Q: You are a director of the Berkeley Research Group, can you tell us a little about what the companies does?

A: Well, I am a director in a certain practice unit, and the practice unit is called “The Financial Institutions Practice.” We focus on the issues that financial institutions face due to regulations, as well as the pressures of the market… the financial risks that they face and how you control those risks. The firm, Berkeley Research Group, has a broader mandate. It’s a firm that was put together by experts in their respective fields, and these experts run practices [in the firm] in their different fields.  We have a very strong anti-trust practice, for instance. It’s got a lot of economists working there. We have a very large intellectual property practice…

Q: As law students and aspiring attorneys, we learn all about how to properly retain expert witnesses and how to properly use them in judicial processes, but we don’t focus on the actual expert’s experience. As an individual who has acted as an expert witness in over 30 different cases, can you tell me a little about how you became so involved in the legal world?

A: It usually happens when a person has been working in a field for a while. I was an investment banker… and I am a CPA as well. So, that work usually comes to the attention of an attorney who is casting for an expert. And generally, I think most people are brought into this field after they have been doing something else. For me, it was investment banking, but for other CPAs, they could just be running their practice… [for example] they could be an auditing firm performing some kind of forensic analyses, and then one day they get a call. The attorney says he needs somebody either to look at an issue or that they are going to trial already and he needs someone to testify. That’s [normally] how they get into it.

Q: You were involved in three of the cases that the SEC identified as “key” cases it brought relating to the 2007 financial crisis. Can you tell me a little about those cases and your work on them?

Yeah, the one that comes to mind is a matter that involves the Charles Schwab brokerage firm. And, there, I was working for one of the investment managers. He had retained me to look at the role that he played in the 2007 financial crisis when he was managing what is called an “ultra short bond fund.” This is fund that is invested in mortgage-backed securities.

So, there I had to assess and explain to the court what a fund manager in that position would be doing, how that fund was managed, and why that fund was different from… some other type of fund. I looked at a lot of activities and the controls that were in place in the Charles Schwab organization because the SEC had accused this defendant of putting out incorrect information about what the fund was doing and how it was doing. So, that was one case.

Another case that I worked on was also mortgage-related. It was a case involving a Countrywide executive. Countrywide was at the center… maybe the epicenter… of the mortgage crisis. They had a lot of these Alt-A and exotic mortgage products that they had originated. There, a person had retained me that was a chief operating officer at Countrywide for a time. He actually was fired in 2006 by the chief executive officer. And that probably was the best thing that could have happened to him because the market fell apart in 2007. This chief operating officer was cast with implementing the internal controls at Countrywide, among other things. But the internal controls were the key feature that essentially fell apart a year later after he left.

I was engaged to assess, first of all, his work while he was there. Then [I had to] explain to the court what he did in terms of trying to make sure that the mortgage products that came out of Countrywide during his tenure met the standards that they said they met. So, that work involved a fairly comprehensive review of all the various committees and the committee structure within Countrywide…. This was committees at the board level, at the senior executive level, and committees that functioned at the lower management levels. And not only did I go through and map them out, I had to go in and actually see if they did anything. So, I was reviewing minutes of all these meetings.

Q: What exactly were you looking for?

A: Well, I was looking for the operation of the controls particularly with regard to their estimates on land losses… because in 2005 and 2006, there was some early evidence of problems in the mortgage markets, but it certainly wasn’t very clear. None of the major ratings agencies were picking up on them. So, what we were looking at was to see if these committees met. If they met, what they were looking at in terms of information relating to the mortgage market.  

For instance, was there anything in their board packages that indicated there was a problem that they ignored… which I did not find.

Q: And if they had ignored such information?

A: Well, when you are a chief officer of a company like Countrywide, you can only be responsible for the structure you set up. After that, you have to depend on other people to run it and operate it accordingly. It then would have led us to understand why it had failed, if it had failed.

At least during that time period leading up to 2006, during his tenure… he just wasn’t seeing any significant problems. Of course, neither was Standard & Poor’s, neither was Moody’s… none of these entities were seeing any significant problems in the mortgage market at that point in time. But it really takes a careful forensic analysis to go through and tell that type of story.

Q: Well, speaking of interesting investigations, you also assisted in the SEC’s investigation of the Bernie Madoff Ponzi scheme. Can you tell us a little about the Ponzi scheme and your experience investigating the case?

A: Well, a Ponzi scheme is a fairly simply mechanism whereby the schemer or fraudster convinces people to give him money. He promises a fairly high rate of return. Then, as he is collecting checks from more recent investors, he uses those checks to pay the promised high rate of return to the earlier investors. He hasn’t necessarily invested the money. Some Ponzi schemers do… I think Allen Standford, for instance, did invest some money. But Bernie Madoff did not. Bernie insisted that absolutely nothing was invested. And as far as anyone can tell, that was correct… at least it was with respect to the Ponzi scheme he operated.

He had a computer system on the 17th floor that was generating these fake account statements. He would also generate these fake trade tickets that he would send on to various people who operated what we call “feeder funds.” These are funds that collect money from lots of smaller investors, aggregate the funds together, and then hand the big pile of cash over to Bernie to invest. So, he was generating lots of paper going back to the feeder funds. And the feeder funds would be convinced that he was operating a legitimate trading business. Of course what he was actually doing was he was waiting there to see how the market turned out for a certain day or certain short period of time. Then he would retroactively decide to say, “well ill go ahead and say I invested two days ago, and then Ill record the gains that I know we would have made had I invested two days ago.” He would then call that a transaction and then book the gain. And then he would generate the trading tickets to make it look like it was legitimate. So, that’s essentially how he ran his scheme.

Q: And you were investigating the SEC’s failure to uncover Bernie Madoff’s Ponzi scheme. How did you go about your investigation? How did you dig up the wrongdoing, so to speak?

A: I was asked to do by the SEC Inspector General was to come in and look specifically at the people who examine brokers like Bernie. The Inspector General was doing his own investigation of the SEC Enforcement groups, which were principally attorneys.

So, we came in and we looked at quite a lot of things, frankly... But, the way we did it is we sat down and talked to people. The Inspector General had been interviewing some of the enforcement attorneys that were involved with some of the early tips that the SEC received. He basically asked them, “What did you do? When you saw this tip come in, what type of process did you follow to try to investigate?” So, he pieced that together and found out that, in some areas the attorneys did pretty well, and in lots of areas they didn’t. So, when we came in and looked at everything, we [were examining] two separate tips that had come into the examinations group at the SEC.

One came into the Washington, DC office, and the other came to the New York office. And the two [offices] pursued independent investigations. Now, according to SEC procedures, they were supposed to log in all investigations into this system that would tell all other offices of the SEC what was going on in terms of investigative work, and who was doing what. Neither of them did though.

So, there were two parallel investigations going. And the only way the DC people and the New York people found out about each other conducting the investigation was that Bernie Madoff told them.

Q: Wait, Bernie told them?

A: Yeah, and that was pretty embarrassing. But, it was emblematic of the way it was being conducted. So, the tips came in… and these were very credible tips from industry professionals… One of them was identified, so I can tell you the name. That was Renaissance Technologies, one of the premier what they call “quant shops.” They are quantitative analysis traders. And they were looking at some fairly simple things… they were just looking at the trading volume and S&P options. And they [knew] Bernie was supposed to be managing somewhere in the range of $7 billion to $17 billion in assets… no one knew exactly what it was, but it was a big number. And if he is hedging $7 to $17 billion dollars in assets, then he has to buy a heck of a lot of options. But, we didn’t see enough trading volume on the CBOE and the S&P100 options to be able to hedge Bernie’s entire portfolio.

So, Renaissance didn’t necessarily think there was a fraud. They just thought that Bernie wasn’t fully hedging his position. In which case, he wasn’t doing what he promised… He doing something else, perhaps taking off more risk. So, Renaissance thought that this was bad and shared that finding with another firm, and an SEC investigator happened to be at that other firm. That investigator saw the information in the compliance officer of that firm’s files, and handed it off to someone at the SEC. And the person that got it at the SEC had to hand it off to another SEC group… and this is where bureaucracy comes in. The different group did not know the qualifications of Renaissance and didn’t appreciate the fact that the Renaissance guys knew what they were talking about.

So, it languished for a long time within the bureaucracy at the SEC. And when they finally got around to investigating it, they didn’t investigate the options trading volume. They went ahead and investigated some tangential issues that really weren’t even in the tip. They were investigating Bernie’s front running, where Bernie was allegedly trying to increase his rate of return by inserting his trades in front of his customer trades. Now, this was another theory being floated in the market, but it wasn’t in this tip though. But, for some reason they decided they needed to go ahead and investigate front running.

Well, the didn’t find front running. And when they didn’t find that, they closed the whole investigation…. Even though they hadn’t looked at options trading at all. So, quite a bit of this looked like Keystone Cops. And that is ultimately what we found and what ended up getting documented in the Inspector Generals report.