Bernard Madoff, the Mafia, and Naked Short Selling

[David Guyatt]

The ever curious Golem XIV questions why national regulators are not drawing the obvious conclusions from the identities of those accused in the Madoff swindle.

The insider "Whistleblower IRL" has some observations in the Comments section.

http://golemxiv-credo.blogspot.com/2010/...lands.html

Golem VIV's piece was intriguing, especially as it focused on the apparent dereliction of duty of bank regulators. And I suppose it might, therefore, be a timely reminder of the following, extracted from post no. 1 of this thread:

Charles Gasparino (citing “speculation” from investigators) reported last week on CNBC that the Russian Mafia might have been partners in Madoff’s larcenous fund business. Or perhaps the Mob had an even greater interest in Madoff’s market making operation, as some of our sources have told us in recent weeks.

Either way, there is a certain cachet.

But it wasn’t just pierogies and pistol-packing wiseguys in purple suits. Mr. Madoff was also a dedicated public servant, volunteering countless hours at the Securities and Exchange Commission.

Indeed, Madoff seems to have written many of the SEC’s rules. For example, Madoff was the principal author of an SEC rule that exempted market makers (i.e. Madoff) from various regulations governing short sellers (i.e. Madoff’s friends).

Madoff’s rule ensured that market makers (Madoff) could, among other things, engage in so-called “naked short selling.” To sell “naked” is to sell stock that one does not actually possess. That is “phantom stock,” according to the SEC Chairman and many others.

Sometimes, short sellers (who profit when shares lose value) offload massive amounts of phantom stock to drive down prices, destroy pubic companies, or even crash the market. That is why there used to be restrictions.

At any rate, I don’t think Madoff had an office at the SEC. He certainly was not employed there. But the SEC was glad to have Madoff write a rule exempting Madoff from the rules. The formal name of the rule is, “the option market maker exception to Rule 203(b)1,” but the SEC was so thankful that it named the rule after the great man himself.
It was called, “The Madoff Exception.”

The Russian mafia have, I believe, enjoyed the hospitality of Austrian banks ever since the arrival in Russia of Boris Yeltsin. Indeed, I seem to recall stories of articulated lorries arriving at Austrian banks in the dead of night, filled with bank notes for deposit (and laundering of course).

And the fact that a crook like Madoff who, it seems, was in league with mafia types was sufficiently inside the door of the US regulator, the SEC, that he could write some of their rules.