page 1 united states securities and exchange …

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

In the Matter of:

File No. GIG-509

WITNESS: Number 4

PAGES: 1 through 112

PLACE: Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C.

DATE: Friday, February 13, 2009

The above-entitled matter came on for hearing, pursuant

to notice, at 10:15 a.m.

""L

Diversified Reporting Services, Inc.

(202) 467-9200

MADOFF EXHIBITS-00061

1 APPEARANCES:

2 On behalf of the Securities and Exchange Commission:

3 DAVID KOTZ, Inspector General

4 HEIDI STEIBER, ES~.

5 Securities and Exchange Commission

6 100 F Street, NE

7 Washington, DC 20549

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1 CONTENTS

3 WITNESS: EXAMINATION

4 Alex J. Sadowski 7

6 EXHIBITS: DESCRIPTION IDENTIFIED

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

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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

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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

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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

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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

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

10 was examined and testified as follows:

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


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

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?


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


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?

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21 things, I think then, a couple of months later, I think that

is when he started dating Shana

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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?


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.


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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


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.



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


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


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 --


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


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 --


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.)

23 THE WITNESS: Okay.

24 BY MR. KOTZ:

25 Q Can you see were it says, "Question: Why does this


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In the Matter of:

File No. GIG-509

GIG-509

WITNESS: Number 3

PAGES: 1 through 61


100 F Street, N.E.

Washington, D.C. 20549

DATE: Thursday, February 19, 2009


to notice, at 2:20 p.m.


(202) 467-9200


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

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OCIE Staff Accountant

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

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OCIE Branch Chief

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





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

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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,

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24 Q Okay. Now, in the 2003 time period, around say

25 April to August 2003, we have some documents which I can show


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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

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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


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


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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.

12 (SEC Exhibit No. 1 was marked for

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

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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


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?


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


··; ·~-: · ··::-:·---::;· ·:


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


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1 CONTENTS

i 2


4 4

5

6

7

8

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19

20

21

22

23

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Jane Doe

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


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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


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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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



In the Matter of:

File No. GIG-509

GIG-509

WITNESS: Number 24



100 F Street, NE, Suite 4000

Washington, D.C. 20549

DATE: Tuesday, April 14, 2009




(202) 467-9200


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.

10 Washington, D.C. 20549

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


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

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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


PersonalPrivacy

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

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26


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.


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


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?


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


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.


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.


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


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.)



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.


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


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.)



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


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.


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

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

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

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.


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


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?


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

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

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

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

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

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


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:


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


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


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


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


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.


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.


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


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.


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


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?


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


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


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."


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


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


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


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


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.


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.


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


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?


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


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


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?


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?


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?


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


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.


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.


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


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.


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.



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?


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?


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.


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,


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:


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.


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


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


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

18 Madoff Securities?

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.



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


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?


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


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.


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


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


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.


1 MR. WOLK: Let's do that.

2 MR. KOTZ: Off the record.

3 (A brief recess was taken.)

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


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


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


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.)


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.


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


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,


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


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.



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.


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


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.




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


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


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,


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.


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.


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

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


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


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


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


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?


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


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


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


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

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."


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


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


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


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


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


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.


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


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

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?"



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


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."


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 --


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?


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,


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?


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?


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?


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

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



Personal Privacy Personal Privacy

PersonalPrivacy

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


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

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

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


Personal Privacy

OCIE Branch Chief

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


Personal Privacy

Personal Privacy

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


1 for identification.)

2 (The witness examined the documents.)

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


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?


1 A She did.

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6

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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


Personal Privacy

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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Personal Privacy

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


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


Personal Privacy

Personal Privacy

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


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


Personal Privacy

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.


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



Personal Privacy

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


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


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


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.


Personal Privacy

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 --


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


Personal Privacy

Personal Privacy

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


Jane Doe

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.


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


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


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


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


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


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.


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


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?


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.


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.


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:


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


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?


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



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


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


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



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


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

13 26 E-mail, Swanson to McCarthy, 3/1/06 108

14

15

16

17

18

19

20

21

22

23

24

25


Former OCIE Attorney Advisor

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


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.

4 Also, so the record will be clear, please let me

; ~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?

5 THE WITNESS: I do.

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

16 for identification.)

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


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,


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


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


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


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


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?


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


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


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


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.


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.


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.


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.


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?


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


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


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


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


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?


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


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.


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


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


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


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,


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?


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


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?

21 A Not that I recall.

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?


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


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?

22 THE WITNESS: Yes.

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

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


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


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


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?


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.


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.



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


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

19

20

21

22

23

24

25


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:

17 Q Could you state and spell your full name for the

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


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.


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


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


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.


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?

20 A That is correct.

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


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 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.").


This document contains information that has been collected in connection with all 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.

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."
