IRS FAILED IN ITS DUTY TO OVERSEE MADOFF’S NONBANK CUSTODIAN ROLE

IRS FAILED IN MADOFF OVERSIGHT FUNCTION, LEGAL AUTHORITY CHARGES; ASKS HOW MANY OTHER PONZI SCHEMES IRS HAS MISSED

by Sherwood Ross, Staff Writer

How did the Internal Revenue Service ever approve Ponzi scheme fraudster Bernie Madoff as a nonbank custodian(NBC) for IRA accounts?

If the IRS authorized Madoff in 2004 to watch over his clients’ securities it had to ignore its own regulations or it would have found him out, charges Lawrence Velvel, dean of the Massachusetts School of Law and an investor that got swindled by Madoff.

In his blog “Velvel on National Affairs” of April 17th, Velvel raises a host of questions that suggest IRS dereliction in the Madoff swindle by failure to follow its own regulations.

     # Did the IRS not check to see whether Madoff had a separate trust division and whether fiduciary records were kept separate from other records?

# Did IRS not check to see whether securities were kept in an adequate vault and not conmingled?

# Did IRS not check to see if there was a permanent record of assets put into and taken out of the vault?

# Did the IRS not examine Madoff’s books and records, as it claimed it had the right to do?

If it had done any of these things, Velvel writes, IRS almost surely would have discovered Madoff was a fraud.

The IRS would have found no vault with securities, Velvel said, because Madoff never bought the securities he told clients he had purchased in their names.

“It (IRS)would have found no separate trust division. It would have found no books and records of the kind needed to be a nonbank custodian of IRAs. It would have found that Bernie Madoff owned almost the whole damn business, not a ‘mere’ 50 percent,” Velvel writes.  After approving Madoff as a NBC, “it must not have done these (oversight) things.”

Velvel wonders if it was not IRS that prompted Madoff to seek nonbank custodian status upon learning that he had been acting in that capacity without IRS approval. “And if this is what occurred, how did the IRS not know for 20 years that Madoff was acting as an unapproved nonbank custodian and how did the IRS approve Madoff despite his failure to follow the regulations?”

And if IRS learned Madoff was acting as an unapproved NBC and told him to apply for approval, “then the IRS had to have known or at least have suspected that he had been acting as an unapproved NBC for years, yet all it did, apparently, was to require him to submit a few pieces of paper whose veracity it did not check, and it then approved him apparently without even looking at his books and records.”

If so, this lack of oversight parallels that of the Securities and Exchange Commission which learned in 2006-7 that Madoff had been acting as an unregistered investment adviser for years (and) did nothing except require him to register.

The bottom line, Velvel writes, is that both the SEC and IRS are “deeply at fault” for failing to expose Madoff. “This would make only the more compelling than it already is the case for extensive governmental restitution to compensate for the extensive governmental fault that wreaked disaster here,” Velvel writes.

“Almost daily,” he concludes, “we hear of more frauds and more Ponzi schemes. Did the perpetrators of those frauds likewise seek and obtain IRS approval to shield themselves from suspicion? The thought is almost too terrible to contemplate but it cannot be ignored. Just how many Ponzi schemes and frauds, if any in addition to Madoff, may have hidden behind some form of negligent or complicitous IRS approval?”

Sherwood Ross

Sherwood Ross is an award-winning reporter. He served in the U.S Air Force where he contributed to his base newspaper. He later worked for The Miami Herald and Chicago Daily News. He contributed a weekly column on working for a major wire service. He is also an editorial and book publicist. He currently resides in Florida.