determining the ~ocus of the exam so

23 that you could say you wanted this particular expertise from

each person, or if it was more these people are availahle so

25 I am going to staff them on this project and then decide what


Former OCIE AttorneyAdvisor

Page 25

the ~ocus was?

2 A I do not recall specifically how the staffing

3 decision worked on this one exam. Generally when we staff

4 examinations we look at all kinds of issues. Staff

5 expertise, availability. Those are key characteristics of

6 who gets staffed on any one.exam.

7 Q I am not clear. Do you decide on the staffing

8 before you got the focus of your exam or do you have the

9 ~ocus and then you get the staff? I am talking aboul in this

10 particular situa~ion.

11 A I do not recall, how that worked in this particular

12 si-,uation. The focus or an examination is an evolving topic.

111 We try to go where the exam leads us. We try to have a plan

1J in the beginning.

15 C? So it is evolving. I am still not clear. Is there

16 any OC protocol of how you choose the staff members for your

17 team? Is it haphazard?

18 A It is not haphazard. I do not know that there is a

9 written protocol about how teams get selected~ We work with

20 expertise. We work with resources. Staff availability. We

21 are interested in staff development. There are a number of

22 factors into who gets selected.

23 BY MR. KOTZ:

24 Q So you would not necessarily make a specific point

25 to have a focus and then ~j.nd the staff after you determine


Page 26

1 the ~ocus? That would not be the particular protocol that

2 you would use'

3 A I would say when we start an examination and get a

4 project we generally have a pretty good idea of at least a

5 broad focus when we start. Narrowing and refining it into

6 something -- it is evolving. We have a good idea, or at

7 least some idea, of what we are trying accomplish as soon as

8 we get an exam -- we decide to go out on exams. That is

9 something we do not know exists. As soon as we know it

10 exists, this is something we are going to pursue, the focus

11 is already developing and then we bring in staff.

12 BY MS. STEIBER:

13 Q Do you recall why you chose Jen Walker and jackie

14 Wood?

15 A I do not.

16 BY MR. KOTZ:

17 Q At some point you became an assistant director

18 while that Madoff cause exam was going on.

19 A That is correct

20 O So how did your role change in connection with this

21 particular exam?

22 A Not too dramatically, but for Eric Swanson's

23 involvement. When I became an assistant director it was a

24 new position. Eric and I talked about how that was yoiriy to

25 work. Eric had more experience than I did and was certainly


Page 27

1 someone who I thought -- commonly sought counsel on all kinds

2 of issues. Procedurally I became the assistant director on

3 it and I would report directly to John McCarthy.

4 BY MS. STEIBER:

5 Q But you just said that you had a discussion with

6 Eric about how you becoming an assistant director would

7 change his role. What was that conversation and what was the

8 conclusion?

9 A The conversation was generally T became an

10 assistant director with Eric so how are we going to work out

11 who is working on what, when does the next project come in,

12 how does -- we did not have it was going to be a,b,c,d, or e.

13 ~t was an evoJving issue. I cert~inl\l came to him

34 saying -- I wanted a very good relationship with Eric, of

15 course. I said T hope he did not mind if ? kept talking to

16 him about issues. It is very collaborative, I think, the way

17 the whole office works.

18 BY MR. KOTZ:

19 Q Did Eric stay in the loop on the Madoff exam even

20 after you hecame assistant director?

21 A I believe he did, we both tried to stay in the

loop with as many exams as we could.

23 Q Did you have less hands-on involvement in the

24 Madoff cause exam alter you became assistant director?

25 A I had more projects after 3 became assistant


Paye 29

I BY MS. STEIBER:

2 Q I thought you said earlier you would have a lead.

3 A It varies depending on the examination.

4 BY MR. KOTZ:

5 Q When you assign staff members to a particular exam,

6 do you talk to them about what the background and purpose of

7 the exam would be?

8 A When I assign staff members to work on a project we

9 discuss the project. We discuss all elements of the project

10 that we are aware of.

11 Q Do you discuss what precipitated the project?

12 A Likely.

13 Q Did you discuss in this case with Jackie Wood and

14 Jen Walker why it is you started a cause exam of Bernard

15 ~Yiadofi?

16 A I do not recall any specific discussions. That

17 does not mean I did not discuss it, I just do not recall

18 Q If you look at the third draft of this dociiment ii

19 says, "The staff recently received information from an

20 outsidc~ source alleging thatBernard L. Madoff, principal of

23 Bernard L. Madoff Investments LLC"

A I am sorry. Where are you reading from?

23 Q Right there.

24 A Okay.

25 O "The staff recently received information from an


Paye 30

1 outside source alleging that Bernard 1~. Madoff, principal of

2 Bernard L. Madoff Investments LLC, a leading market marker in

3 NASDAQ securities, has been committing front running

4 violations." What was the outside source?

5 A I believe we had a conversation with a gentleman.

6 I do not remember his name. I do not believe it was

7 Markolopos.

8 Q

9 A That is likely.

10 BY MS. STEIBER:

11 Q From ~? 12 A Yes. i think that is right. I also think there

13 was a news article or other in-tormatlon that was relevant.

14 BY MR. KOTZ:

15 Q Do you know i~ that in~ormation that you got from

16 was shared with Jackie Wood or Jen Walker?

17 A I do not recall any specific conversations. I do

18 not know.

19 BY MS. STEIBER:

20 Q Do you recall if the _ complaint 21 came through possibly Mavis Kelly?

22 A I believe Mavis had talked to him prior.


24 identification.)

25 BY MR. KOTZ:


Page 31

1 Q Why don't we show you some docume~ts. This is what

2 we are going to mark as Exhibit 3. This is actually an

3 a-mail that you started dated 12/17/03 at 10:44 a.m. See in

4 there it says, "Jen, Mavis Kelly told Eric she has a bunch of

5 stuff on Madoff." I wanted to show you that.

6 . A Was this e-mail sent?

7 Q No.

8 A Just a draft?

9 Q Just a draft.


11 identification.)

12 BY MR. KOTZ:

13 Q The next exhibit we are going to show you we are

14 going to mark as Exhibit 4. This is an

15 _ to Mavis Kelly on wedncsdsy, M~y LI, 2003 at

16 5:47 p.m. with several attachments. You can see one o~ the

17 attachments is a news article.

18 Do you recall that this document and/or the

19 communications between Mavis Kellv and was what

20 precipitated that 2004 exam?

21 A I do not know whether this precipitated the exam or ;

22 not.

23 BY MS. STEIBER:

24 Q You do not recall Mavis giving this to you?

25 A I recall Mavis giving this -- this occurred prior ~-;.·,·?5~~·;;··;;;::·i:···;·.;;;ii~


Page 32

1 to our group starting the Madoff examination. I do not know

2 whether this was the reason we started the examination. I

3 reviewed this information during the course of the

4 examination.

5 Q Did she give this to you directly and then you gave

6 it to Eric Swanson, or did she give it to Eric and --

7 A I do not recall how th~ transmittal of documents

8 went. I recall reviewing the documents. This document is

9 not unfamiliar to me.

10 Q When do you recall reviewing it? Right after she

11 received it? She testified that she believes she gave it to

12 you after receiving it.

n3 A I just do not recall.

14 BY MR. KOTZ:

15 Q Are you aware of any other outside source that

16 could have been referred to in the planning memo in Exhibit

17 E, other than the matter?

18 A I am not. I want to be clear. I am not saying

19 that this did not start it, I just do not rementber. This

20 type of information would likely by something that would have :

21 started it. It is quite possible that this is what started

22 itl but I do not recall specifically what piece of

information started it. It could have been multiple pieces

24 of information.

25 Q But you do not remember any other specific piece of


Page 33

1 information that could have started it, other than what

3 A I do not.

4 Q Let me ask you a couple of questions about

5 Exhibit 4. which is the memo from You

6 remember, though, at the time reviewing these documents?

7 A I remember reviewing this document. I do not

8 remember when I reviewed this document. i

9 Q Do you remember having any communications with Eric

10 Swanson or john McCarthy about this document?

II A I do not remember any specific communications. It

12 would be likely that I had.

13 Q Let me ask you a couple of questions about some of

14 the things in this document. If you can see, in the first

15 full paragraph it says, "The firm does not charge any

16 management or performance fees to these accounts, but rather

17 brokerage commissions. We estimate the amount of money

18 managed under this strategy by EMS" -- referring to Bernard

19 Madoff Securities -- "somewhere between USD 8- to

20 10 billion."

21 Does the fact that, according to this, Madoff does

22 not charge management or performance fees but rather

23 brokerage commissions raise any red flags with you?

24 A It is an interesting fact. It is a distinguishing

25 characteristic of an investment advisor versus a


Paye 34

1 broker-dealer. Broker-dealers would typically charge

2 conunissions. Investment advisors would typically

3 charge -- hedge funds charge performar;ce fees -- charge

4 asset-based compensation.

5 Q But given that he was doing 8- to $10 billion,

6 would that be surprising that he would not charge management

7 or performance fees?

8 A I am sorry. It is hard for me to distinguish

9 between what I know now and what I knew then as far as what

10 would be surprjsjng or·not. I am having difficulty

11 distinguishing yes at that time when T looked at this. This

12 was something that was a red flag. At this point, given all

13 the information that has been out in the press, I see

14 everythiny as a red flag.

15 Q Setting aparl from what you remembered at the time.

16 Just from your general knowledge having worked in OC, would

17 this be a red ~lag?

18 A The mere size of the --

19 Q The size combined with the fact that he did not

20 charge management or performance fees.

21 A I think that is an interesting element.

22 Q But not a red flag?

A I do not know what a red flag is. I am not trying

24 to be combative here. But, yes, it is something we would

25 look at.


Page 35

Q Wouldn't there be a significant amount of money

2 left on Che table ii he was doing 8- to $10 billion and was

3 not charging management or performance fees?

4 A If he was acting as a broker-dealer doing

5 transactions I think that would be typical. If he was acting

6 as an investment advisor then I think that would be atypical

7 BY MR. WILSON:

8 Q Is it significant that these are discretionary

9 accounts in the way he would do his fee structure?

10 A Is it significant that they were discretionary

11 accounts from a broker-dealer?

12 Q \ies.

13 A Il do not mean to downplay a~y of this. All of this

14 is dillerent, therefore interestiny. The structure that he

15 had set up was not normal, I would say.

16 BY MR. KOTZ:

17 Q Let me ask you about that next full paragraph. It

18 says, "According to EMS the options are traded with a number

19 of traders across on the CBOE."

20 Do you know what the CBOE is?

21 A Chicago Board of Options Exchange

Q And you knew what that was at the time?

23 A I did.

23 Q "With an 8- to $10 billion size you must see the

25 volume, but unfortunately you do not. We actually checked


Page 36

1 with some of the largest brokers, UBS, Merrill, et cetera,

2 which told us they never traded with them OEX options. The

3 question is do they really implement the full strategy."

4 Let me ask you first: At the time did this seem to

5 be a concern what ~ wne saying? 6 A I think the entire issue was a concern. Everything

7 about it was a concern. Certainly, we take tips and

8 information along these lines with -- try to put it in

9 context and try to understand whether the information

10 contained in the tip is accurate or not and follow up with

11 that and proceed.

12 To get back to the initial point. He is suggesting

13 do they implement the full s~rategy or not, or are they doing

14 something different than what the strategy is that he is

15 aware of.

16 BY MS. STEIBER:

17 Q He is suggesting he is not really trading the

18 options, isn't he? Or not trading them as he has represented

19 to his clients, correct? The question is do they really

20 implement the full strategy.

21 A The question is do they really implement the full

strategy can mean a lot of different things. It could mean

23

24 understand the strategy to be.

25 Q Let's back up then. Let's look at that paragraph.


Page

1 It says, "According to EMS the options are traded with a

2 number of traders and crossed on the CBOE. With an 8- to

3 $10 billion size you must see the volume" -- so you would see

4 the volume on CBOE -- "but unfortunately you do not. We

5 checked with some of the largest brokers, which told us they

6 never traded with them OEX options. The question is do they

7 really implement the full strategy."

8 So isn't he saying the question is are they really

9 trading these options, or at least trading them at the

10 size --

11 A I think that is a reasonable interpretation of what

12 he is saying.

13 BY MR. KOT7,.

14 Q Isn't he saying that Madoff might be lying about

15 his options trading?

16 A I do not think he goes that far. I think that is a

17 reasonable inference from it that he is concerned about what

18 he understands Madoff's representation is to be and what he

19 understands Madoff to be doing.

20 Q And was that a concern at the time when you guys

21

22 doing the cause exam that Madoff may not be trading these

23 options or may be lying about what his options trading were?

24 A Our focus of the examination was on front running.

25 ~ihat is what we believed was the most likely -- if there was


Page 38

1 a problem there that was the most likely problem. I think we

2 took that focus from all the information we got.

3 Q What about this?

4 A I certainly wish I would have followed up on more

5 stuff after the fact.

6 Q What about this particular issue? Why was there no

7 focus on the point that was making, which 8 is according to Bernard Madoff the options were traded with

9 an 8- to $10 billion size you must see the volume but they

10 did not see the volume.

11 A I do not know why there was not more focus on that

12 issue.

13 BY MS. STEIBER:

14 Q You just said that you would have followed up on

15 more things. What specifically are you talking about?

16 A I wish I would have found out that this was a major

17 Pon2i scheme.

18 BY MR. KOTZ:

19 Q But are you also saying that you wish would have I

20 focused the exam on the possibility of a Ponzi scheme?

21 A I wish I would have done everything I could have

done. I wish I would have found that this was a huge fraud.

23 Q Do you see now, in hindsight, it was a mistake to

24 locus the exam on front running and not on what _ was

25 saying, which was that the options may not be traded and


Page 39

1 certainly not in that size?

2 A I wish I would have focused on all this stuff.

3 Whether it was a mistake or not given the information that we

4 had, and this was information we did have including all the

5 other things we had too, I do not know that it was incorrect

6 or a mistake. Would I have made the same decision again? I

7 do not know that I would have. In hindsight knowing what has

8 gone on,. I wish I had made a different decision.

9 Q Is it fair to say in the exam there was not

10 sufficient analysis or examination of this point that

11 _ is making about the options traded? 12 A In retrospect I believe that is fair to say. At

13 the time, with what we were working on and with what we knew,

14 I do not know that I would have made the same decision.

15 Q Isn't what you were working on what you knew? The

16 information that

17 A This is information that we had at the time.

18 Q So where is the information that is separate from

19 what is saying? You got in a complaint.

20 The complaint is from In the complaint

21 from he makes this point about options. 22 You say, well, based on the other information we had we

23 focused on front running. Where is that information?

24 A I am saying based on all the information that we

25 had, which included all the discussion we had about what is a


Page 40

1 likely issue that is coming out. I think what wethought was

2 the likely issueshere was front running. I do not mean to

3 disregard this, but I do not remember how we came to that

4 conclusion. I am not certain that this is all the

5 information we had. We did not base it solely on this tip

6 ~rom I do not remember all the information that we

7 had.

8 Q Let me ask you this: In the examination that you

9 conducted of Madoff in 2004, did you take any measures to

10 verify whetheror not Madoff was trading 8- to $10 billion in

11 options on the CBOE:

12 A I do not believe we did.

13 Q Let me ask you a couple more questions about the

14 Irlfnrmatlj on in thr I rnmpi;iint. You see were

15 it says, "Accounts are typically in cash at month end."?

16 A Yes.

17 Q Is there any particular significance to that for

18 you as an OC examiner or person that works in OC? What is

19 the relevance of the fact that the accounts are typically in

20 cash at month end, if there is any?

21 Does that mean anything to you?

22 k It means that it is a fact that we put in the mix

23 of information.

24 Q Would you be suspicious because accounts are

25 typically in cash at month end?


Page 41

1 A As opposed to being accounts being in securities?

2 It depends on the trading strategy that is going on.

3 BY MS. STEIBER:

4 Q Are there any regulatory requirements that you

5 would think of that he might be trying to avoid by going to

6 cash at month end?

7 A Not that I am aware of. There may be.

8 Q You are not familiar with 13-F requirements?

9 A Not off the top of my head.

10 BY MR. KOTZ:

11 (Z Let me ask you about another point in here: It

12 says, "There are no third party brokers involved in the

13 plocess- The auditor of the firm is a related party to the

14 principal." At the time was that something that concerned

15 you or was a red flag?

6 A Ayairi, ~he whole document concerns me. Every

17 element is something that is of interest. The whole document

18 is a red flag of a problem. He is asserting a problem.

19 Every piece of information in here is his support of the

20 problem.

21 Q What is the red flag associated with there are no

22 third party brokers involved in the process and the auditor

23 of the firm is a related party to the principal?

24 A Where are you exactly reading from?

25 Q You see where it says, "Since the accounts are at


Page 42

1 EMS the investors,"?

2 A Okay. Thank you.

3 Q It says, "There are no third party brokers involved

4 in the process. The auditor of the firm is a related party

5 to the principal." Why would that be a red flag that the

6 auditor or the firm is a related~party?

7 A His statement that the auditor of the firm is a

8 related party to the principal would indicate that there are

9 potential conflicts with the firm and the auditor.

10 rZ In the course of the examination did you take any

11 measures to determine if that was true that the auditor of

12 the firm was a related party to the principal?

13 A I do not believe we did.

14 Q Any particular reason why not~

15 A I do not remember. I would say we make decisions

16 about what we are looking at, how we look at things, whether

17 to devote resources to things. It is a constantly evolving

18 process.

19 Q Did you take any action to determine who was the

20 auditor or look into the auditor of the firm?

21 A I, myself, do not remember doing anything at the

22 time. I do not remember looking at the auditor issue.

23 BY MS. STEIBER:

24 Q Did you tell anyone on your staff to look at that

25 auditor issue?


Page 43

1 A I do not remember telling anybody else on the staff

2 to look at the issue.

3 BY MR. KOTZ:

4 Q The next part of this complaint says, "BMS never

5 had to face redemption. In fact, given the fact that the

6 different feeders are closed for new investments, there is

7 always replacement capital. One-fifth ratio according to

8 some people." At that time were you aware of the

9 characteristics of a Ponzi scheme?

10 A Generally aware of the characteristics of a Ponzi

11 scheme, yes.

12 BY MS. STEIBER:

13 Q What were those characteristics that you were

14 gene~ally aware of?

15 A What is a Ponzi scheme?

16 Q Yes.

17 A Using somebody else's investment to pay off another

18 investor.

19 BY MR. KOTZ:

20 Q

21 race redemption. In fact, given the fact that the different

22 feeders are closed for new investment, there is always

23 replacement capital." Isn't he providing facts that support

24 the existence of a Ponzi scheme?

25 A I think to be clear about how I would read this


Page 44

1 document. He is not providing facts. He is alleging certain

2 things that have happened. There are a variety of reasons

3 why people make allegations and you need to -- as part of the

4 government and SEC we read all of this kind of information

5 with the idea of trying to figure out what is true and what

6 is not. I would not say that this is a statement of facts.

7 This is this gentleman's allegations of what he believed "

8 happened.

9 O Let me rephrase the question then. When

10 says, "BMS never had -to face redemption. In fact, given the

11 fact that the different feeders are closed for new

12 investments, there is always replacement capital." Isn't he

13 providing allegations of a Ponzi scheme?

14 A I think he is providing allegations of what he is

15 alleging and that could be interpreted as a Ponzi scheme.

16 Q One of the attachments to the document is an

17 article. I think you mentioned earlier you thought there was

18 an article that was part of the reason forthe cause exam.

19 Do you recognize this article?

20 A Yes.

21 Q Do you think this was the article you referred to

22 previously?

23 A Possibly. Is this all part oi the same document?

24 Q It was an attachment, yes.

25 A These are all stapled together.


Page 45

1 RY MS. STEIBER:

2 Q Let's go through this really quickly. You have

3 these two sheets before the article, which are performance

4 statistics for two of his largest feeder funds.

5 Do you recall reviewing this?

6 A Yes.

7 Q Does the name Fairfield Century ring any bells?

8 A Yes.

9 Q In the next attachment he has a 2001 MarHedge

10 article.

11 A Yes.

12 BY MR. KOTZ:

13 Q Do you remember looking at these documents at the

14 time?

15 A I do, yes.

16 MS. STEIBER: This is a clean version of reading

17 the article. It has been highlighted in the work papers.

18 BY MR. KOTZ:

19 Q A couple of things about this article. If you look

20 at the second page of the article all the way on the right

21 about middle of the way through see where it says,

23 "Skeptics,"?

23 A Ye

24 Q It says, "Skeptics who express a mixture of

25 amazement, -tascination, and curiosity about the program


Page 46

1 wonder first about the relatively complete lack of volatility

2 and the reported monthly returns. Among other things, they

3 also marvel at the seemingly astonishingly ability to time

4 the market and move to cash in the underlying securities

5 before market conditions turn negative, and the related

6 ability to buy and sell stocks without noticeably affecting

7 the market."

8 It says, "In addition, experts ask why no one was

9 been able to duplicate similar returns using the strategy and

10 why other firms on Wall Street have not become aware of the

11 fund and its strategy and traded against it, as has happened

12 so often in other cases. Why is Madoff Securities willing to

13 earn commissions on the trades, but not set up a separa~e

14 asset management division to offer hedge funds directly to

15 investors and keep all the incentive fees for itself?

16 Do you remember if this particular issue of the

17 lack of volatility in Madoff's monthly returns was something

18 that you considered in undertaking the cause exam?

19 A Everything in this was part of the consideration of

20 going forward with the examination itself.

21 Q Were there any particular actions that vou took in

22 the cause exam to look into this issue of the lack of

23 volatility in Madoff's monthly returns?

24 A One of the things we tried to do was understand his

25 strategy. That was part of it -- trying to understand it.


Page 47

1 Q What about this point o~, "related ability to buy

2 arid sell the underlying stocks without noticeably affecting

3 the market"? So if you had a 7- to $12 billion hedge fund

4 buying and selling S&P 100 stocks would you expect the volume

5 to be noticed in the market?

6 A I think that is reasonable to state.

7 Q So was there any particular aspect of the exam that

8 looked into this issue of why, the allegation at least, the

9 volume would not be noticed in the market?

10 A I do not remember us looking at the market impact

11 of the trading strategy.

12 Q What about this point that other firms on Wall

13 Street were not able to duplicate similar returns using the

14 straleyy?

15 Do you remember that as something that was thought

16 about?

17 A That, again, as with everything, is an element of

18 something we would review. I think generally every firm

19 makes the same allegation. They can do something different

20 that nobody else can do. That is relevant.

21 Q Wouldn't you say that a fair reading of this part

22 of the article at least implies that Madoff might not

23 actually be trading?

24 A I do not remember believing that or taking that

25 from the article at the ~irne. To say it now, in hindsight,


Page 48

1 with the facts that we have, I can read that into it.

2 Q Do you know if anyone ever contacted Michael

3 Ocrant, the author of this article, as part of the background

4 or examination to get more information?

5 A I do not remember contacting him.

6 Q Is there any prohibition in OC against contacting a

7 journalist?

8 A There is a policy about speaking to journalists. I

9 think the policy is focused on journalists calling foi

10 information. I have never done the reverse -- called a

11 journalist for information.

12 Q What about the rest of the documents in here?

13 Momentum Asset Management Limited, Money Master Fund, October

4 2002

~5 Do you remember if that document was also reviewed

16 at the time?

17 A The whole e-mail and its attachments would have

18 been reviewed at the time

19 Q There is another article, a Barren's article. Were

20 you aware of that article about. Rernie Madoff?

21 A I thought there was more than one article.

BY MS. STEIBER:

23 Q So there was the MarHedge article by Michael Ocrant

24 and then that was soon iollowed by another article. I wanted

25 to see if you had also reviewed the Barren's article


Paye 49

1 A It is possible.


3 identification.)

4 BY MR. KOTZ:

5 Q We are going to show you that document. We will

6 mark it as Exhibit 5. This is an e-mail from John McCarthy

7 to Eric Swanson on December 11, 2003 at 1:53 p.m. Tell me if

8 this is something you recall looking at, at the time, in

9 connection with the Madoff exam.

10 A I do not know if T saw this or not. It would be

11 likely that I did.

12 Q

13 2003 and the planning memo is dated December 2003

14 Do you have any idea why there was that lag between

15 May 2003 and December 2003?

16 A I do not have any idea. As I said, I do not

17 remember seeing this in May 2003. It does not mean that I

18 did not, I just do not remember seeing it.

19 Q Going back to the planning memo for a second. That

20 is Exhibit 2.

21 Do you see it says, "Course of action."?

22 A Yes. On the second page?

23 Q Yes. Why don't we look at the last draft of the

24 planning memo. There are three drafts. It is going to be

25 the last one. Course of action it says, "The staff intends I:


Page 50

1 to send a letter to NASD requesting execution data for Madofr

2 securities for the time period of january i, 2001 through

3 December 31, 2003."

4 Do you know who made that decision to request

5 Madoff trading data from the NASD?

6 A I do not know if an individual made that decision

7 as opposed to the --

8 Q Would that be something that you would typically do

9 in a front running examination?

10 A I do not know what we would typically do in a front

11 running examination. We follow each examination --

12 Q Would that information be helpful in a front

13 running examination?

14 A l'he execution data would certainly be helpful.

1~ Q Did the staff or anyone else send a letter to NASD

16 requesting execution data for MadoJ~~ Securities?

17 A I do not remember getting information from NASD.

18 Q Do you have any idea why that letter was never

19 sent?

20 A I do not, other than we got information from the

21 firm itself. I wish I would have gone to a bunch of

22 different sources to get information.

23 BY MS. STEIBER:

24 Q If you had gotten that trading data from NASD,

25 would you Iiave been able to discover that there was no


Page 51

1 trading?

2 A It depends on the data. The audit trail that NASD

3 holds -- their NASDAQ audit trail, which was NASDAQ's data,

4 would -- it depends on what is required to be transmitted to

5 them. If you are trading in NASDAQ securities, I think that

6 is what OATS captures. Not New York securities. I am not

7 clear exactly what exactly is in the OATS data that NASD

8 retains. They also retain several different types o~ audit

9 trail data sources. NASDAQ would retain trading data trades

10 on NASDAQ.

11 Q So if he is trading S&P 100 stock, or is claiming

12 to, and lie went to the NASD --

13 A You could possibly get some of the information.

14 But if he was trading in New York stocks then you may need to

15 go to New York Stock Exchange. There are a variety of

16 sources to get audit trail in~ormation.

17 BY MR. KOTZ:

18 Q But if you went to the right stock exchange or

19 source you would have been able to uncover that he was not

20 trading?

21 A I think that we would have been able to uncover

22 that he was not trading there

23 Q That he was not trading in the place that he said

24 he was trading.

25 A Right. If he said he was trading in NASDAQ and we


Page 52

1 went to NASDACZ and said can you give me his trades and

2 because he was a broker-dealer -- if he was clearing -- audit

3 trails are a complicated issue. The audit trail that may go

4 to any one exchange can be retained by a clearing member

5 number as opposed to firm member number. The type of audit

6 trail that is.maintained varies.

7 If Bernie Mado~~ said he was trading on NASDAQ in

8 these securities, I would expect that if I went to NASDAQ to

9 find his trades, because he is a broker-dealer-- I am not

10 certain whether or not he was a clearing -- it is --

13. Q You would expect that you would rind those trades

12 and if you did not you would know that he was not trading as

13 he said he was~

14 A If he said he was trading on NASDAQ and I went to

15 NASDAQ and asked for all of Madoff's transactions and they

16 said they did not have any Mado~~ transactions, I would

17 consider that to be a problem and I would go back to the firm

18 and say we do not have these transactions and what is going

19 on. That does not mean that would likely be a problem.

20 Q But you would have caught him in that lie. If he

21 said he was trading in NASDAQ and you went to NASDAQ and

22 there were no trades you would have caught him in that lie.

23 A He could have said he was trading in NASDAQ through

24 an ECN and therefore all his trades are masked

25 because -- there are a lot of different potential excuses.


Page 53

1 None of them should have been good enough.

2 We did not ask him, anyway, so it is all

3 hypothetical.

4 Q Under course of action on the next page of this

5 planning memo, it says, "The staff intends to send a letter

6 to those investment advisor firms that market Madoff-managed

7 hedge funds."

8 Do you know if that was ever done?

9 A I do not believe we ever did that.

10 Q Do you have any idea why not?

11 A No, other than the general decision -- resources

12 and -- I do not remember thinking that -- I am not sure who

13 drafted this document. I was likely involved in the drafting

14 of it, but I do not remember thinking about sending things

15 out. This could be -- as this is a draft document, it could

16 be a draft document prepared by one of the staff members.

17 I just to do not know whether I looked at it or

18 not. Planning memos is something ? would be involved with.

19 Q You are investigating a complaint that someone is

20 engaged in fraud. Do you think it is reasonable to rely

solely on the documents and records provided by the person

22 who is accused of fraud?

23 A I think it depends on the con~plaint. In this

24 instance, I wish I would have gone and checked many more

25 resources than we did


Pacje 54

1 (SEC Exhibit No. 6 was marked foi

2 identification.)

3 BY MR. KOTZ:

4 Q I am going to show you a document. This is a

5 12/19/03 e-mail at 2:13 p.m. from you to Matt ~Daugherty. We

6 are going to mark this at Exhibit 6. There is a reference to

7 Laurie and John. "Talked with Madoff last night. I will

8 explain over that beer."

9 Do you know what that conversation was about?

10 A I do not. I actually do not have any recollection

11 of that at all. It appears to be a draft of mine.

12 MS. STEIBER: It was actually sent.

13 Ti~~ WITNESS: This was something that was actually

14 sent?

15 BY MR. KOTZ:

16 y Do you recall any conversation between Laurie and

17 John talking to Madoff in connection with the exam?

18 A I do not, but I doubt I would have been a party to

19 that conversation. I likely would have been told about the

20 conversation.

21 Q But you do not recall being part of that

22 conversation?

23 A I actually do not. I wrote it down. I assumed it

24 happened. I do not recall it.

25 Q Would it be unusual for Laurie Richards to be


Page 55

1 calling a registrant directly?

2 A I do not know if Laurie called the registrant or

3 the registrant called Laurie.

4 Q If Laurie had called, would that be unusual?

5 A I think it would be atypical. It depends on the --

6 BY MS STEIBER:

7 Q Atypical?

8 A Unusual, atypical. J think they are the same. I

9 think that is fair.

10 BY MR. KOTZ:

11 Q This thing is a bit of a curiosity to u~. Did you

12 have involvement in the gathering of the documents that OC

13 produced to our ofiice?

14 A I did. Right when it happened I gathered

15 everything Z could rind.

16 Q When this document, Exhibit 6, was producec` to us,

17 it did not have the top, where it is you saying to Matt

18 Daugherty you needed a drink before you started writing that

19 thing. "I need a drink. Laurie and john talked with Madoff

20 last night. I will explain over that beer."

21 When we got the document separately from OTT, it

22 did have that. Do you have any idea why that would be?

23 A I do not. In fact, I do not remember this e-mail

24 at all. In preparing documents I pulled all of the -- I have

25 a Madoff folder. I pulled the Mado~i folder documents. I


Page 56

1 went through them. It does not appear to me that this was a

2 document that I had saved in that folder.

3 BY MS. STEIBER:

4 Q The bottom half was in the work papers that were

5 produced on disk, but just not the top half. You do not

6 know --

7 A Because I probably -- I do not know how I was

8 saving things at that time except for putting topical emails

9 into a topical folder. I believe I remember the e-mail from

10 Matt. I just do not rememberthe top e-mail

11 Q How did you gather the documents for OC? You said

12 you kept a topical folder.

13 A I have a topical e-mail folder. I have a ton of

14 them. One of them says Madoff. During the course of the

15 exam I would have pulled over e-mails I t~ought I shoul.d save

16 or for whatever reason I though-~ to put in a folder. In the

17 course of compiling all the information for the -- related to

18 Madoff I believe I copied all my e-mails in that folder into

19 CD and produced them with all the documents I was able to

20 gather as well.

21 BY MR. KOTZ:

22 Q So there was nothing withheld? No portions of any

23 e-mails withheld?

A No.



Page 57

1 identification.)

2 RY MR. KOTZ:

3 Q I am going to show you several drafts of document

4 requests. We are going to mark this entire thing, which is

5 oC headquarters document request draft 1 through 7, and final

6 document request. We are going to mark them Exhibit 7.

7 Do you know who prepared these document requests?

8 A I do not have specific knowledge about whether it

9 was Jackie or Jen or me or anybody else on the team. I do

10 not who did what. We worked together.

11 BY MS. STEIBER:

12 Q Did someone give you instructions on preparing the

13 document request?

14 A I do not recall. If somebody had, it would have

15 been Eric. There probably were potential discussions about

16 the kinds of things that we would be interested in. Document

17 requests typically are prepared by the staff and then

18 reviewed and edited.

19 BY MR. KOTZ:

20 Q If you look at tab 2. There is an e-mail from Jen

21 Walker to you dated 12/22/03 at 12:43 p.m.

22 A Yes.

23 Q "Jackie and I have spoken regarding the letter. I

24 have ~ade a few changes and additions. In particular, I used

25 an i~spec~iori guide for hedge fund management exa~inations to


Page 58

1 make a few additions, which may be a bit over inclusive for

2 our purposes."

3 Do you know, was it Jen Walker's idea to use the

4 inspection guide for hedge fund management?

5 A I do not remember whether it was or it was not.

6 Q Do you know why she would have used that?

7 A We try to pull from all kinds of sources to get

8 help to write document request letters -- find similar

9 things. Anything that is related, so that would be a 4o0d

10 resource .

11 Q Was it your understandiny that Madoff was running a

12 hedge fund at the time?

13 A I do not think we knew what he was doing at the

14 time.

15 Q But there are a number of questions related to

16 hedge fund activity. Does that indicate that you were at

17 least aware of the possibility that Madoff was running a

18 hedge fund?

19 A I think we were open to the possibility of

20 anything. I think it was --

21 Q Tf you say anything, but particularly she is

%2 checking the hedge fund inspection guide and there were a

23 number of questions that related to hedge funds. So isn't it

24 fair to say you were open to the possibility that Madofr was

25 sunriiriy a hedge fund?


Page 59

1 A We were open to the possibility that Madoff was

2 running a hedge fund.

3 Q If you look at tab 3. You can see on the second

4 page, question 2 --

5 A Second page of the request?

6 Q Yes. "Describe in detail the hedging model or

7 investment strategy identified as a split strike forward

8 conversion in a telephone" -- it says conversion, but I think

9 it means conversation -- "between Laurie Richards, John

10 McCarthy, and Bernie Madoff on December 19, 2003."

11 The next one, number 3, also refers to, "Identify

12 the 4 hedge funds discussed on the telephone conversation

13 between Laurie Richards, John McCarthy, and Bernie Madoff on

14 December 19, 2003." You can look later on in the dra~ts and

15 you can see that that reference to the telephone conversation

16 between Laurie Richards, john McCarthy, and Bernie Mado~f on

17 December 19, 2003 was taken out.

18 A Okay.

19 Q Do you have any idea why that would have been taken

20 out?

21 A I do not have any specific recollection of it. In

22 drafting document requests we try to make them more generic

23 than specific, therefore that they can get more response. As

24 opposed to it is not soniething we discussed in that telephone

25 conversation so there I do not have to produce it.


Page 60

1 BY MS. STEIBER:

2 Q It appears that there is something substantive

3 exchanged in that telephone conversation with Laurie and

4 Madoff.

5 A It does appear that way. This is helping me recall

6 what was going on.

7 BY MR. KOTZ:

8 Q There was another exchange that I wanted to ask you

9 about. On the fifth tab, the second page, which is the first

10 page of the letter. See where it says, "The time period of

11 January I, 2001 to present provide the following: a monthly

12 profit and loss statements by security to be provided in an

13 Excel spreadsheet; monthly commission revenues segregated by

14 customer and security."?

15 ~Y MS. STEIBER:

16 Q f-'reviously they were asking for daily data in the

17 drafts. Do you know why that was changed from daily to

18 monthly? You see that first draft where it says request for

19 daily and then by the fifth draft i.t is monthly.

20 A I do not recall the specifics. I would say that we

are always concerned about cJetting more information then we

can handle. My guess is that the separation between daily

23 and monthly would be let's see what we get with monthly and

24 what we can determine from that and determine ii we want

25 daily. Otherwise, we may rioC be able to handle the daily


Page 61

1 volume. That is my guess. I do not have a specific

2 recollection of why we changed this document.

3 Q Would you describe what you are looking for in this

q first request is audit trail data?

5 A First request on tab i. Audit trail data can mean

6 all kinds of things. I would say that daily P&L -- there is

7 not audit trail data we -- could typically be individual

8 trades.

9 Q So if you could look at the final version. You

10 said there was no audit trail request in the first version.

11 Is there any audit trail request in the last version?

12 A I said that Lypically. We will leave what I said

13 on the record. Did we ~equest audit trail in this last

14 version; is that the question?

15 Q Right.

16 A This last version is what we actually sent. We did

17 not ask for detailed trade data, I would say, in this tab 8.

18 Individual trade data.


20 identification.)

21 - BY MR. KOT7,:

22 Q The next document we are going to show you is the

23 response from Bernie Madoff. It is dated January 16, 2004.

24 It is a letter from Bernie Madoff to Eric Swanson dated

25 January 16, 2004. We are going to mark this as Exhibit e.


Page 62

1 Do you remember receiving a response from Bernie

2 Madoff?

3 A I remember seeing this.

4 Q Do you remember if there was any concern at the

5 time about some of the responses that Mr. Madoff gave?

6 A i do not remember specifically. I would say we

7 seldom receive a response to an initial document request that

8 is sufficient. We are constantly working through document

9 productions and document requests.

10 Q A couple of things that Mr. MadofIf says in his

11 letter. It is the second full paragraph. If you could see

12 the end of that par-agraph, second sentence, it says, "Also,

13 please note that we have no communications or disclosures

14 from customers. It is in the strategy to investors. Owners

1~ or prospective investors are owners." Was that something

16 that was or is a concern?

17 A i think it is. Again, everything is a concern.

18 This would be one of the things that would be a concern.

19 BY MS. STEIBER:

20 O Everything in this letter is a concern or

21 everything in the world is a concern?

22 A Everything in the exam is -- every time somebody

23 responds to a document request we would review the document

24 request we get it back from t~iem and work through issues.

25 BY MR. KOTZ:


Page 63

1 Q You can ask the question to a registrant in an exam

2 and they can provide an answer that satisfies the question

3 that you had, or they can provide an answer that raises more

4 questions.

5 A This raised questions.

6 Q The next paragraph says, "Question 3 asked for the

7 identity of hedge funds managed or advised. Bernard Madoff

8 Securities, nor any person or entity affiliated with Madoff

9 Securities, manages or advises hedge funds." What about that

10 answer? Does that answer specifically raise a concern?

11 A It raises concerns. All of these answers raise

12 concerns. We are getting more information about what he is

13 telling us that he is doing.

14 Q Does it raise a concern in the respect that it is

15 inconsistent with the information you had received from

16 Farzine and the articles, particularly that, "Madoff manages

17 more than $6 billion for wealthy individuals. That is enough

18 to rank Madoff's operation among the world's top five largest

19 hedge funds."

20 The information you are getting is that he ranks

21 among the world's top five largest hedge funds. Then Madoff

22 says that he does not manage or advise hedge funds at all.

23 A Those two things are inconsistent. Madoff told us

24 that he did not manage or advise hedge funds. Those are his

25 words. In my recollection the word he is -- advising and


Page 64

1 managing is where he is parsing.

2 Q Do you remember if there was something specific

3 done in the context of this cause exam that would look at

q that inconsistency?

5 A Yes. His argument, as I recall, was that he was

6 the executing broker-dealer, not an advisor. That is how he

7 distinguished himself.

8 Q In the course of the exam did you do anything to

9 attest whether that was correct?

10 A We were concerned whether what he was doing was

11 advice under the investment advisor's act -- this is one of

12 the issues we --

13 BY MS. STEIBER:

14 Q So you talked to the hedge iunds that he was

15 working with to see if they were advising or managing? Yo~

16 said you investigated it. How do you investigate whether

17 someone is advising or managing a hedge fund if you do not

18 ask the hedge fund if they are advising or managing?

19 A Because whether somebody is an investment advisor

20 is a factual element and then a legal element to it. I think

21 we were concerned -- his argument was a potentially legal

22 argument. I am not advising. I am an executing

23 broker-dealer. I think we were concerned about that

24 argument.

25 So you did not test his explanation; you just took


Page 65

1 it as truth and then looked at its legal ramifications?

2 A I think we tested his explanation. We were

3 concerned about whether or not he was actually advising. It

4 was his execution -- I think the terms are difficult. It

5 was, was his alleged execution brokerage strategy really

6 advice, or was it facilitating~the customers' intentions. I

7 think he was trying to make that argument and we were --

8 Q But he is making that argumentand you are taking

9 it as truth that he is only executing these executing these

10 ' trades for his customers.

11 A I think one of the questions we were trying to

12 follow up on was whether he was making the decisions that

13 constituted advice to his customers, or whether the

14 executions he was making were typical broker-dealer

15 executions. As it turns out there were no executions, so it

16 was not the best course of action to take to begin with.

17 We were concerned about whether or not he needed to

18 be registered as an investment advisor, whether he was

19 providing investment advice to his customers, or whether he

20 was appropriately only registered as a broker-dealer. I

21 think that was an issue that was.

22 BY MR. KOTZ:

23 Q What steps did you take other than looking at it

24 from a legal determination?

25 A We mostly looked at it from a legal determination.


Page 66

1 I think that was the internal discussion: does this really

2 constitute advice or not, or can somebody, as a registered

3 broker-dealer, merely be registered as a broker-dealer by

4 providing information.


6 identification.)

7 BY MR. KOTZ:

8 Q I want to show you the next document, which is a

9 January 29, 2004 e-mail. This is from Jen Walker to you and

10 Jackie Wood.- It is dated January 29, 2004 at 9:17 a.m. We

11 will mark it as Exhibit 9.

12 A This is different than typical e-mails. Isn't

13 there normally a header? This is an e-mail that was sent?

14 Q Yes. See in there Ms. Walker says, "Since it has

15 always been my understanding that collar strategies are a

%6 variation of this is a more protected type of position,

17 meaning protective of underlying profits on the stock."

18 Do you know what she was referring to in terms of

19 "collar strategies"?

20 A Collar strategies are generally implemented in

21 options environments. I think her general

22 statement -- collar strategies are limit up side, limit down

23 side.

24 BY MS. STEIB~R:

25 Q You would not expect it to generate substantial


Page 67

1 profits?

2 A I would agree with that. My understanding of a

3 collar strategy would be not generating substantial profits.

4 BY MR. KOTZ:

5 Q Do you recall whether there was any further work on

6 this question that Jen Walker raised?

7 A As to whether Madoff's strategy was a collar? I

8 think we had a lot of discussions about what his strategy

9 really was, what we thought it was. There were a lot of

10 dis cussions . I do'not remember a specific discussion about

11 the use of collars or not. It likely would be.


13 identification.)

14 BY MR. KOTZ:

15 Q I want to show you another document marked as

16 Exhibit 10. These are handwritten notes --

17 on January 29, 2004.

18 Do you recognize these notes?

19 A I believe these are my notes. At least the first

20 page looks like my notes.

21 Q Do you recall having a conversation on January 29,

2004 with

23 A I do. I would say, just to clarify, I do not

24 believe on the fourth page -- that does not look like my

25 handwriting .


Page 68

1 BY MS. STEIBER:

2 Q Whose handwriting does it look like?

3 A I do not know.

4 C, Do you assume it is Jen Walker or --

5 A It could have been John McCarthy. It could have

6 been Eric. It could have been anybody. It could have been

7 Jen. The following pages looks like it is my handwriting.

8 BY MR. KOTZ:

9 Q Let's just go through this document, which is

10 Exhibit 10. What pages are your handwriting, just so it is

11 clear?

12 A It appears that the first page is my handwriting.

13 The second page appears to be my handwriting as does the

14 third page. The fourth page does not appear to be my

15 handwriting. The fifth page does appear to be my

16 handwriting, as does the final page.

17 BY MS. STEIBER:

18 Q Do you recall who was there during the conversation

19 with 20 A I do not recall.

21 BY MR. KOTZ:

22 B we are going to look a little bit at your notes.

23 call wi~h 1, 1/29/04. It says, "Returns are

24 too consistently high for this strategy."

25 Do you recall this being a~ issue that was raised?


Page 69 "

1 A I am not sure I understand what you mean. This

2 being an issue that was raised in the call?

3 Q Yes.

4 A I assume that my notes are reflective of what the

5 discussion was about. I imagine the returns being too

6 consistently high for the strategy was something that was

7 discussed in the call.

8 BY MS. STEIBER:

9 Q Isn't that similar to the concern that Jen had

10 raised in that prior e-mail? The collar strategy you would

11 not expect high returns.

12 A It is similar. Consistently high for the strategy

13 I think really is talking about instead of returning 7 or 8

14 percent he was returning 9 or 10 or 11 or 12. Not 20 percent

15 or something way too high for potentially a collar.

16 Consistent returns ior the strategy is not necessarily

17 inconsistent with it. The type of too high -- the return

18 being too high -- it was just not as exaggerated.

19 Q So Jen is saying with the collar strategy you would

20

21 step further and saying his returns are too high for him to

be using the strategy he claims to be using.

23 A I think that was one of the concerns. The split

24 strike conversion strategy Madoff was alleging, his rate of

25 return was too high for that strategy. I am not sure that


Page 70

1 split strike conversion strategy is necessarily the same

2 thing Jen is talking about here in the collar.

3 BY MR. KOTZ:

4 Q If you could look further in your notes. You have

5 here, "Not doing that strategy because option trading is not

6 as high. How does he trade the options? ~ does not 7 understand how he consistently makes money off of this

8 strategy. Perhaps he does not really use the strategy."

9 Then it says, "The volume of options traded does not seem to

10 be enough to protect the size of the equity trade." It is

11 clear that those were issues that were discussed in the phone

12 call

13 A I am not certain what my line is here, but I am not

14 going to disagree with that. It appears that this is

15 discussed in the phone call.

16 Q Is it fair to say that based on these notes

17 is raising questions about whether Madofi is actually doing

18 the options trading he claimed to be doing?

19 A I think it is ~air to say that this gentleman was

20 concerned that Madoff was not doing the strategy that he

21 understood him to be using.

22 Q This question of options issues, was that looked

23 into?

24 A We looked into what Madoff was alleging he was

25 doing. We tried to get an understanding of his strategy. In


Page 71

1 that sense, yes. The understanding included looking into how i.

2 he was trading options because that was part of his strategy.

3 BY MS. STEIBER:

4 Q He says the volume of options traded does not seem

5 to be enough to protect the size of the equity trading. Did

6 you look at the overall size of the options trading market to

7 see if he could actually even be doing the options trading he

8 was claiming to be doing?

9 A I do not think we looked at the market impact of

10 his trading.

11 Q Of either his --

12 A -- options trading or equities trading. I do not

13 believe we looked at the market impact of the trading.

14 Q Did you discuss these issues that he was raising

15 with Eric Swansori or John McCarthy?

16 A I do not know who was on this call. Likely the

17 discussion about what was said in this call was a discussion

18 with the group.

19 Q Did you think of expanding the exam past front

20 running once - raised these issues? 21 A I would say we always think of expanding almost

22 every exam we are working on. There is just the issue of

23 whether that is the best course of action given the resources

24 and priorities of the office.

25 (Z Do you think you probably considered it and then Li·:···h;il;·li;;,;;·I i~


Page 72

1 decided not to?

2 A That is my guess. I probably should not be

3 guessing.

4 Q But you know you did not expand it after this call?

5 A This was right in the beginning of the exam. We

6 took this into the context of what we were doing. We looked

7 at how he alleged he did his trading. Part of that was him

8 providing us with information regarding his options trading.

9 BY MR. KOTZ:

10 Q There was at the end no expansion of the exam

11 beyond front running; is that right?

12 A Front running was the focus. We tried to get a

13 handle on what he was doing. I think that was the first

14 effort and then whether or not he was front running his

15 market making customer orders.

16 BY MS. STEIBER:

17 Q Did you think about contacting OEA to see if they

18 had some options experts to help you deal with those issues?

19 A I do not remember whether that was something we

20 considered or not.

21 Q But you did not contact OEA?

A I do not remember contacting OEA. I do not think

23 we did.

24 rZ Do you recall that business partner was 25 an options expert?

I···i·--)-i;~:~


Page 73

1 A I do not know that I was aware of his business

2 partner

3 (SEC E;xhibit No. 11 was marked for

4 identification.)

5 BY MR. KOTZ:

6 Q The next document is an e-mail from Jackie Wood to

7 you on February 3, 2004 at 2:20 p.m. We are going to mark it

8 as Exhibit 11. It has an attached memorandum to you from Jen

9 Walker and Jackie Wood. If you could look at page 2 of the

10 document and page 2 of the memorandum, which is page 3 of the

11 eiihibit.

12 Under the first chart it says, "The commission

13 revenues generated from these four institutional clierits

14 account for the overw~lelming majority o~ commission revenues

15 generated for the firm since 2001. Obviously this trading

16 strategy his yielded Mado-tf unbelievable profits, which would

17 explain why the strategy is well-guarded by Madoff."

18 Was it something that was of concern or a red flag

19 that Madoff was a well-known market maker, but that you found

20 that most of his profits came from commission revenues from

21 four clients and not from market making activities?

A I think that was a concern.

23 O Do you remember being particularly concerned about

24 Madcff's strategy yielding him "unbelievsble profits"?

25 A The size of his pro~its were of concern.


Page 74

1 Q Was it your or the team's view at the time that

2 Madoff's profits were not believable?

3 A I do not think our thought was it was unbelievable.

4 Extraordinary. He was working on commissions. I would

5 interpret that to be extraordinary. It says what it says.

6 Q Then it says, "The profits from Madoff's market

7 making trades are nominal compared to the commissions

8 generated from those clients utilizing the split strike

9 forward conversion strategy."

10 Do you see that?

11 A Yes.

12 Q And then on the next page, page 3 of the

13 memorandum, there is a series of follow-up questions. Is it

14 fair to say that at this point in time there was significant

15 follow-up questions and significant concerns about what you

16 were ~inding in the examination?

17 A Yes. We had concerns about what was happening and

18 what he was doing.


20 identification.)

21 BY MR. KOTZ:

22 Q I am going to show you the next document, which are

23 some additional notes. February 4, 2004 conference call with

24 Madoff. It is a series of notes and we are going to mark it

25 as ~xhibit 12. Are these your notes?


Page 75

1 A I do not believe these are my notes.

2 Q Take a look at all the pages to see.

3 BY MS. STEIBER:

4 Q Do you recognize the handwriting?

5 A I do not.

6 BY MR. KOTZ:

7 Q Do you recall a conference call with Madoff on

8 February 4, 20q4?

9 A I do not have a recollection of it, but these

10 appear to be notes of such a call.

11 Q Do you know if you were on the call?

12 A I do not know, but it would be likely.

13 BY MS. STEIBER:

14 Did you take notes when you have a call with a

15 registrant?

16 A Sometimes I would take notes when I would have a

17 call with a registrant.

18 BY MR. KOTZ:

19 Q Do you know if you took notes on that call?

20 A I do not know if I did or not.

21 Q We have before February 3rd this memorandum we

22 showed you and then we have a February 4th conference call

23 with Bernie Madoff. On February 3rd there,

24 list of follow-up questions.

25 Do you recall whether Madoff had addressed these


Page 76

1 questions in this call?

2 A I do not recall the substance of the call. I have

3 not read these notes. Given the timing, assuming the timing

4 is accurate of the dates here, I suspect that part of the

5 call was following up on some of the concerns that we had.

6 Q Do you know ifthe call was with Bernie Madoff or

7 Peter Madoff?

8 A I do not remember the call.

9 Q Do you remember generally if the communications you

10 had were with Bernie directly or with Peter?

11 A I think the communications were mostly with Bernie.

12 By MS. STEIBER:

13 Q How many communications do you recall?

14 A I do not know.

15 (S More than three?

16 A Likely. I do not know.


18 identification.)

19 BY MR. KOTZ:

20 Q We have another set of notes. We are going to mark

21 them as Exhibit 13. The first note says, "Can we read

22 CD-ROM?"

23 Do you know if these notes are your handwriting?

24 A The first page appears to be Iny handwriting. The

25 second, third, fourtl-i, fifth, and sixth page appears to be my


Page

1 handwriting. All these notes appear to be my handwriting.

2 BY MS. STEIBER:

3 Q So Exhibit 13 appears to be entirely your

4 handwriting?

5 A it does.

6 BY MR. KOTZ:

7 Q Look on the second page. There is a box on the top

8 that says Mavis. Underneath that it says, "Few stocks on a

9 few days with critical. Get OATS from NASD. Enact all

10 Madoff-orders."

11 Do you recall wanting to get OATS from NASD?

12 A I do not have a specific recollection of this.

13 This would seein to be similar to the document you showed me

14 earlier. That was one of the questions whether we should get

15 that kind o~ in~ormation.

16 Q As we indicated earlier, you never did get the OATS

17 from NASD.

18 A I do not recall getting information from NASD.

19 BY MS. STEIBER:

20 Q Do you recall a conversation with Mavis?

21 . A I do not. The only Mavis I know is Mavis Kelly.

These could be completely inconsistent with each other. I do

23 not know. I just have no recollection of it.

BY MR. KOTZ:

25 Q Look at the next page. It provides a list of


Page 78

1 client options and equity purchases.

2 A I~ is a list of client options and equity

3 purchases. Okay. It is a bunch of numbers talking about

4 options, i am not sure what all the numbers mean having just

5 looked at this.

6 BY MS. STEIBER:

7 Q Does it seem to indicate that the caller has

8 executed before the equity positions purchased? Can you

9 tell?

10 A I cannot tell. I know I wrote this, but right now

11 it is confusing to me.

12 BY MR. KOTZ:

13 Q Why don't we look at the next page. It says,

14 "Questions. Nexi page."

15 BY MS. STEIBER:

16 Q Hre these open questions that you had with someone

17 or your staff expressed concerns about these issues?

18 A I think these were issues that we were concerned

19 about.


21 identification.j

BY I"3R. KOTZ:

23 Q I am going to show you another document. I will

24 mark it as Exhibit 14. This is an e-mail from Jen Walker to

25 you and Jackie Wood on February 4, 2004 at 2:04 p.m. This


Page 80

1 resolution on the issue of whether he should register as an

2 investment advisor?

3 A I do not recall whether we did.

4 Q You do not recall your exam coming to any

5 conclusion on that issue?

6 A I do not recall that.


8 identification.)

9 BY MR. KOTZ:

10 Q The next document is a compilation of document

11 requests. OCHQ supplemental Madoff document request drafts 1

12 through 10, and final document requests. It is a series of

13 documents with tabs of 1 ~o 10.

14 A These are all drafts of the second document

15 request? Is that is what is being presented to me?

16 (1 Yes. If you look at tab 5, there is an e-mail from

17 Jen Walker to Jackie Wood, dated February 11, 2004 at

18 4:42 p.m. There is an attachment. It is an attached draft

19 February 2004 letter to Peter Madoff.

20 Does it appear in that draft that there was a

21 request for audit trail data?

22 A Yes. This is a typical trade-specific data

request.

24 Q Does that request include audit trail data

25 associated with the hedge fund accounts?


Page 81

1 A I am not sure what it is specific to. It is

2 inclusive of providing all trading activity. It appears to

3 be all the activity of the firm. The question itself does

4 not appear to be specific to any one type of account.

5 BY MS. STEIBER:

6 Q If you go to the seventh draft does it appear that

7 you are sending this draft to Eric Swanson for review and

8 revision?

9 A It says, "Eric, please take a look at this when you

10 get a chance and we will send it out." Yes. It appears I am

11 sending it to Eric for review and revision.

12 Q Do you recall if he provided revisions?

13 A I do not.


15 identification.)

16 MR. KO1'Z: Let me show you Exhibit 16.

17 This is a two-page document. It says on it

18 February 2004 from Eric Swanson to Peter Madoff.

19 BY MS. STEIBER:

20 Q Do you recognize the handwriting on that draft?

21 A The first page handwriting appears to be mine.

There is handwriting on the second page that I do not

23 recognize. The bottom of the second page appears to be my

24 handwriting.

25 BY MR. KOTZ:


Page 82

1 Q On the first page do you see where it says, "SEC

2 speaker."?

3 A Yes.

4 Q So you wrote that?

5 A That appears to be my handwriting.

6 Q Do you know why you wrote "SEC speaker"?

7 A I do not.

8 O Did anyone mention to you at that time that Madoff

9 was an SEC speaker? Do you think you are referring to Bernie

10 Madoff?

11 A I could be "SEC speaks."

12 Q Do you know why you would write that?

13 A I do not.

14 Q Was there any consideration at the time while you

15 were conducting this exam that while you were doing an exam

16 of Bernie Mado~~ was involved as an SEC speaker?

17 A I do not recall him ever being involved as an SEC

18 speaker, nor at SEC Speaks. SEC Speaks, I think, is

19 exclusively SEC speakers. I would not say that this

20 necessarily references him. I do not know what it

21 references.

22 Q Was there at any point in time discussion while you

23 were doing the Madoff cause exam that the guy you were

24 looking at was a prominent guy, he was involved in industry

25 matters, had been sitting on panels with the SEC? Was that


Page 83

1 ever raised?

2 A I do not recall it ever being raised. It does not

3 mean that it was not.

4 Q Was there any pressure placed on you to take a

5 different actio~ or maybe not push as hard because of Bernie

6 Madoff appearing on these panels or him being respected in

7 the industry?

8 A No.

9· BY MS. STEIBER:

10 Q Let's go back to these notes. You crossed out the

11 audit trail data that we had discussed in the beginning and

12 say, "For next letter."

13 Do you know why you did that?

14 A No. I do not have any specific recollection. I

15 can tell you we are always hesitant to get audit trail data

16 because it can be tremendously voluminous and difficult to

17 deal with and is a huge resource issue for us. It takes a

18 ton of time.

19 Q So that kind of detailed trading data is voluminous

20 and time consuming and so you might have chosen not to ask

21 for it?

22 A I do not recall specifically, but this appears to

23 say to save it for the next letter.

24 Q So if you look at the last draft, has that request

25 for audit trail data been removed as per your corrections or


Page 84

1 revisions?

2 A It appears that document request number 1 in

3 Exhibit 16 is no longer in this Exhibit 10.

4 Q So the last draft that we have does not appear that

5 there is a request for audit trail data.

6 A I am not familiar with the sequence of drafts.

7 Assuming what you say to be true, this question is not in

8 this document.

9 Q You say, "Save for next letter."

10 Do you know if any other letter was sent to Madoff?

11 A I do not know if there was a third letter.

12 BY MR. KOTZ:

13 Q Do you know who signed the final letter? The final

14 document request.

1~ A Do we have the final document?

16 Q We have the last version.

17 A We do not have a signed document?

18 MR. KOTZ: We are going to go off the record for a

19 moment.



identification.i

23 BY MR. KOTZ:

24 g we are going to put another document into evidence

25 and mark it as Exhibit 17. It is a signed co-c~y of a letter


Page 85

1 from Eric Swanson to Peter Madoff dated February 18, 2004.

2 Looking at Exhibit 17, which is a signed copy of the final

3 document request sent to Peter Madoff by Eric Swanson, could

4 you just note for the record that the audit trail data

5 request in Exhibit 16 was not put in the final version of

6 Exhibit 17?

7 A Question 1 in 16 is different than 17. The

8 question 1 asked for detailed trade data.

9 Q And that question for detailed tradedata is not

10 included in the final version, Exhibit 17?

11 A Yes.


13 identification.)

14 BY MR. KOTZ:

15 Q Now we have the next response from Bernie Madofr.

16 It is marked as Exhibit 18. It is a March i, 2004 letter

17 from Bernie Madoff to Eric Swanson. I assume you saw this at

18 the time.

19 A Yes.

20 Q So in this document BernieMadoff says, "We are

21 providing copies of client account statements reflecting all

22 the transaction data related to the accounts of those clients

23 utilizing the split strike forward conversion strategy."

24 What Bernie Madoff is providing are customer confirmation

25 statements, not an audit trail. Is that right?


Page 86

1 A Yes.


3 identification.)

4 BY MR. KOTZ:

5 Q If you want to see copies of what was provided, we

6 will mark that as Exhibit 19, documents provided by Bernard

7 Madoff Investment Securities.

8 MS. STEIBER: Those are a sample of those customer

9 statements provided.

10 THE WITNESS: Nineteen was an attachment to

11 eighteen?

12 MS. STEIBER: This is a portion of the attachment.

'13 BY MS. STEIBER:

14 O Does that look familiar?

15 A That does look familiar.

16 BY MR. KOTZ:

17 Q Was what Bernie Madoff providing? Customer

18 confirmation statements, not an audit trail? Is that right?

19 A Is Exhibit 19 an audit trail?

20 Q Right.

21 A Exhibit 19 is customer account statements showing

22 dates, amount of securities bought, and prices. It does not

23 appear to show the individual transactions underlying the

24 information on the document.

25 Q Going back to Exhibit 18, Bernard Madoff says in


Page 87

1 the last full paragraph, "There are no other communications

2 or correspondence between Madofr Securities and their clients

3 utilizing the split strike forward conversion. Madoff

4 Securities does not communicate or correspond with the

5 investors or owners of its clients."

6 Do you remember that being something that was a

7 concern when he wrote that in the letter?

8 A We were concerned about his communications.

9 S So that is a yes?

10 A Yes

11 BY MS. STEIBER:

12 Q Wasn't it odd he did not have any e-mail and he was

13 a high tech operation?

14 A What was going on was different than what I was

15 used to. It was all a concern. I do not mean to over

16 generalize, but it was a concern. We were trying to figure

17 out what was going on.

18 BY MR. KOTZ:

19 Q Is it fair to say you had never seen anyone operate

20 quite the way Bernie Madoff did before?

21 A I had not. I think that is right.


23 identification.)

24 BY MR. KOTZ:

25 Q The next document is going to be marked as


Page 88

1 Exhibit 20. This is an e-mail from Jen Walker to you, dated

2 March 10, 2004 at 6:32 p.m.

3 Do you recall Jen raising questions after the

4 response to the second document request?

5 A The sequence of events I am unclear about because I

6 do not have the dates in frontof me. These are questions

7 that Jen has raised.

8 Q Do you see that the document response was March I,

9 2004 and Jen's e-mail is March 10, 2004?

10 A Yes. So these are questions Jen has raised after

11 that letter.

12 BY MS. STEIBER:

13 Q Looking at the customer statement does that seem

14 fair --

15 A That seems ~air. I do not know where her questions

16 came from, but the sequence appears to be --

17 BY MR. KOTZ:

18 Q Does that refresh your understanding that at this

19 point in time after Bernie Madoff submitted a response to the

20 second request for documents there were still outstanding

21 questions?

A There were.


24 identification.)

25 EY MR. KOTZ:


Page 89

1 Q I am going to show you the next document, which are

2 some notes. The date on it is March 18, 2004. It is two

3 pages. It says Madoff on the top of the first document. We

4 are going to mark this as Exhibit 21.

5 Do you recognize the handwriting?

6 A I do not. It is not my handwriting

7 Q This seems to indicate on March 18, 2004 there was

8 a conference call with Bernard Madoff. Do you remember that

9 call?

10 A I do not have a specific recollection of that call.

11 Q Would you likely have been on that call?

12 A I would likely have been on that call.


14 identification.j

15 BY MR. KOTZ:

16 Q Let's go on to the next document. This is a letter

17 from Bernard Madoff to you dated March 23, 2004. We are

18 going to mark this as Exhibit 22.

19 Do you recall receiving this letter from Bernie

20 Madoff?

21 A I recall seeing this.

BY MS. STELBER:

23 Q Had you requested that those customer statements he

24 provided be sent to you in electronic format?

25 A I do not remember, but this appears to say that is


Page 90

1 what happened.

2 Q It appears in this letter that there is no

3 additional data provided, correct? It is just the same

4 customer statements but in electronic format. It says, "Each

5 file contains the monthly statement data for 2003, which was

6 previously sent to you in print form."

7 A I have not connected the two. That statement makes

8 sense, but I cannot say that is exactly-what it is. I just

9 do not have the knowledge. It is likely the case.


13 identification.)

12 gy MR. KOTZ:

13 Q The next document is marked as Exhibit 23. That is

14 an e-mail from Jen Walker to you dated March 23, 2004 at

15 7:35 p.m.

16 Do you remember an issue that was raised by Jen or

17 otherwise discussed relating to differences between the large

18 i~und Tremont and Sway, a smaller fund?

19 A I do not have a specific recollection of this

20 e-mail. It shows that I received it.

2_ Q Do you have a recollection that Jen flagged some

issues about trade dates varying, particularly these

23 differences between the large fund and the smaller fund?

24 A I am afraid I do not have a recollection. I would

25 have read the e-mail.


Page 91

1 Q Do you have a recollection that generally there

2 were still some questions that were outstanding during this

3 period of time?

4 A Yes.


6 identification.)

7 MR. KOTZ: This next document is a document from

8 you.

9 MS. STEIBER: It is a draft that I do not think you

10 sent. Jt looks like you sent it to yourself.

11 BY MR. KOTZ:

12 Q This is dated March 24, 2004 at 2:52 p.m. That is

13 what we are going to mark as Exhibit 24. If you look on the

14 second page of this e-mail you are saying, "Although Madoff

15 executes the strategy, does that also mean he executes any

6 assignments that may occur' Would he consider these types of

17 transactions part of his strategy? I think we can assume in

18 some instances that an option trade can be assigned after the

19 position is transferred to the custodial bank account. The

20 trades in the fund accounts seem to reflect that all

21 executions are transferred to the custodial bank on

settlement date. What broker would handle that assignment?"

23 Do you remember these lingering questions that you

24 had at this point?

25 A I do not. I do not know that this was an e-mail


Page 92

1 that was sent. I just cannot tell from the heading. I would

2 say there were lingering questions

3 Q You, yourself, had some lingering questions? Is

4 that fair?

5 A That is fair.


7 identification.)

8 BY MR. KOTZ:

9 Q I am going to show you the next document. We are

10 going to mark this as Exhibit 25. It is dated March .31, 2004

11 from Jen Walker to you. I want to particularly ask you

12 about, in this a-mail string, an a-mail that you sent to

13 Jen Walker with a copy to Jackie Wood. Friday, March 26,

14 2004 at 4:57 p.m. you were saying, "Jinco trades differently,

15 at least iri March, but it could be simply that the size o~

16 the fund only requires one day instead or three to buy and

17 sell a position. Look to see if that situation is similar

18 for other funds."

19 Do you recall anything about this particular issue?

20 About Jinco trading differently.

21 A I do not.


23 identification.)

24 BY MR. KOTZ:

25 Q I am going to show you another e-mail. We are


Page 93

1 going to mark this as Exhibit 26. This is an April 6, 2004

2 a-mail from Jen Walker to Alex Sadowsky at 6:49 p.m. See in

3 there Jen Walker is asking Alex Sadowsky about a variety of

4 matters.

5 Alex Sadowsky replies, "Get the mutual fund work

6 completed first."

7 Jen Walker replies, "Thanks."

8 Do you remember there being a particular concern or

9 priority in the office about doing mutual fund work at that

10 time?

11 A There were two sets of exam sweeps. One was

12 broker-dealer revenue sharing that I believe finished around

13 the end of 2003. From that we started a sweep of mutual

14 funds. The reverse side of the broker-dealer revenue sharing

15 sweep, which was a sweep of 45 mutual funds. That was one of

16 the projects we were working on.

17 Q Who was Alex Sadowsky?

18 A Alex Sadowsky was at this time a branch chief.

19 Q Genevievette Walker did work for him?

20 A Yes. The structure in the office was people worked

21 for wherever the projects went. Administratively you

reported to a branch chief, but that did not mean you

23 exclusively worked on that branch chief's projects.


25 identification.)


Page 94

1 BY MR. KOTZ:

2 Q I am going to show you the next document. We are

3 going to mark it as Exhibit 27. This is an e-mail from you

4 to Jen Walker on April ?, 2007 at 9:29 a.m. In the a-mail

5 string Jen Walker sends an e-mail to you saying, "Hi Mark. I

6 know you have working on the Madoff project with us

7 now. I am not sure what you want Jackie and I to do

8 considering Madoff. We are focused on the mutual fund

9 project as requested. Should we just focus on mutual funds

10 and return to Madoff when we are done?"

11 You respond, "Concentrate on mutual funds for the

12 time being."

13 Do you recall instructing Jen Walker to focus on

14 mutual funds as opposed to the Madoff matter?

15 A I do not recall this specific e-mail, but there

16 were competing priorities for projects. The mutual fund

17 project was one or those competing priorities. Reading this

18 e-mail, it appears ~ told Jen to focus on the mutual fund

19 project.

20 Q Did this mutual fund project have to do with market

21 timing issues?

22 A No. It was mutual fund revenue sharing.

23 BY MS. STEIBER:

24 Q Would it surprise you that if in the work papers

25 there is no evidence that any other work was ever done on the


Former OCIEAttorney Advisor

Page 95

1 Madoff project after that e-mailthat we saw on 3/31?

2 A It would not surprise me because I put the

3 documents together. At this time it was refocusing

4 priorities.

5 Q So you do not know or any documents that we have

6 never seen from the work papers showing that a lot of work

7 took place after 3/31?

8 A I do not know the specific timing, but we -- I just

9 do not know of any other work done and what was happening on

10 Madoff. Certainly, as this e-mail would indicate, people

11 were concentrating on mutual funds.

12 BY MR. KOTZ:

13 Q So from the time period that you instructed Jen

14 Walker to focus on mutual funds you are not aware of any

15 further work being done on the Mado~f examination?

16 A My recollection as helped by this e-mail is -- the

17 e-mail says, "I know you have Michael working on the Mado~~

18 project with us now." I believe that is T

19 believe Mike was working on it, but I do not recall what he

20 was doing, how he was concentrating on it, or how much effort

21 he was putting into it.

Q Other than efforts, you are not aware of

any work having been done on the Madoff examination

24 subsequent to you informing Jen Walker to focus on mutual

25 funds?



Former OCIE AttorneyAdvisor

Page 96

1 A I am not. I do not have Specific knowledge of

2 people working on it. It was one of their projects.

3 BY MR. WILSON:

4 Q Was Jackie Wood working on mutual fund projects?

5 A I believe she was.


7 identification.)

8 BY MR. KOTZ:

9 Q This is another e-mail. We are going to mark it as

10 Exhibit 28. This is an e-mail from you to Eric Swanson on

11 March 16, 2005 at 2:34 p.m.

12 Swanson says to you in the e-mail, "What is the

13 status of Madoff hedge fund-thingy?"

14 You say, "Deady."

15 What did you mean by that?

16 A I think we did not know what to do next.

17 Q Are you referring to it being dead? Is that what

18 the reference is?

19 A I imagine what this means is there was not much

20 work being done on it right then.

21 Q You say, "Does it need to be revised?"

22 What is "it"?

23 A I do not know.

24 Q Did you maybe mean revived?

25 A Yes. That is the way I would take that. Do we


Page 97

1 need to concentrate on Madorf.

2 Q You also say, "We never found any real problems."

3 Isn't it the case that there were a lot of open

4 questions?

5 A I think there were open questions and I do not

6 think we found problems. There were questions that needed to

7 be -- that we could focus more time on to get answers to. I

8 do not think at that point we had said there were violations.

9 Q Do you think you ever got to the point where you

10 made a determination whether there were any violations during

11 that exam?

12 A I do not think we made a determination that there

13 were violations.

14 Q So it was left with open questions?

15 A ~ believe it was.

16 (Z Do you know whether the Madoff documents were,

17 around that point in time, put aside in boxes perhaps to be

18 sent to storage?

19 A I am not exactly sure where the Madoff documents

20 were at that time. I do not think we werepreparing to send

21 Madorf documents into storage.

22 Q During that time period when Jen and Jackie Wood

23 were focusing on mutual fund matters, do you know whether the

24 Mado~~ documents were in boxes?

25 A They could have been in boxes from the beginning of


Page 98

1 the examination. I would not take too much from the

2 reference to boxes as in boxed up to be sent away. Feople

3 keep boxes in their offices to store documents while the exam

4 is going on because sometimes that is the way documents are

5 being stored.

6 Q Do you remember trying to locate documents

7 involving Madoff to send to NYRO?

8 A I do

9 Q Do you remember if it was easy to find the

10 documents?

11 A It was not.

12 Q So the fact that it was not easy to find the

13 documents, does that indicate it was not being worked on in

14 an active way?

15 A No. It was not easy to find the documents because

16 Jen Walker was not in the office at the time that the

17 documents were being looked for and she had information about

18 the documents.


20 identification.)

21 BY MR. KOTZ:

22 Q We are going to mark this next document as

23 Exhibit 29. This is an e-mail from Jen Walker to Jackie

24 Davis, cc Donohue on June 2, 22005 at 9:40 a.m.

25 Jackie Davis, in the e-nail string, says, "Hello


Page 99

1 Jen. Can you remember if the boxes marked Madoff were in the

2 hallway near your office or if not which hallway?"

3 Jen responds, "I remember seeing them but because I

4 thought to myself, hmmm, I never heard anything more about

5 that case it was going to storage."

6 A Where are you reading from?

7 Q You can read from the whole string if you want.

8 Let's go to the bottom of the string. You see Jackie Wood

9 e-mailing Jen Walker with a cc to you on Wednesday, June I,

10 2005. "Hey Jen. Mark is looking for the Madoff junk.

11 remember yiving it to you so we could all have the Madoff

12 stuff in one central location."

13 You say in the next e-mail to Jackie Wood, "We need

1? to send this stuf~ to NYRO ASAP so get Denise to get you into

15 jen's office today if possible." Is what you are referring

16 to is Jen was not there?

17 A That is right.

18 Q The next day, June 2nd, you see the~e-mail exchange

19 between jackie Davis and Jen Walker where Jackie says, "Hello

20 Jen. Can you remember if the boxes marked Madoff were in the

21 hallway near your office? If not, which hallway?" Then you

22 see the response from Jen, "I remember seeing them because I

23 thocght to myself, hmmm, I never heard anything more about

24 that case it is going to storage."

25 Do you know ii at the time that you were searching


Page 100

1 for these documents to send to NYRO it was Jen Walker's

2 Impression that the documents were going to storage and she

3 never heard what happened with that case?

4 A I do not know why Jen had the impression that the

5 documents were going to storage.

6 Q But you are not surprised that shewould not

7 remember what happened with the case because it was dormant

8 for a significant period of time?

9 A I think that is fair.


11 identification.)

12 MR. KOTZ:

13 Q The next document I am going to show you has been

14 marked as Exhibit 30. It is an e-mail from Eric Swanson to

15 john McCarthy on 2/28/06. From John Nee in the e-mail string

16 to Eric Swanson on Tuesday, February 28, 2006.

17 Before we get to this, do you remember

18 communications with NYRO about your exam?

19 A Yes.

20 Q What did you tell them exactly about your exam?

21 A I do not remember the specific communications

themselves. I remember we forwarded everything to NYRO.

23 Q Did you brief them on what you had found or not

24 found?

25 A I just do riot remember. I do not rerrember verbal


Page 101

1 communications

2 gy MS. STEIBER:

3 a There was no closing report in the work papers.

4 You never wrote a closing report, correct?

5 A Because, from my mind, our exam was not closed.

6 BY MR. KOTZ:

7 a Because you never completed the work.

8 A Yes. We never completed the work.

9 Q Was it unusual for a matter to be left dormant for

10 such a long period of time? In this case one year.

11 A I think it is usual for staff to be refocused on

12 different priorities all the time. We had many things to do

13 and not enough resources to do them all. It would be unusual

14 for this exam to sit without a lot of actioii oil it, as I

15 think it did for some time period.

16 a So you do not remember whether you provided the

17 folks up in New York with the information about the

18 outstanding issues that you had with respect to your Madoff

19 exam when they decided to work on theirs?

20 A I do not remember what verbal communications there

21 were. I thought there was a letter. I imagine there was a

22 verbal communication as well, but I just do not know.

23 a Did you ever follow up to find out what happened

24 with the New York examination?

25 A I did not.


Page 102

1 Q Were you aware of this reference in Exhibit 30

2 where John Nee tells Eric Swanson, "We closed out the exam

3 after looking for and not finding any evidence of front

4 running. However, shortly thereafter our enforcement people

5 got an anonymous complaint alleging either Madoff is front

6 running or it is the biggest Ponzi scheme ever."

7 A I do not remember ever seeing this set of

8 documents.

9 Q Do you remember viewing the closing report that the

10 New York office did that is attached to this e-mail?

11 n I do. It was in December of this year.

12 Q But not prior to that~

13 A Not prior to that.

14 BY MS. STEIBER:

15 C2 And Eric did not tell you that there was an

16 enforcement Investigation into Madoff?

17 A He may have. I do not recall any conversations.

18 BY MR. KOTZ:

19 Q Do you recall hearing about Harry Markolopos prior

20 to December 2008?

21 A No.

22 Q So you do not think you were aware at any point in

23 time that this entity that you were looking at in examination

24 was then being looked at in an enforcement case?

25 A ? do not recall being aware of that.


Page 103

1 Q Clearly,no one contacted you from the enforcement

2 division to ask you about what work you did in the

3 examination of Madorf in connection with their enforcement

4 investigation.

5 A I do not recall that contact.

6 Q And no one in the New York office who were

7 examiners working on their investigation ever contacted you

s after you handed over the documents to seek any information

9 about what you did?

10 A I do not remember whether there was a conversation

11 about the documents.

12 Q Do you remember i~ there were any substantive

13 conversations after the documents were handed over?

14 A I do not remember.

15 Q You do nor remember it happening?

16 A I know there was communication with NYRO regarding

17 the examination. I do not remember the sequence of the

18 communication and quite frankly whether I was involved in the

19 communication other than the information in the documents.

20 Q I want to ask you about a couple other things and

21 give you an opportunity to hear and comment on statements

that were made. Genevievette Walker has made some statements

23 about her working relationship with you and statements about

24 different matters that she worked on that are critical of

25 you. I just wanted to give you an opportunity to address any


Page 104

1 issues related to that.

2 A What were her statements?

3 Q I do not necessarily want to go into all the

4 specifics. There was a complaint filed, which I am sure you

5 are aware of.

6 A I am aware. I must admit, 7 do not know if I am

7 allowed to discuss it.

8 Q You are allowedto discuss it. You can discuss

9 anything with us. Do you have any comments specifically on

10 the complaint that she filed against you?

11 A She filed a cornplairit against the commission and I

12 was a witness to it.

13 Q That is correct.

14 A I thought the complaint had no merit. It was a

15 complaint alleging discrimination. There were two witnesses,

16 myself and I believe it alleged sex

17 discrimination based on her being a woman and racial

18 discrimination based on her being African American. I was

19 utterly surprised when I heard about it. Certainly 7 never

20 felt that was something I would take into account or would

21 ever do.

22 Q What was your impression of Ms. Walker and her

23 abilities?

24 A I think she could have strong abilities. I think

25 they did not always come through.


former OCIE Branch Chief

Page 105

1 Q Would you say she was stronger on the technical

2 side then on the work ethic side?

3 A I think that would be a fair characterization.

4 CL' So the concerns you had with her in terms of her

5 work situation was in terms of effort, coming to work, and

6 that kind of thing?

7 A I was not her administrative branch chief. The

8 administrative side o~ things was not something I dealt with.

9 Her being at work more often helps with projects, of course,

10 but I was not one who was giving her reviews on that element

11 of her work ethic.

12 Q Do you know what :irially happened with the EEO

13 complairii.?

14 A I believe it was settled and she left. I do not

15 believe that was related.

16 RY MS. STEIBER:

17 Q Do you recall if the ~ricrion between you started

18 during the Madoff exam?

19 A No. 5 must say I was very surprised by the

20 complaint. I think she felt there were things going on and

21 friction that I did not see.

22 Q no you know if she felt there was friction between

23 you two during the Madoff exam?

24 A I did not know about any of tha.. There was

25 friction about findi~q the boxes, so that was


Page 106

1 BY MS. STEIBEK:

2 cli I-lad she filed -~hat complaint against you prior to

3 the searching for the boxes?

4 A Again, it is a complaint against the agency. It is

5 a big distinction. I was not aware of it at that time.

6 BY MR. KOT7,:

7 Q Let me ask you about some specific statements made

8 regarding the Madoff exam. Ms. Walker stated that Eric

9 Swansoi~ had appointed her lead of the Madoff project, i,o you 10 recall that?

11 A I do not recall that. That could be true. I do

12 not remember whether there was a lead appointed, and if there

13 was whether it was her.

14 What about the ststen!ent that whe~ Moc took over

15 the exam you put jackie Wood as co-lead of the exam instead

16 of having Jen Walker just the lead?

17 A As I said, I do not recall whether there was a

18 lead, so to make co-leads I just do not know. These are

19 indications of her frustrations that I was not aware of.

20 Q You wanted Jackie Wood to be the lead and because

21 of that you nnade i'; difficult for her to perform her Job.

What is your reaction to that?

23 A I do not understand how I made it diF-ficul; for Jen

24 to perform her job

25 O So i- ii you;- position that you do net believe you


Fage 107

1 made it difficult for Jen Walker to do her job?

2 A That is right.

3 Q What about the allegation that you would call

4 impromptu meetings when she was out or noticed she just left

5 to make her look bad?

6 A I heard that allegation during the course of her

7 complaint. I was surprised when I heard it. Impromptu

8 meetings occur all the time. You walk into someone's office.

9 That is a method of communication. I do not deny that

10 impromptu meetings occurred while Jen was not there, but

11 there was no intention to meet while Jen was not present

12 Q I am going to go onto another topic now. Were you

13 aware at any point in time of Eric Swanson having

4 difficulties with john McCarthy? Any ~riction between the

3_5 two over some period of time?

16 A No.

17 Q Were you aware at any point in time that Eric

18 Swanson began a relationship with Shana Madoff?

19 A At some point in time I became aware.

20 Q What point in time was that? Was it during the

course of the Madoff examination?

A No, it was not.

23 O Do you think it had any impact on the Madoff

24 examination?

25 A Eric's relationship with Shana?


Page 1


In the Matter of:

File No. GIG-509

GIG-509

~-~~.~ -~s~-~· ,n, i

i Number ~-ri\

i WITNESS:



100 "F" Street, N.E

3rd Floor Conference Room


DATE: Monday, April 27, 2009

The above-entitled matter came on for hearing,

pursuant to notice, at 9:45 a.m.

Diversified Reporting Services, Inc

(202) 467-9200


Paye 2

i EARRNCES:

On behalf of the Securities and Exchange Commission: g

H. DAVID KOTZ, ESQ. Inspector General

HEIDI: STEIBER, ESQ. Tnvestigator

F 6 CHRISTOPHER WILSON, ESO. Investigator

d' 7 Office of the Inspector General

i 8 Securities and Exchange Commission

9 100 "F" Street, N.E.


11 (202) 551-6037

12

13 On hehalf of the Witness:

14 TY COBB, ESQ.

15 Hogan & Hartson LLP

16 Columbia Square

17 555 Thirteenth Street, N.W.


19 (202) 637-5600

20

·21

22

23

24

25


Paye 3

1 CONTENTS


4 John McCarthy 9


7 1 Non-Disclosure and Confidentiality 9

8 Agreement - McCarthy

9 2 Appendix A, List of Examinations

10 and Staff 26

11 3a 8/3/2000 Memo, Richards and McCarthy 29

12 to Walker and Cutler

13 3b 12/20/2000 Letter, Richards to 29

14 S. Madoff Skoller

15 3e 3/8/2001 Memo, McCarthy to Kichardson 29

16 4 3/3/03 Memo with attachment 32

17 5 10/20/2002 ~-m 33

18 6 8/27/03 E-mail, to Daugherty 36

19 7 10/29/03 E-mail, McCarthy to Swanson 36

20 Entitled: Call ASAP

21 8 11/10/03 Memo, to Swanson 37

9 Barren's Article 5/7/01 42


24 11 5/21/03 E-mail with attachments, 49

25


OCIE Staff Attorney

OCIE Staff Attorney

Page 4


2 12a 12/18/03 E-mail, McCarthy to Richards 51

3 12b 12/2003 Planning Memorandum 52

4 13 12/17/03 Draft Letter, Swanson 65

5 to NASD

6 14 12/10/03 E-mail, Richards to 67

7 McCarthy

8 15 12/18/03 E-mail, Richards to McCarthy 73

9 16 12/19/03 E-mail, Donohue to Daugherty 73

10 17 Madoff Document Request 76

11 18 1/6/04 E-mail, Swanson to P. Madoff 76

12 19 1/16/04 Letter, B. Madoff to Swanson 82

13 20 1/2Y/04 Notes from call with 1 87 14

15 21 2/4/04 Notes from Conference Call with 91

16 ~. Mado~tf


18 23 2/4/04 E-mail from Walker to Donohue 94

19 and Wood

20 24 3/11/04 Memo from Richards, McCarthy, 94

21 Swanson, Donohue, and Daugherty to Gray

22 25 Document Requests to B. Madoff, Drafts 95

1-10 and Final

24 26 Draft Letter from Swanson to P. Madoff 96

25 27 3/11/04 Letter from R. Madoff to Swanson 97


Page 5


2 28 Madoff Investment Securities 98

3 Account Statements

4 29 3/9/04 Letter, McCarthy to Firestone 103

5 30 4/6/04 E-mail, Walker to Sadowski 107

6 31 4/7/04 E-mail, Donohue to Walker 107

7 32 3/16/05 E-mail, Donohue to Swanson 110


9 34 2/28/06 E-mail, Nee to Swanson 117

10 CC: Lamore

11 35 3/1/06 E-mail Exchange, McCarthy 118

12 and Swanson

13 36 12/19/05 E-mail, Buchmueller to 120

14 McCarthy

15 3'7 3/19/06 E-mail Exchange, S. Madoff 121

16 and McCarthy

17 38 4/17/06 E-mail, S. Madoff to McCarthy 122

18 39 4/21/06 E-mail, Sadowski to McCarthy 123

19 40 4/6/06 E-mail Exchange, Sadowski and 128

20 McCarthy

21 41 4/23/06 E-mail, Swanson to McCarthy 131

42 4/27/06 E-mail Exchange, McCarthy and 133

23 Swanson

24

25


Page 6

1 PROCEEDINGS

2 ~R. KOTZ: On the record. Okay, we are on the

3 record at 9:45 a.m. on April 27, 2009, United States

4 Securities and Exchange Commission.

5 I'm going to swear you in, if that's all right?

6 Could you please raise your right hand?

7 Whereupon,

8 JOHN ANDREW MCCARTHY



11 MR. KOTZ: Okay. Could you state and spell your

12 full name for the record?

13 THE WITNESS: John Andrew McCarthy, J-o-h-n

14 A-n-d-r-e-w M-c-C-a-r-t-h-y.

15 MR. KOTZ: Okay. Mr. McCarthy, my name is David

16 Kotz; I'm the Inspector General of ~he United States

17 Securities and Exchange Commission. And I have mycolleagues

18 here, Heidi Steiber and Chris Wilson and you have your

19 attorney here, Mr. Ty Cobb. This is an investigation by the

20 Office of Inspector General, case number OIG-509.

21 I'm going to ask you certain questions and you'll

22 have to provide answers under oath. The court reporter will

23 record and later transcribe everything that is said.

24 Therefore, please provide verbal answers to the questions, a

25 nod of the head or another non-verbal response won't be able


Page 7

1 to be picked up by the court reporter.


3 finish my question before you provide your response and I'I1

4 try to let you finish your response before I ask my next

5 question. In addition, it is important you understand the

6 questions and give accurate answers. If there's anything you

7 don't understand or anything you do not know or are not sure

8 about, please let me know, otherwise, I will assume that you

9 heard and understood the question.


11 ?'HE WITNESS: Yes.

12 MR. KOTZ: Okay. I'm going to give you the

13 standard perjury language. As you can see, your response to

14 statements given today are provided ater you've sworn an

15 oath and wi13~ be taker, d.own verbatim by the court reporter.

16 This is an official U.S. government law enforcement

17 investigation. The claims asserted in this case are serious

18 ones. It is very important that you tell me everything you

19 know about the matter at hand and are completely forthcoming

20 and truthful with me.

21 I'm formally advising you that your testimony today

22 is subject to the laws of perjury. Providing false or

23 misleading testimony under oath is a very serious offence.

24 If the evidence shows the testimony you have given is false,

25 we may refer it as appropriate


Page 10

1 A I went to the University of Michigan,

2 undergraduate. Got a master's from the London School o~

3 Economics and then went to law school at the University of

4 Maryland.

5 Q Okay. What year did you get your degree from

6 Michigan?

7 A 1986.

8 Q And then what year did you go to the London School

9 of Economics?

10 A The ~ollowiriq two years, so 1989 1 got the degree.

11 Q Okay. And then where did you go to law school?

12 Maryland?

13 A University of Maryland.

14 Q And what year did you graduate law school?

15 A '92.

16 g Okay. What was your ~irst job after qrad.iatiny law

17 school?

18 A Clerk for the --

19 (Interruption to proceedings.)

20 Q How long did you do that for?

21 A For the year clerkship.

22 Q Okay. What kind of things did you do for them?

23 A I wrote draft opinions for the judge.

24 Q Okay. Anything to do with securities issues?

25 A No, it was mainly -- criminal law was the vast


Page 11

1 majority of my opinions.

2 Q What about in 1993, what did you do after the

3 clerkship?

4 A Then I joined the SEC.

5 g Okay. What was your first position for the SEC?

6 A I worked as a staff attorney in the Division of

7 Market Regulation.

8 Q What was the -- was that -- what other division was

9 it in? Office of Compliance, Inspections Examinations? I'm

10 sorry, what was the division that it was in?

11 A The -- I first worked at the SEC for the Division

12 of Market Regulation.

13 Q Oh, okay. I'm sorry, Division of Market

14 Regulation. For how long did you work for the Division of

15 Market Regulation?

16 A The -- that -- the area I worked in was made into a

17 separate office and I can't recall the date, '95 I think. So

18 I stayed in the same position but there was a change in --

19 so, where I worked was turned into a separate office, the

20 Office of Compliance Inspections and Examinations.

21 Q Okay. All right. So officially, you didn't start

22 working for OC until '95 but your office --

23 A And the dates I'm not exactly sure, but yeah, until

24 it was first formed by Chairman Levitt at the time.

25 Q Okay. And who was your initial supervisor?


r)age 12

1 A When I first started at the SEC my branch chief was

2 named

3 g And then do you get a promotion over time at the

4 SEC?

5 A Yes .

6 Q When was that?

7 A I became a branch chief, again, the dates aren't --

8 I think in '96, something along those lines.

9 Q Okay. What kind of duties did you have as a staff

10 attorney?

in A I was in the office of SRO Inspections, so I was

12 responsible for, you know, conducting inspections as part of

13 a inspection team.

14 Q And then as a branch chief, what were your duties

15 there?

16 A Basically, managing the inspection, managing a team

17 of attorneys to conduct the inspections.

18 Q How long did you serve as a branch chief?

19 A Again,·I'm not exactly sure, but approximately four

20 years maybe.

21 Q Okay. So until approximately 2000?

22 A Yes.

23 Okay. And then in 2000 you left the SEC; is that

24 right?

25 A i think it was '99, yeah.


Personal Privacy

Page 13

1 Q How come you left the SEC?

2 A My former boss, was of

3 Knight Securities and he asked me to join him in his firm.

4 Q What was your position at Knight Securities?

5 A Regulatory counsel.

6 Q How long did you work at Knight Securities for?

7 A A short period of time, maybe three, four months

8 Q What kind of things did you do there at Knight

9 Securities?

10 A Drafted -- you know, again, in the short period of

11 time, drafted comment letters and worked on, you know,

12 regulatory issues for the firm.

13 Q And then after three or four months with Knight

14 Securities you went back to the SEC?

15 A Correct.

16 (Z How come you left Knight Securities after only a

17 few months?

18 A Yes, my wife still worked here, still worked at the

19 SEC so we -- I was commuting by train up to New Jersey every

20 week and so there's personal -- that was not working out as

21 intended. There was a lot of stress on, you know, on me.

22 And then -- so, that's one -- part of -- one part of the

23 reason, the other reason was I didn't like the job itself.

24 I thought Knight Securities, you know, was growing

25 very fast and so I then, you know, also talked to Lori about,



Page 14

1 you know, getting a promotion at the SEC. So I thought that

2 was very desi.rable for me, vis-...-vis my job at Knight:

3 Securities.

4 Q That was Lori Richards?

5 A Yes, ma'am -- yes, sir.

6 Q Okay.

7 A Ma'am for Lori.

8 Q Now, do you recall that at some point in time there

9 was an action brought by the SEC against Knight Securities?

10 A Yes.

11 Q Okay. What was that about?

12 A It was a, you know, fundamentally at its core, best

13 execution issue.

14 Q Were there allegations that Knight Security was

15 engaged in front-running?

16 A Yes.

17 Q Okay. And was that going on while you were at

18 Knight Securities or --

19 A I don't know. It could have been when I was there

20 also.

21 Q Okay. But the allegations didn't surface until

after you left Knight Securities; is that right?

2~ A Correct.

24 Q Okay.

25 MS. STEIBER: Did your departure from Knight


Paye 15

1 Securities have anything to do with front-running or --

2 execution violations?

3 THE WITNESS. No.

4 RY MR. KOTZ:

5 Q All right, so you came back in about 2000 you think

6 to the SEC?

7 A I -- this was probably -- I remember July '99 if my

8 memory serves me correct.

9 Q Okay, July 1999. And what was your position when

10 you returned to the SEC?

11 A I think I was an assistant director.

12 Q Okay. Who was your supervisor at that point?

13 A Maryann Gajella. No, I'm sorry, I'm confused when

14 I was promoted to associate director and assistant direc~or

15 I'm not sure if that's correct.

16 g Okay.

17 A I thought when I came back from Knight Securities I

18 was, at some point, promoted to associate director.

19 Q Okay. And then subsequently you were --

20 A Before that I was assistant director.

21 Q Okay.

I apologize.

23 Q All right. What about in the period of time 2003

24 to 2006, what was your position at that time?

25 A Branch chief. And then at some point I was a -- I


f-'age 16

1 was promoted to assistant director and then I worked --

2 MR. COBB: No, he said 2000.

3 BY MR. KOTZ:

4 2003 through --

5 A Oh, I'm sorry. I'm in '93. 2003 to '06 I would

6 have been associate director.

7 Okay. So in that period of time, 2003 to 2006,

8 where you were associate director, who did you report to

9 then?

10 A To Lori Richards

11 Okay. And what were your duties as associate

12 director?

13 A T was responsible for the -- running the SRO

14 Inspection Program.

15 Okay. How many people did yo~ have under you at

16 that point?

17 A It varied over time, but maybe as little as 10 to

18 15, to as many as 25 or so.

19 Q Okay. Who were your direct reports when you were

20 associate director?

21 A I think assistant directors would have been Eric

22 Swanson and Mark Donohue.

23 Okay. So in that 2003 to 2006 period you

24 supervised both Eric Swanson and Mark Donohue?

25 A Directly, yes.


Page 17

1 Q Okay. And then how long did you serve as an

2 associate director?

3 A Until I left the Commission two-and-a-half years

4 ago.

5 Q Okay. So that was --

6 A Back in --

7 Q -- 2007?

8 A 7th November 2007.

9 Q How come you left the Commission that time?

10 A Mainly because there was a good opportunity

11 presented to me and it was about that point in my career that

12 I felt it was a good time to leave the Commission.

13 And what's the position that you left to go to?

14 A I went to the head of compliance at where ? am now,

15 Getgo LLC.

16 And you remain in that position today?

17 A Correct.

18 Q Okay. When did you first hear of Bernard Madoff or


20 A Early on in my career.

21 (Z So that would be in the '90's you think?

22 A Early, yeah. Mid-90's, like --

23 Okay. What did you hear of Bernie Madoff or Madoff

24 Securities in the mid-90's?

25 A I conducted an exam of the market-making unit.


Page 18

1 Okay. In the mid-90's?

2 A I think -- again, I don't recall the exact dates

3 but it was a limit order display exam.

4 Q Okay, yeah. We'll get to the specific exams in a

5 minutes, but was -- so that was the first time you heard of

6 Bernie Madpff, when you conducted the exam? You weren't

7 aware of them before that?

8 A Not that, I mean, the first time I now can

9 recollect learning about Madoff was when we -- when I was

10 asked to do an exam.

11 Q And what was Bernie Madorf's reputation at that

12 time?

13 A ? -- the firm's -- I didn't know what his

14 reputation was --

15 Q Okay.

16 A -- I knew what the firm's reputation was.

17 Q What was the firm's reputation?

18 A That it was one of the, if not the largest third

19 market-maker in which they executed over the -- you know,

20 listed securities over-the-counter. And they had a very good

21 reputation in terms of their execution quality of retail

22 customer orders.

23 Q Okay. And did you ever -- were you ever aware of

24 Bernie Madoff's involvement with SEC functions or SEC

25 matters?


Page 19

1 MR. COBB: Ever or about that time?

2 BY MR. KOTZ:

3 In that time

4 A The time -- again, as a junior attorney I was not

5 familiar with that, no.

6 (Z You ever hear that Bernie Madoff had a friendship

7 with former Chairman Arthur Levitt?

8 A Now or at that time?

9 Q At that time.

10 A I wasn't aware of that, no.

II Q Okay. Are you aware or' that now?

12 A Yes.

13 Meaning now within the last year?

14 A Recently, yeah, now within the last -- just from

15 what I've read the --

16 Okay, subsequent to December 2008 you mean?

17 A Correct.

18 CZ Okay. Have you ever met Bernie Madoff in person?

19 A Yes.

20 How many times?

21 A Maybe three.

22 Q Okay. And that's --

23 A I'm guessing, but that's approximately what I

24 think.

25 O What were those times?


Page 20

A During the exams and then at -- he was at Eric

2 Swanson's wedding, would be the last time.

3 Q Okay.

4 MS. STEIBER: Did you see him at SEC events?

5 THE WITNESS: I don't recall.

6 BY MR. KOTZ:

7 Q Okay, well we'll get into the exams, but did you

8 have a conversation with him at Eric Swanson's wedding?

9 A I didn't -- no, I did not speak with him.

10 Q Okay. So other than through the exams, the only

11 time you met Bernie Madoff was at the wedding and you didn't

12 speak to him at the wedding?

13 A Well, met, I guess I didn't meet him, but he was --

14 the only time I saw him would have been at the exams and at

15 the wedding.

16 Q Okay.

17 MS. STEIBER: Did you receive any personal phone

18 calls from him that were not exam-related?

19 - THE WITNESS: No, not that I recall.

20 BY MR. KOTZ:

21 Q Okay. Let's talk about policies in OC for a

32 minute. Were there formal policies and procedures for

23 handling tips or complaints when you were in OC?

24 A Formal policies?

25 B Yes.


Page 21

1 A I would have -- I wouldn't be aware of formal

2 policies.

3 Q Wouldn't be aware?

4 A Right.

5 Q Why wouldn't you be aware of them?

6 A I mean there were -- I don't recall like a written

7 policy on how to handle them.

8 (Z Okay. So you were not aware of any formal policies

9 about how to handle complaints --

10 A Yeah, I'm -- how were you -- formal like written

11 policies in a manual or something like that, I'm not aware of

12 those.

13 Q There were informal policies?

14 A There would be -- if I got a tip or complaint I

15 would handle them then probably, depending on what the tip or

16 complaint was and -- certain way to make cure that they were

17 handled appropriately.

18 Q So what was that way?

19 A I would -- if it made sense to conduct an

20 examination given what the facts, I would have then

21 assigned -- I would assign -- I would ask someone to, you

22 know, basically -- up an exam or inspection.

23 Q Okay. But would you log somewhere, anywhere, that

24 you got a tip or complaint?

25 A Not that I recall, no.


Page 22

1 Q And how would you decide whether there was

2 information that would necessitate doing an examiriation?

3 A Again, if the complaint seerr~ed -- I guess, things

4 like the credibility of it, whether it was in my jurisdiction

5 as it were, those would be the main factors.

6 Q Okay. And were there times where you would refer

7 the information or complaint to the enforcement division?

8 A I don't recall doing that.

9 Q Okay. Would there be situations that if you got a

10 complaint that you would feel that enforcement should be

11 provided a copy of the complaint or would your decision be

12 either to do an examination or not?

13 A Yeah, I don't recall getting the complaint, the tip

14 or complaint that if I didn't follow up in my program that it

15 made sense to ~orward it on to someone else.

16 Q So if the complaint was credible and had

17 allegations of potential violations of securities laws you

18 would decide to do an examination or inspection?

19 A If it was within -- my jurisdiction, yes.

20 (Z Okay. Did you receive tips or complaints yourself,

21 personally, while you were at OC?

22 A I'm thinking I -- nothing comes to mind that I can

23 recall

24 Q Okay. But you received them from others; is that

25 right?


Page 23

1 A I'm sorry, I'ni --

2 Q You would receive tips or complaints from other

3 people?

4 A You mean within the building?

5 Yeah, within OC.

6 A Yeah, that was probably -- yes, I do recall several

7 instances of that.

8 Q Okay. And who would they come from? Would they

9 come from Lori Richards?

10 A I think it depends

11 Q Okay. Do you remember any tips coming to you from

12 Lori Richards?

13 A Yes.

14 Q Okay.

15 BY MS. STEIBER:

16 Q How many tips or complaints did you receive from

17 any source during your years at OC?

18 A You know, I can only recall, right now, two.

19 Q And as an associate director --

20 A But again, you'd have to define what exactly a tip

21 or complaint is, but I only recall two that come to mind, but

22 my guess is there were probably more.

23 Q And as an associate director, how many tips or

24 complaints did OC receive per month, approximately?

25 A I don't know. I mean, you know, there was a


Page 24

1 hotline that I'm aware of and things like that that other

2 people within OC managed. So I assume that tips or

3 complaints within my jurisdiction would flow to me from that

4 source would be probably the main source of that I would have

5 been aware of.

6 Q From this hotline? And what would the hotline do

7 with the tips or complaints?

8 A I assume that there was -- if it made sense for my

9 jurisdiction to follow up then they -- I assume they would

10 have alerted me.

11 Q I'm just wondering if there's a database or

12 something that you're aware of ~~iat the hotline kept.

13 A I would assume they tracked it but I'm not aware o~

14 that.

15 Q Okay.

16 BY MR. KOTZ:

17 (Z What is a cause examination?

18 A It -- there -- it would be an out-of-cycle exam

19 that for some reason made sense, you know, they had some

20 cause to do it out of cycle or not within the routine

21 inspection process.

22 (Z So if you got a tip -- and you said depending on

23 the tip if it's credible and within your jurisdiction you

24 would have an exam or inspection be done, would you at that

25 point do that kind of an examination, a cause examination?


Page 25

1 A In our vernacular that would probably -- I would --

2 probably would refer to that as a cause exam, yes.

3 (Z Now you mentioned your jurisdiction. What was your

4 jurisdiction?

5 A Primary jurisdiction was inspection o~

6 self-regulatory organizations. And then as part of that

7 program we primary -- we were focused on surveillance

8 investigatory and enforcement programs at the SRMs and then

9 as part of the surveillance programs, a lot of times you'd

10 have to conduct trading exams because the records wouldn't

11 exist solely at the SRMs. Then we also started, as we got

12 more staff to do trading examinations of broker-dealers or

13 for brokers or specialists, things like that.

14 Q Okay. So if a tip or complaint came in and it

15 there was determination that you would do a cause

16 examination, who would determine what the focus of the

17 examination would be?

18 A Typically being -- if I was referred the tip I

19 would decide what the focus would be, maybe in consultation

20 with my assistant directors.

21 Q Okay. But in -- the final decision would be made

22 by you as associate director?

33 A Yeah, but it's very -- I have a very collaborative

24 approach, it wasn't dictatorial.

25 CZ Okay. How long would it typically take from the


Page Z6

1 time OC receives a credible tip or complaint to begin a cause

2 examination?

3 A Depending on staffing issues it -- the planning

4 memos should start, you know, more or less immediately,

5 within the next, you know, within a week or so or two at the

6 most.

7 Q So if it took several months for the planning memo

8 to start, would you consider that too long o~ a period of

9 time?

10 A No, I mean, again, it depends on what's starting

11 the -- when it was written or finished, but I would assume

12 that they would start thinking about how to do the exam and

13 staffing it and things like that.

14 Q Right away?

15 A Well, you know, within a matter of weeks, yes.

16 Q Okay. All right, let's talk -- you mentioned some

17 of the different matters you were involved in related to

18 Madoff Securities, so let me ask you about that. We can show

19 you a document, this is marked as Exhibit 2 and this is a

20 chart of Madoff exams. It says at the top, "Appendix A, List

21 of Examinations and Staff." Yeah, this was created by OC.

22 (SEC Exhibit No. 2 was marked


24 A Created by OC in response to --

25 A request to identify thedifferent exams that


Page 27

1 related to Madoff in connection with the investigation, but

2 not during his time there.

3 MR. COBB: So reasonably created as a summary?

4 MS. STEIBER: Right.

5 BY MR. KOTZ:

6 Q Right. Correct. So if you see under 1998

7 inspection of eight third-market firms, HQ, 1997 to 1998, you

8 see your name appears there along with several others?

9 A Yes.

10 . Q Do you recall that inspection, the 1998 inspection

11 of eight third-market firms?

12 A Yes, I do, vaguely.

13 g What do you recall about it?

14 A I'm sorry, am I on the right one?

15 MR. COBB: I don't know. I was just trying to read

16 both pages.

17 THE WITNESS: Around 1998?

18 MR. COBB: 1998 on this one though, right?

19 MR. KOTZ: Right.

20 MR. COBB: Trifocals just killing me.

21 THE WITNESS: I recall we were -- I recall the

22 issue of best execution was front and center in terms of

23 the -- either recent adoption or the process to adopt the

24 order-handling rules, so we followed up on the issues that

25 are -- the focus of the order-handling rules such as best


Page 28

1 execution and limit order display. That's what I recall.

2 BY MR. KOTZ:

3 g Do you recall if there was any conclusion, that the

4 inspection came to about Madoff?

5 A I don't recall.

6 Q At the next one on this, Exhibit 2, right above it

7 it says 1999 limit order display review, H~.

8 A Yes.

9 And your name is listed on that one as well.

10 And -- so you were.involved in that examination?

11 A Yes.

12 Okay. So what do you recall about that one?

13 A That I recall more clearly, we did a limit order

14 display exam of Madoff.

15 What does that mean, "limit order display exam of

16 Madoff?"

17 A In '97 the SEC passed a rule requiring

18 market-makers and specialists to display customer limit

19 orders that are better than the NBBO and so once the rule --

20 so we were basically making siire that people were complyiny

21 with the new rules -- or Madoff was complying with the new

22 rules.

23 And what was your involvement with that

24 examination?

%5 A I think I was a branch chief on that exam.


Page 29

1 Q Okay. I'm goiny to show you two documents -- three

2 documents in connection with the exam. We're going to mark

3 these as Exhibits 3a, 3b and 3c. 3a is a memorandum from

4 Lori Richards and you to Richard Walker and Steven Cutler,

5 Division of Enforcement, dated August 3, 2000. 3b is a

6 letter from Lori Richards to Shana Madoff Skoller, December

7 20, 2000. And Exhibit 3e is a memo from you to Arthur

8 Richardson, Division of Enforcement, dated March 8, 2001. If

9 you could take a look at these documents and I'11 ask you

10 some questions.

11 (SEC Exhibit Nos. 3a, 3b, 3e were

12 marked for identification.)


14 A Okay.

15 Q Okay. Based on your own general recollection and

16 the documents, what do you recall about the findings in

17 connection with this limit order display review examination?

18 A I recall pretty much what it says, that we found

19 violations at the firms we inspected.

20 (Z Including Bernard L. Madoff Investment Securities?

21 A Yes.

Q And do you recall that OC referred it to

23 enforcement for a deficiency letter?

24 A I recall we referred the results of the exam to

25 enforcement, yes, I do.


Page 30

1 Q Okay. Do you recall that at that time OC

2 recommended a deficiency letter be sent out?

3 A I recall that we sent out a deficiency letter.

4 (2 Okay.

5 BY MS. STEIBER:

6 Q Do your recall that OC took the position that an

7 enforcement action should be brought in that case?

8 A I recall that we felt that it -- the violations

9 were material enough to refer to enforcement, yes.

10 And do you recall how enforcement reacted to your

11 recommendation that an action should be brought?

12 A ~ don't recall.

13 Do your recall who made the decision that a

14 deficiency letter would be the appropriate result to the

15 exam?

16 A I don't recall. What I recall is that we sent a

17 deficiency letter and also referred to enforcement. I don't

18 recall that that was the final result.

19 BY MR. KOTZ:

20 (Z So did you know if an enforcement action was ever

21 brought against Madoff?

A I do not know. But obviously, ?'m guessing that

23 nothing was ever brought, but I don't know.

24 Q Now, on 3b, the letter is referenced to Shana

25 Madoff Skoller, do you know if you met Shana Madoff at that


Page 31

1 time?

2 A During the exam, the onsite portion, I don't

3 recall, but it's possible

4 g Do you recall who the contact person on that exam

5 was from Madoff?

6 A It was always Peter Madoff.

7 (Z Did you have any contact with anyone else at Madoff

8 Securities during this 1999 limit order display exam?

9 A I mean, I would say 99 percent of the

10 communications were with Peter Madoff. I think other people

11 might have said hello or something to that regard, but he was

12 the point person.

13 C2 Okay. Did you have any contact with Bernie Madoff

14 j, connection with the 1999 limit order display exam?

15 A I think he said hello to the team, if I recall

16 correctly.

17 Q But that was it?

18 A That's all I recall.

19 Q Do you recall why you referred these reportsto

20 enforcement for further action?

21 A I don't recall.

22 Q Okay. Going back to the chart, the next matter

23 listed was the 2003 QQQ trading review and your name is

24 associated with that as well. Do you remember that exam?

25 A Just a very vague recollection.


Page 32

1 Q Okay. Let me show you a document, perhaps that

2 will help. This is a memorandum ~rom you, Eric Swanson, Matt

3 Daugherty to Lori Richards, dated March 3, 2003, and we're

4 going to mark this as Exhibit 4. Thank you. And if you can

5 see attached to Exhibit 4 is an April 8, 2003 document

6 request from Eric Swanson to Peter Madoff.


8 identification.)


10 MR. COBB: And the record will reflect the act of

11 describing documents. Is there a question about --

12 MR. KOTZ: Well, I just wanted --

13 MR. COBB: Does he recall it?

14 MR. KOTZ: Well, I just wanted him to read it

15 first.

16 MR. COBB: Sure.

17 MR. KOTZ: And then I'm going to show him another

18 document.

19 THE WITNESS: How much you -- I can read it

20 carefully, I mean, do you want me to spend a lot of time? I

21 mean, I'm not --

22 MR. KOTZ: Right. Well, just -- you don't have to

23 read it and analyze it, just kind of read it over and then

24 I'm going to show you another document and ask you a question

25 about it.


Page 33

1 THE WITNESS: Okay, sure.

2 MR. KOTZ: Okay? This document you can mark --

3 MR. COBB: Read it over.

4 MR. KOTZ: -- as Exhibit 5. This is an e-mail from

5 to Eric Swanson with an attached memorandum from

6 to Tom Eidt dated September 12, 2003, Re: Madoff

7 Activity on QQQ.


9 identification.)

10 iWitness examined the documents

11 THE WITNESS: You said this is an e-mail or --

12 MR. KOTZ: No, it's a -- yeah, there's an e-mail

13 dated Monday, October 20, 2002 --

14 THE WITNESS: Oh, with the attachment?

15 MR. KOTZ: -- attachment.

16 MR. COBB: And the attachment is the memo?

17 MS. STEIBER: Yes, the attachment is the memo.

18 MR. KOTZ: And I'11 just point you out to

19 something, you can continue to read it afterward if you want.


21 BY MR. KOTZ:

22 Q In the memo from to Tom Eidt it says, "We

23 decided to investigate trading in the security based on the

24 ~act that the market for QQQ is often locked or crossed. We

25 have suspected that when one of these types of markets -- for


OCIE Staff Attorney

OCIE Staff Attorney

OCIE Staff Attorney

Page 34

1 security, that market-makers and specialists were violating

2 their duty at best execution on customer trades." My

3 question is is that your recollection of what led to this

4 examination?

5 A Yes, that's a fair sentence.

6 Q And what was your role in this triple Q

7 examination?

8 A I was apprised that, if I recall., that -- I often

9 encouraged my staff to come up with ideas, I think Brad came

10 up with this, I'm not sure. And so my role would have simply

11 said, "Sure, go ahead and do that."

12 Q Okay. And then while the examination was ongoing

13 did you have any role?

14 A Not that I recall, no.

15 Q Did you have any contacts with anyone at Madoff

16 Securities during this triple Q examination?


18 52 Okay.

19 BY MS. STEIBER:

20 Q As the associate director with examinations going

21 on under you, would you monitor the exams to make sure that

22 they were completed? Would you follow up on the

23 examinations?

24 A Rely on Eric and Mark to basically manage the

25 day-to-day part of the exams.


Page 35

1 Q And then at some point did -- like monthly, would

2 they come and report to you the exam findings or did you

3 track it on a spreadsheet?

4 A I think we tracked all of our exams and inspections

5 in a, you know, I think -- I don't know what -- in an Excel

6 type database or something like that.

7 Q Did you put all of those exams in the Start

8 database? Is that what you're referring to?

9 A I think we had, in-office -- the office had a

10 track -- you know, a summary of all the open inspections and

11 exams and I would get copies of that.

12 Q And would you follow up to make sure that they were

13 being worked on or --

14 A I mean, where I felt - I would ask questions and

15 see how things were going, sure

16 MR. KOTZ: Okay, show him the e-mail

17 MR. COBB: Are you done with five or --

18 MS. STEIBER: Yes.

19 BY MR. KOTZ:

20 Q Yeah. Okay, we're going to mark the next document

21 as Exhibit 6. And this is an e-mail from to Matt

Daugherty 8/27/2003, 5:26 p.m. And here it references Matt,

23 "We had a second call with Madoff and I think we understand

24 these trades a lot better." Do you know if you were on the

25 phone with any of the calls with Madoff in connection with


OCIE Staff Attorney

Paae 36

1 this exam?


3 identification.)

4 A I don't recall that I was, no.

5 Q Okay. Do you know when he says, "We had a second

6 call with Madoff," who he's referring to? is that Peter

7 Madoff?

8 A I don't know.

9 Q Okay, let me show you another document. This is an

10 e-mail from you to Eric Swanson dated 10/29/2003, 3:52 p.m.

11 We're going to mark this as Exhibit 7. And this document

12 you -- it's entitled, "Call Madoff Re: Fleet ASAP." Do you

13 remember why you were suggesting to Eric Swanson that he call

14 Mado~f?


16 identification.)

17 A '03, I don't recollect why.

18 (2 Do you know what Fleet is? Re: Fleet ASAP?

19 A Fleet is a broker-dealer in -- I'm pretty sure.

20 Q So is it a different broker-dealer? Is it related

21 to Madoff?

22 A Right, it's a separate broker-dealer.

23 Okay. So do you have any idea why you would be

24 suggesting call Mado~f Re: Fleet?

25 A I could guess, but maybe Fleet was sending Madoff


Page 37

1 orders, their retail order -- something to do with that.

2 Q Okay.

3 A But that's a guess.

4 g Okay. I understand that. Mark the next document

S as Exhibit 8. And this is a memorandum from to

6 Eric Swanson dated November 10, 2003, Re: Examination of

7 Madoff, Execution --


9 identification.)

10 MR. COBB: You want this back? I'm trying to --

11 BY MR. KOTZ:

12 Q Okay. If you look in the second paragraph it says,

13 "The staff has found numerous inconsistent instances of bad

14 executions by MADF, Bernard L. Madof~ Investment Securities

15 LLC."

16 A I'm sorry, I don't see where you'r-e reading.

17 Q I'm sorry, second paragraph.

18 A Yeah.

19 Q See where it says --

20 A "The staff has found --" Okay.

21 Q "-- resulting in some loss to the customers

22 involved." So "Staff has found numerous inconsistent

23 instances of bad executions by Madoff resulting in some loss

24 to the customers involved." So you recall that that was the

25 conclusion of the triple Q exam? And then if you can -- if


OCIE Staff Attorney

Page 138

1 you also look at the --

2 A 7 don't recall that.

3 Q Okay.

4 MR. COBB: Go through it and look at the

5 appendices


7 BY MR. KOTZ:

8 Q If you could take a look at the third page in the

9 document which has conclusion. You see where it says, "The

10 staff believes that there's a best execution problem with

11 Madoff. The staff further believes that Madoff and its

12 broker customers have thus far failed to adequately monitor

13 this behavior. Based on these conclusions, the staff

14 recommend that a deficiency letter be sent out outlining the

15 problem areas, as well as recommending that Madoff execute

16 customer orders at ECNs when it is able to do so rather than

17 proprietorialy taking that price, all that is getting the

18 customer aworse IT price."

19 Do you recall that in the triple Q exam, staff

20 concluded that there was a best execution problem with Madoff

21 in general?

22 A I mean, obviously I see it now, but I don't recall,

23 you know, obviously this is refreshing -- this I agree with,

24 it says what it says.

25 Q Okay. And do you recall thatthe star~ recommended


Page 39

1 that a deficiency letter be sent out?

2 A I mean, without seeing this I wouldn't have

3 recalled it, but yes, I can see that they -- that's what they

4 recommended.

S Q Okay. And the first page of this document, Exhibit

6 8, it says at the top, BE-Final. Do you see that?

7 A Yes.

8 Q Do you know what that would refer to?

9 A Probably best ex-final, would be my guess. I'm

10 guessing.

11 Q Is that your handwriting?

12 A It's no my handwriting, no.

13 Do you know it a deficiency letter was ever sent

14 out in connection with the triple Q exam?


16 Q Who would have made the decision to -- whether or

17 not to send out a deficiency letter?

18 A Deficiency letter would typically be done by --

19 recommended by the branch chief and the assistant director.

20 (Z So the --

21 A And thenthey would probably cc me or alert me

22 depending on how serious it was.

23 Q Okay. But who would actually make the decision as

24 to whether to send it, not recommend that it be sent but

25 decide that they would send it?


Page 4

1 A I mean, it's -- depending on how serious it is,

2 it's something that a branch chie~ could do, but they would

3 certainly alert their assistant -- the assistant director --

4 (2 Okay.

5 A -- or cc them.

6 Now, if a deficiency letter was sent out, would it

7 be in the work papers?

8 A It should be in the work papers, yes.

9 Q Okay. Now, we had testimony from and I

10 wanted to tell you what he said and give -- ask you to

11 comment about this. He indicated to us that he didn't

12 believe a deficiency letter was ever sent out and when asked

13 why he said, "I rfmember seeing this Inemo -- sending this

14 memo, and frankly, there were a lot of projects at the time

15 that would kind of die off. I mean, you know, you do some

16 initial review and then you go up the chain and I think the

17 superiors had determined, "Well, I got other thiriy~ to worry

18 about." Those old projects just kind of languished andI had

19 a lot of projects like that."

20 And then when asked specifically abcut this project

21 he said, "There was never any further direction. It was a

pretty common occurrence." Is that an accurate reflection of

23 what happened in OC at that time?

24 A I would disagree with that characterization.

25 Q Okay, in what way?


OCIE Staff Attorney

Page 41

1 A Well, I mean, he's -- that's his perception of what

2 was going on at the time, but -- above him, but I would

3 disagree with that description.

4 Q So what was your perception of what went on and

5 that you would disagree?

6 A Well, if he felt things died there might have been

7 reasons why they died and maybe he wasn't aware of.

8 (1 Okay.

9 MS. STEIBER: Is that normal practice, not telling

10 the staff that performs an examination of the reasons why

11 their recommendation wasn't accepted?

12 THE WITNESS: I would tell people who worked for me

13 exactly what was going on.

14 MR. KOTZ: And you don't ber why there's at

15 least no record, and according to there was no

16 deficiency letter sent out in the triple O exam?

17 THE WITNESS: I don't remember why, no.

18 MR. COBB: Only for clarification, he doesn't know

19 that there's no record.

20 MR. KOTZ: Right.

21 MR. COBB: Okay.

MS. STEIBEK: But wouldn't you, as the associate

23 director, keep track of what open projects there were and

24 what conclusions each project had?



OCIE StaffAttorney

Fage 42

1 MS. STEIBER: Where would you keep track of that?

2 THE WITNESS: Like I said, we had a -- Tina Berry

3 was for the -- most of the years, responsible for keeping

4 track of our open inspections.

5 MS. STEIBER: Okay, so --

6 THE WITNESS: And so --

7 MS. STEIBER: And so if I go to Tina Berry she

8 should have a record of the inspections that were under you

9 as associate director and their resolutions?

10 THE WITNESS: I think that's fair, yes.

11 BY MR. KOTZ:

12 Q So if we went to Tina Berry and/or reviewed the

13 work files and found no evidence of deficiency letters, isn't

14 it likely that a deficiency letter was never sent out?

15 A I mean, if you can't find one, I think that's a

16 reasonable conclusion, yes

17 Q Okay, next document. Okay, this next document is

18 an article called "Don't Ask, Don't Tell, Bernie Madoff is so

19 Secretive He Even Asks his Investors to Keep Mum," by Erin

20 Arvedlund, 5/7/2001. A two-page document we're going to mark

21 as Exhibit 9.


23 identification.)

24 MR. COBB: Read it --



Page 43

1 BY MR. KOTZ:

2 Q Okay, do you recall ever seeing this document

3 before?

4 A I mean, I see it now but I don't recall, no.

5 Q Okay. Do you see where it says at the top, "John,

6 she is very good. This is a great exam for us. Lori."

7 A Yes.

8 Q Do you think that refers to Lori talking to you?

9 A Yes.

10 Q And you see that this is dated 5/7/2001, and if you

11 look in the bottom right-hand corner it has a date 5/15/2001.

12 Do you know whether Lori Richards sent you this article in --

13 sometime in May of 2001?

14 A I don't know.

15 Do you regularly read Barron's?

16 A No.

17 Q Okay. Do you consider it a reputable publication?

18 A Yes.

19 Q Other than recalling specifically this article

20 right now, do you recall that Lori Richards sent you a copy

21 of an article about Bernie Madoff and suggested that this

22 would be a great exam?

23 A I mean, it looks like she did but I don't recall

24 it.

25 Q Okay.


Page 44

1 A And it's eight years ago, right?

2 Q I'm sorry?

3 A It's eight years ago, so it's a long time ago.

4 Q Let me ask you just about a couple of things in the

5 article. The third paragraph down, you see it says, "But

6 what few on the street know is that Rernie Madoff also

7 manages more than 6 billion for wealthy individuals. That's

8 enough to rank Madoff's operation among the world's five

9 largest hedge funds according to a 2001 report in MarHedge, a

10 trade publication."

11 Were you aware of the magnitude of Bernie Madoff's

12 managing of money and the fact that he was a very, very,

13 large hedge fund, enough to rank him among the world's five

14 largest hedge funds in the early 2000's?

15 A Was I aware?

16 Q Yeah.

17 A Not -- no, and if I read this it would have been

18 probably my first awareness of that business.

19 BY MS. STEIBER:

20 Q So if Lori sent you an article, do you think that

21 you would have read it?

22 A I mean --

23 Q She sent you an article in 2001.

24 P, Sure.

25 B Do you think you would have read it?


Page 45

1 A Typically I would have, but it's possible I didn't.

2 Q And if you read it in 2001 and you saw that Bernie

3 Madoff manages more than $6 billion for wealthy individuals,

4 would that have seemed like a large amount of money at that

5 time -- in that time period from 2001 to 2003?

6 A I would have -- yeah, I wasn't familiar with the

7 hedge fund business, I wouldn't have known. I mean, I would

8 have saw -- I would have saw they said the five biggest of

9 the -- I would assume that that's what it would have been.

10 Q Well, you said in the mid-90's that you were

II familiar with Bernie Madoff as a market-maker, If you had

12 read this in 2001 would it have surprised you that he's also

13 supposedly managing money in the 6 billion range?

14 A That he also had a hedge fund business wouldn't

15 have surprised me, no. I mean, I didn't - I simply didn't

16 ]tnow.

17 You had never heard of it before but it wouldn't

18 have surprised you?

19 A I mean, firms have run different businesses.

20 Obviously, I was focused on the trading business; if they had

21 other ones I wasn't aware of that. And then, obviously, if I

22 read this I would have been aware.

23 Q But you were just saying that you're not familiar

24 with the hedge fund business, so at that point, when you have

25 an article and -- that's been brought to your attention for a


Page 46

1 great exam and some of the information you might not be

2 familiar with, was there someone you would have gone to in OC

3 so that they could explain it to you

4 A If I ~elt a need that I needed to have it explained

5 to me, yes, I would.

6 g Okay, so if you read something and you didn't

7 understand it, would you have felt a need to understand it?

8 A Well, this seems self -- I -- this seems self --

9 you know, this seems -- it says what it says so I don't see

10 why I would have asked someone to explain anything to me

11 Q Okay. So you're unfamiliar with hedge funds, this

12 is -- and that's not familiar to you and you might have a

13 great exam hut you would not have sought out any more

14 information about the hedge funds mentioned in the article.

15 Is that your testimony?

16 A I don't recall either one way or the o~lier seeking 17 out any other information.

18 Q Okay.

19 BY MR. KOTZ:

20 Q There's a reference in the sixth paragraph to

21 I~airfield Greenwich. Do you see that.-' And Fairfield Century 22 Limited?

A Yes

24 Q And then, "Managed by Bernie Madoff, Fairfield

25 Century has assets of 3.3 billion." Do you know if OC ever


Page 47

1 examined any of the Madoff feeder funds like Fair%ield?

2 A I do not know.

3 g Okay.

4 BY MS. STEIBER:

5 Q Did you get a status on what other associate

6 directors in OC -- what matters they were manaying?

7 A I don't recall ever getting any --

8 You didn't have like --

9 A -- documents as to what they were doing.

10 Not documents, but would you get e-mail, like

11 updates, showing you what everyone was working on?

12 A No, I don't recall that.

13 Did you have OC meetings --

14 A We had a staff meeting in which -- yes, in which

15 the other associates would talk about, you know, their most

16 siyniiicant projects. So yeah, i= -- it was oral but, yPah.

17 (Z So -- and you don't remember a hedge fund sweep

18 that was -- of fund-to-funds that was performed in 2003?

19 A I don't recall, no.

20 BY MR. KOTZ:

21 Q Okay. So if you got an article from Lori Richards

22 that said, "She's very good. This is a great exam for us,"

23 what would you have done?

24 A I don't know what I did in this instance.

25 Okay, but in --


Page 48

1 A I don't recall opening an exam as a result of this

2 article.

3 Q Okay. Do you recall any further conversations with

4 Lori Richards about her suggestion that you do an exam?

5 A I don't recall.

6 Q Okay. Do you know if you ever contacted Erin

7 Arvedlund to get more information about what she wrote in the

8 article?

9 A I don't recall. I mean, I would recall, I

10 didn't -- I never called or spoke to her.

11 Q Was there a prohibition in OC or some kind of rule

12 against calling an author of an article like this to get more

13 information?

14 A Not that I'm aware of.

15 Q Okay. Let me show you another document, we'll mark

16 this as Exhibit 10. This is an e-mail from you to Eric

17 Swanson dated December 11, 2003, 1:53 p.m. To see if this

18 further refreshes your recollection, this is a copy of the

19 same article, it seems as though you're forwarding to Eric

20 Swanson in 2003.

21 (SEC Exhibit Nd. 10 was marked for

22 identification.)

23 A The same article that I just saw?

24 Q Yes.

25 A Okay.


Fage 49

1 Q Okay. Do you have any recollection of why you

2 might have forwarded this article to Eric Swanson two years

3 later?

4 A Typically, I forward articles as an FYI or possibly

5 for something for us to follow up on.

6 O Okay. But you don't remember specifically

7 forwarding this article or seeing this article?


9 BY MR. WILSON:

10 Q Do you recall why Tina Berry sent you these

11 articles?

12 A I'm only guessing, I mean, because she knows that

13 we've done exams on Madoff and we might find it interesting.

14 Q But you don't recall any type of conversation about

15 that?

16 A With Tina?

17 g Yes.


19 BY MR. KOTZ:

20 (Z Okay, let's show you another document, we'll mark

21 this Exhibit 11. This is an e-mail from - to

22 Mavis Kelly dated Wednesday, May 21, 2003, 5:47 p.m. This is

23 a two-page e-mail with several attachments.


25 identification.)


Page 50


2 MR. COBB: I'm sorry, Exhibit 11? Did we skip one

3 or did I miss one?

4 MR. KOTZ: This is 10.

5 MR. COBB: Okay, I'm sorry. Thanks.

6 BY MR. KOTZ:

7 Q Have you ever seen this document before?

8 A I don't recall ever seeing this, no.

9 No? Do you know whether this document triggered a

10 cause examination of Bernie Madoff?

13 A ? don't know.

12 (1 Do you knowwhat did trigger the cause examination

13 of Bernie Madoff in 2004?

14 A Which cause exam are you referring to?

15 Q The cause exam that Washington Headquarters worked

16 on.

17 A The one that was within my yroup?

18 Q Yeah.

19 A I mean -- thought about it, I think it was the --

20 an article that I was made aware of and I assume it's that

21 article.

22 Okay. Let me show you another document. This is

23 an e-mail from you to Lori Richards dated December 18, 2003,

24 6:13 p.m. We're going to mark this as Exhibit 12. And in

25 this article you say, "Lori, regarding tip IA/IC received


Page 51

1 about Madoff, a compliance officer and an investment advisor

2 notified Mavis that he was concerned about the returns

3 Fair~ield was posting." Then you say, "We would like to

4 contact this compliance officer and get a better

5 understanding of how the strategy is supposed to work."

6 (SEC Exhibit No. 12a was marked for

7 identification.)

8 MS. STEIBER: So do you now recall that you were

9 familiar with this tip from to Mavis? And

10 remembering that you're under oath.

11 THE WITNESS: I remember I'm under oath all the

12 time. Again, I'm -- I can see what's said in this e-mail

13 and -- so, I'm a little confused by the e-mail because it

14 seems to be from me but it seems to be written from Eric.

15 MS. STEIBER: Like you had forward -- maybe had

16 forwarded an e-mail that you were writing with Eric to Lori?

17 THE WITNESS: Yeah, but this doesn't look like a

18 forward, I -- in terms of the e-mail traffic

19 MS. STEIBER: Did you and Eric work closely

20 together?


22 MS. STEIBER: So it was possible that you could

23 work on an e-mail together and send it to Lori?


25 MR. COBB: Yes, it's possible?


Page 52

1 THE WITNESS: It's possible, yes

2 BY MR. KOTZ:

3 Q Okay, I'm going to show you another document.

4 We'll mark this as Exhibit 12. This is an e-mail from you,

5 Eric Swanson, Mark Donohue, Genevievette Walker, Jackie Wood,

6 to Lori Richards, dated December 2003.

7 If you see in this document, which is a planning

8 memorandum, in the background section it says, "The staff

9 received -- recently received information from an outside

10 source alleging that Bernard L. Madoff, the principal of

11 Bernard L. Madoff Investment Securities LLC, Madof~

12 Securities, a leading market-maker in -- securities has been

13 front-running violations."

14 Do you see that?

15 (SEC Exhibit No. 12b was marked for

16 identification.)

17 A Yes.

18 Q Okay. Were you aware that there was an examination

19 in your group of Bernard Madoff of alleged front-running

20 violations?

21 A Yes.

22 Q Okay. Do you know what the outside source referred

23 to in this memorandum was?

24 A I don't -- I can only guess that the article but

25 I'm not sure.


Page 53

1 Q You think the article was an outside source and not

2 the - complaint that was sent in May of 2003

3 and that is referred to in the December 2003 e-mail?

4 A I don't know, but it makes sense, yes

5 Q So -- but you do remember that a cause exam was

6 initiated of Bernard L. Madoff and Madoff Securities; is that

7 right?

8 A Yes.

9 Q Okay. And --

10 A By my group.

11 Q By your group. And what was your involvement in

12 that cause exam?

13 A I instructed my staff to do the cause exam.

14 Q Why did you instruct your staff to do the cause

1.5 exam?

16 A My recollection is that Lori -- Lori and I had a

17 discussion, it could be e-mails, I'm not -- I can't remember

18 exactly, that there's allegations that Madoff may be taking

19 advantage of his retail order flow.

20 Q Where did those allegations come from?

21 A My recollection is they were from the media, the --

22 a newspaper article, or Barren's would be my guess.

23 Q Okay. And in that conversation did you talk about

24 the fact that you had received a complaint from an entity

25 like Mr. and then actually followed up with him on


Page 54

1 several occasions to get information about his allegations

2 about Bernie Madoff?

3 A I don't recall. I don't recall his allegations.

4 Q And how is the decision made as to what the cause

5 examination of Madoff would focus on?

6 A Well, my group was responsible for trad-ing exams,

7 so we focused on, in essence, the trading aspect of the

8 allegation.

9 Q What was the trading aspect of the allegation?

10 A We31, whether the retail order flow could be, you

11 know, based on the best execution exam, could be harmed by if

12 information was passed to other entities.

13 Q What about allegations that were raised by -

14 - that seemed to indicate Mr. Madoff was not actually

15 trading at all?

16 A I don't recall those allegations.

17 Okay. So is it possible that you made this

18 decision with Lori as to how to focus the cause exam of

19 Madoff without being aware of allegations that came in at the

20 same time by - ~?

21 A I'm trying to understand your question.

Q Well, is it possible that you made the decision to

23 focus the cause exam of Bernie Madoff on front-running

24 allegations without being aware that . had

25 come in and brought allegations to OC that were somewhat


Page 55

1 different in nature?

2 H Is it possible that I -- I focused on the

3 front-running aspect of the exam, yes.

4 Q Because you hadn't seen the fact that a complaint

5 had come in around the same time period that your staff was

6 working on -- your staff was aware of.

7 MR. COBB: I think that misstates his testimony, he

8 said he --

9 MR. KOTZ: I'm asking the question.

10 MR. COBB: -- just didn't recall.

11 MR. KOTZ: But I'm asking the question.

12 MR. COBB: Well, you said he said, that was my

13 objection.

14 BY MR. KOTZ:

15 Q All right, I'11 re-ask the question. You made the

16 decision to -- was it you who made the decision to focus on

17 front-runnina in this cause exam?

18 A Look I -- as I recall I got a -- I had a discussion

19 with Lori saying there was allegations of front-running of

20 Madoff's retail -- so that's what I -- so therefore, I

21 focused on that.

22 Q So it was you who made the decision to focus on

23 front-running?

24 A Was it me?

25 Q Yeah, you.


Page 56

1 A That's all I recall that I focused on because that

2 was -- it could bemainly because that was the area of

3 expertise for my crew.

4 Q Okay, but I'm trying to establish who made the

5 decision to focus on front-running. Was that a decision made

6 by you?

7 A I don't recall focusing on front-running, I recall

8 talking to Lori that there's allegations of front-running so

9 I said that -- so I said that would be an area that we could

10 do an exam.

11 Q Okay, so who made the decision in the Madoff exam

12 that the exam would look at front-running?

13 A I made -- I decided the scope of the exam for Mark

14 Donohue.

15 Q Okay. And you're not aware that at the same time

16 period your staff had received a complaint ~rom

17 1 _ that made different allegations; is that right?

18 A I don't recall ever seeing that, no.

19 Q Let me ask you a couple questions about Exhibit 11,

20 which is I ·complaint. I'II just ask you iT

21 this -- the issues at all were ever raised at that time

22 period. One of the things that says is -- and you

23 can look kind of middle way down the page it says, "According

24 to EMS," do you see that?

25 A Yes.


Page 57

1 Q "The options are traded with a number of traders

2 and crossed on the CBOE." Do you know what the CBOE is?

3 A Yes.

4 Q What is it?

5 A It's an options exchange in Chicago.

6 Q Okay. And you knew what that was at the time?

7 A Yes.

8 Q Okay. Then it says, "With an 8 to 10 billion size

9 you must see the volume, but unfortunately you don't. We

10 actually checked with some of the largest brokers, UBS,

11 Merrill, et cetera, which told us they never traded with them

12 OEX options. The question is do they really implement the

13 full strategy?"

14 Do you recall at any time in making a determination

15 about what the scope of the Madoff exam would be, this issue

16 about whether MadofS was actually implementing his trading

17 strategy for options --


19 Q You don't recall this issue being something that

20 was discussed or what don't you recall?

21 A I don't recall it being discussed, I don't recall

being aware of it.

23 Q I'm sorry?

24 A I don't recall being aware of it at this time.

25 g Okay. All right, another question from this


Page 58

1 document to ask whether you recall being aware of -- you see

2 where it says, "Accounts are typically in cash at month end?"

3 A Yes.

4 Q Do -- first of all, do you know what is -- is there

5 any relevance to that, why accounts would be typically in

6 cash at month end?

7 A I don't know.

8 Q Would there be any securities regulation

9 requirements that Madoff could avoid by going to cash at the

10 end of every month?

11 A There could be, I'm not familiar at the top of my

12 head what those are.

13 Q Okay. And then further down on this Exhibit 11,

14 _ complaint, it says, "There are no third-party

15 brokers involved in the process. The auditor of the firm is

16 a related party to the principal." Is that -- wouldthat be

17 a concern?

18 A Now, obviously, it would be.

19 Q But it wouldn't at that time.

20 A I wasn't aware of this at the -- I can't recall

21 being aware of this at the time, so --

22 Q Okay, but would it be a concern? Before whatever

23 happened in December 2008, would that be a concern?

24 A It would be, certainly noteworthy, something that

25 should be followed up, perhaps.


Page 59

1 And do you know if in connection with the cause

2 exam or Madoff if anyone did follow up about this issue of

3 whether there are no third-party brokers involved or anything

4 about the auditor of the firm? Was that ever followed up?

5· A Not that I recall.

6 CZ Okay. And then earlier in that same document,

7 Exhibit 11, it says, "The firm does not charge any management

8 or performance fees to these accounts, but rather brokerage

9 commissions. We estimate the amount of money management --

10 strategy by EMS, somewhere between USD 8 to 10 billion. Is

11 that something that would be a concern?

12 A A concern of me at the time, ~ don't know

13 Q But I mean, the fact that the firm does not charge

14 any management or performance fees, is that -- would that be

15 odd?

16 A Obviously, now having read a lot of stuff in the

17 media, I understand that that is odd. At the time I might

18 not have been -- I was not familiar with this part of the

19 business.

20 Q Okay. And then if you see in Exhibit 11 there are

21 several attachments. One attachment is another article in

22 MarHedge entitled, "Madoff Tops Charts, Skeptics Ask How."

23 Do you see that article?

24 A Yes.

25 Q Do you recall that? Have you ever seen this


Page 60

1 article before?

2 A I don't recall seeing this article.

3 Q At the time you -- at the time that you made the

4 determination to have the staff undertake the Madoff cause

5 exam, were you familiar with the basic characteristics of a

6 Ponzi scheme?

7 A 7 would say I -- in the colloquial sense, yeah, I

8 would understand what Ponzi scheme is.

9 Couple of things that were referenced in the

10 article I wanted to ask you about. If you could see on page

11 2 of the article, the second page of the article --

12 MR. COBB: Hedge article?

13 BY MR. KOTZ:

14 Q Sorry, yes, MarHedge article, attached to the

15 _ complaint. It says, "Skeptics who express a mixture

16 of amazement, fascination, and curiosity about the program

17 wonder first about the relative complete lack of volatility

18 in the reported monthly returns. Among other things they

19 also marvel at the seemingly astounding ability to time the

20 market to move to cash in the underlying securities before

21 market conditions turn negative and the relatedability to

22 buy and sell the underlying stocks without noticeably

23 affecting the market."

24 Do you remember that that was an issue that was

25 discussed or was thought about when you were going to


Page 61

1 undertake the cause examination of Madoff?

2 A I don't recall that being an issue, no.

3 Okay. Do you recall anything about the lack of

4 volatility in Madoff's returns being an issue?

5 A No.

6 O Do you know if anybody ever contacted the

7 individual who wrote this article, Michael Ocrant, in

8 connection with the Madoff examination?

9 A I did not contact him, I don't know if anyone else

10 did.

11 Okay~ You think if you had been aware of this

12 _ _ complaint the examination's scope might

13 have been more than just front-running?

14 A It's -- my area was on trading so it's -- it could

15 have very well been the same, same scope.

16 Q But if you got a complaint that alleged other

17 areas, for example, that he may not have been trading at all,

18 you would have done the same type of exam?

19 A It's a hypothetical, I don't know what I would have

20 done. But certainly, reasonably would have followed up with

21 it whether it was my group or another -- another group did

22 it.

23 Q Okay, so even if your group --

24 A There's jurisdiction issues, so I was careful, you

25 know, we were care~ul not to do IASE exams -- not careful but


Page 62

1 simply, you know, we would make sure that the appropriate

2 area of the OC did the exam. So I probably would have worked

3 with other areas.

4 BY MS. STELBER:

5 () Well, let me ask you about that. You wouldn't have

6 worked with other areas, is that what you just said? Sorry.

7 A I didn't say that, no.

8 (Z Okay. Well, what I don't understand is if you're

9 going in for an examination and you said your expertise is

10 trading, and you're the associate director and you're putting

11 together a team; could you have pulled from the Investment

12 Advisor part of OC to get an examiner on the team who is more

13 familiar with hedge fund trading?

14 A I could have done that or could have separated the

15 issues and had -- you know, have the IC group do the do

16 that exam separately.

17 g But if you have a registered broker-dealer but not

18 registered hedge fund, so you would -- you could create the

19 team though that goes in, because of the ED registration, any

20 way you want, right? You could have somebody with investor

21 advisor experience, someone with broker-dealer trading

22 experience, someone with other types of experience; you don't

23 have to just have people from the Market Oversight or SRO

24 group, correct?

25 A There's no requirement or guideline that would --


Page 63

1 that, correct.

2 BY MR. KOTZ:

3 Q Do you recall what time period it took from the

4 time that you instructed the staff to initiate the Madoff

5 exam as to when the planning memo began to be prepared and

6 the exam was initiated?

7 A I saw the -- if that's a planning memo, but I don't

8 recall.

9 Q You don't recall it being a particularly long

10 period of time, many months, before the planning memo was

11 ever started?

12 A I don't recall that, no.

13 Q Okay. But if the office received a complaint from

14 1 in May of 2003 and the planning memo

15 didn't -- wasn't drafted until lat December 2003, do you

16 think that was too long a period of time to follow up on a

17 complaint?

18 A It would depend on a variety of factors that --

19 What would those factors be?

20 A Well, resources, how, you know, how credible the

21 complaint was, et cetera, things like that. But obviously,

22 the decision was made to do the exam, so typically I would

23 expect once a decisions been made for the planning memo to

24 be, you know, done in a relatively short period of time.

25 Q Okay. And that would be a lot shorter than seven


Page 64

1 months, would you say?

2 A What I'm talking about -- from what -- you know,

3 when the decision was made to do the exam to start the

4 planning memo.

5 Q Okay. What about the time period from when the

6 complaint came in until the decision was made to do the exam,

7 could that take months?

8 A It could, but I would expect it to, you know, to be

9 done, you know, in less than months.

10 Q Okay. Why don't we go to the planning memo. Okay,

11 gong back to F.xhibjt 12, the planning memo. You see in this

12 memo, which is from you and several others to Lori Richards,

13 under "Course of Action," number 3 on the first page? See,

14 it says, "The staff intends to send a letter to NASD

15 requesting execution data for Madoff Securities for the time

16 period of January 1, 2001 through December 31, 2002."

17 Why would staff send a letter to NASD requesting

18 execution data?

19 A Because it's often easier to get trade data

20 directly from the NASD and it has a certain level of

21 reliability.

22~ (r And do you know who made the decision to -- that it

23 says that "The staff intends to send a letter to the NASD

24 requesting execution data?"

25 A I'm pretty sure it was -- my understanding was Mark


Page 65

1 Donohue was running the exam so I would expect it to be him.

2 And do you know whether the staff ever did send a

3 letter to the NASD requesting execution data for Madoff

4 Securities?

5 A I don't know if they actually did it but I would

6 assume they would have.

7 BY MS. STEIBER:

8 Q is it a standard step in a front-running exam to

9 get trade data from the NASD or from an exchange?

10 A It makes a lot of sense, yes. But I mean,

11 front-running exams are relatively -- you know, there's -- I

12 don't recall ever being involved in that many of them, so

13 whether there's a standard step probably is overstated.

14 Q So it wouldn't be unusual --

15 A No.

16 -- to get the trade data and it would be --

17 MR. KOTZ: And appropriate --

18 MS. STEIBER: -- good practice.

19 THE WITNESS: It makes sense to get it, yeah.

20 BY MR. KOTZ:

21 Okay, I'm going to show you a document. It's a

22 draft letter to the NASD from Eric Swanson, December 17,

23 2003. And we're going to mark this as Exhibit 13. Would

24 this letter be requesting the execution data from NASD?



Page 66

1 identi~ication.)

2 A It looks like it, yes.

3 Q And you don't know if this letter was ever sent

4 out?

5 A This is obviously -- not the signed copy on

6 letterhead, so --

7 Q Okay. You mentioned earlier that you remembered

8 two tips that came in while you were in OC. Any of them

9 relate to Madoff?

10 A That would be this as a tip, yes. I would view the

11 Madoff -- my recollection is Madof~ was -- I would qualify as

12 a tip.

13 O Okay, so one of them is the one we're discussing

14 now and what is the other one?

15 A Again, I use a tip, the Knight Securities case was

16 started based upon an allegation by an employee there.

17 Q An allegation by

18 A By an employee at Knight. So I would view that as

19 a tip as such.

20 MS. STEIBER: Did that come in to you?

21 THE WITNESS: I think -- now that I think about it

22 more, I think it was part of a arbitration that we became

23 aware of, so --

24 BY MR. KOTZ:

25 Okay, I'11 show you another document, mark this as


Page 67

1 Exhibit 14. This is aT1 e-mail from Lor·i Richards to you,

2 12/10/2003, 7:13 p.m. responding to an e-mail from you to

3 Lori.


5 identification.i

6 MR. COBB: What's the number?

7 THE WITNESS: 14.

8 BY MR. KOTZ:

9 Q Do you recall anything about an informant on Canary

10 that also had information about Madoff?

11 A I guess my recollection of why I started the Madoff

12 exam was based-on that tip, so that makes sense.

13 Q A tip from the outside, because previously you

14 talked about an article?

15 A Right, but again, when I was -- in my recollection

16 of my discussions with Lori, you know, again, it's a long

17 time ago, my recollection was it was a tip or somehow she

18 became aware of the possibility of front-running. So whether

19 she got it from the article or tip, you know, this seems more

20 consistent with my recollection.

21 Q Okay. What -- you say in this e-mail in response

22 to Lori, "How can I get trading records if they're hedge

23 fund? Can we get a formal order?" Why would you want to get

24 a formal order? What kind o~ formal order would you want to

25 get?


Page 68

1 A Again, my guess -- again, this is -- a guess, is

2 that I felt we couldn't get their -- I felt they probably

3 weren't registered or I knew that somehow and we couldn't

4 get -- we would -- couldn't get their records through the

5 exam process.

6 BY MS. STEIBER:

7 Q So why didn't you seek a formal order?

8 A My understanding is that Madoff agreed to give us

9 trading records voluntarily, so -- would have needed -- if

10 they agree to give you the records then it doesn't

11 necessitate to get a subpoena requiring them to do it.

12 Q So if you have a registered broker, a

jl 13 broker-dealer, you can have any of their trading records,

14 correct

15 A Right.

16 Q -- without needing a formal order? You didn't need

17 him to agree, he would have to provide all of his trading

18 records to you.

19 A Right, but my understanding at the time, obviously

20 I understand more now, but was that Madoff had a hedge fund,

21 so that's probably why I said that. But yes, you're right,

22 all of the records -- broker-dealer records -- would not have

23 been why I would have said that.

24 Q Okay.

25 BY MR. KOTZ:


Page 69

1 Q And then you say in this, "I will draft a letter to

2 get that info tomorrow a.m. Okay with you?" Lori says yes.

3 Do you know if a letter was ever drafted?

4 A Usually when I tell Lori I would do something I

5 would have instructed people to do it, so -- but I can't

6 recall whether a letter was actually drafted.

7 BY MS. STEIBER:

8 (Z And could you walk us through what the purpose of

9 drafting a letter would be based on your e-mail? You know,

10 describe what types of data you were going to request.

11 A Well, I'd say if I can -- again, my -- I don't

12 recall this but do you want me to run through the email what

13 I think? "If not, I can fairly easily figure out where their

14 executing their hedge fund trades and get the trading info

15 from their executing brokers." So what I meant there was I

16 would have, hopefully, somehow figured out where the hedge

17 fund was executing its orders and then send broker-dealer

18 requests to those entities.

19 And then you make --

20 A Also, they were probably executing orders. And

21 then I say, "But they may be executing their orders

22 in-house," meaning that I could probably just get -- if

23 that's the case then I could ask their broker-dealer for the

24 trading records.

25 Q So if they're executing them in-house you would


Page 70

1 have just gone directly to them to get the trading records?

2 A To --

3 g You wouldn't go anywhere else? If they're

4 executing in-house where would you go to get the trading

5 records?

6 A To the -- to Madoff broker-dealer.

7 Q Is it -- I want to be clear because I'm confused as

8 to your going to be investigating potential fraud of a

9 registrant and you would go to that registrant to request the

10 trading records?

11 A I was investigating potential front-running so you

12 would go to the -- you would get trading records from that

13 entity, yes.

14 Q Is there anywhere else that you could have gone?

15 If you know that they're executing them in-house and you

16 don't want to go to the registrant because you want to have

17 objective third-party records, is there anywhere you could go

18 to get those trading records?

19 A Like I said previously, you could go to the NASD to

20 get audit trail data. Whether there's enough information in

21 that audit trail for these purposes,·it depends. Audit trail

would simply say -- would simply have the executing

23 broker-dealer and the time and the price and the date, so

24 whether it was enough specificity to -- for the purpose of

25 the exam you'd have to -- typically you would have to then


Page 71

1 get more specificity at the broker-dealer level

2 Q At the broker-dealer level~ Is there -- okay, you

3 go to the NASD, you look at their audit trail and you say you

4 don't think it's sufficient. Can you go back to the NASD and

5 ' ask for additional information?

6 A · Well, for instance, if you get -- NASD would say,

7 we -- you know, Madoff bought 1000 shares of Microsoft, so if

8 you want to know that. You would not be able to determine

9 whether it was 1000 shares from the hedge fund or from a

10 retail client. So that information you -- that degree of

11 specificity would have, in my understanding, would orily be at

12 the broker-dealer level

13 (Z The broker-dealer. There'd be no -- so you would

14 have absolutely nowhere you could go objective third-party to

15 find out if -- who -- for whom ~~ie -- or for whom the trades

16 were executed?

17 A Right, so to know which customer to -- which

18 customer the trade was for you would have to go to the

19 broker-dealer level. And again, typically these are omnibus

20 accounts and the like, so all -- the only information you

21 would have would beMerrill Lynch or Madoff by 1000 of a

22 Microsoft and that's what would occur -- and the time and

23 sales, of course. That's the information that would be at

24 the SRO level. If you wanted for -- depending on what you

25 were doing for the exam, if you wanted -- if you needed more


Page 72

1 specificity you would have to go to the broker-dealer.

2 Q Well, so do you think that a good practice would be

3 to get the records from the NASD and then also get them from

4 the broker-dealer so that you could compare what you're

5 provided?

6 A I mean, often we would just -- often I would just

7 get the information directly from the broker-dealer. I,

8 obviously, know what you're asking, you're -- if I thought

9 there could be -- if I thought the records were -- any reason

10 think the records were not accurate, yes, I would then want

11 to verify with the NASD.

12 BY MR. KOTZ:

13 Q Okay, I'm going to show you another documen~. I'11

14 mark it as Exhibit 15. This is the e-mail from Lor-i to you,

15 it's a reply to the e-mail fron~ you to Lori. The e-mail from

16 Lori to you is dated 12/18/2003, 4:25 p.m.

17 And then I'm going to show you another document.

18 It is Lori Wichards e-mail 12/18/2003, it's marked 16. And

19 then the next document we're going to mark -- okay. The

20 e-mail from Lori Richards to you dated 12/18/2003, 4:25 p.m.

21 is Exhibit 15. And then the second document is from Mark

22 Donohue to Matt Daugherty, 12/19/2003, 2:13 p.m. and that's

23 going to be Exhibit 16.

24 See, it references in both these e-mails are two

25 calls put in to Madoff by you and Lori Richards. Do you


Page 73

1 recall having a conversation with Madoff at that time?

2 (SEC Exhibit Nos. 15 and 16 were


4 A Yes.

5 Q Okay. And who was on that call, which Madoff was

6 it?

7 A Bernie and possibly Peter, but I don't recall

8 Q Okay. And what did -- what happened in that phone

9 call? What was said?

10 A The purpose of the call, as I recollect, I'm not

11 looking at the e-mail so it's just as I recollect now, were

12 basically to verify that he had ahedge fund, to make sure we

13 understood generally what the -- yeah, I wasn't aware of

14 hedge funds so I asked questions about what that looked like,

15 where the trades were executed, things like that. And to

16 basically make sure that we could - understood enough so

17 that we could then start conducting the exam.

18 Q So you had substantive questions you asked Bernie

19 Madoff in that call about his operations?

20 A Subsequent to the call?

21 Q Substantive questions in that phone call about

22 Bernie Madoff's operations that were asked?

23 A These were just general questions.

24 MS. STEIBER: But they were general substantive

25 questions, right? They're not just "I'm going to start an


Page 74

1 exam next week," they're -- you were asking probing questions

2 about his operations?

3 THE WITNESS: I think it was just to get an -- I

4 think my main objective was to make sure that we could send a

S document request letter that made sense. It's common

6 practice to call a firm to make sure, "Hey, you're a market

7 maker, you know, you execute over-the-counter we're going to

8 send you over-the-counter document request letters." So it's

9 very, for me, a common practice.

10 MR. KOTZ: But it was an informational phone call?

11 You were trying to seek information about his operation?

12 THE WITNESS: And to make sure -- and then --

13 right, in -- basically to make sure we could then construct a

14 rational document request letter.

15 MS. STEIBER: Is it usual for you, as the associate

16 director, to call the registrant before starting an exam?

17 THE WITNESS: Typically, for SRO inspections, yes

18 it would be me depending on -- yeah, specialists exams it

19 would be me. It would be kind of how important I thought the

20 exam was.

21 MS. STEIBER: Wasn't it unusual though, you had

22 Lori also on the phone call with you? Did you think it was a

23 really important exam or --

24 THE WITNESS: No, that's not -- I mean, it's

25 happened before but it's not, certainly not normal.


Page 75

1 BY MR. KOTZ:

2 Q It's certainly not normal?

3 A It's not normal for Lori to be on a call with me,

4 no. But it's -- I'm sure it's happened many times in the

5 past.

6 Q And so why would there be a particular case where

7 Lori would be on the call as well?

8 A My recollection in this instance was that she got

9 the, you know, got the tip and I said, "Well, why don't we

10 call together," or something like that.

11 Q You didn't take any notes of that phone cajl?

12 A I don't recall taking notes.

13 Q Did Lori Richards say anything to you in particular

14 ahout Bernie Madoff in connection with that phone call or

15 otherwise, in connection with the exam, that would affect

16 scope or focus of your exam?

17 I mean, she may have said something. I mean --

18 said -- helped me -- you know, obviously we would have had a

19 discussion as to what the scope of the exam would be, but --

20 (Z Did she ever indicate to you to back off from any

21 aspect of examining Madoff's operations?

22 A That's definitely -- I feel strongly that that

23 would be highly unlikely that she would ever do that and she

24 did not do that here. I don't recall her ever saying back

25 off anything in my whole career, so --


Page 76

1 Q Okay. All right, the next document we're going to

2 mark as Exhibit 17. This is an e-mail dated 1/29

3 MR. COBB: Are you done with these?

4 MR. KOTZ: Yeah.

5 MR. COBB: I'm sorry, it goes so fast. I'm

6 notorious here for screwing up the exhibits.

7 MS. STEIBER: Hold on. Could we go off the record

8 for a second?

9 MR. KOTZ: Yeah, why don't we go off the record.


11 MR. KOTZ: Okay, now we're going to -- we're going

12 to mark the document as Exhibit 17, different document than I

13 previously indicated. This is a -- yeah, this is a

14 compilation of the OC Headquarters' first Madoff document

15 request, draft 1 through 7, and a final document request.

16 And then in addition we're going to put into evidence as

17 Exhibit 18 a letter from Eric Swanson to Peter Madoff dated

18 January 6, 2004.



21 MR. COBB: Just on -- so the 17 is a series of

22 drafts that ultimately culminates in 18, is that --

23 MS. STEIBER: Yes.

24 MR. COBB: Okay, thanks.

25 BY MR. KOTZ:


Page

1 Q So do you remember sending out a document request

2 to Bernie Madoff?

3 A I don't recall specifically, but --

4 Q Do you recall generally sending a document request

5 as part of the cause exam?

6 A Yes.

7 Q Okay. And do you recall what kind of documents you

8 were seeking to obtain in that document request?

9 A I don't recall specifically, but it would have been

10 records to -- consistent with doing the front-running exam.

11 MS. STEIBER: And what were those records

12 consistent with doing the front-running exam?

13 THE WITNESS: The records that they're laid out in

14 the letter.

15 MR. KOTZ: Okay.

16 MS. STEIBER: If you were doing a front-running

17 exam and you were going to make a letter, without looking at

18 .what you have, what would be the documents that you would

19 want requested? You talked before about audit trail data,

20 would that be one of the things that you would want?

21 THE WITNESS: I would certainly want sample trades

from the retailers and sample trades fromwherever we thought

23 the proprietary trades were being executed at.

24 MS. STEIBER: Okay, would there be anything else

25 you would want?


Page 78

1 THE WITNESS: That would be the -- those trading

2 records would be the core of the examination. I suppose

3 you'd want WSPs and things of that nature that are typical to

4 what --

5 MS. STEIBER: What are WSPs?

6 THE WITNESS: Written Supervisory Procedures. And

7 the main issue here would be Chinese Walls, to ensure that

8 order information doesn't flow to a --

9 MS. STEIBER: Anything else you would want?

10 THE WITNESS: That's -- that would be the heart of

11 the exam from my perspective. You can -- you need that

12 'trading information to see in --

13 MR. KOTZ: Okay. Yeah, if you look at the third

14 · draft, F3 in that document --

15 MS. STEIBER: See the e-mail to you?

16 BY MR. KOTZ:

17 Q In Exhibit 17, the third draft, there's an e-mail

18 from Mark Donohue to you and Eric Swanson dated 12/24/2003,

19 4:03 p.m. "Attached is the latest version of the Madoff

20 document request letter." Do you see that?

21 A Mm-hmm.

22 Q And the next page, do you see the number 1 on the

23 draft document request letter?

24 A Mm-hmm.

25 (Z What type of information was being sought in this


Page 79

1 draft under number 1?

2 A So what type of information? It looks like --

3 Q Yeah, why would ydu request the daily profit and

4 loss statements and daily commission revenues?

5 A I'm a strong believer that we should make sure we

6 see where the -- on any exam -- where the firm's making money

7 because that's often a -- of where there's possible

8 irregula~jties. If they're losing money then it would

9 probably be something that would be less interesting than if

10 they're making.

11 Q Why would you request specifically daily profit and

12 loss statements or daily commission revenues?

13 A I figure that's -- I don't know.

14 MS. STEIBER: Well that's not audit trail data, is

15 it?

16 THE WITNESS: No.

17 BY MR. KOTZ:

18 Q Okay. And then if you look on the second page of

19 this document it says, "Describe in detail the hedging model

20 or investment strategy identified as the split-strike forward

21 conversion in a telephone conversation between Lori Richards,

22 John McCarthy and Bernie Madoff on Uecember 19, 2003." Do

23 you see that?

24 A Yes.

25 Okay. And then the next one, it says, "Identify


Page 80

1 the four hedge funds discussed in the telephone conversation

2 between Lori Richards, John McCarthy and Bernard Madoff on

3 December 19, 2003." Do you see that?

4 A Yes.

5 (Z Okay. Then if you look at Exhibit 18, the final

6 version of the document request, you see that it asks for

7 monthly profit and loss statements by security and monthly

8 commission revenues, not daily. Do you have any idea why you

9 would have asked for monthly when the draft said daily?

10 A Why the change? I don't know.

11 Q Okay. And if you look at paragraph two on Exhibit

12 18, the final draft, the next page there, it leaves out any

13 reference to a telephone conversation between Lori Richards,

14 John McCarthy and Bernie Madoff on December 19, 2003, both in

15 two and in three. Do you see -- do you have any idea why

16 it -- that reference to a telephone conversation would be in

17 the draft but not in the final?

18 A Why they took it out, I don't know. I don't recall

19 being part of the drafting process.

20 Q Okay, you don't recall being part of the drafting

21 process? Okay, if you look at the fifth tab in Exhibit 17

22 you see there's an e-mail, "John and Eric attached to a

23 document request with the revisions we just discussed." See?

24 I mean, doesn't it seem as though you were part of the review

25 process for this document request?


Page 81

1 A That would suggest that I discussed something with

2 Mark, yes.

3 (Z But a minute ago you said you weren't.

4 MR. COBB: No, he didn't. He said he didn't

5 recall

6 MS. STEIBER: No, he said he wasn't involved.

7 MR. COBB: No, he said --

8 THE WITNESS: I said I don't recall being a part of

9 the draft.

10 MR. COBB: You want to read it back or play it

11 back? He said he didn't recall being part of the drafting

12 process.

13 MS. STEIBER: Does this refresh your recollection

14 then that you were involved in the drafting process?

15 THE WITNESS: I mean, no, it doesn't but yes, I

16 certainly think I -- this looks like a valid and true

17 document. This is -- it's starting to be a long time ago so

18 I don't recall what -- you know, whether or not I was --

19 MS. STEIBER: And in that final draft, Exhibit 18,

20 is there a request for audit trail data in that final draft?

21 That final letter that was sent out?

22 MR. COBB: You want him to read the whole letter or

23 you just want him --

24 MS. STEIBER: He could read it an let me know if

25 there's any request for audit trail data.


Page 82

1 MR. COBB: Doesn't that speak for itself? We'll

2 accept a representation, I mean --

3 MR. KOTZ: But we'd like him to answer the question

4 if he wants to cooperate with us.

5 THE WITNESS: Looks like in this --

6 MR. COBB: Well, he has been totally cooperating,

7 he's here vo·luntarily. You're asking him to read a letter

8 and tell you whether there's something in there, the letter

9 speaks for itself.

10 MR. KOTZ: Well, I'd like him to answer the

11 question.

12 THE WITNESS: So in this letter it looks like

13 there's not a request for audit trail data.

14 BY MR. KOTZ:

15 (Z Okay, thank you for the response. We're going to

16 show you the next document. Okay, we're going to mark as

17 Exhibit 19 a letter from Bernard L. Madoff to SEC, Attention:

18 Eric Swanson, dated January 16, 2004. Do you recall, as part

19 of the cause exam, receiving a response from Bernie Madoff?


21 identification.)


23 Q You don't recall that you ever got a response from

24 Bernie Madoff?

25 A I didn't -- I would have expected a response but I


Page 83

1 don't recall seeing it or reading it.

2 Q Okay. Do you think you would have seen it or read

3 it or that would have been something that Eric Swanson would

4 have done?

5 A -- this is a prosecution of the exam that would

6 be -- something that I typically wouldn't be involved with.

7 Q Would or would not?

8 A Would not be typically involved with.

9 Q Okay. So do you recall though, in general, that

10 there were requests made for documents to Madoff and do you

11 recall whether he provided documents or what happened? What

12 exactly do you recall about this exam?

13 A I don't recall being part of the day-to-day running

14 of the exam.

15 (Z Rut do you recall knowing -- learning anything

16 about the exam, whether Madoff complied with the document

17 requests or gave information that gave the staff concerns?

18 A I don'·t recall there ever being -- I don't recall

19 Mark or Eric or anyone highlighting concerns about whether

20 documents were being produced or not.

21 Q Do you recall Mark or Eric or anyone else

22 highlighting any concerns about Madoff's responses or the

23 exam?


25 g So it was pretty -- kind of routine thing you had


Page 84

1 allegations of front-running and what did you find in these?

2 A My recollection is when I asked Mark whether he was

3 finding indicia of front-running that he said, no, he has not

4 yet come up with any indicia of front running. But I don't

5 recall when exactly I asked him and that would have been at

6 some point during the examination --

7 Q And do you recall --

8 A -- several times.

9 Q I'm sorry, several times?

10 A Possibly, I might have asked Mark several times,

11 "Hey, how's it going," or something like that. That's just

12 my general recollection.

13 () And do you recall whether there was a final

14 determination of whether Bernie Madoff was front-running?

15 A My recollection is Mark said they did not find any

16 indicia of front-running.

17 Q Okay. Did they do a closing report in connection

18 with the exam?


20 g Why wouldn't they do a closing report? Was that

21 normal to do a closing report? You would just end an exam

22 with Mark saying he didn't think there was frontrunning and

23 that would be the end of it?

24 A Typically, staff is supposed to -- when they finish

25 an exam they're supposed to close it out and I think there


Page 85

1 should have been a close-out memo is my understanding.

2 MS. STELBER: Is there anything else you do at the

3 end of an exam to show the -- for the registrant?

4 THE WITNESS: If there was -- typically there would

5 be deficiencies of some nature so we would typically send a

6 deficiency letter.

7 MS. STEIBER: What about a meeting with the

8 registrant at the end?

9 THE WITNESS: I don't view that as a -- it could

10 have happened on exams but I don't remember that being a

11 typical thing to do.

12 MS. STEIBER: So it would be the closing report and

13 the defi_ciency letter, it wouldn't be the two main indicia of

14 the exam being closed?

15 THE WITNESS: That's fair, I guess.

16 BY MR. KOTZ:

17 Q Okay. And you don't remember anyone raising to you

18 any concerns about Madoff's responses to the document

19 requests? We've had significant testimony that the folks on

20 the exam had very grave concerns about some of the things

21 Madoff was saying. You don't remember anybody bringing that

22 to your attention?

23 A I do not, no.

24 Q Were you hands-on as an associate director or -- it

25 just -- I'm just trying to understand. Folks that worked on


Page 86

1 the exam, through a-mails and testimony, have relayed that

2 there were very significant concerns about what Madoff was

3 providing them, what information he was giving them. And it

4 seems as though they never, at least according to you, they

5 never brought it to your attention. Do you think that was

6 because you were hands-off with these exams or with this

7 particular exam oris there any --

8 MR. COBB: I think his testimony was not that they

9 never brought it to his attention, it was that he didn't

10 recall anybody bringing it to his attention.

11 BY MR. KOTZ:

12 Q Okay. So it may have been that you had -- were

13 actively involved in these discussions about concerns about

14 Madoff's operations you just don't remember3

15 A It's very possible if they were serious that I was,

16 you know, Mark or Eric came to me, but I don't recall those

17 conversations.

18 Q Okay. I'm going to show you another document, I'm

19 going to mark this as Exhibit 20. This is a -- notes 05 a

20 telephone call with dated 1/29/2004. If

21 you see, there's references here to returnsare too

22 consistently high for this strategy, not doing that strategy

23 because ops and training is not in high. He doesn't

24 understand how he consistently makes money off this strategy,

25 perhaps he doesn't really use the strategy. The volume o~


Page 87

1 options trading doesn't seem to be enough to protect the size

2 of the equity trading." Do you remember a phone call back

3 with the complainant _ ?


5 identification.)

6 A I don't recall -- I've never -- I don't recall ever

7 recognizing the name or talking to him or her.

8 Q And you don't recall at any point anybody who

9 worked on the exam come to you and say, "We talked to some

10 individual and this is what he said?"

11 A 7 don't recall that.

12 Q And you don't recall any issues that were raised

13 about how Madoff really doesn't use the strategy after the

14 exam was initiated, when they did follow up to get

15 information from the person who submitted the complaint?

16 A I mean, no, I don't -- my focus was on the issue of

17 front-running. I don't recall that issue.

18 Q Right, if you look back at Exhibit 12b there's an

19 e-mail from you to Lori Richards where it says, "We would

20 like to contact this compliance officer and get a better

21 understanding of how this strategy is supposed to work." So

22 does that seem as though that you, or you and Eric, actually

23 requested that they call _ back?

24 A This certainly asks Lori. Yes, according to this

25 e-mail that makes -- that seems a reasonable conclusion.


Page 88

1 g So looking at the -- we showed you -

2 complaint and this information about the conversation with

3 In retrospect, do you think it was a mistake to

4 focus the scope of the exam on front-running when these other

5 allegations were brought to the SEC's attention?

6 A For me?

7 Q Yes.

8 A It was not a mistake for me to focus on that, on

9 front-running, because that's where my area, my team's area

10 of expertise led.

11 Q So even if you get allegations of other matters

12 that could be indicia of potentially, a Ponzi scheme, you

13 would have focused only on front-running?

14 A Well, the other allegations, at least the way I

15 read them, were more appropriate handled by the Investment

16 Advisor Investment Company Group.

17 Q So do you think it was a mistake not to bring to

18 anyone else's attention that there were allegations other

19 than what you were looking at relating to Bernie Madoff?

20 A Was it a mistake not to bring it to other people's

21 attention?

22 g Right.

23 A It -- the other allegations should have been

24 brought to other people's attention, yes.

25 And in ~act, if those allegations had been brought


Page 89

1 by you or your office to the other people's attention,

2 perhaps Bernie Mado~f's Ponzi scheme would have been

3 uncovered. Okay?

4 A I don't know.

5 Q But if a complaint comes in and folks working for

6 you are looking at the complaint and reacting to the

7 complaint and you're referencing the complaint in an e-mail,

8 wouldn't that be your responsibility, as the associate

9 director, to make sure that all the allegations in the

10 complaint are looked at, not just the front-running ones?

11 A T think my responsibility is to take information

12 that's consistent with my program and to follow up on those

13 complaints

14 Q So you wouldn't have any responsibility if other

15 issues were brought to your attention that were not within

16 your program to relay that to anyone else?

17 A I think from the documents you provided me it -- I

18 probably was comfortable that the IAIC group had the

19 information that you're speaking of. So I think I -- so

20 my -- if you're asking me what's reasonable and what's not, I

21 think it's reasonable that I would have expected them to, if

22 they were aware of the complaints, I would have expected them

23 to follow up on those complaints that were consistent with

24 their program.

25 BY MS. STEIBER:


Page 90

1 Q So you're -- you'd be surprised we have testimony

2 from the Investment Advisor Group that says when you were

3 given this complaint, because it's a registered

4 broker-dealer, that they -- you were expected to look at all

5 of the allegations and they thought that you were conducting

6 an exam that looked at all of the allegations?

7 A Would I be surprised if they said that?

8 Q Would you be surprised, do you think?

9 A I mean, if that's what they said, yeah, again, I'm

10 just explaining to you what I would -- what my expectations

11 would be. The broker-dealer issue that -- from this

12 information is obviously -- front-running, so that's what I

13 followed up on.

14 BY MR. KOTZ:

15 Q And you don't -- do you feel you have any

16 responsibility to ensure that someone else, somewhere,

17 follows up on other allegations that are brought to your

18 staff's attention?

19 A Again, I took the information that I -- I took the

20 information and started a front-running exam. If there are

21 IASE issues embedded in the complaint then, you know, I would

22 have expected them to follow up on those as appropriate.

23 g Okay. I'11 show you the next document. Mark it as

24 Exhibit 21. This is a conference call with Madoff dated --

25 or notes of a conference call with Mado~~ dated 2/4/04. Do


Page 91

1 you recall if you participated in the conference call with

2 Madof~ in February 2004?


4 identification.)

5 A February '04, I don't recall being part of a call,

6 no.

7 Q I'm sorry?

8 A I don't recall being part of a conference call with

9 Madoff.

10 At any point in time?

11 n No, I February of '0/3.

12 Q Okay.

13 A I said previously, yes, I was in a call with Lori

14 with Madoff.

15 Q Okay, but that's the only call you remember being

16 on with Madoff was the one with Lori?

17 A On the -- for this front-running exam that's the

18 only one I recall, yes.

19 Q But with respect to another exam? The previous one

20 we talked about?

21 A I said previous exams I could have been on calls

22 with -- it probably would have been Peter on the other exams,

23 yes.

24 Q But the point person on the cause exam in 2004,

25 that was Bernie Madoff?


Page 92

1 A The call that Lori and I did was with Bernie

2 Madoff, yes .

3 Q Did -- did you think it was odd or did anyone say

4 to you that it was odd that Bernie Madoff, himself, was the

5 point person on an exam? He was the one that the OC folks

6 dealt with directly, the exam folks dealt with rather than

7 compliance officer or a lawyer?

8 A I think it's -- I was used to that form the Madoff

9 firm, it appears that Peter Madoff was the point person.

10 Would it be normal for Merrill Lynch? Certainly not. So

11 yes, it's odd as in atypical, but I viewed it as much smaller

12 firm that it didn't strike me as noteworthy at the time.

13 Okay, I'11 show you the next document we marked as

14 Exhibit 22. These are additional notes. You recognize these

15 notes?


17 identification.)

18 A I mean, it's not my handwriting so I guess, no, I

19 don't recognize it.

20 g Okay, second page of the notes, can you turn to

21 that for a second, has reference to "Get OAT from NASD and

22 act all Mado~~ orders."

23 MS. STEIBER: It has Mavis -- at the top.

24 MR. KOTZ: And then it has -- yeah, Mavis Kelly,

25 that was the woman who forwarded the Hachemian complaint. Do


Page 93

1 you know what that reference is "To get OATS from NASD?"

2 A OAT stands for order audit trail that NASD keeps.

3 Q And what would be the purpose of getting OATS from

4 NASD?

5 A As I stated before, it would be a way to get trade

6 data.

7 (Z What about ACT? What does ACT refer to?

8 A OATS and ACT are basically audit trails. ACT is a

9 subset of OATS. ACT would be -- is typically easier to get

10 and quicker, historically. But ACT is time and sales and

11 firm. So it would have the name of the firm, the time of the

12 trade and the date and the price, things like that.

13 Q And do you know if the staff ever got OATS from

11 NASD, or ACT?

15 A ~ don't know.

16 Q Okay. Do you recall any issues that arose about

17 whether Madoff needed to register as an investment advisor in

18 the course of the cause exam of Madoff?

19 A I don't recall that being an issue for my exam.

20 Q Okay. Now let me show you a document that may be

21 able to refresh your recollection. I'm going to mark this as

22 Exhibit 23, this is an e-mail from Genevievette Walker to

23 Mark Donohue, Jacqueline Wood, February 4, 2004, 2:03 p.m.

i 24 I'm going to show you that document and then the

25 second document we're going to mark as Exhibit 24, this is a


Page 94

1 memorandum from Lori Richards, you, Eric Swanson, Mark

2 Donohue and Matt Daugherty to Dan Gray dated March 11, 2004.

3 Does this refresh your recollection that the

4 investment advisor issue actually was an issue in your exam?



7 A Yes.

8 Q Okay. A minute ago you didn't think it was?

9 MR. COBB: He said he didn't recall.

10 THE WITNESS: I didn't recall it be7ng an issue,

11 no.

12 BY MR. KOTZ:

13 Q Okay. So now that you see the document, do you

14 recall anything about this issue?

15 A I still don't recall, no. But obviously, yes,

16 there's a draft document to Dan Gray.

17 Q And why would they -- why would you and Lori, Eric

18 and Mark, Matt, send a memo to Dan Gray about this issue?

19 Who is Dan Gray?

20 A I think he -- I think it's referring to Dan Gray in

21 Market Regulation.

22 Q Why would the memo go to him about this issue?

23 A I haven't read the memo in detail but it --

24 typically we'd send memos if we had questions of securities

25 laws or interpretation or guidance, things like that.


Page 95

1 Q And you don't remember whether this issue was

2 resolved as to whether Bernie Madoff should register as an

3 investment advisor at that time?

4 A Right, I don't recall.

5 MS. STEIBER: Could you review the last paragraph

6 to see if it --

7 THE WITNESS: The "additionally" paragraph? Okay.

8 BY MR. KOTZ:

9 Q Does that refresh your recollection as to what

10 happened with that issue regarding the investment advisor and

11 your exam?

12 A I'm still -- don't recall this issue, but it says

13 what it says.

14 Q Okay. I'11 show you the next document marked as

15 Exhibit 25. This is the second set of document requests to

16 Rernie Mac30ff, drafts 1 through 10 and a final request. Do

17 you remember an additional document request that went out to

18 Bernie Madoff?


20 identification.)


22 Q I'm going to show you another document marked as

23 Exhibit 26. This is a draft letter from Eric Swanson to

24 Peter Madoff. Do you recognize, personally, any of the

25 handwriting on this letter?


Page 96


2 identification.)

3 A It's not mine and I don't recognize whose it is.

4 g You see that there's -- on the face of Exhibit 26

5 there's question one, which is crossed out. Do you see that?

6 A Yes.

7 Q What kind of information was being requested here

8 that was crossed out?

9 A We call it trading data.

10 MS. STEIBER: Would this be audit trail trading

11 data that's requested?

12 THE WITNESS: Right, audit trail I also refer to

13 SRO, but it would be trading data from the firm, it looks

14 like.

15 MR. KOTZ: And if you look at Exhibit 11 in the

16 previous document, whch is the final letter that was sent to

17 Madoff dated February 18, 2004 --

18 THE WITNESS: February 18, 2004? Yes.

19 MR. KOTZ: Do you see that the information

20 contained in the draft that was crossed out in 26 was not put

21 in the final?

22 MS. STEIBER: Of those notes -- next letter.

23 MR. COBB: So the next letter is on 26 and then

24 your question is is that request in the February 18th letter,

25 which you represent is the final letter?


Page 97

1 MS. STE~BER: Correct.

2 MR. COBB: Okay.

3 THE WITNESS: Right, so this is not in here,

4 correct.

5 BY MR. KOTZ:

6 Q And do you have any idea why it wasn't in ·there or

7 what "save for next letter" refers to?

8 A I don't.

9 Q Huh?

10 A I do not.

11 Q All right, next document we're going to show you,

12 Exhibit 27. This is a letter from Bernie Madoff date March

13 11, 2004 to Eric Swanson in response to the second document

14 request. I'11 ask you if you ever saw this letter.


16 identification.)


18 A I don't recall seeing this letter.

19 Q Okay. And do you recall anything about any

20 responses from Bernie Madoff, any representations made by

21 Bernie Madoff in his responses to the document requests?

22 A I do not recall, no.

23 Okay, the next document is a series of documents

24 we're going to mark as Exhibit 28. It says, "Bernard L.

25 Madoff Investment Securities LLC, New York, London, Period


Page 98

1 Ending 12/31/01." Do you know what this document is?


3 identification.)

4 MS. STEIBER: If you refer back to that March Ist

5 letter, the first line says, "In response to your letter of

6 February 18, 2004, we are providing copies of client account

7 statements reflecting all the transaction data related to the

8 accounts of those clients utilizing the split-strike forward

9 conversion strategy." Okay. And this is a sample of -- I'm

10 making representation, this is a sample of one of those

11 customer statements that was provided inresponse to the

12 second document request.

13 MR. COBB: "This" being Exhibit 28?

14 BY MS. STEIBER:

15 Q Exhibit 28. Looking at that client customer

16 statement, would you describe that it contains trading, audit

17 trail data information?

18 A Well, it's an account statement that has trading

19 information in it.

20 Q Would that be audit trail information?

21 A I would call this an account statement not a audit

22 trail.

23 Q If you were conducting a front-running examination,

24 would the data provided in that customer statement be

25 sufficient to perform anadequate or good front-running


Page 99

1 examination?

2 A It's possible, yes

3 Q Why do you say it's possible?

4 A We're talking about front-running a retail order

5 flow --

6 Q Okay, how --

7 A -- so if you -- so typically, front-running

8 means -- it's almost always in the context of large blocks of

9 orders. So if I'm Fidelity and I'm going to sell 10 million

10 shares of Microsoft, then if I have that information before

11 they prosecute their execution strategy then I can trade

12 ahead of that order because that order typically will move

13 the market. So if I buy before they start selling, that

14 price is -- then I will get better prices because of that

15 market information.

16 In a retail -- in this exam we're talking about

17 retail order flow of 100 shares and none of the orders by

18 themselves would move the market, so the information is not

19 valuable to front-run. So I think the theory of this

20 front-running inspection was whether -- or my theory of it at

21 the time was whether or not you could, in almost a real-time

22 sense -- you would need, you know, strong technology -- you

23 could see trends from the retail flow and act upon the trends

24 be fore , you know, the next group of retail orders got

25 executed.


Page 100

1 So the premise on this whole exam was how do you

2 front-run retail orders. And I think, you know, I think at

3 the time and probably today, I think it's -- I think -- I'm

4 still not -- I still do not think it's very easy if not --

5 if -- and almost -- whether it's possible to front-run retail

6 orders except in the context of pre-opening orders.

7 So that's -- yeah, I do remember asking mark to

8 concentrate on the pre-open where you most likely would have

9 market-moving information, the intraday trading. The

10 intraday trading ~ think was much more difficult to -- much

11 more difficult for that information to be front-ran.

12 So back to your question if you're looking at - if

13 you have account statements which show you bought 10,000

14 shares on a certain day, I think that's, to me, enough

15 information to know that that's unlikely to have front-ran

16 retail customer orders because it's simply -- there's no

17 information in retail order flow to determine -- to take

18 advantage of that to get a better price for Exxon or Home

19 Depot.

20 (Z So you think -- you cduld have been the one that

21 told Mark Donohue not to seek any other trade data other than

22 what's in this customer statement?

23 A I mean, I definitely -- like I said, the

24 front-running -- should have included trading data from

25 retail side and from the proprietary side. I don't recall


Page 101

1 and would certainly be surprised i~ I ever said, "Don't get

2 the proprietary trading data."

3 Q Now, if -- do you think if your exam team had gone

4 to the NASD and gotten the trade data they would have

5 discovered that Madoff wasn't trading? Discovered it was,

6 potentially, a Ponzi scheme?

7 A The -- well, actually, the trade data from the

8 market-making unit would have been at ACT and from what I've

9 seen those are real trades. What I understand -- what I

10 recall from the phone call with Madoff was that most or all

11 of his trading was done out of London so those trades would

12 not have been included in the SRO audit trail.

13 Q So if he was trading in London he wouldn't have

14 trading records?

15 A He would have trading records, yes.

16 Oh, he would have trading records but --

17 A Or should have had trading records.

18 Q So there's nowhere you could go to get trading

19 records if he's trading in London? I want to understand, if

20 he's trading in London it seems that, to me, you would still

21 have places you could go --

22 A Well, I would have expected Mark and the team to

23 get the trading records from his trading in London. He

24 should have a trade blotter in London.

25 And do you know if that was ever requested? Did


Page 102

1 you talk to Mark about requesting a trade blotter?

2 A I do recall that -- I do recall talking to him

3 about getting the retail -- samples of the retail flow and

4 samples of the proprietary trades, which should have been the

5 trade record from London, from his broker-dealer in London.

6 Q Now, what -- could you give a little bit more

7 detail about what Madoff said about trading in London and why

8 you recall that?

9 A On the phone -- yeah, again, I knew nothing about

10 his hedge fund and he explained in general terms about his

11 hedge fund and that most -- it might have been most or all

12 his trading was done out of London. I recall that because

13 that means my theory of the front-running case getting trade

14 data from the broker-dealer on the retail side or proprietary

15 side means we would have had to have gotten trade data from

16 London, so I just viewed that as noteworthy.

17 BY MR. KOTZ:

18 Q Okay, I'm going to show you another document, we'll

19 mark that as Exhibit 29. This is-an e-mail from you to

20 dated March 9, 2004, 12:31 p.m.

21 See you're providing information to

22 about Madoff Securities. You see part of what you tell

23 is, "Madoff has consistently generated revenues --"

24 I'm sorry, "Madoff has consistently generated returns for the

2~ hedge funds of around 10 percent per year, which we have been


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Page 103

1 told is high given the conservative nature of the strategy

2 and market conditions over the last several years. We're in

3 the process of analyzing one year of transactions in all the

4 hedge funds for which Madoff executes this strategy."

5 So do you recall having any -- first of all, who is

6 Where did he work?


8 identification.)

9 A Division of Enforcement.

10 Q Okay. Why would you provide information to the

11 Division of Enforcement?

12 MR. COBB: You mean why did he in this instance or

13 why would he generally?

14 RY MR. KOTZ:

15 Q Well, both I guess. Let's start with why did you

16 in this instance.

17 A I mean, they might be having -- they might -- often

18 I would -- they would come to me for when they didn't

19 understand trading or market issues, so that's -- that would

20 be a typical interaction I would have with the Division of

21 Enforcement in general.

Q Okay. But why would you provide them information

23 about a particular registrant that you were examining?

24 A Do you mind if I -- should I read the whole e-mail

25 or --


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Page 104

1 Please, sure.

2 A Okay.

3 (The witness examined the documents.

4 THE WITNESS: I'm sorry, are these e-mails part of

5 the chain? It's on page -- their not page numbered but it

6 starts with subject?

7 MS. STEIBER: I'm actually not sure. I have a call

8 in to OC because they recently produced these e-mails and I'm

9 waiting for a call back to say, you know, exactly -- if they

10 are just from a search that mail came out this way. We just

11 want to ask you a question about that first e-mail

12 THE WITNESS: First one, okay. I'm sorry, I was

13 reading

14 MS. STEIBER: Yeah.

15 THE WITN~SS: These look like they're not related.

16 MS. STEIBER: Right.

17 THE WITNESS: Okay. So I mean, this e-mail looks

18 like -- I think vaguely recall kind of apprising of kind

19 of interesting issues that are -- that could possibly --

20 exams that could possibly be referred to enforcement at some

21 time. That's what --

22 BY MR. KOTZ:

23 (Z Do you think you were referring the facts that

24 Madoff had consistently generated returns of about 10percent

25 per year, which is high given the conservative nature and the


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Page 105

1 market conditions, to enforcement for their possible

2 investigation of Madoff?

3 A Yeah, I would -- I mean, again, I don't recall

4 this, but that's, you know, looking at the -- maybe a

5 heads-up as opposed to this is -- usually referral -- an

6 actual referral is more formal with a memo, but it certainly

7 is a heads-up to about issues we see ·at Citadel with

8 Madoff.

9 Q Okay. And so one of the issues you saw at Madoff

10 had to do with his consistently high returns?

11 A Yeah, I mean it's part of the story that I'm giving

12 him a heads-up about.

13 And you say, "We are in the process of analyzing

14 one year of transactions in which all of the hedge funds for

15 which Madoff executes his strategy," do you know how that

16 analysis was done?

17 A I'm sorry, where's that sentence? "We're in the

18 process of analyzing one year of transactions in all the

19 hedge funds for which Madoff executes his strategy." How

20 it's done?

21 SZ How would you have gdne about analyzing that one

22 year of transactions?

23 A I don't know.

24 (Z Do you remember analyzing one year of transactions

25 in all of Madoff's hedge funds?


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Page 106

1 A I donot, no.

2 Q Do you know if anybody with investment advisor

3 experience was brought in to analyze those returns?

4 A I don't recall anyone being brought in.

5 Q Do you know if falsification of returns would have

6 been something that you looked into in your analysis of one

7 year or transactions?

8 A I'm sorry?

9 Q Do you know if falsification of the returns would

10 have been part of the analysis that you were in the process

II or conducting?

12 A To determine whether they were false?

13 Q Yeah.

14 A I don't know.

15 O But I mean, would that be -- it talks about an

16 analysis of one year of transactions in all the hedge funds

17 for which Madoff executes the strategy. As part of that

18 analysis would you look at whether the returns were

19 falsified?

20 A I don't know. I don't recall my team doing this

21 exam or part of the front-running exam.

22 Q Right, but I mean if you said to

23 that you're in the pr-ocess of doing this, I assume you did --

24 your team actually did it.

25 A I would assume so too, yes.


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Page 107

1 Q Okay.

2 MS. STEIBER: ~ just wanted to go back real quickly

3 to Exhibits 12a and 13, which one of them is the planning

4 memo that's addressed to you in which in section 3a it talks

5 about requesting trading data from the NASD and then that

6 draft letter to the NASD. if -- you had testified earlier

7 that Madoff told you he was trading in Europe?

8 MR. KOTZ: I,ondon.

9 MS. STEIBER: Oh, sorry, in London. Why would you

10 he drafting a letter to the NASD or why would that be part of

11 your process if you really believed that he was trading in

12 London?

13 THE WITNESS: Well, front-running is kind of two

14 sets of data. Of one -- we would certainly need the data

15 about the retail flow and that would be easy to get from the

16 NASD.

17 MS. STEIBER: Okay.

18 MR. KOTZ: Okay, we're going to mark two exhibits

19 now, Exhibits 30 and 31. The first one, Exhibit 30, is an

20 e-mail from Genevievette Walker to Alex Sadowski, 4/6/2004,

21 6:49 p.m.

22 And then the next one, Exhibit 32 is an e-mail from

23 Mark Donohue to Genevievette Walker --




Page 108

1 MR. COBB: I'm sorry, you went 30 and then 32.

2 MR. KOTZ: -- dated 4/7/2004. I'm sorry, 9:29 a.m.

3 MS. STEIBER: So this is Exhibit 30 and 31.

4 BY MR. KOTZ:

5 Q Yeah. So Exhibit 30 is 4/6/2004, 6:49 p.m. e-mail

6 and 31 is the 4/7/2004, 9:29 a.m. e-mail from Donohue from

7 Genevievette Walker.

8 You can see in these e-mails, the first e-mail

9 Genevievette Walker says to Alex Sadowski asking which are

10 the priority of her projects. And she said, "I'm not sure

11 where the hedge fund project falls on our list of priorities

12 as of right now, please advise." And then Alex Sadowski

13 responds, "Get the mutual fund work completed first."

14 And then the 4/7/2004 a-mail, we have Genevievette

15 Walker working on -- asking -- sending an e-mail to Mark

16 Donohue saying, "Should we just focus on mutual funds and

17 return to Madoff when we're done?" And Mark Donohue saying

18 to Genevievette Walker, "Concentrate on mutual funds for the

19 time being."

20 First, was that the team that was working on your

21 Madoff exam, Genevievette Walker, Jacqueline Wood and Mark

22 Donohue? Is this the same exam that you have been talking

23 about?

24 A That's my recollection, yes.

25 Q Okay. So were you aware that Mark Donohue


Page 109

1 instructed Genevievette Walker to stop working on the Madoff

2 exam in favor of mutual funds work?

3 A I don't read it that he told her to stop, but I

4 wasn't aware of either of these e-mails.

5 Q Okay. Were you aware at any point in time that

6 there was a shift in priorities from the Madoff exam to

7 mutual funds work?

8 MR. COBB: Well --

9 THE WITNESS: I mean, Mark says concentrate on the

10 mutual fund, that doesn't mean, you know, there's eight hours

11 in a day, you can obviously -- I assume what he meant was,

12 you know, focus on that and get it done first but it doesn't

13 mean stop working on Madoff or --

14 MR. KOTZ: So --

15 THE WITNESS: And Mark certainly didn't tell me,

16 "I'm having people stop working on Madoff," or anything like

17 that.

18 MR. KOTZ: Okay. So were you aware that there was

19 a almost one-year period where no work was done on the Madoff

20 examination?

21 THE WITNESS: I was not aware of that, no.

MR. KOTZ: Would it surprise you to hear that? I

23 mean based on your recollection do you think that that could

24 have happened that there was this year-long period where

25 nothing was done on the Madoff exam from the moment that Mark


Page 110

1 Donohue told Genevievette Walker to concentrate on mutual

2 funds until a year later?

3 THE WITNESS: April '04 to April '05, that would

4 surprise me, yes.

5 MR. KOTZ: Okay. I'm going to show you the next

6 document, we're going to mark this as Exhibit 32. This is an

7 e-mail from Mark Donohue to Eric Swanson, 3/16/2004. See,

8 Eric Swanson says to --


10 identification.

11 MS. STE~BER: 2005.

12 MR. KOTZ: 2005, I'm sorry.

13 MS. STEIBER: This is almost a year later.

14 MR. KOTZ: 3/16/2005, that's right. You see Eric

15 Swanson sends an e-mail to Mark Donohue on March 16, 2005,

16 "What is the status of the Madoff hedge ~und thingee?" And

17 Mark Donohue says, "Dead, we never found any real problems."

18 Were you aware that in or around the period of

19 March 2005 when the NYRO folks began asking questions about a

20 Madoff exam they were working on that they went to your staff

21 to ask what happened with your exam? Are you -- do you

22 remember that?

23 MR. COBB: I'm sorry, just let me -- that's two

24 questions. First you asked him whether he was aware of this

25 exchange and then you added that other communication to his


Page 11?

1 staff. So is that two questions, right?

2 BY MR. KOTZ:

3 Q Yeah, I don't think I did but we'll -- are you

4 aware of the Mark Donohue -- Eric Swanson trying to find out

5 what happened with the Madoff hedge fund thingee?

6 A No, I mean I was aware that Mark told me, I can't

7 remember the date, that they weren't find anything so it's

8 consistent with this.

9 Q But --

10 A But r don't know the -- I don't recall the dates

11 when I asked Mark.

12 O But where you aware that Eric Swanson was trying to

13 find out whatever happened with the Madoff examination in

14 2005?

15 A No, I don't recall this. I don't recall this

16 e-mail

17 Q Do you recall at some point in time that the folks

18 in New York asked for information or documentation from your

19 office about Madoff -- about your Madoff exam?

20 A I recall that John Nee -- was doing a similar exam.

21 I mean, I got the sense it was after in time to our exam, but

22 I do recall that, yes.

23 a okay. And you recall that John Nee asked you to

24 provide documents relating to your exam to provide to them?

25 A I mean, I recall us sending our files, as it were,


Page 112

1 to John Nee to incorporate it in his exam.

2 Q At that point in time that you sent your files to

3 John Nee, did you have an understanding that your Madoff exam

4 had been completed?

5 A My understanding is that we did not find any

6 indicia of front-running, yes.

7 Q Okay. Would it surprise you that that's not what

8 Mark Donohue testified? And in fact, Mark Donohue testified

9 that there were significant questions that were pending but

10 that the exam hadn't been worked on for almost a year.

11 A That would surprise me, yes.

12 Q Do you think that that could have happened and you

13 weren't aware of it?

14 A I'm not aware of it, so yes, it could have

15 happened. I'm sorry, what do you -- what could have

16 happened?

17 Do you think that Mark is not providing truthful

18 information or is it that you just weren't aware that this

19 was happening?

20 A I certainly believe Mark is providing truthful

21 information, no question about that. Was I aware of those

details at the time or now, I don't recall being aware of

23 them.

24 Q Would that be concern that an exam that was

25 operating under you would be left dormant for almost a year?


Page 113

1 A It's concerning, yes.

2 Q Do you remember -- what was your reaction when you

3 found out that the New York office was also conducting an

4 exam of Madoff?

5 A I remember being mildly upset about that.

6 Q Why was that?

7 A Because it meant that we probably didn't put our

8 information into the tracking system like we're supposed to

9 do.

10 So you weren't aware that New York was doing an

II examination of Madoff at the same time and New York wasn't

12 aware that you were; is that right?

13 A I was not aware that they were, I don't know what

14 they were aware of.

15 Q Did you discuss your examination with the New York

16 office?

17 A I remember John Nee contacting us or me, but I

18 don't recall me discussing it clearly. I'm sure it was

19 discussed with them.

20 Q What do you say clearly was discussed with them?

21 A Well, I think I told -- I asked Mark and maybe Eric

to, you know, deal with the fact that we have two ongoing

23 exams of the same firm at the same time or in near terms. So

24 you know, I would have instructed them to coordinate and make

25 sure you're as helpful -- if theirs was ongoing, as helpful


Page 11/1

1 to them as possible, something like that.

2 Q Do you recall that at that time Mark and Eric

3 really hadn't really gotten very far in their exam and so

4 there really wasn't much information for them to provide to

5 New York?

6 A I mean, I do recall that Mark told me that he was

7 not finding anything, but I would have assumed there would

8 have been documents to provide from the exam.

9 Q Do you think that the exam that was conducted under

10 you, the Madoff cause exam, was conducted in a adequate way?

11 A I mean, now you're telling me that there was

12 nothing done for a long period of time, I think that shows a

13 certain level of inadequacy, yes

14 MR. COBB: If in fact it's true, you have no

15 knowledge of that.

16 THE WITNESS: Right.

17 MR. KOTZ: Do you recall it being difficult to find

18 the Madoff documents when they were being sent up to the New

19 York regional office because people didn't know where they

20 were because the matter hadn't been worked on for so long?

21 THE WITNESS: I do recall Genevievette, issues with

22 Genevievette, that -- and, you know, of putting one and one

23 together that maybe the documents -- if the documents were

24 kept by here and then we had trouble with documents that she

25 was responsible for keeping.


Page 115

1 MR. KOTZ: What kind o~ trouble did you have with

2 the documents that Genevievette was responsible for keeping?

3 THE WITNESS: Like sloppiness, things like that. I

4 think there's doors were locked and it was hard to get to

5 them sometimes, just vague recollections.

6 MR. KOTZ: What about in terms of Genevievette's

7 work? Was her work sloppy?

8 THE WITNESS: I would say she was one of the weaker

9 employees I've had in my career.

10 MR. KOTZ: What about Jacqueline Wood?

11 THE WITNESS: I would say on the contrary, she's

12 probably one of the best I've ever had.

13 MS. STEIBER: Were you aware of problems between

14 Mark Donohue and Gen Walker?


16 MS. STEIBER: What were you aware of?

17 THE WITNESS: I think she made an allegation

18 against him.

19 MR. KOTZ: Did you -- were you aware of any

20 allegations that Ms. Walker made against Mr. Donohue relating

21 to the Madoff exam?

THE WITNESS: No.

23 MR. KOTZ: Okay, you weren't aware of Ms. Walker

24 stating that she wanted to continue to work on the Madoff

25 exam but wasn't allowed to?


Page 116

1 THE WITNESS: I wasn't aware of that, no.

2 MR. KOTZ: Do you think that the difficulties

3 between Mark Donohue and Ms. Walker might have had an impact

4 on how the Madoff exam was run?

5 THE WITNESS: I don't think ~t should have. I

6 mean, it's unfortunate she was a weak member, but the data

7 analysis could have done -- been done by Jackie at a high

8 level, so -- but it's certainly, you know, probably didn't

9 help, obviously.

10 MR. KOTZ: Okay. Do you remember ever following up

11 to find out what happened with NYRO's exam?

12 THE WITNESS: Following up, I don't recall.

13 MR. KOTZ: Do you remember at any point -- do you

14 remember at any point in time learning that the enforcement

15 division was looking into Madoff?

16 THE WITNESS: I, obviously, became aware of it in

17 the media but I don't recall at the time ever being made

18 aware of it, no. The Enforcement Division in New York or

19 generally?

20 MR. KOTZ: Anywhere.

21 THE WITNESS: Anywhere, yeah.

22 MR. KOTZ: All right, next document I'm going to

23 show you is Exhibit 33. This is an a-mail from you to Eric

24 Swanson dated 2/28/2006. We're going to mark this as Exhibit

25 33. And the next document we're going to mark as Exhibit 34,


Page 117

1 which is an e-mail from John Nee to Eric Swanson, cc Peter

2 Lamore dated 2/28/2006 at 3:03 p.m.

3 And you see you're asking Eric Swanson, "Any news

4 on that NYRO exam of Madoff," in the 2/28/2006 e-mail. And

5 then in the 2/28/2006 e-mail, 3:03 p.m. there is a response

6 from John Nee saying, "We closed out the examination after

7 looking for and not finding any evidence of front-running,

8 see attached report. However, shortly thereafter our

9 enforcement people got an anonymous complaint alleging Madoff

10 is either front-running or is the biggest Ponzi scheme ever."

11 Does that refreshyour recollection as to whether

12 you became aware at any point that en~orcement was looking

13 into Madoff?



16 A If these are accurate, yes.

17 Q Do you remember if you reviewed the examination

18 closing report that the NYRO office provided you?

19 A I don't recall looking at it in detail, no.

20 Q Did you have any particular reaction that

21 enforcement was looking into Madoff fdr an allegation of the

22 biggest Ponzi scheme ever?

23 A I don't recall having a reaction, but --

24 Okay.

25 A -- but probably was.


Page 118

1 Q Okay. Let me show you the next document we're

2 going to mark as 35. This document is the day after you

3 received this e-mail on February 28, 2006 that gave

4 information about Madoff possibly having the biggest Ponzi

5 scheme ever.

6 And this is an e-mail dated 3/1/2006, 9.15 P-m. An

7 e-mail exchange between you and John McCarthy, where you

8 say -- I'm sorry, between you and Eric Swanson where you say

9 in the e-mail, Wednesday, March Ist at 8:00 to Eric Swanson,

10 "Two things, one put the squeeze on Shana. Two, Cutler gave

11 Lori a tip we should follow up on."

12 So this is the day after you find out that Madoff

13 may have been running the biggest Ponzi scheme ever. Do you

14 recall why you're asking Eric Swanson to put the squeeze on

15 Shana?


17 identification.)

18 A Yeah, I mean it's --I think it has to do with the

19 conference that was coming up, if I recall correctly.

20 Q Okay. But the Shana in this e-mail, 3/1/2006

21 e-mail, that refers to Shana Madoff; is that right?

22 A Yes.

23 (2 Okay.

24 A And these are what -- at night or on weekends I

25 would, things that I would kind of to remember I would shoot


Page 119

1 off an e-mail. One, you know, put the squeeze on Shana,

2 two --

3 O Do you remember what the tip was? "Cutler gave

4 Lori a tip we should follow up on," was that the tip related

5 to Madoff?

6 A No, I -- again, pretty much well remember it was --

7 Cutler gave very few tips to me, obviously, most of it went

8 the other way. I do remember he wanted us to look into

9 possible -- possibility of insider trading in CDSs and that's

10 about the right period of time.

13 And why were you asking Eric Swanson to put the

12 squeeze on Shana?

13 A Because I wanted to -- originally, I did not

14 decline to go to a conference, a big annual conference, I

15 think I was getting pressure at that time. You know, Lori

16 was really encouraging senior staff to participate in

17 conferences and she was - if I recall correctly, like, you

18 know, the emcee of the conference in Florida so I wanted --

19 you know, I asked her previously, and this is a follow up to

20 that, whether she could get me on a panel.

21 (Z And why would Eric be putting the squeeze on her?

22 A Probably just asking Eric to because he

23 communicated witki her more than I did so I just, you know,

24 when you're talking to her, you know, remind her if she's had

25 any luck with getting me on a panel.


Page 120

1 So that has nothing to do with you finding out that

2 Madoff was potentially running the biggest Ponzi scheme ever?

3 A To me it's -- it has nothing to do with it, it's

4 something completely separate.

5 Q Okay. Did you ever -- strike that. When did you

6 first meet Shana Madoff?

7 A It's possible during those exams and the late -- in

8 late 90's, but when I recall interacting with her would have

9 been when we started the SIA breakfast.

10 Q So would you say your interactions with her were

11 all professional or were there any social in nature?

12 A They were primarily professional until this period

13 of time.

14 Q Okay. Next document we're going to -- an e-mail

15 we're going to mark it as Exhibit 36. This is an e-mail from

16 you to dated 12/19/2005, 10:57 a.m. Do

17 you know who is? Is that how I

18 pronounce her name, do you know?


20 identification.)

21 A I don't know but it sounds right to me.

22 Q She has a reference in there -- is

23 sending an e-mail to you saying, "Shana would like to send

24 you something but, unfortunately, we don't have your mailing

25 address. Would you be so kind to send it to me?" Do you


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Page 121

1 know what Shana was trying to send you?

2 A I do not know.

3 Q Did Shana ever send you a gift?

4 A I don't recall ever getting a gift, no.

5 Q Okay. Do you remember an SAA conference took place

6 around March 19th or March 20, 2006 in Florida?

7 A Yes.

8 Q Okay. I'm going to show you an e-mail, we''re going

9 to mark this as Exhibit 37. This is an e-mail between you

10 and Shana Madoff, 3/19/2006, 5:42 p.m. You said before that

11 you had a professional relationship with Shana up to a

12 certain point and then it might have been more social.

13 What do you recall about the social relationship?

14 Here is a reference to grabbing a cocktail and lots of other

15 e-mails, but, you know, if you want to just tell me first

16 based on your recollection, what was the nature of the

17 relationship?

18 (SEC Exhibit No, 37 was marked for

19 identification.)

20 A Until the -- yeah, I probably don't recall ever

21 doing anything social at all, maybe a dinner the night before

22 one of the breakfasts before that. And then this -- at this

23 conference she, you know, we -- you know, I met her for beers

24 and we had beers. So that was the first time I kind of ever

25 talked to her about anything personal, you know, non-work


Page 122

1 related.

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8

9

10

11

12

13

14

15

16 Q Okay. We're going to mark the next document as

17 Exhibit 38. This is an e-mail from Shana Madoff to you dated

18 Monday, April 17, 2006, 5:10 p.m.

19 Do you see in this e-mail Shana says to you, " Th an k

20 you for your kindness, I really want to get some alone time

21 with you because I want to talk to you about the other night.

22 Hope all is well." Do you know what she was referring to in

23 wanting to get some alone time with you to talk about the

24 other night?



Personal Privacy

Page 123

1 identification.)

2 A I think so, yes

3 Cr What was that?

4 A I think -- again, I can't remember the exact night,

5 but it, you know, within a matter of days I was in New York

6 with Eric and she and Eric -- or Eric asked me to go to a

7 karaoke bar with -- and meet up with Shana. She was with

8 Eric at the time. And then the karaoke bar turned out to be

9 a -- I call it a strip club, but a high-end strip club, and I

10 was extremely upset. But they kind of where having -- looked

11 like they were having fun at my expense, so I think it became

12 a big deal between Eric and myself.

13 Q And how are they having fun at your expense?

14 A Well, because the told me we were going to a

15 karaoke bar hut it was not a karaoke bar.

16 And so you were uncomfortable being at a strip

17 club?

18 A I was then and generally don't like going to places

19 like that.

20 Okay. I'm going to show you another document, this

21 is marked as Exhibit 39. This is an e-mail 4/21/2006 from

22 Alex Sadowski to you.


24 identification.)

25 MR. COBB: I'msorry, 4/21 did you say?


Page 124

1 MS. STEIBEK: Yes.

2 BY MR. KOTZ:

3 V This e-mail and some subsequent e-mail reference

4 there being secrets from you and issues with full disclosure

5 about Eric Swanson and Shana Madoff. Do you recall that

6 there was a time period where there was an issue about

7 information being kept from you about their relationship?

8 A Yes, I do.

9 Q Okay. So what do you recall about that?

10 A Well, I mean, Eric and I -- I was very much against

11 him having a relationship with her and I made it clear

12

13

14

15

16

17

18

19

20

21 g Did the fact that she worked for a registrant have

22 any impact on your feelings about whether Eric Swanson should

23 maintain a relationship with her?

24 A The driving motivation -- that was not even -- the

25 driving motivations were much more personal than that. That


Personal Privacy

Page 125

1 issue wouldn't have really come into play.

2 Q I'm sorry, would not have come into play?

3 A That would have not -- that would not have -- in my

4 mind then and now, that would be kind of -- there's -- what

5 drawed me to the conclusions would not have been that fact.

6 That would have been, I guess, irrelevant in this --

7 Q So you didn't think there was anything

8 inappropriate about the fact that Shana was a registrant,

9 Eric worked for the SEC, potentially he would be regulating

10 the entity that Madoff -- that Shana worked for? This was a

11 company that had been examined three, ;our times and

12 investigated by the SEC.

13 A I -- you know, it might have played a minor role in

14 my thinking, but I think, you know, if she was -- again, it

15 was a very personal -- why I didn't want him dating her was

16 more personal than kind of the fact that she worked at a

17 broker-dealer.

18 Q Did you have any concerns about the Madoff

19 operations in terms of the fact that you had done an

20 examination of front-running or that perhaps that part of

21 what you were concerned about Eric being involved with was a

22 person who may have been in a company or the compliance

23 officer of a company that was involved in illegal things?

24 A I mean, at that time I didn't view Mado~~ a company

25 that was doing illegal things.


Page 126

1 Q So that's no.

2 A .Ask the question again.

3 Q So the fact that you had done an exam, you hadn't

4 found front-running but yet there was still questions about

5 Madoff's returns --

6 MS. STEIBER: You had that complaint from Nee

7 saying that maybe their running the largest Ponzi scheme

8 ever.

9 THF, WITNESS: Oh, T see. Again, my -- the reason

10 why I was against him dating Shana were, I would say more

11 pro~ound than that -- those sorts of issues didn't come into

12 play.

13 BY MR. KOTZ:

14 Q You just didn't like Shana for whatever reason?

15 A That's fair, I guess.

16 Q And there was a time period when you and Alex

17 Sadowski were kind of sharing information about what happened

18 with Eric and Shana; is that right?

19 A Is it right that I would have shared information

20 with Alex?

21 Q Yeah.

22 A Yes.

23 Q Okay. And then there was an incident where you saw

24 them, you saw Eric and Shana together, I think at his

25 apartment, his roommate was there. What was the roommate's


Page 127

1 name?

2 MS. STEIBER:

3 BY MR. KOTZ:

4 Q and you got very upset. Do you

5 recall that?

6 A Yeah, vaguely, but yes I do recall that.

7 Q Okay.

8 A I guess I was surprised.

9 Q And didyou indicate to Eric Swanson that if he

10 didn't ci~t of his relationship with Shana Madoff he would

11 lose you as a friend?

12 A I mean, that's consistent with how I felt, yes.

13 g Okay. But in the end Eric Swanson didn't cut off

14 his relationship with Shana, in fact, he married her. Is

15 that right?

16 A That's right.

17 Q So how did that resolve itself given that you were

18 so upset andI guess you're still friends with him today

19 aren't you?

20 A Yes.

21 (Z Okay. So how did that resolve itself?

A Slowly. I mean, something that still, to this day,

23 I'm somewhat upset in.

24 Q And how did you feel when you found out that in

25 December 2008, that Bernie Madoff had admitted to a Ponzi




Page 128

1 scheme? Did you feel like if, perhaps, Eric had listed to

2 you he might not be involved with somebody who, at least now,

3 has an uncle who's, you know, one of the most famous

4 fraudsters ever?

5 A That thought came to my mind, yes.

6 () I'm going to show you another document. This is

7 Exhibit 40. This is an e-mail from you and Alex Sadowski,

8 Thursday, April 6, 2006 at 2:01 p-m- Do you recall what you

9 were referring to when you said, "I guess we won't be

10 inspecting Madoff any time soon?"


12 identification.)

13 MR. COBB: Do you recall the context of the e-mail?

14 THE WITNESS: Yeah.

15 MR. COBB: This is 40, I'm sorry? Yeah, 40. God,

16 I wish I could see.

17 THE WITNESS: I mean, I recall this general

18 situation, yes.

19 MR. KOTZ: What do you recall about the general

20 situation?

21 THE WITNESS: ThatI was upset about it and, you

22 know, probably more accurate description would be saying Eric

23 won't be inspecting Madoff anytime soon. But it's

24 real point is to -- for me to tell Eric -- or I'm sorry,

25 Alex, that, "Hey, I'm aware of what's going on." The point


Page 129

1 of it was not about our inspection program.

2 MR. KOTZ: Did you think at any point in time that

3 Eric's relationship with Shana Madoff had an impact on the

4 operations of the SEC such that, you know, decisions would be

5 made about whether Madof~ would be inspected?

6 THE WITNESS: Certainly, if an inspection of Madoff

7 was in the offing he would not be part of it, certainly.

8 MR. KOTZ: But would that factor into decisions of

9 your group whether you would be involved in a Madoff

10 inspection?

11 THE WITNESS: ~t -- mainly, I mean, again, it would

12 mainly be whether he would be involved but not the group in

13 general, no.

14 MR. KOTZ: So the group could do a Madoff

15 inspection without Eric?


17 MR. KOTZ: Did you feel at any point in time that

18 Eric should formally recuse himself from all Madoff matters

19 after he developed a relationship with Shana Madoff?

20 MR. COBB: Well, were there any Madoff matters

21 after that?

22 MR. KOTZ: I mean, was there any responsibility on

23 Eric Swanson's part to take any action after he started

24 developing a relationship with the compliance o~ficer or

25 registrant?


Page 130

1 THE WITNESS: I would view that -- I mean, I would

2 view that as peculiar. I mean, if it -- if a matter came up,

3 certainly he would -- should be recused. But as people that

4 are into romantic relationships, they may or may not -- they

5 don't preactively recuse themselves is my typical experience.

6 MR. KOTZ: What about if somebody was say,

7 interviewing for a job with a particular company? Somebody,

8 Eric Swanson was interviewing for a job with Madoff, would he

9 send out some kind of recusal saying, "From now on I'm not to

10 be involved in any Madoff matters?"

11 THE WITNESS: Yeah, I think there's a -- again, I'm

12 not that familiar with the process, but I think you're

13 supposed to alert -- if I understand it -- I mean, I told

14 Lori when I was interviewing at Getgo. I don't know if

15 that's a policy or simply a process that I did.

16 MR. KPTZ: Do you think that that same type of

17 policy should apply when somebody is involved in a romantic

18 relationship?

19 THE WITNESS: I don't view that as unreasonable,

20 but again, I think the main thing is to ensure that if

21 there's an -- if there's a regulatory matter before someone

22 that should recuse themselves that they handle it

23 appropriately.

24 MR. KOTZ: I'11 show you the next document. I'11

25 mark it as Exhibit 41. This is an e-mail from Eric Swanson


Page 133

1 to you dated 4/23/2006 at 5:33 p.m. You see at the bottom of

2 the page an e-mail from you to Steve Luparello, where you

3 say, "Shana, Steve, Mike and john, I'm sorry for such short

4 notice but it looks like the SEC contingent is going to have

5 to back out of the Greenwich breakfast. Obviously, we can

6 proceed -- you all can proceed without us but given the usual

7 aspects of this breakfast T understand that it creates

8 difficulties without SEC involvement." Do you recall why the

9 decision was made for the SECcontingent to back out of the

10 break~ast?


12 identification.)

13 THE WITNESS: I'm not sure on the dates but I think

14 after the karaoke thing I made the decision I don't -- you

15 know, want to basically limit my interactions with Shana, so

16 I was asking her to -- I told Eric to cancel the breakfast.

17 MS. STEIBER: Why, because she was playing a joke

18 on you?

19 THE WITNESS: I just felt that Eric was comporting

20 himself iri a way that he never did in the past, I just

21 wanted -- I just felt it was better for me not to be, you

22 know, involved in that situation.

23

24

25


Personal Privacy

Page 132

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22 BY MR. KOTZ:

23 Q Do you think there's, generally, any concerns about

24 having too much fraternization between SEC examiners and

25 registrants or representative of registrants? Is there a


Personal Privacy

Page 133

1 point at which there's too much interaction and

2 fraternization?

3 A There's -- yeah. When, obviously, people are

4 married to people at broker-dealers, et cetera, so I mean,

5 you know, I think it's just simply a matter of judgment

6 what -- where that line is.

7 Q Okay. You don't think that it creates sort of an

8 appearance problem when there's too much fraternization or

9 interaction between examiners and registrants at these kind

10 o~ social functions?

11 A It certainly could, yes.

12 Q Okay, I'11 show you the next document, we'll mark

13 it as Exhibit 42. And this is an e-mail from Eric Swanson to

14 John McCarthy dated 4/27/2006, 9:46 a.m.

15 ~ere in an e-mail below in the exchange on April

16 27, 2006, 10:46 a.m., you emailed to Eric Swanson "red flag."

17 You can look at the whole thing and see if you can figure out

18 what the red flag refers to.


20 identification.)


A Yeah, I remember this.

23 Q What was it referring to?

24 A Replacing -- I think if I was to do a full

25 sentence -- right now, you're doing things that I -- now


Page 134

i you're doing things that I ask you to do. Meaning, I'm being

2 sa~castic, you know, actually being cooperative again like

3 you used to be is maybe is how -- would have been better.

4 Q Does it seem that Eric doesn't get that. He says,

5 "You're asking me to do this, what am I supposed to do?"

6 He's -- it seems --

7 A Yeah, I recall -- I think what I -- I'm sorry.

8 Q Go ahead, I'm sorry.

9 A What I recall is that I canceled the breakfast then

10 basically said, "Okay, we'll do the one more." The hedge

11. fund one I felt was actually relatively important, .the one up

12 in Greenwich, so 7 think we -- Eric was kind -- I put him in

13 probably an awkward situation of canceling it then kind of

14 rescheduling it is my recollection.

15 Q Okay.

16 A And then that was the last one.

17 (Z And do you remember when -- around the time that

18 Eric left the SEC there was a going-away party for him?

19 A Yeah, it was at my house, yes.

20 (Z Okay. And Shana attended this party?

21 A Yes.

22 Q Okay, was that a problem given your concerns about

23 their relationship or was that -- as the process sort of took

24 place you were more relaxed or mellow about the relationship?

25 A I think it was a point I was getting mellower, but


Page 135

1 I still did -- again, I still did not view her in a positive

2 vein and probably didn't want her coming to my house would be

3 my guess

4 Q And then how long --

5 A Rut things were -- things were mellowed out, if I

6 recall correctly, by that time significantly more than --

7 Q And how long after Eric left the SEC did you leave

8 the SEC?

9 A I left in November '07.

10 Q So about a year a~terward?

11 A Makes sense.

12 Q Okay. Did your departure have anything to do with

13 Eric or Shana?

14 A ~ left the SEC for completely unrelated reasons,

15 yes.

16 Q Okay. What was your reaction when you first heard

17 that Bernie Madoff had admitted to conducting a Ponzi scheme

18 given the fact that there was an examination that you were

19 involved in?

20 A One of surprise.

21 Q We discussed here several exams that the OC

22 division did of Madof~, are you aware of other registrants

23 where there were so many exams done over a short period of

24 time?

25 A I mean, it -- probably -- you could probably find


Page 136

1 many examples or similar.

2 Q Where there were three or four exams conducted at

3 the same entity?

4 A I mean, I -- I'm guessing but I don't -- I think

5 you could find many examples of that. I mean, obvj ously, if

6 you look at a Merrill Lynch, but that's not really an apples

7 to apples example. But a relatively small firm is -- a

8 relatively small firm that just has, as it turns out, two

9 lines of business, and it's probably -- it would probably be

10 fewer examples of that.

11 Q And do you think there are other examples of

12 situations where not only were there several exams of a small

13 firm but also an enforcement investigation opened up of a

14 small firm?

15 A Are there examples -- I assume that would be

16 relatively unusual, but again, I don't know.

17 Q Okay. Were you surprised overall that OC, in

18 either your exam or the NYRO exam or other exams, didn't

19 discover the Ponzi scheme?

20 A I mean, I was not surprised, I my judgment, given

21 the scope of the exam under me that we didn't find it, no.

22 Q What about the New York regional office exam that

23 they did'?

24 A Certainly, with the Markopolos memo, information

25 like that, I think the odds should go up significantly they


Page 137

1 would find it.

2 Q Did you have occasion to read Harry Markopolos'

3 memo?

4 A I did. I read most of -- not every word.

5 Q When?

6 A When it came out in the Wall Street Journal.

7 Q After December 2008?

8 A Yes.

9 Q Okay. And what was your impression of that letter

10 written by Mr. Markopolos?

11 A It's -- kind o~ speaks for itself. It's

12 exhaustive, obviously he was obsessed with the issue and --

13 Q Do you think it was a credible document?

14 A Again, reading in the Wall Street Journal with

15 20/20 hindsight it made a lot of accurate poiriis

16 Q Do you think if you had access to that document

17 when you did your exam you would have been able to uncover

18 Madoff's Ponzi scheme?

19 A The answer is I don't know.

20 Q Okay. Do you think OC examiners have the necessary

21 qualifications to be effective?

22 A Some do, some don't.

23 Q What about the folks on your team?

24 A Again, getting up the learning curve and

25 understanding the markets and trading takes a long time. So


P~ge 138

1 you know -- but, you know, most of the highly-motivated staff

2 end up getting pretty far up the learning curve, but not all

3 Do you think at the time that your team conducted

4 theMadoff cause exam they were experienced enough, had

5 enough qualifications to be able to do an adequate job?

6 A Certainly, I think Mark did and Eric did, yes.

7 Q What about the rest of the team?

8 A Like I say, Genevievette was one of the weaker

9 employees I've had, so I would probably say no to her. But

10 ~ackie, with proper direction, could do a decent job.

11 Q Okay. Did Eric Swanson's relationship with Shana

12 Madoff have any impact at all on the cause exam that you

13 headed?

14 A None that I'm aware of, no.

15 Q Since Bernie Madoff confessed to the Ponzi scheme

16 in December of 2008, haveyou had any conversations with any

17 current or former employees about the examination, the cause

18 exam that you worked on?

19 A I spoke, only socially, with Lori. Spoke very

20 briefly with Eric, but not about the exam. I speak a lot to

21 Alex because he works for me now, presently, but, you know,

not about the exam.

23 (Z Okay. Were you aware that Alex had come and spoke

24 to us?

25 A He had to ask me for time off, yes.


Pase 139

1 Q Okay. And did you and Alex talk about the

2 substance of the conversations in the interview he gave us?

3 A He talked, he told me generally what he talked

4 about and said he couldn't, you know, wasn't allowed to speak

5 about the testimony. So --

6 Q So what did he tell you generally about what he

7 talked about?

8 A He said there were a lot of personal stuff, I think

9 he said something to that effect.

10 Q Did he say anything about substantive matters

11 relating to the exam?

12 A He didn't -- he did not talk to me about that at

13 all, no, or reference it.

14 MS. STEIBER: When did you speak to Lori about the

15 exam?

16 THI~ WITNESS: I never spoke to Lori about the exam.

17 MS. STEIBER: When was the last time --

18 THE WITNESS: I spoke to her socially, yes, saw her

19 at a restaurant recently and we've had coffee a couple times,

20 but notabout issues -- it's very clear we can't talk about

21 anything Madoff.

22 MR. KOTZ: What about with Eric Swanson? Have you

23 ever had a conversation with him about the Madoff matter?

24 THE WITNESS: No. Again, I think, except in the

25 context of, "How are you doing? How are you holding up?"


Page 140

1 Things like that.

2 MR. KOTZ: And you went to Eric Swanson's wedding

3 with Shana Madoff?

4 THE WITNESS: Correct.

5 MR. KOTZ: Who else from either current or former

6 SEC employees were there?

7 THE WITNESS: Well, the people I knew, there

8 where -- I mean, Steve Luparello was I guess a former, Lori,

9 my wife, I think Alex was there, and perhaps others I can't

10 recall off the top of my head.

11 MR. KOTZ: Just to kind of be clear, was there any

12 effort at all by anyone to limit your scope of your Madoff

13 investigation or back off from the Madoff investigation?

14 THE WITNESS: None whatsoever.

15 MR. KOTZ: Okay. And in your time at the SEC did

16 you ever see situations where powerful influential people got

17 preferential treatment because of their position?

18 THE WITNESS: Got preferential treatment? No, I've

19 never seen that.

20 MR. KOTZ: When you were conducting the Mado~~

21 cause exam, was it a factor that Mado~r had been an

22 influential person who was previously head of the NASDAQ,

23 otherwise well-known figure in the industry?

24 THE WITNESS: If it was a factor it would have been

25 probably an opposite factor. I think a lot of people are


Page 141

1 excited to work, you know, like specialists case because

2 they're high profile. Madoff might have had -- fallen into

3 · that category.

4 MR. KOTZ: Okay. So anything else about the Madoff

5 cause exam or Madoff investigations or otherwise relating to

6 Bernie Madoff that we haven't asked you today that is

7 relevant?

8 THE WITNESS: You seem pretty comprehensive, so

9 that's all I can think of.

10 MS. STEIBER: Can we just go back to -- I think you

11 covered this earlier -- but looking back there's nothing

12 different that you would do in your exam if you had to do it

13 all over again?

14 MR. COBB: Based on the same information he had at

15 the time?

16 MS. STEIBER: Based on the same information you had

17 at the time, is there anything different that you would wish

18 that you had done?

19 THE W~TNESS: Well, you referred to an Ii-month

20 period that -- where nothing was done, so I would like to

21 have done something differently in regard to that, yes.

22 MS. STEIBER: What about have a closing report for

23 the exam, would that be something that should have been in

24 place?

25 THE WITNESS: Again, I mean, is that a do or -- is


Page 142

1 that incredibly important to me at this stage whether

2 there -- or not there's a closing report? No, it's whether

3 or not they did a good job investigating the exam and looked

4 for front-running aggressively. Yes, would I have liked them

5 having a closing report? Sure, but I don't think that's

6 demonstrative of, you know, why, you know, the results of the

7 exam, per se. Rut yes, I would like that.

8 MS. STEIBER: What about make sure that they went

9 to a third party to retrieve trading data?

10 THE WITNESS: Again, vis-...-vis the -- as I

11 understood the exam, you know, that you'd have records in

12 London and records in the U.S., vis-...-vis the retail shops.

13 So getting -- I think in retrospect, getting third-party

14 records of the London trades would have probably -- 1 assume

15 they were done over-the-counter, I think there would have to

16 have been indicia of that the records he provided us were

17 false.

18 MS. STEIBER: But you still wish that they had

19 requested any such records?

20 THE WITNESS: Well, again, for the retail records,

21 getting them from the broker-deal directly makes sense to me

22 because you need -- we would have probably needed the level

23 of detail they provided. Yes, obviously, if there's indicia

24 that these records could be false or falsified, yes, I would

25 have liked to verify them with a third party.


Page 143

1 But I don't think there, at the time, there was any

2 indicia that, you know, the retail flow was false data and,

3 in fact, it probably wasn't false data. Obviously, the

4 London trades would have been false, from my understanding.

5 MR. KOTZ: Okay, I think that's all we have. I

6 caution you as we've cautioned others, not to discuss your

7 testimony with anyone else. And you signed that

8 confidentiality agreement. And that you will get back to us

9 on --

10 MR. COBB: I promise.

11 MR. KOTZ: -- signing your agreement, having your

12 firm look at it. Okay? All right, we are off the record.

13 (Whereupon, at 1:10 p.m. the examination was

14 concluded.)

15 """""

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17

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20

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Page 1


In the Matter of: ' )

File No. GIG-509

GIG-509

WITNESS: Number 66

PAGES: 1 through 16 k-; ·-:L Li Iv; u ~J~ ~~


100 F Street, N.E., Room 6735

Washington, D.C.

DATE: Friday, June 19, 2009




(202) 467-9200


Page 2

1 APPEARANCES:

3 On behalf o~ the Securities and Exchange Commission:

4 HAROLD KOTZ, ESQ.



7 100 F Street, NE



11 WHITTEN PETERS, ESQ.

12 Williams ~ Connolly, LLP

13 725 12th Street, NW


15

16

17

18

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20

21

22

23

24

25


Page 4

1 PROCEEDINGS

2 MR. KOTZ: We will go on the record at 3:11 p.m. on

3 June 19th, 2009. This is a telephonic interview, and I am at

4 the United States Securities and Commission Office of

5 Inspector General.

6 I'm going to swear you in, Chris, if that's all

7 right.

8 MR.~ COX: That's fine.

9 MR. KOTZ: Could you please raise your right hand?

10 MR. COX: All set.

11 Whereupon,

12 CHRISTOPHER COX

13 was called as a witness and, having been previously duly

14 sworn, was further examined and testified as follows:

15 EXAMINATION

16 BY MR. KOTZ:


18 record, please?

19 A Christopher, C-h-r-i-s-t-o-p-h-e-r, Cox, C-o-x.

20 Q Okay. My name is David Kotz. I'm the Inspector

21 General of the United States Securities and Exchange

22 Commission. This is an investigation by the Office of

23 Inspector General, Case Number OIG-509.

24 I'm going to ask you certain questions and you'll

25 have to provide answers under oath. The court reporter will


Page 7

1 traditionally he would, but I don't believe --

2 BY MR. KOTZ:

3 Q So there's no clear -- kind of clear-cut

4 supervisor?

5 A Right.

6 MR. PETERS: That's correct.

7 THE WITNESS: I think I'm the CEO and head of the

8 Agency and Chairman of the Commission for that purpose, and

9 that's the best description I could relay.

10 BY MR. KOTZ:

11 Q Okay, great. In what year did you leave the SEC?

12 A 2009.

13 Q Do you remember when in 2005 you began at the SEC?

14 A I don't remember the precise date in August, but it

15 was in August.

16 Q And the month that you left in 2009?

17 A January.

18 Q Did you ever hold any other job with the SEC?

19 A No.

20 Q Okay. When did you first hear of Bernard Madoff or

21 Bernard Madoff Investment Securities?

22 MR. PETERS: Are you saying in his official

23 capacity?

24 BY MR. KOTZ:

25 Q In any capacity.


Page 8

1 A That would have been the week of the press release

2 announcement. My recollection is that that was mid-week, and

3 I would have heard about it the day that we issued the press

4 release.

5 Q Okay. So December of 2008?

6 A Yes.

7 Q At the time that you heard the news that Bernard

8 Madoff had confessed, you hadn't been familiar with that

9 name?

10 A No, I had not heard his name before.

11 Q Or the name of his company?

12 A No.

13 Q And have you ever met any member of the Madoff

14 family?

15 A No.

16 Q Prior to December 2008, prior to the news coming

17 out about a confession by Bernard Madoff, were you aware that

18 the Enforcement Division of the SEC had received numerous

19 referrals questioning legitimacy of Madoff's claimed returns?

20 A No.

21 Q Prior to December 2008, were you aware of Harry

22 Markopolis giving a complaint to the Enforcement Division

23 alleging that Madoff was running a ponzi scheme?

24 A No.

25 Q Okay. Had you heard the name Harry Markopolis


Page 9

1 prior to December 2008?

2 A No.

3 Q Prior to December 2008, were you ever aware that

4 the Office of Compliance, Inspection & Examination had

5 performed examinations of Madoff?

6 A No.

7 Q And how did you first hear that Madoff's ponzi

8 scheme -- that he had confessed to running a ponzi scheme?

9 A I would have learned the outlines of this of -- at

10 once with learning about the emergency action that the SEC

11 was bringing.

12 Q Were you told anything specifically about the

13 history of the Enforcement Division's involvement with

14 Madoff, about their decision to close the investigation?

15 A Not at the time that I first learned of this, but

16 essentially immediately upon learning of it the Deputy Chief

17 of Staff and the General Counsel inquired in my behalf of the

18 Division of Enforcement and OCE seeking as much background on

19 this as they could as much forthwith provide.

20 Q Okay. And what specifically do you recall them

21 telling you about the history of Enforcement's involvement

22 with the investigation of Bernard Madoff?

23 A Well, you know, over the next few days the outlines

24 of what I now know in greater detail began to emerge, and

25 some of the documents early on emerged. Though I did see


Page 12

1 Madoff at the time that he became the Chairman of NASDAQ.

2 Q Do you recall which Chairman that would have been?

3 A No.

4 Q Okay. Anything else you can recall?

5 A I think that's it.

6 Q Now, I sent you a copy of an April 26th, 2006

7 letter from a concernedcitizen to you, and it states "Your

8 attention is directed to a scandal of major proportions which

9 was executed by the investment firm Bernard L. Madoff, 885

10 Third Avenue, New York, New York. Assets well in excess of

11 $10 billion owned by the late Norman F. Levy, an

12 ultra-wealthy, long-time client of the Madoff firm had been

13 co-mingled with funds controlled by the Madoff company with

14 gains thereon being retained by Madoff. This action may have

15 been taken with the knowledge and consent of the late Norman

16 F. Levy in an effort to take it with him by avoiding federal

17 and estate taxes on these billions of dollars. This is an

18 extreme example of uncontrollable greed which should be

19 investigated by the proper authorities."

20 Did you see this letter that I just read and that I

21 sent to you at that time in April of 2006?

22 A No.

23 0 Okay. Did you see that letter at any point in time

24 prior to Bernard Madoff confessing the ponzi scheme?

25 A No.


Page 13

1 Q And just because the letter is addressed to you,

2 that doesn't mean that you would read every correspondence

3 you would get; is that right?

4 A Of course. In fact, even letters that, unlike this

5 one, are not anonymous and not as brief as this one that

6 might look more regular, and even letters that under normal

7 Agency procedures the Chairman would be expected personally

8 to sign would first go to the Correspondence Unit. Then

9 staff would make a decision about whether it should go to the

10 Chairman or whether it should go to some other senior staff

11 person or member of the staff. And that is I believe what

12 happened to this letter based on the fact that it is stamped

13 "Chairman's Correspondence Unit."

14 Q And you never saw any other version of this letter

15 as well, is that right, before December 2008?

16 A No.

17 Q And you did not ever see any letter that was sent

18 in to the SEC with a complaint against Madoff prior to Madoff

19 confessing in 2008?


21 Q Okay. Is there anything else that you'd like to

22 add that you think might be relevant that I haven't asked

23 about?

24 A Well, not knowing the parameters of your

25 examination in its entirety, I don't think so.


This document contains information that has been collected in connection with an investigation conducted by the U.S. Securities and Exchange Commission Office of Inspector General (OIG). It contains confidential, privileged and sensitive information and should not be recopied or distributed without the express consent of the GIG.

Interview of Bernard L. Madoff

At approximately 3:00pm on June 17, 2009, Inspector General H. David Kotz and Deputy Inspector General Noelle Frangipane interviewed Bernard L. Madoff at the Metropolitan Correctional Center, 150 Park Row, New York, NY. Madoff was accompanied by his attorney, Ira Lee Sorkin of the firm of Dickstein Shapiro, LLP, as well as an associate from that firm, Nicole DeBello.

The interview began with IG Kotz advising Madoff of the general nature of the OIG investigation, and advising that we were investigating interactions the Securities and Exchange Commission (SEC) had with Madoff and his firm, Bernard L. Madoff Investment Securities, LLP (BLM), going back to 1992. At that point, Sorkin advised Madoff that his only obligation was to tell the truth during the interview.

The interview began with Madoff stating that the prosecutor and trustee in the criminal case "misunderstood" things he said during the proffer, and as a result, there is a lot of misinformation being circulated about this scandal, however, he added, "I'm not saying I'm not guilty."

2006 Exam:

Madoff recalled that with respect to the 2006 OCIE exam, "two young fellows," (Lamore and Ostrow) came in "under the guise of doing a routine exam;" He said that during that time period, sweeps were being done of hedge funds that focused on ~-ont- running, and that was why he believed Ostrow and Lamore were at BLM.

Madoff recalled that they were there for two months, and that they "spent 90% of their time looking through emails." He opined that this is "routine for the SEC now, they feel that's the way they find things."

Madoff stated that Ostrow and Lamore looked through bank reconciliations,

expense accounts, and checks. He stated that he didn't understand what they were looking for. He said that he had "tons of capital," and so he "didn't understand why they were looking at that stuff." Madoff stated that Ostrow was "so cryptic" and that he spent a "huge amount of time looking at invoices for expenses." Madoff stated that he didn't know what Ostrow was looking for, because he was looking at cancelled checks and phone bills. He stated that he surmised that Ostrow was looking for wrongdoing pertaining to something that was going on in the industry at that time, namely, people paring independent contractors.



Madoff also noted that during the 2006 exam, Ostrow in particular kept asking for computer runs. He stated that they taxed his computer programmer in that they "kept asking her to do different runs" and to reformat the material.

Madoff stated that Ostrow and Lamore asked him, "Do you do a retail business?" to which he replied no. He stated, however, that "At this time (2006), I was trying to conceal." He also told them, "I don't manage money."

Madoff stated that "Everything the SEC did prior to 2006 was a waste of time."

When asked whether he was the one who told NYRO staff about the DC exam

just prior to this, he stated, "Yes", confirming that NYRO didn't know DC had done an exam. He said that the SEC NYRO staff insisted it was a routine exam, and that "we haven't been here in ten years." to which Madoff replied, "You were just here." (Referring to DC OCIE staff).

Madoff recounted a conversation with Ostrow:

WO: "So tell me about this article." (Ostrow referring to the MarHedge article, leaning back with his hands behind his head "like Lieutenant Colombo.")

BM: "What about it?"

(Madoff stated that Ostrow was "acting as if I didn't do this business.") BM: "Lori Richards has a whole file I sent her with this info. They have it." WO: "Well, it's a big organization; we don't talk to each other."

Madoff stated that he thought Ostrow was pretending that he had not been aware of the other ongoing examination, but Ostrow was acting "as if the left hand didn't know what the right hand was doing."

Madoff stated that he "really got annoyed" with Ostrow for repeatedly asking BLM to generate computer runs.

Madoff stated that during this exam, they "never looked at fi-ont running." He stated that two months after they left, he received a letter citing him for "two ridiculous violations," which they were wrong about; the violations they cited were incorrect. He went on to state that when BLM submitted their response to the SEC letter and copied it to F~NRA, FINRA responded like, "What the heck? Are you nuts with this nitpicking?" Madoff stated, "After two months, they found 2-3 nitpicky things, and they were wrong about those things."

Madoff stated that he did not provide false documents to the OCIE examiners, except the client statements. He stated that he did not provide or make false records for the SEC. He added that they "never asked for DTC records" or other records that needed to be prepared.



He stated that Ostrow and Lamore "never really got into books and records as related to stock records or DTC records." Madoff stated that "they never even looked at my stock records" or did a "box count." He said he was "astonished" that they didn't ask for DTC records, and stated that only a regulator could get those records from DTC, and the SEC would "have to go to DTC." He added that DTC does not have separate accounts for each customer, but rather, provides a global report, but stated that if they went to DTC, they would've seen his market-making position, and that it "would've been easy for them to see" the Ponzi scheme.

Madoff stated that the SEC could've gone to counterparties, and if they had, they "would've seen it," adding, "they didn't do any of that." He stated that "it's the only thing to do," and clarified, "If you're looking at a Ponzi scheme, it's the first thing you do."

Two years prior to 2006 exam, OCIE inquiry:

Madoffrecalied that two years before Ostrow and Lamore came to examine BLM, he received a phone call from Lori Richards, which he characterized as an inquiry for a hedge fund sweep. He stated that while in the lobby of his building, his personal cell phone rang:

LR: "Bemie, its Lori." BM: "Hi Lori."

LR: "I need you to help me out. Can you tell me about your hedge funds." BM: "I don't have a hedge fund." LR: "I didn't think so."

BM: "I execute trades for hedge funds."

Madoff recollected the call lasting about 15 minutes, and stated that John McCarthy may have been on the call, but could not remember for sure. He remembered Richards telling him that he'd probably get a call from McCarthy and that they may need more information from him.

Shortly thereafter, Madoffreceived a call from McCarthy, during which McCarthy told him, "You'll get a letter after the first of the year." Madoff stated that when he got the letter, it was readily apparent to him that they were focused on front running and thought it was part of a sweep that the SEC was doing on front running. He recalled the letter was seeking the names of hedge funds he did business with, a description of his split-strike conversion strategy, copies of "maybe" two years of statements from large hedge funds, and his P&L trading profit in those securities.

Enforcement Investigation:

Madoff said it was "amazing to me" that he didn't get caught during the Enforcement investigation, because they specifically asked him, "Are these secunties at DTC?" They further pressed, "What is your account number." He replied, "646." Madoff stated that it was "obvious they thought that something was amiss." He went on


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by the U.S. Securities and Exchange Commission Office of Inspector General (OIG). It contains confidential, privileged and sensitive information and should not be recopied or distributed without the express consent ofthe GIG.

to say that when they asked for the DTC account number, "I thought it was the end game, over. Monday morning they'll call DTC and this will be over... and it never happened."

Madoff stated that when nothing happened, he thought, "After all this, I got away lucky." But he said he thought it was just "a matter of time," saying "that was the nightmare I lived with." ~Vhen Enforcement did not follow up with DTC, "I was astonished."

Madoff stated that the Enforcement investigators "asked all the right questions, but it was still focused on front-running." He said that the investigators dismissed the allegation of a Ponzi scheme as "inconceivable to them."

He noted that the SEC never asked him about his accounting firm. He stated, "I used a small accounting firm, but I also used KPMG London and they were terrible."

Madoff stated that he got the impression through all the exams and investigations that "it never entered the SEC's mind that it was a Ponzi scheme." He noted that there

was a DTC Terminal in the cage, but, "They never went in to the cage."

When questioned as to why he didn't bring an attorney to the testimony he gave in the Enforcement investigation, Madoff stated, "I didn't think I needed one." He added, "I had good answers for everything. Everything made perfect sense." He said he did not come to the testimony without an attorney because he was trying to fool the SEC into thinking he had nothing to hide. He also denied that he ever changed course during his testimony. He said, "No, that's not what I said. Options are not part of the model, that's what I said."

When questioned as to whether he was concerned about Frank DiPascali giving testimony, Madoff answered,"No, he didn't know anything was wrong, either."

Madoff further stated that he was surprised that the Enforcement investigators never asked for options contracts. He stated that he only had a master contract, and that, "You can't replicate options records." When we asked him if he had options contracts ready in case·the SEC asked for it, he answered, "No."

Madoff stated he "was relieved" when he got the letter from Enforcement indicating the case was over. He was relieved all he had to do was register.

Fairfield Greenwich:

Madoff stated that the widely-reported telephone call with Fairfield Greenwich related to an argument that was going on between BLM and the SEC as to whether BLM had to register as an IA. Madoff stated that the problem was with the Fairfield Greenwich prospectus mention of Madoff. He said, "I told my clients I'm not an investment adviser. I wasn't giving investment advice." Madoff stated that this was the crux of his argument with the SEC, that "I'm not giving advice, I'm employing a



strategy." Madoff went on to state that the reason he said what he did during the telephone call with Fairfield Greenwich is that he was trying to impart this view of his role, and added, "Look, these guys aren't rocket scientists. That's the problem."

Exams and Investigations Generally:

When questioned did he ever steer exams towards front-running, he answered, "No. I didn't have to."

Madoff stated that he didn't have to tell examiners his role in the industry,

because they already knew.

Madoff stated that the investigators didn't ask him questions regarding the Ponzi because "everybody dismissed this aspect." He didn't believe from the examinations that there was any focus on a possible Ponzi scheme.

Madoff stated that there were two points at which he thought "the jig was up": i. During the on-site OCIE exam, because he thought it was routine for

the SEC to check with an independent third party 2. Right after his testimony during the Enforcement investigation when

they asked him "what's your DTC account number?"

Madoff noted that it was standard operating procedure for the SEC to give two week's notice to prepare documents, but stressed that he "never prepared any records for SEC investigations or examiners." He said the only one at fault is Ostrow, because "that's his job on-site."

When asked about whether he was concerned the SEC would do an Lt~ exam after

he agreed to register, Madoff responded no, and that in general, he understood IA exams to be less rigorous than ED exams, noted that the cycle for IA exams was different, and had no reason to think that an IA exam would be any different than a ED exam.

Madoff stated that he was "worried every time" he was examined or investigated by the SEC, and that "it was a nightmare for me," because "it was very basic stuff." He added, "T wish they caught me six years ago, eight years ago...."

Madoff told us that everything he told Lamore, Ostrow, and the Enforcement investigators and his strategy and the computer model was true. But, he added, that "even with artificial intelligence, you still need to have a gut feel." He said, "It's a combination of technology and trader's feel, and I was a good trader."

Madoff noted that there are two schools of thought on how to deal with exams: i. Make the examiners crazy, make things difficult for the examiners tin

connection with this, Madoff noted that every firm keeps books and records differently, and that having an examination is "like getting a tax audit, it's a pain in the ass.").


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2. Cooperate with the examiners, make it easy (which Madoff stated is what "we always did.").

Madoff stated that SEC examiners didn't always look at the big picture issues, rather, they focus on minutia. He stated that he didn't have any suggestions as to how to fix that problem. However, he stated that he believed the problem with SEC examiners is a combination of the "experience they have and the procedure they use." He said, "It all comes down to budgets, I guess."

Madoff indicated that it lent to the credibility of his firm that he had passed examinations by the SEC. He stated that some clients would ask him when was the last time he'd had an exam, and he'd give them the date.

Lori Richards:

Madoff stated that "he had known Loll for a number of years."

Stated that he sent Lori Richards a copy of his strategy (likely referring to documents he provided to SEC in 2004).

Stated that he doesn't know Lori really well, but he's on a first-name basis with her. He stated that she's a "tough regulator." He said she's "not a pals-y wals-y, let's go for drinks" type ofperson.

Ostrow :

Madoff indicated that Ostrow was an "obnoxious guy," and noted that Ostrow wore an SEC jacket with the word "Enforcement" emblazoned across the back. Madoff stated that Ostrow wore this jacket in the BLM offices, as well as while going in and out of the building. Madoff also stated that this jacket "caused an uproar" in the BLM offices, and that it did not look good to have someone walking through the building with a jacket such as that. Madoff asked Ostrow if he was in the Division of Enforcement with the SEC, which Ostrow indicated he was not.

Madoff stated that Ostrow "was very cryptic." Madoff stated that Ostrow was "doing things that made no sense to us at all." He added that Ostrow was a "total asshole." He said Ostrow "was an idiot," citing Ostrow's repeated requests for computer runs, which would take eight hours to run off. Madoff stated, "I almost came to blows with him." Madoffalso characterized Ostrow as a "blowhard" who acted aggressively and was not intimidated by Madoff. He noted that Ostrow "talked tough, but didn't look at anything."

Lamore:

Madoff said he thought Lamore understood options.



Mark Donohue:

Madoff stated that Mark Donohue looked at the right things for front-running, but only would have discovered it was a Ponzi scheme if he had gone to DTC.

Madoff stated that communications from Donohue 'tjust dropped off." He stated that during the exam, he called Donohue:

BM: "Is there something going on here I should know about?" MD: "No, we're just trying to understand the business. Sunlight is the best

disinfectant."

DTC:

He stated that reconciling records with DTC was something they "should've done in '06." When questioned as to whether the Ponzi scheme would have been uncovered by the SEC if it had gone to DTC, he stated, "Yes. It's very easy to do."

He stated that in 2006, it was clear they asked about front-running because there were sweeps of the industry at that time for front-running. But in trying to discover a Ponzi scheme, he stated, "It's very easy if you want. You must do a third party check. It's absolutely a must." He went on to add that "It's Accounting 101 to look at DTC, do a box count" if you are looking for a Ponzi scheme.

When asked if his accounts were segregated at DTC to see if there was trading, he replied, "Yes, of course."

Madoff stated that in the very beginning, he was buying stock. However, later on, if the SEC asked for DTC records, there would have been no way of duplicating a DTC record.

When asked, "Did you ever have fake DTC records ready in case the SEC asked for them?" Madoff answered, "No."

1992 Exam:

Regarding the 1992 Investigation and examination of Avellino and Bienes,

Madoff stated that the DTC records he provided during the OCIE exam were good. He said, "I returned the money immediately."

Madoff stated that Dick Walker (then head of NYRO) said, "I told the examiners that if Bernie Madoff is handling these accounts, you have no problem."

Madoff stated that "I had no idea these guys (Avellino and Bienes) had thousands of clients.''



He said the SEC saw that the trades were real in 1992. When asked if the SEC

did in later exams what they did in '92, would they have uncovered the Ponzi scheme? Madoff answered, "Absolutely." He added, "There is no way they can avoid being criticized for not doing that in 2006."

Madoff said that in 1992, the SEC came for the examination and recalled John

Gentile was the supervisor. Madoffdescribed Gentile as an "Italian guy wearing a short sleeve shirt," and called him a "no bullshit" guy. Madoff stated that Gentile came to BLM and wanted to see the stock record, the DTC records, and the blotters. Madoff said that Gentile, "knew what he was looking at and that was it." (Madoff also contrasted this experience with Ostrow who "comes in like he's Colombo.").

On dealing with SEC:

Madoff stated that he was the only representative from BLM that dealt with SEC staff because that was the way he "always" handled exams. He said, "I always dealt with the exams. My brother handled the market making exams."

Madoff stated that 2003 was the first time he could've been caught by the SEC.

Madoff said that when the MarHedge and Barrens articles came out, he expected the SEC to come to him, and that he was surpnsed the SEC didn't follow up with him. He also mentioned that Erin Arvedlund ("That idiot woman from Barrens.") didn't know what she was talking about, and that it was obvious she was not familiar with the industry.

Madoff stated that he was "kidding" when he sa~d he was on the "short list" to become SEC Chairman, and that he didn't remember telling anyone that Cox would be Chairman before he was named.

Madoff stated that when comparing the SEC and NASD (F~RA), "the level of skill of the staff is pretty much the same." However, he noted that people in the industry are more concerned about an SEC exam than a FINRA exam in general.

Madoff denied that he ever acted as a reference for an SEC employee who was seeking ajob. He also stated that he never called anyone at the SEC or Congress to influence an examination of his firm.

On beginning the Ponzi scheme:

Madoff stated that the "problem occurred when I made commitments for too

much money and then I couldn't put the strategy to work." He stated, "I had a European bank, I was doing forward conversion, they were doing reverse conversion." He stated that the returns he typically generated, "I thought I was going to be able to do." He explained that when that didn't happen, he thought, "Fine, I'lljust generate these trades


This document contains information that has been collected in connection with an investigation conducted by the U.S. Securities and Exchange Commission Office of Inspector General(OIG). It contains confidential, privileged and sensitive information and should not be recopied or distributed without the express consent of the GIG.

and then the market will come back and I'11 make it back... and it never happened." He added, "It was my mistake not to just be out a couple hundred million dollars and get out of it."

Mary Shapiro:

Madoff stated that Mary Shapiro was a "dear friend," and that she "probably thinks I wish I never knew this guy."

Madoff stated that Shapiro was a Commissioner and signed the order in the 1992 Avellino and Bienes matter.

Annette Nazareth:

Madoff stated that he knows Nazareth better than he knows Lori Richards. He

said he knew Nazareth "very well," and mentioned that she also knew his brother and two sons. He also noted that he was Chairman of the Market Structure Committee when she

was the head of Market Regulation.

Arthur Levitt:

Madoff stated that he knew Levitt at Amex, before he was at the SEC, and stated that he knew Levitt "very well." Madoff stated that he went to lunch with Levitt once, to complain to Levitt that he "had to do something about intemet stocks." Madoff stated that Levitt subsequently "went on t.v. and gave a warning about it."

Christopher Cox:

Madoff never met Cox.

William Donaldson:

Madoff stated that he and Donaldson were "sort of like competitors," and noted that they had "mutual respect for each other."

ELisse Waiter:

Madoff stated that he knows Waiter "pretty well," and characterized her as a "tenific lady."

Linda Thomsen:

Madoff stated that he met Thomsen at SIA meetings, but did not know her well.


This document contains information that has been collected in connection with an investigation conducted by the U.S. Securities and Exchange Commission Office of Inspector General (OIG). It contains confidential, pnvileged and sensitive information and should not be recopied or distributed without the express consent of the GIG.

Other SEC Staff:

Madoff stated he does not know Commissioners Paredes, Aguilar, or Casey. He stated that he knew economists at the sec, but just as part of working in the industry.

Harry Markopolos:

Madoff expressed disdain for Markopolos and the fact that Markopolos has received a lot of press, stating that Markopolos calls himself a "seer." He called Markopolos a "joke in the industry." We went on to state that "this was a guy who was just jealous" of his business. He stated that "hedge fund guys are just marketers."

On Eric Swanson and Shana Madoff:

Madoff denied that he ever dealt with Swanson, and denied knowledge of the romance. He stated that he "found out after the fact." He said that his brother was afraid

to mention it to him. Madoff stated that he "didn't even know she was going with him until a couple of years afterwards," and estimated he found out six months before the wedding. He said he brother said to him, "Shana is dating Ene Swanson." Madoff replied, "Who?" Peter said, "He works for Lon Richards."

Madoff described Eric as a "straight sort of guy." Madoff stated that the relationship between the two "never gave him any comfort" about being examined by the SEC, and denied ever asking Shana to go get information or otherwise influence an examination.

Simona Sub and Meghan Cheung:

Madoff stated that Suh and Cheung "acted professional" and that they were "knowiedgeable as much as attorneys can be." However, he noted that they were not as knowledgeable as an industry insider.

Reputation, Strategy, and Industry:

Madoffnoted that he was in the securities industry for 50 years prior to his arrest and that he "wrote a good portion of the rules when it comes to trading."

Madoff stated, "I'm very proud of the role I played in the industry... of course I

destroyed that now."

Madoff stated that he served on the committee as to who should reg~ster as Investment Advisers. He said that they were trying to get hedge funds to register, and stated that "nobody wants to register" because then, they would be subject to prosecution


This document contains information that has been collected in connection with an investigation conducted

by the U.S. Securities and Exchange Commission Office of Inspector General (OIG). It contains confidential, privileged and sensitive information and should not be recopied or distributed without the express consent of the GIG. for fraud. He noted that IAs start as small operations, as opposed to BDs which are generally formed from large businesses.

He noted that there is a general feeling in the industry that Broker-Dealers have a harder time in exams than Investment Advisers. Madoff stated that he wasn't concerned

about registering because there would be a more thorough IA exam, because there was the understanding that IA exams were easier than ED exams, and also, the IA exam cycle is different. He further stated that he had the understanding that the first IA exam that a newly registered entity got was actually less rigorous than a ED exam. Madoff said that he took the position that he was not required to be registered as an IA.

Madoff stated that when dealing with the SEC, there was "never any hint" that

SEC was looking for signs of a Ponzi scheme or that they were looking at his trading. He stated that this was "primarily because of the reputation I had." He had not been aware of the specificity of the complaints brought to the SEC's attention.

Madoff stated that OCIE was looking for front-running, and even if somebody said he was doing a Ponzi scheme, they'd "probably discount this accusation" because they'd think "Why would he do a Ponzi scheme?" He added, "Of course they'd be shocked it's a Ponzi." He stated that they would be "astonished."

Madoff stated that he'd heard that Menill Lynch, Goldman Sachs, and Credit Suisse wouldn't do business with him, however, he stated that David Kamansky (Merrill Lynch CEO), Dan Tully (former Chairman and CEO Merrill Lynch), and the Chairman of Morgan Stanley the did not name John Mack) were clients of his. He stated that these people did business with him and did not think the returns of 10-12% were unusual. He stated that if you look at his strategy day-to-day, it would be "extremely volatile, however, month-to-month it would show low volatility. He stated he would hold on to a loss until it became viable again, and that the strategy itself was real, "not that exotic," and "not that unusual." He noted that he sent Lori Richards a copy of his strategy.

Madoff stated that the SEC focused only on front-running in exams, noting the "returns weren't that spectacular." He stated that "credible people knew it could be done or else they wouldn't be clients." He stressed that the strategy made sense, and that stories of300% returns were "total nonsense." He stated that "All you have to do is look

at the tYPes of people I was doing this for to know it was a credible strategy." He added that "Tney knew the strategy was doable," and that they "Knew a lot more than this guy Harry [Markopolos]."

Madoff noted that the industry is growing incredibly complicated. He gave the example of when his firm put up a credit default swap and didn't know how to the books. Madoff said he didn't know, and it wasn't in manuals, so he called

He sa~d didn't know, but conferenced in

another industry person, who told him to put it in his London office books. He said he called Merrill Lynch, Lehman Bros, five firms total, all of which didn't know. He said


Personal Privacy


This document contains information that has been collected in connection with an investigation conducted by the U.S. Securities and Exchange Commission Office of Inspector General (OIG). It contains coniidential, privileged and sensitive information and should not be recopied or distnbuted without the express consent of the GIG. the NASD had no clue. Madoff stated that today, lots of trades are done off the books

because people don't know what to do with them.

Madoff stated that the only problem with SEC Headquarters is that he had "too much credibility with them and they dismissed the Ponzi."

Madoff said, "You can't have the transparency the regulators want you to have because it's proprietary and detrimental." He stated, "By and large the industry is honest." He added, "I got myself in a terrible situation, it's a nightmare... The thing I feel worst about besides the people losing money is that I set the industry back." Madoff noted that he "did work in the industry long before I did anything wrong." Madoff spoke of the situation, "It's a tragedy, it's a nightmare."

Madoff insisted that his market making business was totally walled off from the financial side.


Memorandum of Interview of Arthur Levitt

On Monday June 22, 2009, I interviewed by telephone Arthur Levitt, former Chairman of the Securities and Exchange Commission (SEC).

Mr. Levitt stated that he began working as Chairman of the SEC in 1993 and served as Chairman for approximately 8 years. He stated he held no other position with the SEC.

Mr. Levitt stated that he met Bernard Madoff on an infrequent basis while he was Chairman of the SEC, mostly at seminars or outside functions. He approximated that he saw Mr. Madoff once a year while he was the Chairman of the SEC. He did not recall having lunch with Mr. Madoff and did not believe he ever met with Mr. Madoff alone. Mr. Levitt stated he did not have a personal friendship with Mr. Madoff, had never socialized with him, and did not know his family, other than having met Bernard Madoffs brother. Mr. Levitt stated that he had met Bernard Madofrs brother when he

visited Madoff s offices with members of his staff (5 or 6 people from the Division of Market Regulation.) He did not recall when this visit took place or who specifically from the Division of Market Regulation joined him in the visit, but recollected that it was

during his tenure as Chairman of the SEC. He did not remember anything about the visit, except that it lasted for approximately 30 minutes. He further stated that Madoffs firm was one of many that he had visited and that he routinely visited broker-dealers, exchanges, and brokerage firms while he was Chairman of the SEC.

Mr. Levitt stated that while he was Chairman of the SEC, he was not aware of any examinations that the SEC was conducting regarding Madoff. He also stated that as

Chairman of the SEC, he did not see, was not aware of, and was never provided any information that any complaint had been filed about Madoff. He stated he never heard of Harry Markopolos while he was at the SEC.

Mr. Levitt stated that he never heard any whispers that Madoff was engaged in any wrongdoing either while at the SEC or after he left the SEC before December 2008. He also stated he was not aware of any complaints provided to the SEC against Madoff after he left the SEC prior to December 2008.

Mr. Levitt stated his reaction after Madoff confessed in December 2008 was

"astonishment" and that from what he knew of Madoff, he felt Madoff was unlikely to have engaged in criminal activity.

Mr. Levitt stated he was not aware while he was Chairman of the SEC that Madoff had

been managing money for outsiders, only being aware of Madofr s broker-dealer operation. Mr. Levitt also said he didn't recall knowing anything about Madoff managing money for investors at any time before the story broke.

Mr. Levitt stated that he spoke generally with SEC officials after December 2008 about the Madoffmatter, stating to them "can you believe this happened," but did not discuss any details about what went wrong or the examinations or investigations of Madoff.


Mr. Levitt stated he never communicated with the SEC on behalf of Bemard Madoff after

he left the SEC.

When asked if while he was Chairman, he was aware of any preferential treatment given to high-level industry people, Mr. Levitt replied, when there were allegations against hi~h-level industry people, we "salivated" and he stated he rejected the notion that SEC would "go easy on anybody."


WHEAT WU A Professional Limited Liabili~y Corporation

1050 17th Street, N.W., Suite 600, Washington, D.C. 20036 Phone: (202)496-4963 Fax: (202)587-2980

www.wheatwulaw.com

Judith L. Wheat Shanlon Wu Marlon C. Gri~ith Julie Grohovsky [email protected] shanlonwu@whearwulaw. corn [email protected] juliegrohovs~y@wheorwulaw. com

Douglas Whipple O/Counse(

FACSIMILETRA NSMISSION

To: Inspector General H. David Kotz Fax: US Securities and Exchange Commission Phone:

From: Katherine Warren / DWB Fax: (202) 587-2980 Phone: (202) 496-4963

Date: June 12, 2009 Pages: 39 (including cover)

Re: SEC OIG Investigation

Message:

The information contained in thisfacsimile message is transmitted by an attorney. II is privileged and conjidential, intended onlyfor the use oSthe individual or entity named above. Ifyou are not a named addressee, or if there is any reason to believe that you m~y have received this message in error, please do not read the message below or any subseguentpa~es. In addition, any dissemination, distribution or copy dthis communication or the injbrmalion contained herein is prohibited Ifyou believe you have received this transmission in error, please call the sender immediately at 202-496-4963 and return the document viafirsr class mail to the address above via the U.S. Postal Service. You will be reimbursedforpostage. Thankyou.


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WHEAT WU A Professional Limited Liability Corporation

1050 17th Street, N.W., Suite 600, Washington, D.C. 20036 Phone: (202)496-4963 Fax: (202)587-2980

www.wheatwulaw.com

Judith L. Wheat Shanlon Wu Marlon C. Gri~fith Ju[ie Grohovsky judi~hlwhear@wheatwulaw. corn shanlonwu@whealwulaw. cam marlongri~i~h@whealwulaw. com juliegrohovsky@whea~wulaw. com

Douglas Whipple OjCounrel

June 12, 2009

VZA FIRST-CLASS MAIL and FACSIMILE

Inspector General H. David Kotz

U.S. Securities and Exchange Commission Office of Inspector General 100 F Street, N.E. Washington, D.C. 20549-2736

Re: SEC OIG Investigation

Dear M. Kotz:

I~represent Genevievette Walker-Lightfoot, a former employee of the U.S. Securities and Exchange Commission (SEC) in Washington, D.C. Ms. Walker-Lightfoot worked for the SEC from 2001 to 2006. I am writing in response to requests that my client received from your office to participate in an investigation that you are conducting regarding the SEC's handling of an investigation into Bernard k. Madoff(Madoff) and Bernard L. MadoffInvestment Securities (BMIS) from late 2003 to early 2004. During that time, Ms. Walker-Lightfoot was employed by the SEC in the Office of Compliance Inspections and Examinations in the SRO/Market Oversight Group in Washington, D.C. and, among other responsibilities, was assigned to the Madoff investigation.

As you know, Ms. Walker-Lightfoot is no longer employed by the SEC and therefore is not obligated to participate in this inves-tigation. Nonetheless, Ms. Walker-Lightfoot wishes to fury aid in your investigation into this important matter. She does so in spite of her concerns over the manner in which she was treated while employed at the SEC, which will be described in detail below and which resulted in her receiving a favorable settlement from the SEC claim of hostile work environment. She also does so in spite of her concern over from your office having insinuated that her failure to speak with your office mi negative opinions of Ms. Walker-Lightfoot's job performance appearing in the IG report. Such. an approach is inappropriate and insulting to a career public servant who received only exemplary performance evaluations while at the SEC and who appears to be the only person working at the SEC on the 2003/2004 Madoff investigation who raised any serious concerns about the documents and explanations provided by Madoff during that investigation.


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\IYHEAT ~U A Professionol Limled Liabiii~y Corpora~ion

Inspector General I-I. David Kotz June 12, 2009 Page 2 of 8

A summary of Ms. Walker-Lightfoot's participation in the 2003/2004 Madoff investiga~ion ow. That summary is followed by detailed responses to a list of topics provided by

. We trust that this information will aid your understanding of what occurred during and after the 2003/2004 Madoff investigation

Ms. Walker-Lightfoot's Role in the Madoff Investig;ation

In April 2004, Ms. Walker Lightfoot was removed from her position as the lead investigator in an SEC investigation into Madofrs trading activities in various hedge funds, including but not limited to Fairfield Sentry, Tremont, Yeshaya, and other major feeder funds. Her removal from this Madoff investigation came shortly after she raised questions about the veracity and completeness of documents and explanations provided by Madoff regarding his trading activities. Ms. Walker Lightfoot's direct supervisor on the Madoff investigation, Mark J. Donohue, informed her of her removal from the investigation. Donohue worked under the Assistant Director in charge of the Madoff investigation, Eric J. Swanson, who would marry Bernard Madoff~s niece, Shana Madoff, approximately one year later.

Ms. Walker Lightfoot's work on the Madoff investigation commenced in late 2003 following a complaint made to the SEC regarding Madoffs trading activities. In early 2004, the SEC received a number of documents in response to a request that had been made to Madoff ~regarding that complaint. On March 10, 2004, after reviewing those documents, Ms. Walker- ;Lightfoot sent an e-mail to Donohue, her immediate supervisor on the investigation, requesting some follow-up documents and questioning the information in the documents that had been provided. It was Ms. Walker-Lightfoot's belief that the SEC did not have enough infonnation to conduct the investigation. Of the documents Ms. Walker-Lightfoot did review, she noted among other things that trading and settlement dates varied for accounts that traded according to the "split-strike conversion" strategy. Ms. Walker-Lightfoot told Donohue and Swanson that if the specific conditions mentioned by Madoff were a prerequisite for the "split-strike conversion" strategy to activate, then the trade and or settlement dates should not have varied for those

accounts per her review of trading account documentation provided by Madoff. Moreover, the trade dates versus settlement dates were inexplicably inconsistent and varied when compared to the securities industry standard of T+3 (trade date plus 3 days). This led Ms. Walker-Lightfoot to believe that either the strategy did not work as stated and/or the account statements and other documentation provided to the SEC were inaccurate. Ms. Walker-Lightfoot communicated her concerns to Donohue and Swanson directly and in the March 10, 2004 e-mail.

On March 23, 2004, after reviewing dociunents submitted by Madoff, Ms. Walker-Lightfoot sent another e-mail to Donohue explaining ·that the mechanics of Madofrs split-strike conversion strategy did not work as Madoff had des~ribed it to SEC staff. In that e-mail, Ms. Walker- Lightfoot explained that, to the extent Madoff had claimed that the model used to execute the

split-strike conversion orders of clients defined the conditions that were to exist before executing the strategy, significant differences should not exist between the trading activity in the Tremont


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~NHEAT T~YU A Professional Limiled Liability Corpora,ion

Inspector General H. David Kotz June 12, 2009 Page 3 of 8

and Sway accounts, including the trade dates listed in the documents provided. Moreover, equity/hedge restructuring activity, a component of the "split-strike strategy" as described by Madoff, was not accurately reflected in the account trading documentation provided to the SEC. Ms. Walker-Lightfoot provided her thoughts to Donohue and Swanson and noted that the SEC needed to follow-up with Madoff as to the mechanics of the strategy and the accuracy of the account trading statements provided to the SEC.

At the same time that Ms. Walker-Lightfoot was leading the Madoff investigation and providing her findings to Donohue and Swanson, she was meeting with resistance from them. For example, she was excluded from meetings related to the Madoff investigation. That is because Donohue continuously called impromptu meetings of the Madoff team when Ms. Walker- Lightfoot was away from her desk even though Donohue's office was right next to hers, and it would have been obvious to him and to anyone else meeting with him in his office, including Swanson, that Ms. Walker-Lightfoot was not in her office at the time the meeting was called. When sh_e was able to join an impromptu meeting, having learned about it after it had already started,Ms. Walker-Lightfoot was still tardy and would miss important information shared at the beginning of the meeting.

Finally, on April 7, 2004, Ms. Walker-Lightfoot was told to "concentrate on mutual funds," an investigation that already had 11 SEC employees working on it, and on April 22, 2004, Donohue told Ms. Walker-Lightfoot to give all of her documentation from the Madoff investigation to a co-worker, Jacqueline Wood, who was to remain on the Madoff investigation as the sole dedicated attorney. It is Ms. Walker-Lightfoot's understanding that, shortly after her removal from the Madoff investigation, the investigation was closed and the files boxed up and sent off site for storage. Ms. Walker-Lightfoot's office was directly adjacent to Ms. Wood's office, and Ms. Walker-Lightfoot observed Ms. Wood boxing up the Madoff files in record retention boxes typically used for storage of SEC files.

During her tenure as the lead investigator on the Madoff investigation, Ms. Walker-Lightfoot noticed a dramatic negative change in her work environment. After her removal from the Madoff investigation, Ms. Waiker-Lightfdot continued to be treated poorly, although she had been performing on a consistently above average level, receiving full grade promotions yearly, up to her full performance level of an SK-14, with merit and step increases thereafter. Yet, after raising her concerns about the Madoff investigation, Ms. Walker-Lightfoot became a victim of a pattern and practice of workplace harassment so intolerable that in August of 2005 she filed a complaint wi oyment Opportunity Commission (EEOC) alleging that Mark Donohue and who was supervised by Donohue, were creating a hostile work environment for her. It should be noted that the first person in the SEC to whom Ms. Walker- Lightfoot complained about this treatment was Eric Swanson, who did nothing to relieve her situation, thus prompting her to file her complaint with the EEOC. Ultimately, the SEC settled that complaint favorably for Ms. Walker-Lightfoot. After settling the EEO claim, Ms. Walker- Lightfoot left the SEC and began working at the Federal Reserve Board, where she remains employed to this date.



~NHEAT T~NU A Prolessional Limi~ed Liabi(i~y Corporalion

Inspector General H. David Kotz June 12, 2009

Page 4 of 8

In sum, Ms. Walker-Lightfoot raised concerns about Madofrs alleged "split-strike conversion" strategy as early as 2004. Her concern stemmed from her review of the account statements and other documents for the Fairfield, Tremont, Sentry, and Yeshaya funds, which revealed that those statements were inaccurate and that the options trading activity for many of the transactions was not accurately reflected on the account statements. Of course, we now know that the so called "split-strike conversion strategy," was simply a fi.ont for Madofrs Ponzi scheme, that the statements flagged by Ms. Walker-Lightfoot were actually fabricated by Madoff, and that Madoff may not have effected any trades over the last 13 years.

In response to the list of topics provided to us by Mr. Wilson, my client responds as follows:

I. Brief Background

Ms. Walker-Lightfoot has a B.A. in Government and International Relations with a minor in Frenchland a paralegal certificate from Georgetown University. She also has a J.D. and a certificate in Comparative and International Law from the Columbus School of Law at the Catholic University of America (CUA Law) and an MBA from the University of Maryland at College Park's Smith School of Business.

~Between college and law school, Ms. Walker-Lightfoot was employed as a paralegal first with the Department of the United States Navy within the Judge Advocate General's Office (JAG) at the Pentagon and then with a trust and estates law firm. During law school, Ms. Walker- Lightfoot won first place for best brief in the Securities Law Moot Court Competition and placed third in the oral arguments portion of the competition. She was accepted into the application- only SEC Student Observer Program for law interns after her first year in law school. During her participation in that program, Ms. Walker-Lightfoot interned in the Office of Investor Education and Assistance (OIEA) where she worked on general securities law matters. As a law student, she took a series of rigorous business and finance law based elective courses in CUA Law's securities law program. She also worked as a law clerk in the General Counsel's office of the National Archives and Records Administration and interned in the Office of the Chief Counsel

for Export Control at the U.S. Department of Commerce and the NASD's (now FINRA) Office of Dispute Resolution, where she worked on securities arbitration and mediation cases.

Ms. Walker-Lightfoot graduated from CUA Law School in May of 1999, took and passed the Maryland state bar examination, and was admitted to practice law in the state of Maryland as of January 2000. In August of 1999, Ms. Walker-Lightfoot went to work in the American Stock Exchange's (AMEX) Member Firm Regulation Department in New York, where she conducted equities- and options-related investigations of brokerage firms and registered representatives. Of particular note, she participated in one investigation that led to the expulsion of a specialist firm from the AMEX trading floor for various securities violations. Moreover, she provided legal expertise during various equities and options trading investigations. She also referred various investigations to the SEC for manipulative and violative trading activity such as insider trading


~NHEAT ~YU A Projessional Limued Lio6ilily Corporolion


Page 5 of8

and market manipulation. While employed at the AMEX, Ms. Walker-Lightfoot received bonuses as well as a merit raise. As part of her employment, she took advantage of extensive training in options trading at the New York Institute of Finance as well as extensive on-the-job training and experience via being a member of the Member Firm Regulation Department and surveilling the AMEX trading floor for securities violations. As you can see, Ms. Walker- Lightfoot's education and employment experiences made her uniquely qualified to work in the Self-Regulatory Organization (SRO)/Market Oversight Group in the Office of Compliance Inspections and Examinations (OCIE) at the SEC.

In March of 2001, Ms. Walker-Lightfoot resigned from the AMEX after accepting a position in the Office of Compliance Inspections and Examinations (OCIE) in the SRO/Market Oversight Group at the SEC in Washington, D.C. Her second line supervisor for the entire duration of her time in OCIE was Swanson. Ms. Walker-Lightfoot handled various matters while employed at OCIE and led an examination after just six months in the position. She began work at the SEC as a GS-II (now SK-I1) and was promoted annually until reaching her full performance grade level of SK-14. Her final grade and step level at the SEC was as an SK-14 step 16. In addition to annual;promotions, Ms. Walker-Lightfoot also received annual cash awards and merit increases:in addition to consistently positive and praiseworthy narrative annual performance evaluations. She did not have any negative performance issues while an employee of the SEC, nor did she receive any negative commentary on her narrative evaluations. While employed at the SEC;:Ms. Walker-Lightfoot also participated in options training at the Chicago Board of Options Exchange (CBOE). Additionally, she was a member of the OCIE teams that received recognition for work on the Research Analysts' Conflicts of Interest Global Settlement Team as well as the Mutual Fund Reform Team. Moreover, as her narrative performance evaluations reflect, Ms. Walker-Lightfoot found significant securities law violations and/or made significant contributions to every single project she worked on as an SEC employee from April 16, 2001 through January 27, 2006. As noted above, Ms. Walker-Lightfoot resigned from the SEC on January 27, 2006 after settlement of an EEO claim she filed- against Mark Donohue and for creating a hostile work environment for her at the SEC in OCIE. Esfandiary was supervised by Donohue, and both were supervised by Swanson.

Ms. Walker-Lightfoot has been employed at the Federal Reserve Board in Washington, D.C. since January 30, 2006. She initially worked in the Risk Management Group within the Banking Supervision and Regulation Division as a subject matter expert in securities law and private equity matters concerning banking organizations. In May of 2008, she transferred to the Large Institutions Group within the Division of Banking Supervision and Regulation with responsibility for Bank of NY Mellon Corporation, the Depository Trust Corporation, and State Street Corporation. She also continued to serve as a securities law subject matter expert, speaking at Federal Reserve Bank Conferences, acting as a liaison with the SEC on various securities law matters, and advising senior management within the Division of Banking Supervision and Regulation on securities matters impacting banking organizations such as Regulation R, auction rate securities, variable rate demand notes, and mutual funds. Her most



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T~NHEAT VVU A Professionol Limited Liobilily Corporo~ion


Page 6 of 8

notable accomplishment at the Federal Reserve Board has been briefing Chairman Bernanke on the effects of sponsored and advised mutual funds on Federal Reserve supervised banking institutions during the market turmoil that began in 2007. Ms. Walker-Lightfoot has received two cash awards during the last two performance cycles as well as a rating of "EXTRAORDINARY" during her most recent performance review for 2008.'

II. General Knowledge of Reputation of Bernard L. Madoff Investment Securities and Bernard 'Madoff

Ms. Walker-Lightfoot understood the general reputation of BMIS and Madoff to be that it was difficult to become an investor with them and that they had a great strategy for earning money. BMIS' investment strategy was not to be questioned, and anyone who did so was disparaged by BMIS and Madoff as being "too stupid" to understand.

III. OCIE Exams Prior to 2003

A. Knowledge of any prior OCIE examinations of Madoff Securities

Ms. Walker-Lightfoot has no knowledge of any prior OCIE examinations of BMIS.

IV. 2003-2005 Cause Examination

A. General Recollections of Cause Examination, including recollections of:

a. Madoff Examination Planning Memo;

Ms. Walker-Lightfoot is aware of no planning memo with regard to the investigation at issue. In her experience, it was not routine for there to be a planning memo for every investigation.

b. Initial Tip/Complaint that Led to Examination;

Ms. Walker-Lightfoot does not know where the tip or complaint came from which led to the 2003 examination. She has not seen a written complaint or been told the substance of any oral complaint or tip. It appeared to Ms. Walker-Lightfoot that the tip or complaint came to the SEC through Associate Director John McCarthy.

Ms. Wall<er-Lightfoot's evaluations from her work at the SEC are attached as Exhibit A and her resume is attached as Exhibit B. A rating of"EXTRAORDR\TARY" is the Federal Reserve's highest rating, reserved for a limited number of employees. It indicates performance that substantially and consistently exceeds the Board's high standards and expectations and is accompanied by a substantial percentage increase in salary.


WHEAT WU A Professionol Limi~ed Liobilily Corporo~ion

Inspector General H. David Kotz June 12, 2009 Page 7 of 8

c. First Document Request;

Ms. Walker-Lightfoot has not seen a copy of the first document request sent to BMIS and Madoff from the SEC.

d. Conference calls with Madoff;

Ms. Walker-Lightfoot was not a party to any conference calls that included Madoff or anyone from BMIS.

e. Second DocumentRequest;

Ms. Walker-Lightfoot recalls the second document request. Her suggestions for follow up questions with regard to the second document request were all contained in e-mails that are now in the possession of the SEC OIG and which are described above.

-f. Additional Questions Raised by Walker;

It is Ms. Walker-Lightfoot's recollection that most of the questions she raised during the course of the Madoff investigation were included in e-mails which are now in the possession of the SEC OIG

:g. Analysis of Madoff trading performed by Walker (comparison of trading in accounts & collar)

Ms. Walker-Lightfoot compared the stated investment strategy of BMIS with what the documents revealed about what trades were actually performed and on what dates. To the extent that this information did not match up, she told her supervisors and suggested additional information and documents that should be provided by BMIS.

V. Communications with NYRO Examiners about NYRO Examination

Ms. Walker-Lightfoot had no communications with the NYRO Examiners and was not aware that the investigation had been transferred to the NYRO examiners until recently. In her experience, when investigations were transferred to NYRO, there would be a telephone call to bring the NYRO up to speed on what work had been done on the investigation to that point. She is unaware of any such telephone call regarding the transfer of the BMIS investigation.

VII. Walker's View on Team Assigned to Madoff Cause Examination and Their Approach to Examinations.

Ms. Walker-Lightfoot's "view" of the team assigned to the Madoff investigation was that they did not have much experience in equity and options trading. Rather, their experience was in


WHEAT WU A Projessionol Limi~rd Liobili~y Corporo~ion

Inspector General i-I. David Kotz June 12, 2009 Page 8 of 8

general litigation. During her tenure at the SEC, Ms. Walker-Lightfoot observed many people who appeared to be hired by the SEC more for their personal connections to other SEC employees than for any substantive experience or knowledge they possessed. It appeared that these employees were supposed to learn on thejob, which was difficult to do given the nature of the SEC's work.

We trust that this information will aid in your investigation.

Sincerely,

3J~k ~h CEI~LY~·3

Julie Grohovsky

Cc:


Personal Privacy

Genevievette E, Walker-Lightfoot

Admitted to Practice Law in the State of Maryland, January 2000

Federal Reserve Board of Governors

Banking Supervision and Regulation-Large Institutions Group, 20" St. and Constitution Ave. N.W. Washington, D.C. 20551 Supervisory Financial Analyst, May 2008-Present

Manage portfolio activities concerning Bank of New York Mellon, State Street Corporation, and the Depository Trust and Clearing Corporation

· Advise management on asset management, brokerage firm and transfer agent activities of banking organizations · Create and design supervisory program concerning securities activities within banks

Federal Reserve Board of Governors

Banking Supervision and Regulation-Risk Management Group, 20" St, and Constitution Ave. N.W. Washington, D.C. 20551

Supervisory Financial Analyst, January 2006-May 2008 Briefed Chairman Bemanke on the effects of the market turmoil on bank sponsored and advised investment funds

Made management presentations on asset management, broker-dealer, MSRB, SEC and private equity matters Division representative on interagency working group for the implementation of Regulation R and the revisions to the 1994 Nondeposit Investment Products Retail Sales Statement

U.S. Securities & Exchange Commission Office of Compliance Inspections and Examinations, 100 F Street, N.E. Washington, D.C. 20549 Attorney, April 2001-January 2006

Chairman's Award for Excellence 2004 Mutual Fund Reform Team

Capital Markets Award 2003: Research Analyst and Investment Banking Personnel Conflicts of Interest Global Settlement Team

· Managed compliance reviews of regulated entities, including the formulation of strategy and objectives Made policy recommendations regarding compliance with federal laws and regulations

· Recommended remediation to be implemented by the senior management of regulated entities Analyzed financial statements, research reports, financial transactions and executive compensation data for legal liability

· Drafted reports detailing findings and recommendations resulting from compliance reviews Assisted in trial preparation, including depositions related to SEC enforcement referrals

The American Stock Exchange (Formerly an NASD company, now FINRA) Market Investigations Department, 86 Trinity Place, New York, N.Y. 10006 Senior Trading Analyst, August 1999-March 2001

Market Investigations Department Liaison to Investigation of Specialist Unit and AMEX/NASD Member Firm Re: SEC Rule 10b-18 Violations--

Investigation Resulted in Industry Expulsion of a Member of the Specialist Unit

· Special project liaison to the AMEX's Enforcement Department Reviewed trading in AMEX equities and options for violations of exchange niles and federal securities laws

· Conducted numerous insider trading investigations and other reviews of violative trading violations, some of which resulted in SEC referrals

· Conducted short sale violation investigations concerning frms' affirmative obligation requirement · Conducted investigations into allegations of unauthorized trading · Prepared memoranda and NASDR and SEC referrals based upon investigative findings

Conducted on-the-record inte~liews/depositions

NASD Regulation, Inc., an NASD Company (now FINRA) Office of Dispute Resolution, 1735 K Street N.W., Washington, D.C. 20006 Legal Extern, January 1999-March 1999

Successfully Completed Arbitrator Training and Examination

· Assisted in conducting arbitration hearings, including managing the pre-hearing and discovery process · Drafted arbitration awards and prepared/audited financial control documents pertaining to fees and fines imposed · Conducted internal audit reviews offu~ancial control documents relating to arbitration awards


U,S. Department of Commerce Office of the Chief Counsel for the Bureau of Industry and Security (formerly the Bureau of Export Control), 14'h Street and Constitution Ave., N.W., Washington, D.C. 20230 Legal Extern, September 1998-November 1998

Assisted with the administrative enforcement of export control laws and regulations concerning sensitive goods and technologies and attended hearings on Capitol Hill related to commerce matters Researched and drafted memoranda concerning the discriminatory impact of export control laws under Title VII

National Archives & Records Administration

Office of the General Counsel, 8601 Adelphi Road, College Park, MD 20740-6001 Law Clerk, May 1997-June 1998

Drafted internal memoranda pertaining to NARA regulations and relevant federal law Deputy Designated Agency Ethics Official responsible for dispensing ethics advice Designated alternative dispute resolution committee member for the Office of the General Counsel

U.S, Securities & Exchange Commission Office of Investor Education gr Assistance, 100 F Street, N.E. Washington, D.C. 20549 Law Clerk, September 1997-December 1997

Investigated allegations of fraud made by investors involving misrepresentation and nondisclosure Prepared memoranda interpreting federal securities rules and regulations

OTHER PROFESSIONAL EXPERIENCE

Sierra Villas Board of Directors

9198 Red Branch Road Columbia, MD 21045

Director, February 2009-Present Manage community association financial and community affairs as an elected director to the board

Martin Luther King Jr. Holiday Commission Howard County, Maryland Government, 6751 Columbia Gateway Drive, Columbia, MD 21046 Commissioner (Appointed by Howard County Executive Kenneth Ulman), October 2008-Present

· Coordination of appropriate activities and ceremonies to honor the ideals and legacy of Dr. King · Assist local governments and private organizations with respect to the observance of county and federal holidays

honoring the birthday of Dr. King

Cable Compliance Commission Montgomery County, Maryland Government, 101 Monroe Street, Rockville, MD 20850

:~:Commissioner (Appointed by the Montgomery County Executive Douglas Duncan), March 2003-December 2003 Adjudicate subscriber complaints, pursuant to the Maryland Administrative Procedures Act, conceming customer cable service or any other product or service that uses the equipment of the applicable franchise agreement, such as one-way or interactive video, audio, data and information services Impose fines on cable companies for noncompliance with the applicable franchise agreement Provide regulatory policy advice to the Commission's assigned county attorney and the County Council

Alpha Kappa Alpha Sorority, Incorporated, Iota Lambda Omega Chapter, Howard County, MD

University of Maryland st College Park, RH, Smith School of Business, M.B.A. Program, College Park, MD 20740 M.B.A. Program Teaching Assistant, "Doing Business in the Middle East and North Africa", October 2007-January 2008

University of Maryland at College Park, College Park, MD 20740 Under~aduate Instructor, August 2004-December 2004

EDUCATION

M,B,A., May 2007 The University ofMnryland, Roberl H. Smilh School ofBusiness, College Park, Maryland

Juris Doctor and Certificate, Comparative and International Law Institute, May 1999 The Catholic University ofdmerica, Columbus School o~Law, Washington, D.C.

Honors: Securities Law Moot Court Competition 1999 1" Place Best Brief Category 2"d Place Best Overall Category 3'd Place Oral Arguments Category

Paralegal Certificate, August 1996 Bachelor of Arts in Government and International Relations, minor in French, May 1995 Georgetown University, Washington, D.C.


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