Madoff and the Sorkin Affair

Growing questions are being asked by legal scholars and Wall Street veterans over the background role that Bernard Madoff’s attorney, Ira Lee Sorkin, played in 1992 that may have resulted in Madoff looting investors for an additional 16 years.  That question now takes on heightened urgency as Sorkin negotiates a plea deal for Madoff that would avoid the antiseptic sunshine of an open courtroom trial.

The 1992 episode was troubling enough but a search of court records shows Sorkin and his former law firm of 20 years, Squadron Ellenoff, were targets of more serious  charges in one of the largest Ponzi schemes of the 1990s, Towers Financial Corporation, run by Ponzi mastermind Steven Hoffenberg.

Steven Hoffenberg’s heist involved $462.5 million, which in 1994 the SEC called “one of the largest Ponzi schemes in history.”  Like Madoff, Hoffenberg paid off earlier investors with the proceeds from later ones while creating a lavish lifestyle and subterfuge that eerily parallels Madoff: an estate on Long Island, a Manhattan apartment, a corporate jet, a yacht, a tiny accounting firm, and lawyer Ira Sorkin.  Hoffenberg also displayed an amazing calm under fire: while under intense scrutiny by the SEC, Hoffenberg tried to buy the New York Post.  At the height of his fraud, Madoff served as Chairman of the NASDAQ stock market’s Board of Directors and served over a number of years on 10 committees of the brokerage industry’s primary regulator, the National Association of Security Dealers (NASD).

Hoffenberg was arrested by the U.S. Attorney for the Southern District of New York on February 17, 1994 on charges of securities fraud and obstruction of justice.  He later pleaded guilty to five counts including securities fraud, conspiring to obstruct justice, two counts of mail fraud, and one count of tax evasion.  He was eventually sentenced to 20 years in prison.

But in 1988, six years before Hoffenberg was finally arrested and hundreds of millions of dollars more would be stolen, the SEC appears to have been close to uncovering the Ponzi scheme.  But into the fray stepped Ira Sorkin and his law firm, Squadron Ellenoff, to work out a deal with the SEC.

The Administrative Trustee for Towers Financial would later file a malpractice lawsuit against Squadron Ellenoff, charging in court papers that Squadron Ellenoff, through the course of their legal representation of Towers Financial, received access to a confidential memorandum that revealed the fraudulent accounting practices but, nonetheless, the law firm falsely responded to SEC inquiries and subpoenas.  The trustee alleged that “Squadron Ellenoff’s ability to delay the inevitable discovery of the Ponzi scheme, while simultaneously neglecting to advise Towers of the manifestations thereof, served to increase the number of defrauded investors and Towers’ ultimate liability.”

A class action lawsuit was also filed naming Squadron Ellenoff by defrauded investors of Towers Financial.  The plaintiffs alleged that Squadron Ellenoff prolonged the Towers fraud in two ways: by making material misstatements and omissions to the SEC during its representation of Towers, and second, by creating the agreement whereby earlier investors had the choice of receiving back their original investment plus simple interest or holding onto their 18 per cent  notes until maturity.  According to plaintiffs, this agreement crafted by Squadron Ellenoff did not reveal the fraudulent nature of the underlying investments, despite Squadron Ellenoff’s alleged awareness of the fraud.  Plaintiffs claimed that had it revealed what it knew, more of these earlier investors would have reclaimed their funds, thereby putting an end to the Towers’ Ponzi scheme.

The Second Circuit Appellate Court relieved Squadron Ellenoff of legal liability on the basis that they had not had a direct role in the issuance of the notes purchased by the plaintiffs or communicated a misstatement to investors about the notes.  Charges against the firm of aiding and abetting and conspiracy were considered barred under the U.S. Supreme Court decision in Central Bank, N.A. v. First Interstate Bank, NA which had come down four years earlier. (114 S. Ct. 1439, 1994).

Some observers believe that this decision may have emboldened Sorkin when he represented two accountants involved in the Madoff matter in 1992 before the SEC.  The accountants were selling unregistered notes, promising returns of 13 to 20 per cent and funneling the money to Madoff.  Similar to the earlier investigation in the Towers Financial matter, this case had the potential to stop Bernard Madoff 16 years earlier and spare subsequent investors from billions of dollars in stolen assets.

The accountants, Frank Avellino and Michael Bienes, went back to the 1960s with Madoff.  They worked for Saul Alpern, Madoff’s father-in-law, who had an accounting practice.  When Bernard Madoff started his own firm on Wall Street in the early 1960s, they began raising money for him to manage.   Eventually, their firm became known as Avellino & Bienes.

In 1992, the SEC filed a suit against Avellino & Bienes charging them with selling $440 million of unregistered securities to 3200 investors. Although the SEC knew the money had gone to Madoff, their complaint referred only to an unnamed broker.  The SEC said at the time they felt they were looking at a Ponzi scheme.

Then in steps Ira Sorkin, still at Squadron Ellenoff, and in the precise move made in the Towers Financial matter, offers to return all the money.  Except the money wasn’t all returned.  Behind the scenes, clients were simply allowed to sign agreements directly with Madoff and continue receiving those steady, stellar returns of 13 to 20 per cent according to lawyers representing defrauded clients.  The SEC was somehow persuaded to drop the case in exchange for an agreement that Avellino & Bienes would shut down their firm and pay a fine.
But Avellino did not get out of the business of funneling money to Madoff, according to two lawsuits filed in Nantucket Superior Court, where three of his victims live.  He simply solicited the money under a fictitious entity called Kenn Jordan Associates, promising returns of 10 to 15 percent.

On the list released by the court of past clients who held accounts with Madoff appears the following names: Ira Sorkin, Nathan Sorkin (Ira’s deceased father), Rosalie Sorkin (Ira’s deceased mother), Howard Squadron (Ira’s deceased former law partner), Anne Squadron (wife of Howard Squadron), the Squadron law firm’s retirement plan, three of its clients. How much money was withdrawn from these accounts over the years and what annual percentage rate they earned has not been disclosed to the public.  What is known is that 90 days before Towers Financial filed bankruptcy, the sum of $662,000 was paid to the law firm of Squadron Ellenoff according to the Administrative Trustee.
Sorkin now works for Dickstein Shapiro LLP.  Squadron Ellenoff merged with Hogan & Hartson LLP in 2002.

The prosecutors in the Madoff matter have asked for a court hearing this week to review the conflicts that Ira Sorkin may have. Perhaps they might want to consider all of the above.

PAM MARTENS worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article.  She writes on public interest issues from New Hampshire.  She can be reached at

Pam Martens has been a contributing writer at CounterPunch since 2006. Martens writes regularly on finance at