According to federal prosecutors, Enrica Cotellessa-Pitz was employed at Bernard L. Madoff Investment Securities LLC (“BLMIS”), from 1978 through December 11, 2008. In 1998, Cotellessa-Pitz became the Controller of BLMIS.

Beginning in the late 1990s until the collapse of BLMIS in 2008, Cotellessa-Pitz and other conspirators created false and misleading entries in the books and records of BLMIS and in reports filed with the SEC – purportedly as part of a scheme to disguise transfers of funds from the BLMIS Investment Advisory (“IA”) business to BLMIS’s Market  Making and Proprietary Trading  (“MMPT”) operations. As a result of the transfers, MMPT appeared more profitable than would otherwise have been the case. Further, Cotellessa-Pitz and her co-conspirators created false and fraudulent documents that were

• given to the SEC in connection with its audit of BLMIS; and
• provided during tax audits of Bernard L. Madoff.

On December 19, 2011, Cotellessa-Pitz, 53, pled guilty in Manhattan federal court to a four count Superseding Information charging her with:

• COUNT ONE: Conspiracy to (1) Falsify Books and Records of a Broker-Dealer; (2) Falsify Books and Records of an Investment Adviser; (3) Make False Filings with the SEC; and (4) Obstruct and Impede the Lawful Governmental Function of the IRS.

Maximum Penalties: 5 years in prison; 3 years of supervised release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution; and criminal forfeiture.

• COUNT TWO: Falsifying Books and Records of a Broker-Dealer

Maximum Penalties: 20 years in prison; 3 years of supervised release; fine of the greatest of $5,000,000 or twice the gross gain or loss; mandatory $100 special assessment; restitution; and criminal forfeiture.

• COUNT THREE: Falsifying Books and Records of an Investment Adviser

Maximum Penalties: 5 years in prison; 3 years of supervised release; fine of the greatest of $250,000 or twice the gross gain or loss; mandatory $100 special assessment; and restitution.

• COUNT FOUR: Making False Filings with the SEC

Maximum Penalties: 20 years in prison; 3 years of supervised release; fine of the greatest of $5,000,000 or twice the gross gain or loss; mandatory $100 special assessment; and restitution.

Cotellessa-Pitz was released on a $2.5 million bond on the condition that the bond be co-signed by eight financially responsible individuals and secured by $800,000 in cash and property. In addition, she has surrendered her passport and her travel  is restricted to the Southern and Eastern Districts of New York. As part of her guilty plea, Cotellessa-Pitz agreed to cooperate with the Government in its ongoing investigation of the fraud that occurred at BLMIS.

Cotelessa-Pitz  faces a statutory maximum sentence of 50 years in prison. She is also subject to mandatory restitution and criminal forfeiture and faces criminal fines up to twice the gross gain or loss derived from the offense.  Accordingly, Cotellessa-Pitz has agreed to forfeiture of more than $97 billion.  Her  sentencing is scheduled for  June 2012.

Bill Singer’s Comment

Slowly but surely the layers are being pulled back and the nature and extent of the Madoff scam is — and will be — revealed.  We are already getting a far better sense of the parameters of this historic Ponzi.  For starters, we see that it had its roots in the late ’90s. A disturbing realization because it means that Wall Street’s regulators had at least a decade of red flags, warnings, inconsistencies, and whispered rumors, which went unnoticed or, worse, disregarded.

I note that the prosecutors are asserting that Cotellessa-Pitz and her co-conspirators fabricated books and records that were apparently submitted to the SEC.  At the heart of this conspiracy was the goal of beefing up MMPT through the hidden infusion of funds from the IA.  Oh, so the much-vaunted Madoff market making and prop trading wasn’t all that it was cracked up to be.

The unsettling aspect of this record-keeping legerdemain is that none of Wall Street’s cops seemed to have had an inkling that the cards were marked or extra aces stuffed in a sleeve.  Ya gotta wonder, though — isn’t the underpinning of forensic accounting that  you don’t merely accept the representations on books and records?  Aren’t you supposed to seek supporting documentation and source statements?  What the hell happened at the SEC and FINRA and other regulators overseeing Madoff for a decade — was this simply a case of rubber stamping without verification?

Shining more light on this line of inquiry, note that two of the four counts assert that the conspiracy specifically involved falsification of the broker-dealer’s books and records (and a conspiracy to achieve the same).  There’s no longer any way for the securities industry regulators to dodge that bullet or pretend that the Madoff fraud wasn’t about the broker-dealer but only about the investment adviser.

Alas, Madoff for a decade, MF Global for a few years — SEC, FINRA, CFTC, NFA . . . you can slice and dice the acronymed regulators as you see fit.  The system didn’t work.  The question going forward is can it get the job done as presently structured.

As if there should be any doubt for regular readers of Street Sweeper, I don’t think Wall Street’s regulatory system is up to the job and needs a drastic and dramatic overhaul.

We have three levels of securities regulators in the United States: federal (such as the SEC and CFTC); state securities divisions, and self-regulatory organizations (such as FINRA and NFA).  At best, a federal prosecutor should be a back-stop, not the first line of defense.  As things presently stand, only US Attorney Preet Bharara is getting the job done when it comes to regulating Wall Street.  That’s not acceptable. But for Bharara’s recent investigations and prosecutions of Wall Street fraud, there just isn’t much indication that the three-levels of federal, state, and self regulators are getting between the public and the bad guys.

SEC Enforcement Chief Khuzami may complain, as he has, about the unfairness of Judge Rakoff’s rejection of the SEC’s dubious settlement with Citigroup Global Markets, Inc. (See, SEC Files Historic Appeal of Judge Rakoff’s Citigroup Settlement Rejection (“Street Sweeper”, December 16, 2011).  How odd that in times that call for bark and bite, the SEC opts to divert its precious resources towards filing a federal appeal against a judge who demanded a fairer and more meaningful settlement with one of Wall Street’s Big Boys.  Such petulance and wound-licking does nothing to protect the public.  Moreover, it must delight the likes of Goldman Sachs, Bank of America, UBS, and other financial services firms who have recently come under fire. A sitting federal judge and the head of the SEC’s Enforcement are having a very public pissing contest. Wonderful.

Ultimately, Bharara has repeatedly demonstrated a willingness to bang heads, to go to trial, and to eschew the soft settlement.  Sadly, we have two conflicting messages.  The US Attorney for the Southern District of New York fired an opening salvo against Wall Street and kept up his barrage.  The SEC seems content to bluster and whine.