Fiserv snared in Madoff web

Tucked among the hedge funds and the famous names on Bernard Madoff's client roster is an unlikely group of about 800 people — strangers to one another, yet all listed at the same anonymous Denver address. Now, they are discovering a painful common bond, shared with at least two previous groups of stung investors. For at least the third time in as many years, the company behind Denver P.O. Box 173859 has turned up as a go-between in a collapsed Ponzi scheme. The address belongs to Fiserv Inc., which served as middleman for Madoff and scores of regular Joe-and-Jill investors: dentists and doctors, insurance salesmen and builders who trusted Madoff to manage specialized individual retirement accounts. Their losses with Madoff, together with earlier cases, raise questions about Fiserv and the risks inherent in what are known as self-directed IRAs. These financial products are an increasingly popular way of letting people invest in real estate or small businesses and other less-traditional investments. Fiserv was the conduit for investors who trusted their retirement savings to Madoff, the money manager who told authorities in December he was behind a $50 billion scam. Authorities and experts now believe the actual number, while enormous, may turn out to be far less. Fiserv's role was to send investors their balance statements and dispense checks to them. In return, Fiserv charged the investors a fee. Much of the money trusted to Madoff through Fiserv reflects decades-long relationships. Some investors say they opened self-directed IRAs as far back as the 1970s with a Florida company, Retirement Accounts Inc. Over time Fiserv acquired Retirement Accounts and several of its competitors, merging them in 2004. Today the merged business manages about 135,000 IRA accounts. The company has not been implicated in any wrongdoing related to Madoff. But twice before investors have blamed Fiserv and its subsidiaries for failing to protect them. In a California class-action lawsuit settled last year, a Fiserv subsidiary paid $8.5 million to elderly victims of a long-running Ponzi scheme that made investments through self-directed IRAs administered by the Denver company. The investors lost about $100 million. A separate lawsuit against Fiserv, brought by about 40 investors in the same scam, is ongoing. More recently, investors sued Fiserv in the wake of a $300 million Ponzi scheme run by Louis J. Pearlman, the Florida impresario who created boy bands 'N Sync and the Backstreet Boys. The suits, filed in December, accused the company of turning a blind eye to fraud. Fiserv denies responsibility, saying it is merely a custodian for self-directed accounts. "We simply process transactions initiated by customers," the company said in an e-mail responding to questions. "It is not our role to advise clients about the decisions they make." But lawyers for investors in the California and Florida cases take issue with that. "That's exactly what Fiserv has said and will probably continue to say," said Kara Wolke, an attorney with the Los Angeles firm of Glancy Binkow & Goldberg, which represented investors in the case that was settled. "But basically our case was there comes a point where they know when something's bad because they're professionals in the industry." Robert Pearl, a Naples, Fla., attorney who represents investors in cases against Fiserv, said his clients were relying on the company to be the "gatekeeper" for their investments. The investors were only allowed to direct their cash through accounts open with Fiserv, he said, even though they should have been able to go to any vendor offering self-directed IRAs. "You could not use an IRA custodian other than Fiserv if you wanted to invest your money with Pearlman," Pearl said. Some Madoff investors are similarly skeptical. "It's not their responsibility to give me investment advice, but they have a responsibility to protect me from a thief," said Peter Moskowitz, a retired dentist from Corona, Calif. whose IRA — which he believed held $1.15 million — was trusted to Madoff and administered by Fiserv. Unlike traditional IRAs invested in stocks, bonds or mutual funds, self-directed IRAs allow investors to put their money into alternative investments. The only hitch is that the assets can't be used by the investor or their family at the time of the investment, since the goal of the IRA is to provide for future retirement. Self-directed IRAs made up about 3 percent of the $4 trillion IRA market as of the third quarter of last year, said Tom Anderson, who runs the Pensco Trust, another large administrator of self-directed IRAs, based in San Francisco. Investors alone decide where their money will go but must do it through a company like his that technically then "owns" the investments for tax purposes, he said. The custodial firm then handles the bookkeeping. His firm charges an annual fee of $375 to $2,500 depending on the size of the account. "If a guy buys a fishing boat and then falls off and drowns, it is not the fault of the boat," he said. "Just like that, we do everything we can to inform investors of what the rules are" of a self-directed IRA. That allows investors to diversify their holdings and seek larger gains. But self-directed IRAs are also places where financial fraud can fester. That's because investors, not the IRA custodians, must handle all the due diligence for their holdings on their own, which many are ill-equipped to do, said Colorado Securities Commissioner Fred Joseph. "Investors have a misunderstanding or false hope if they think custodians do something more than they do," he said. "They fail to see that the custodian's job to follow the directions of the investor and collect a fee." As baby boomers retire, many are moving their savings from employer accounts with limited investment options into self-directed accounts. But too many do so without checking out the advisers or the investments they peddle, said Pat Huddleston, a former Securities and Exchange Commission official who now runs Investor's Watchdog, a Marietta, Ga. firm that runs checks on brokers. That makes the accounts ripe for rip-offs, he said. Some Madoff investors said receiving quarterly statements from Fiserv gave them false security. Moskowitz, the retired dentist, said he opened his account with a Fiserv predecessor at the direction of two accountants who, it turned out, were funneling money to Madoff. In 1992, the SEC shut down the operation run by the men, Frank Avellino and Michael Bienes. But Moskowitz left his money with Madoff, administered by the same IRA trustee. When he called Madoff's office a few years ago and asked to switch trustees, he said a broker told him that the money manager would only do business with Retirement Accounts, which had been acquired by Fiserv. Fiserv sold most of its investment support services business to TD Ameritrade Holding Corp., in a deal announced in 2007. The remainder — which manages individual retirement accounts — is to be sold to a group of investors, pending federal approval, the company said. That business remains in Denver. In early February, a trustee filed a list of Madoff's clients with the U.S. Bankruptcy Court in New York stretching to more than 13,000 entries. Of those, about 800 are listed as accounts managed by NTC & Co., whose post office box and address are shared with Fiserv. But Francis Vitagliano, director of retirement education and a visiting scholar at the Center for Retirement Research at Boston College, questioned why so many Madoff investors were at one self-directed IRA company, because technically they could have taken their business to any of the firms that offer such services. Self-directed IRA firms often commission sales people to direct investors to them, Vitagliano said. That is likely how the Madoff money probably found its way to Fiserv and the companies it absorbed. Those people are paid to get that kind of business, he said. Moskowitz, the California investor, said his frustration with Fiserv is based partly on what happened when he made changes to his IRA in 1998. The company sent a letter to Madoff asking him to re-register stocks in Moskowitz's new account. But Moskowitz believes Fiserv took Madoff's word, without verifying the existence of the stocks. If Fiserv had done more "to verify the stocks were there," he said, "then they might have discovered that they weren't."