Saturday, April 2, 2011

Fraud Professionals are the Real Winners in Madoff Case

The fees paid to fraud professionals such as attorneys, consultants and accountants to clean up the mess that Bernie Madoff's famous Ponzi scheme left is projected to reach over $1 billion! According to the Washington Post the fees paid to such professionals last year were almost $300 million and an additional $800 million is projected. Almost half of the fees went to the law firm of the trustee, Irving Picard. These fees are being criticized by those overseeing the case as described in the following quote from the Washington Post:
(A) federal watchdog warned Thursday that neither the courts nor officials at the Securities and Exchange Commission effectively oversee the fees and expenses paid to outside contractors and urged regulators to watch more closely to make sure the payments are appropriate.  
When brokerage firms collapse, the SIPC intercedes to recover money for the clients of the firm and can enlist private experts to help in the task. In the Madoff matter, the leader of the private contractors administering the case is Irving H. Picard, who was named as trustee by the SIPC without competitive bidding and then approved by a court. 
Members of Picard’s team have been paid at rates that ran as high as $742 an hour, according to the SEC inspector general in his report issued Thursday. As of Dec. 31, payments to Picard and his law firm, Baker & Hostetler, totaled more than $130 million, the SIPC said in a January letter.
These cases provide a huge opportunity for professionals to charge exorbitant fees. Usually, the organization paying the fee is at the mercy of the professionals providing the services since they need the work done pronto. I've seen investigations of when an audit fails to detect financial statement fraud and the fees for the investigation can be 50-100 times the audit fee. What was a $1 million audit turns into a $100 million fraud investigation.

Some of the fees are due to the pressures put on the investigators. The professionals are often traveling and working long hours doing very detailed work to get to the bottom of the mess. They often leave "no stone unturned" and have highly paid professionals doing very detailed and mundane tasks such as reading emails or compiling bank records. The professionals normally don't discount their fees either whereas in other work, such as an audit, they often charge at something like 60% of their maximum billing fee. Not so in a fraud investigation: 100% realization rates.

They say crime doesn't pay but for the professionals who come in after the fact, it does...

1 comment:

  1. It's good to be Picard - Not so good to be a victim of the SEC & SIPC failures to regulate and insure.