Aiding and Abetting, a Madoff Family Affair: Why Secondary Actors Should Be Held Accountable for Securities Fraud through the Restoration of the Private Right of Action for Aiding and Abetting Liability under the Federal Securities Laws
Nunziato, Melissa C., Albany Law Review
In the first few weeks of December 2008, Bernard L. Madoff confessed to running what he described as, "basically, a giant Ponzi scheme." (1) In reality, what Madoff described in such modest terms was a scheme of massive proportions, what has been referred to as "America's largest financial fraud ever." (2) The exact scope of the Madoff scheme is still unraveling; however, it is estimated that thousands of investors lost somewhere between twenty and sixty-five billion dollars. (3) Madoff purported to invest the savings of some four thousand clients, and these investors spanned across forty-eight of the fifty states, (4) as well as throughout Europe, Latin America, and Asia. (5) But it all was a sham, perhaps from the very beginning.
In part, what makes the Madoff affair so notable is that Bernie Madoff and his family members were well-known and respected in the securities industry. Many members of the Madoff family held securities licenses, were considered experts in the field, and worked alongside Bernie in his brokerage business. Despite their involvement and expertise in the business, to date none of the family members other than Bernie Madoff have been held liable for participating in the scam. Indeed, the current regulatory framework insulates them from private civil liability. On July 30, 2009, however, Senator Arlen Specter, on behalf of himself and cosponsors Edward Kaufman, John Reed and Sheldon Whitehouse, introduced S. 1551, the Liability for Aiding and Abetting Securities Violations Act of 2009, which would reinstate a private cause of action against those alleged to have aided and abetted securities fraud violations under section 20 of the Securities Exchange Act of 1934. (6) This Comment discusses how the Madoff family represents a class of potential defendants who remain shielded from private civil liability because investors are unable to bring causes of action against those who aid and abet securities fraud, and proposes that Senator Specter's bill is the appropriate mechanism to restore the right of private litigants to sue aiders and abettors. Part I of this Comment discusses the Madoff Affair, including Madoff's massive Ponzi scheme and how the scam went undetected by regulators for nearly half a century. Also discussed in Part I is how the brokerage firm that Bernie Madoff began in 1960 was a family business, the role that the Madoff family played in its operation, and the inability of investors to seek retribution from alleged secondary actors like the Madoff family. Part II outlines the history of the private cause of action under section 10(b) of the Securities Act and SEC Rule 10b-5. Specifically, Part II examines the implication of the private cause of action for aiding and abetting securities fraud, and the significant case law and legislation that have impacted the right of private litigants to pursue secondary actors. Finally, Part III discusses the ability of Senator Specter's bill to reinstate the private right of action for aiding and abetting liability. This Comment concludes that there is a need to restore the private right because the current enforcement mechanisms by the Securities and Exchange Commission are insufficient.
I. THE MADOFF FAMILY AFFAIR: A PARADIGM FOR THE NEED TO REINSTATE THE PRIVATE RIGHT OF ACTION FOR AIDING AND ABETTING SECURITIES FRAUD
A. The Madoff Ponzi Scheme: "America's Largest Financial Fraud"
Madoff got his start in the securities industry after graduating from Hofstra University in Long Island, in 1960. (7) He began his brokerage business, Bernard L. Madoff Investment Securities (BMIS), on Wall Street in Downtown Manhattan, and later moved his entire operation to Midtown, where he occupied the seventeenth, eighteenth, and nineteenth floors of the Lipstick Building. (8) Many of Madoff's early customers were referrals from an accounting firm, Alpern & Heller, owned and operated by Sol Alpern, Bernie Madoff's father-in-law. …