Fiserv, TD Ameritrade, and the Bernie Madoff Fraud

The investment scams of Peter Dawson, Nicholas Cosmo, Andrew Bowdoin, and Bernard Madoff are generally referred to as Ponzi schemes, but the respective wrongdoings have a fundamental difference than the fraud committed by the eponymous Charles Ponzi:   Whereas Mr. Ponzi acted alone, Dawson, Cosmo, Bowdoin, and Madoff had the implicit support and involvement of major financial institutions.

In Dawson’s case various well known mortgage companies figure prominently, including Countrywide Home Loans, and Washington Mutual.

Cosmo relied heavily on Bank of America for banking services, as well as MF Global and other commodities brokers who blindly let him squander investor money without clarifying the source of his funds.  Bowdoin also heavily relied on Bank of America for his fraud.

As alleged in a class action suit my office filed today in the U.S. District Court in Colorado, Bernie Madoff couldn’t have defrauded nearly 1,000 investors of their retirement money without the assistance of Fiserv (Nasdaq:FISV) and its affiliates.

Fiserv and its subsidiaries served as the exclusive custodian for any customer of Madoff Securities who invested through a retirement account such as an IRA or 401(k). The exclusivity was presumably mandated by Bernie Madoff himself as the highly unusual arrangement allowed him to raise some $1 billion in funds while avoiding detection.  Fiserv, in turn, earned lucrative fees and turned a blind eye to Madoff’s “investment” activities.

Retirement account custodians are mandated by the IRS to hold custody of their customer’s assets, even if they are self-directed, as was the case with the Madoff retirement accounts. Among the reasons for this requirement is to protect investors from having their retirement assets stolen.  And Madoff’s retirement account clients had go reason to believe that Fiserve had custody of their assets: If they wanted to increase their investments with Madoff, they were required to deposit their money with Fiserv; and if they wanted to withdraw their money, the checks were issued by Fiserv.  Fiserv also sent investors quarterly statements providing the value of their holdings.

But my office has confirmed that Fiserv never maintained custody of the assets supposedly managed by Madoff. The statements that Fiserve sent to Madoff investors were pure fiction.

TD Ameritrade Holding Corporation (Nasdaq: AMTD) in February acquired a portion of Fiserv’s Investment Support Services (ISS) business, including $10 billion held in 2,200 plans administered by 80 independent third party administrators.  Interestingly, TD Ameritrade excluded the Madoff Securities accounts from the transaction.  The Toronto Dominion Bank affiliate no doubt discovered Fiserv’s unusual Madoff arrangement while doing its due diligence and likely was concerned about assuming the liabilities of the business.

The U.S. Attorney’s office is actively probing the Madoff scandal and it is my hope it will investigate the Fiserv allegations contained in our lawsuit.  And given the involvement of prominent financial institutions in at least four Ponzi schemes, it’s high time Congress convened hearings and conducted a broad-based investigation.