Complex financial statements stumped investors

By Casey Ross and Steven Syre
Globe Staff / December 14, 2008
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Lawrence R. Velvel said his monthly financial statements from Bernard L. Madoff Investment Securities were indecipherable. They detailed dozens of complex, six-figure trades he couldn't understand, yet consistently produced the same result: double-digit returns.

Until Bernard L. Madoff's arrest Thursday, Velvel said neither he nor his accountant had any reason to question how the prominent Wall Street investor, a former chairman of the Nasdaq Stock Market, had been managing his money.

"This all looked kosher to us," Velvel said yesterday. "Far from being greedy, this was a deliberate decision to accept lower, steadier returns than what was going on in the market."

Now, Velvel wonders why he did not know Madoff's business was divided into two, one for clients like him, and another, more exclusive operation for hedge funds and people with vast fortunes.

"We didn't have a whisper of knowledge that he was running money for a small number of extraordinarily rich people," said Velvel, who is dean of the Massachusetts School of Law. "When someone has a whole other side to their business, they have to be careful that the other side doesn't take them down, like it did with banks and investment securitization."

Velvel and other Massachusetts investors said they are now combing through financial statements to find hints of what federal investigators say is one of the nation's largest financial frauds. In complaints filed against him, federal officials quoted Madoff as saying he ran a Ponzi scheme - paying one set of investors with money from another.

One Boston businessman who invested with Madoff became suspicious of his operations this fall, when his financial statements reported gains of 1.5 percent to 2 percent while most other investment firms were experiencing massive losses. The businessman, who asked for anonymity because he didn't want his losses publicized, also questioned how Madoff's strategy of quickly buying and selling bundles of stocks could generate significant returns.

"I didn't understand how it could possibly be a profitable business," said the businessman. "So I went to my financial advisers and said, 'We should check this out and make sure we're comfortable.' "

But after meeting with Madoff's firm in New York, the advisers said that they could find no reason for alarm, a conclusion that others, including the Securities and Exchange Commission, also reached over the years after looking into Madoff's operations.

Velvel said he began investing with the firm in 1995, after a lawyer friend told him he had received steady returns from investments with Madoff. At a meeting at the firm that year, he listened intently as a Madoff executive described an investment strategy of buying large baskets of securities and then quickly selling them for a small profit. The firm would hedge losses by purchasing options to sell stocks at prearranged prices, thus protecting against sharp drops in value.

Velvel said the returns, as promised, were consistent: usually 10 percent to 12 percent gains, year after year. In good years, profits were 15 percent to 16 percent. But they rarely fluctuated or dropped significantly.

"It seemed like a brilliant technique for producing slow but steady returns," he said.

Velvel would not reveal how much he had invested with Madoff, but said: "For a person like me, it was a lot of money. I'm a law school dean, not a financier."

The firm's strong performance induced some investors to entrust all of their savings to Madoff, whose reputation seemed to guarantee that their money could not be lost.

"People would sell their family businesses and you gave everything to Bernie," said one investor who asked for anonymity. "It was like putting it in a savings account. It was safe. He was your nest egg guy. Nobody ever took money out. Why would you take money out?"

Individuals and nonprofit organizations that invested with Madoff are now coping with losses in both their charitable funds and savings accounts. Former employees of the Robert I. Lappin Charitable Foundation, which closed its doors after losing all of its $8 million to Madoff, are now wondering what happened to their 401(k) retirement accounts, also managed by Madoff's firm.

Several investors said the only difficult part of doing business with Madoff was understanding his financial statements, which typically ran six pages and outlined a dizzying array of transactions. Tax records from two charitable trusts overseen by former Stop & Shop owners Avram and Carol Goldberg, both of which employed Madoff to manage some of their money, reflect a extraordinarily high amount of trading activity. Securities were purchased and sold, over and over, during the course of a single year.

One Goldberg family trust, with assets of $20.1 million, reported asset sales of $99.8 million by Madoff in 2006. A second trust, with assets of $9.3 million, reported asset sales of $56.4 million directly attributed to Madoff that year. Both trusts had given Madoff only a portion of their total assets to manage.

Velvel said the detail reported in the monthly statements makes it hard for him to believe that all of the transactions were simply conjured up as part of a Ponzi scheme. If they were, he said, it seems implausible that the scheme could have been perpetrated solely by Madoff, the one man now in custody.

"I wonder who else lubricated this for him and what did they know," he said. "Who else must have known this was going on and said nothing?"

Casey Ross can be reached at Steven Syre is a Globe columnist. He can be reached at

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