Madoff Faces Life In Prison

The federal sentencing guidelines in this article appear to be correct. I didn't bother doing the calculation, since 10 years for a 70 year old is effectively a life sentence.

If convicted, Bernard Madoff faces life in prison

UPDATE - before someone else comments to tell me that 80 is not a life sentence, please note that I specifically said I did not do the calculation. My point was, that the sentence will be so long that it will be a life sentence. I understand that people live to be 80.

The sentencing guidelines are complicated, and the sentence is determined by adding up points based on a variety of factors. Number of victims, dollar amount of the losses, etc. A quick review of the guidelines, which are complicated, total offense level is off the chart. Yes, the sentencing guidelines chart only goes to 43 points, which is a life sentence, literally, for most crimes. It is difficult to get that high. Very difficult. By my calculations, on only ONE count of an indictment, the point total would be above 50.

There are deductions, and other adjustments, but someone convicted of a fraud of this magnitude gets a sentence that is more than 30 years. As I said, a life sentence.

SIPC Disappointment Down the Road for Madoff Investors

There is such a fundamental misunderstanding of SIPC in the investor community that it is sometimes frightening. SIPC is not a Congressional bailout for investors who lost money. It is not insurance. Its sole function is to protect investors if a brokerage firm goes out of business due to bankruptcy or other financial difficulties and customer assets are missing.

SIPC's role is to return the customer's cash and securities to them from the failed firm. That's all it is. SIPC will get you back your cash (up to $100,000) and will replace your missing securities (up to $500,000).

SIPC is NOT an insurance company, and it does NOT cover an investor's losses that were caused by fraud on the part of the broker dealer.

And that leaves Madoff's investors in the lurch. There will be some interesting twists in this case, but on its face, this is a fraud, not a failed brokerage firm. While SIPC will make sure that the assets that were in the accounts are returned to the investors, the problem is obvious - the firm's statements are undoubtedly fraudulent, and there were no assets in those accounts. It remains to be seen what SIPC will do in that situation.

And, it will be amazing, despite recent press reports, if Judge Stanton opens the SIPC case to investors in the feeder funds. The simple fact is that Judge Stanton cannot do that. It would take, literally, an Act of Congress to expand SIPC in that manner, and for Madoff investors in feeder funds, that is not going to happen.

However, investors in feeder funds do have another alternative - they can sue the feeder funds. Those funds are not bankrupt, and they should have insurance to cover negligence. At the same time, some of those investment agreements attempt to exclude negligence, so feeder fund investors have to be careful, and each claim has to be examined carefully.

There are a lot of law firms out there looking to represent Madoff direct and indirect investors. Ask questions, ask for their background, ask for their experience in securities fraud cases, in ponzi scheme cases, in dealing with brokerage firm issues, and SIPC cases.

Then call us.

Madoff's Cash Stash

Keep the source of this tidbit in mind, but one newspaper is reporting that investigators believe that Madoff has put millions of dollars offshore, and according to this article, there are accounts at Mellon Bank that appear to have sent and received money from offshore locations.

The source is the New York Post, in its story Madoff's Cash Stash.

Fund Blames US Regulators for Losses

You gotta love the Madoff Middlemen. Now they are blaming the regulators for their own failures, even from overseas. A British investment fund, which apparently lost something like 30 million dollars, is screaming about the "systemic failures" in the US regulatory system.

The SEC and FINRA certainly blew this. (Why does no one talk about FINRA's culpability here? They are the primary regulator for Madoff's broker-dealer, not the SEC). However, the SEC was not created to protect 300 million dollar hedge funds, and is certainly not in the business of protecting hedge funds that are located in foreign countries.

Those investment institutions are considered to be experienced enought, and financially educated enough to protect themselves, to conduct their own due diligence and to make their own investment decisions. The US securities statutes recognize the ability of investment professionals to make their own decisions, as do the investors who give these managers their money to invest.

The SEC blew this, but that does not excuse, or even address, the failure of these well paid "investment managers" to recognize a Ponzi Scheme when it was staring them in the face. And, it is comments like this, and the fact that other professionals did spot the fraud, that leads to the question

"What the heck did you do for your 2% plus 20%?"

If the fraud was so easy to spot that the SEC should have stopped it, let's take a look at the fund's due diligence file when it investigated, recommended, and maintained its investment in Madoff.

That is where the blame lies.

Investment fund slams US regulators

Madoff Insane?

The Madoff Mess has moved to the gossip columns. The NY Daily News has a gossip column that "reports" that Madoff may try a sanity defense, some sort of mental break that caused him to do what he did.

Keep the source in mind, but that defense is not very likely to work. Insanity defenses in financial fraud cases are rare. In fact, I can't even think of one. Any thoughts?

The Start of the Mortgage Meltdown

With landscapers claiming $150,000 a year incomes, WaMu built a home mortgage business that eventually collapsed in a sea of bad mortgages. The NYT has a story today that provides an intense insight into the home mortgage business, and the collapse of Washington Mutual.

By Saying Yes, WaMu Built Emplire on Shaky Loans

No Damages in Suit vs. SEC

I didn't want to be the first to say it, but now that Professor Chemerinksy of UC Irvine School of Law has said it out loud, there is no stopping me - it seems that no one sees a viable suit for money damages against the SEC for the Madoff Mess. There just isn't a statute or rule of law that would support such a suit.

Not to mention sovereign immunity. Remember, you can't sue the King.

I wish Howard all the luck in the world with this one. If he makes it through discovery we will all be saying how innovative he was in bringing the suit, but for now, not so much.

Nice catch by Securities Docket.

Madoff Middlemen Under Investigation

WSJ: Investigators probing the Bernard Madoff investment scandal are
beginning to turn their attentions to the middlemen who attracted
billions of investment dollars to Mr. Madoff's funds, said a person
familiar with the government effort.

Yup, no shocker there. I blogged about this here and here

Securities Fraud Prosecutions Lowest since 1991

More troubles for Cox? Since he is gone in a couple of weeks, it probably doesn't matter, but there is a lesson here. Criminal prosecutions for securities fraud are down significantly. 133 prosecutions this year, vs. 437 in 2000, and 513 in 2002.

There are any number of factors that can cause this decline - I suppose it could be due to less actual securities fraud, but I doubt that is the case. More likely is the explanation that since the Justice Department gets is securities fraud cases from the SEC, the new policies at the SEC, which are said to cause a decline in civil enforcement actions, have also led to a decline in criminal prosecutions.

We need to know more about the decline. While the press is using this as a negative, it might actually be a positive. Has the government rooted out the bad cases, and now only bringing the ones that should be brought?

Let's hope that Mary Shapiro doesn't use this statistic to force the Staff to bring more cases, just to get the numbers up.


Securities Docket has more.

Securities Fraud Prosecutions Lowest since 1991

More troubles for Cox? Since he is gone in a couple of weeks, it probably doesn't matter, but there is a lesson here. Criminal prosecutions for securities fraud are down significantly. 133 prosecutions this year, ves. 437 in 2000, and 513 in 2002.

There are any number of factors that can cause this decline - I suppose it could be due to less actual securities fraud, but I doubt that is the case. More likely is the explanation that since the Justice Department gets is securities fraud cases from the SEC, the new policies at the SEC, which are said to cause a decline in civil enforcement actions, have also led to a decline in criminal prosecutions.

We need to know more about the decline. While the press is using this as a negative, it might actually be a positive. Has the government rooted out the bad cases, and now only bringing the ones that should be brought?

Let's hope that Mary Shapiro doesn't use this statistic to force the Staff to bring more cases, just to get the numbers up.


Securities Docket has more.

Inside Madoff

I have been involved in the aftermath of a couple of Ponzi schemes over the years, and it seems to me that none of them actually start as a fraud. They start as an investment that goes bad, and the man at the center simply can't bring himself to admit to his investors that he is losing money. With a foundational belief that he can turn it around, he takes the money from new investors, and continues paying old investors. He doesn't turn it around, and disaster follows.

CNN.com has an interesting background piece on Bernard Madoff. One telling quote - "His weakness was he was incredibly egocentric. He had to feed that ego."

That might sum up the entire Madoff Mess in one sentence.

http://money.cnn.com/2008/12/26/news/companies/understanding_Madoff/index.htm

Madoff Investor Sues SEC

Here we go, a first in what will undoubtedly be numerous attempts - a Madoff investor has sued the SEC for negligence, which she claims cause her to lose $2 million dollars with Madoff.

Investor Who Lost Money in Alleged Scheme Seeks Relief From SEC - WSJ.com

A New York woman who lost nearly $2 million investing with Bernard Madoff has filed a claim against the Securities and Exchange Commission alleging the agency was negligent in failing to detect an alleged decades-long fraud.

John E. Sprizzo, US District Court Judge

John Sprizzo, a United States District Court Judge in the Southern District of New York, has passed away. I had the privilege of appearing before Judge Sprizzo on numerous occasions. As noted in this NYT article, he was certainly intelligent and had a sense of humor that you don't often see in judges. Oral argument in his courtroom was always an adventure because of those qualities, and he will be missed.

WSJ Does Madoff Background

The WSJ does some background on Madoff. Sorta interesting, if you are the type who reads biographies of serial killers.

Madoff Created Air of Mystery

Report: SEC In a State of Panic over Madoff

Cox's statement that the SEC failed to follow credible, specific leads in the Madoff Mess has put the SEC staff in a panic. According to this article, they have started to review past investigations to see what else they might have missed, and have been instructed not to destroy documents or emails because of the ongoing investigation into what they did, or rather, didn't do.

http://www.securitiesdocket.com/2008/12/21/report-sec-in-state-of-complete-panic-over-madoff-mistakes/

Madoff Middlemen Are Circling the Wagons

Not that it took any legal genius to figure out, but I mentioned a few days ago that the Madoff Middlemen - the advisers and hedge funds who put their clients' money with Madoff - are going to be the viable defendants in the Madoff Mess. Apparently the Madoff Middlemen agree.

These advisers and funds are all out hiring attorneys, and BigLaw is responding by creating "Madoff Advisory Groups" as if that means something special (more on that later).

Legal pundits don't believe that the BigLaw firms can economically handle the cases, (see the quotes by Professor Coffee and Professor Weisberg at Law.com) and acknowledge that it will be the small boutique firms that ultimately run with this litigation, but that is not stopping the Middlemen from hiring the firms.

Madoff - 30 Years and 4,000 Investors?

Is it possible that Madoff has been running a scam since the 70's with over 4,000 investors?

It is truly amazing how much of a life these stories take on as they unfold. I may wind up eating these words, but does anyone really believe that Madoff has been defrauding people for 30 plus years?


However, Bloomberg says:

U.S. regulators, trying to unravel the breadth of Bernard Madoff’s alleged $50 billion fraud, have found evidence of misconduct stretching back to at least the 1970s, two people familiar with the inquiry said.

Bloomberg.com: Worldwide

More on the Attorney Who Married the Niece

The NYT has information and interviews relating to the SEC attorney who married Madoff's niece. Straightshooter, hardworking, and no evidence that he did anything wrong.

Another victim of Madoff

Madoff Investor List

The WSJ has a list of Madoff Investors and the amounts that they lost. There is quite a bit of double counting in there, but the list is extensive.

Madoff's Victim List - The Wall Street Journal

The Madoff-Fairfield Connection

The Wall Street Journal has a lengthy story about an SEC examination of Madoff in 2006, as well as a detailed version of the Harry Markopolos story - Markopolos is the analyst at a rival firm who figured out that Madoff's returns were not real, and tried to get the SEC to believe him for years.

Interested parties should read the article, it repeats, with detail, the examination of Madoff's trading strageties that demonstrated that the story was impossible and provides other detail that we have not seen yet.

And there is another interesting aspect to the story. According to the article, the examination in 2006 did not only involve Madoff's firm, it involved Fairfield Greenwich. Fairfield Greenwich is the 17 billion dollar hedge fund that placed money with Madoff on behalf of its clients. Estimates are that Fairfield Greenwich lost 9 billion dollars with Madoff.

We just posted a article about Fairfield Greenwich suing its accountants for not discovering the Madoff fraud. Now we learn that in 2006, the SEC requested documents not only from Madoff, but from Fairfield Greenwich, in connection with its examination of Madoff. The article also states that the SEC interviewed Madoff, his assistant, an official from Fairfield Greenwich and another employee.

One problem was apparently that Fairfield Greenwich did not disclose to investors that their money was being managed by Madoff, and that Madoff was not registered as an investment adviser. The story is a bit cryptic, but says that the examination ended when Madoff registered as an investment adviser, and Fairfield agreed to disclose information about Madoff to its investors. That of course, it what the law requires them to do, but it was enough to close the investigation.

I am not so sure that would have been the result if a small broker-dealer violated the registration requirements of the Investment Advisor Act, or if a small investment adviser violated the disclosure provisions of that Act, but that is another issue - the disparate treatment of financial firms based on their size and muscle.

The interesting part of the story is that Fairfield Greenwich, which is being portrayed as a victim in the Madoff Mess, appears to be a little closer to the core than previously reported. The move by Fairfield Greenwich to sue its accountants may very well be an strategy designed to provide cover for the investor claims that may be coming down the road.

http://online.wsj.com/article/SB122956182184616625.html

The SEC Attorney and The Niece

More details are coming out about the potential conflict between the SEC staff attorney who oversaw at least one "inquiry" at Madoff's firm, and Madoff.

By now everyone knows that the attorney married Madoff's niece, who was the compliance officer at the firm. The original story said that he left the Commission in 2006, they started dating in 2006 and got married in 2007. The original stories also said that he supervised an inquiry at the firm, at some unspecified time.

Now the AP is reporting that he was part of a team that examined (not just "supervised an inquiry") Madoff's brokerage firm operation in 1999 and 2004. As we know, neither resulted in any action against Madoff. The attorney's spokesman said he met the niece at a breakfast in October 2003, started dating in April 2006 and were married last year.

I was hoping that the end result of this story was that the attorey didn't know the niece until after he left the Commission, but that is apparently not so. However, there is nothing that says that he was dating her when he examined the firm. Meeting someone, or knowing someone, does not cause an automatic conflict.

But this case has more than its share of side stories. And I would imagine that the Mukasey recusal is the first of a number of conflicts that we are going to see as the cases move forward.

US Attorney General Removes Himself From Madoff Investigation

This case is a mess. With everything else that is going on around the Madoff Mess, there is now an AP report that the US Attorney General Michael Mukasey has removed himself from any investigation of Madoff. Fortunately, the reason is that his sone is representing a financial officer at Madoff's firm.

I like and respect Judge Muckasey, and it is no surprise that he made the right call, unlike other government officials who might not have been so quick to do so.

http://news.yahoo.com/s/ap/20081217/ap_on_bi_ge/madoff_scandal

The Best Defense..........Madoff Strategies

Fairfield Greenwich, a 17 billion dollar hedge fund which invested its money with Madoff is considering suing its accounting firm...for failing to detect the fraud, according to Financial Times

That's interesting. Aren't investors lining up to sue Fairfield Greenwich for failing to detect the fraud?

The Madoff Middlemen - Liability for Fees on Phantom Profits?

In earlier posts I referenced the potential liability of investment advisers who put their client's money into Madoff's investments, and the potential liability of investors themselves, who made a profit in Madoff's investments.

The second series of lawsuits is going to be a longer time in coming, since SIPC will first have to sort out the books and records of the firm, figure out who got money, who lost money, and a host of other facts and figures.

But the first series of lawsuits are cranking up, and being fueled by the press. The NYT has an article this morning that points out the huge sums of money the "Madoff Middlemen" made in simply investing their client's money with Madoff as part of the middleman's investment advice.

First, keep in mind that most investment advisers charge a percentage of assets under management as a fee. Something like 1% a year. Many advisers also charge a fee based on the profits in the assets. That fee varies from manager to manager, but lets call it 20%.

Now take a look at the NYT article, In Fraud Case, Middlemen in Spotlight.

The NYT sets up the article by describing the wealthy lifestyle of certain investment advisers. Its unfair because that lifestyle is presumably well earned. But then it goes into how much money investment advsiers made, for "simply" recommending another investment adviser.

Life is not so simple, and if it was that simple, we would all be doing it. Managing millions or billions of dollars is not easy, and is not something that most of us could do. Which is why some investment advisers get paid as much as they do. It is also why some investment advisers use other investment advisers to manage some of the funds - it is just impossible to manage 14 billion dollars by yourself.

While the article is not fair, it is instigating another series of lawsuits - against the Madoff Middlemen for a return of their fees.

Some investment advisers put some of their managed assets with other advisers. This is something of an oversimillification, and there are other compensation methods, but watch the money flow. The submanager, the one who got a portion of the assets, charges his 1% plus 20% of profits, on the portion of the assets he is managing for the original adviser. AND, the original adviser, the "Middleman" charges his 1% on what is left, and 20% of those profits, if any.

Again, there are other arrangements, and I am using this one to make a point, it is not an actual example. It sounds like double dipping but it is not, and it is perfectly legitimate. Of course, that arrangement only goes on a long as the fees of the submanager justify the cost, and the returns are there.

Why does the first manager get his 1% and 20%? Because he is investing the assets, conducting due diligence, monitoring the investments, etc. and therein lies the rub.

Due diligence? One will have to see how that due diligence worked, because there may be some problems there, but this whole thing gets a lot more complicated for the Middlemen. Now that Madoff's investment operation is a fraud, and one that perhaps goes back 10 years, the Middlement have a problem.

Not only do they have an issue with their investment advice and potential lawsuits, what about the 1% and 20% that they collected on the phantom profits reported by Madoff? The Middlemen are going to be totally innocent of any wrong doing in this aspect, as they have a right to report the value of investments held by other registered advisors, but they collected a fee based on profits that did not exist.

And we are not talking about chump change here. We are talking 1% a year of something like 20 BILLION dollars, or maybe 10 billion, or 50 billion, And then the 20% on profits. That is tens of millions of dollars a year in fees based on phony profits.

Are those middlemen obligated to pay those fees back to their clients?

A Telling Look At Who Didn't Invest in Madoff

This fraud is going to be as much about the lack of due diligence as it is about Madoff's fraud, his compliance officer marrying an SEC attorney who investigated the firm, and his $65 haircuts.

It is going to be about the apparent lack of due diligence by the individuals who invested in Madoff, and those who recommended the investment.

As the story develops it appears that we are going to find completely inadequate due diligence, flagrantly fraudulent account statements, and a lack of follow up by investors and their other advisers.

I have been convinced of that since the start of this story, and my conviction is gaining strength every day. Securities Docket pointed out this story from Fortune Magazine - "Who isn't a Madoff victim? The list is telling"

The author makes my point. Sure, some investors made direct investments with Madoff, and they got scammed. But a significant number of investors made an investment at the recommendation of their own adviser. Fortune's point is that anyone who did their homework should have known something was wrong.

And to make the point; look who is missing from the list of investors. The managers for large institutions did not invest with Madoff. I mentioned the blacklisting by Societe Generale in an earlier post, an event which occurred because of due diligence performed by the bank. And other hedge fund managers who did not invest because their due diligence revealed that the returns were not possible.

The Fortune article points out that Universities and large institutions did not invest. In the list of investors, "[t]here's no Harvard management, there's no Yale, there's no Penn, there's no Weyerhauser, no State of Texas or Virginia Retirement system."

Why not? A $50 billion dollar fraud by a major Wall Street figure should have snared a University or two. Why did they avoid the fraud?

Simple. Due Diligence. Madoff's funky account statements, improbable returns and is "black box" of investing would have not survived an institutional quality due diligence review. Quoting from the article "when you get to page two of your 30-page due diligence questionnaire, you've already tripped eight alarms and said 'I'm out of here.'"

The manager quoted in the article claims to have seen those signs in 1997. (Societe Generale claims they saw it in 2003, this claim goes back 11 years!) According to the article and the manager

"I found him stylistically like a lot of traders: fast-talking, distractable, not remarkable," Hedges says of Madoff. But during their two-hour meeting, Hedges says, "there was one red flag after another."

For starters, he couldn't grasp Madoff's investing strategy. "I kept saying, 'you've got to explain it to me like I'm in first grade,' " he says. To no avail.

Then there was the fact that Madoff was charging no fees other than trading commissions: "The notion that something is fee-less -- which is what they largely proferred -- is too good to be true."

The fact that Madoff's operation was audited by a microscopic accounting firm also worried him. "He was also so secretive about his asset base -- that was another red flag."

In the end, Hedges was uncomfortable and Bessemer decided not to let Madoff manage any of its money.

It remains to be seen if this is just one extremely astute investment manager, or perhaps a very lucky manager.

Or maybe he was just a diligent manager. My firm is in the process of investigating exactly what information was available to investors and managers in connection with their recommendation of Madoff as a place to invest.

The results will be that this was either an extremely sophisticated investment scam that fooled most professionals, or a series of due diligence failures.

SEC Probes Its Conflicts with Madoff

I cannot believe this is going on. I really thought I have seen everything in my 27 years of securities regulatory, compliance and litigation. I have seen frauds; outrageous frauds. I have seen extreme churning, outright unsuitability, flagrant market manipulation, and even a conflict of interest or two.

But never have I seen a fraud this massive, with so many side stories.

And just when you thought it was over, the SEC drops a bombshell - Cox admits that the SEC staff was aware of numerous red flags but did nothing, and in the next moments we learn that Madoff's niece, WHO WAS MADOFF'S COMPLIANCE OFFICER, is married to an attorney who worked at the SEC for 10 years, including positions as a senior inspection and examination official.

You get one guess what a senior inspection and examination official does.

But wait...there is more. According to the WSJ, a spokesman for the attorney admits that a compliance team under his supervision made an inquiry at Madoff's firm.

Did you get that? The SEC senior attorney, who married Madoff's neice and former compliance officer, supervised an team who made inquiries at Madoff's firm. And we know that the SEC never did anything about Madoff as a result of any investigation or inquiry.

OK, I get it. We are going to learn that he didn't know her at the time of the inquiry, he started dating her in 2006 when he was leaving the commission, they married after he was gone, etc. I get it. It is all innocent and a massive coincidence.

I get it. But you gotta admit, this is one tangled story. I still haven't figured out if Madoff's securities firm was separate from his investment advisory firm, or where the accounts were housed, or who sent out confirmations and account statements. I know the SEC staff had credible accusations that they did nothing about (and I know this because Cox told me so), no I have to figure out if the Staff had a conflict of interest?

This is going to be one heck of an investigation.


SEC to Probe Its Ties to Madoffs - WSJ.com

SEC Cox's Startling Admission

In a statement SEC Chairman Cox has admitted that "credible and specific allegations regarding Mr. Madoff’s financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of SEC staff, but were never recommended to the Commission for action."

So, he has launched an internal investigation, blah, blah blah. His press release is at the SEC website.

Amazing. While the Staff is busy investigating small broker dealers for bookkeeping errors, is Chairman Cox really telling us that his staff ignored "credible and specific allegations" that ultimately led to the largest securities fraud in this nation's history?

Of course, ignoring those allegations had nothing to do with the fact that Madoff was the former president of NASDAQ, and the chairman of various boards. We all know it is only the small firms who cause the problems, right?

Can you say Madoff? Can you say Dreier?

I thought you could.

Madoff's Funky Account Statements

Doctored account statements have to ultimately be at the center of the Madoff fraud, there is simply no other way that one could have run this scam for so long. You have to report holdings and trades to customers at some point in time, and if you are a broker-dealer, you have to do it monthly.

I mentioned in an earlier post that this fraud must have involved the brokerage firm, and not just Madoff's investment advisory business. That became clearer when SIPC stepped in to start liquidating the broker-dealer.

Now the NY Post has an article which claims it has found glaring errors on the brokerage firm's account statements. According to the article:

For example, one statement that's part of a Nov. 30 performance
report suggests that Madoff's outfit purchased shares of Apple at
$100.78 on Nov. 12.

However, even when accounting for a usual three-day settlement
period, the stock never traded at $100 a share. Its trading range on
the day that the shares were supposedly bought was between $90.01 and
$92.43, sources noted.

Such inaccuracies appear throughout the performance statement. In
another case, the Madoff statement reflects the purchase of Citigroup
shares at $12.51 on Nov. 12, even though the stock that day traded in a
range between $9.52 and $10.63.

"Everything's a couple bucks off," said Jonathon Trugman, founding
partner of New York hedge fund Pendulum Capital Management, who
reviewed the documents but did not invest with Madoff.

"To find something as glaring as the price of Apple stock, what more do you need?" said Trugman.

Indeed, what more do you need? Was anyone looking at these statements. I have been involved in cases where unsophisticated investors check the prices on their account statements. No one was checking Madoff's?

Problems at Madoff Obvious?

Another interesting side story to the Madoff Madness - putting aside the reports to the SEC, it appears that other investment experts realized that something was wrong, and refused to put their client's money with Madoff.

I spoke to a very successful hedge fund manager last week, who told me that he was asked to look into Madoff as a potential investment for a client of a client. He said after a review of the information he was provided, he told the client's client that he would not make the investment, because the returns were too great, and too consistent over an extended period of time. In his words, it was unbelievable, and impossible. And this from an investment manager who has been very profitable, for over a decade.

As press reports come out, there are more and more stories like this Other investment professionals, looking at Madoff statements, or returns, or whatever they reviewed, came away with the view that it was impossible, and something was wrong. The WSJ has a detailed analysis of one customer's account statements for an account that was being managed by Madoff and his "black box." With some digging, they learned that it was impossible for Madoff to do what he did in that account with 17 billion dollars - there simply was not enough options and securities in existence to invest that sum of money in that manner.

Today we learn that Societe General considering placing funds with Madoff, in 2003. The International Herald Tribune is reporting that after conducting due diligence on Madoff's investments,

Madoff's numbers simply did not add up. Société Générale immediately put Bernard L. Madoff Investment Securities on its internal blacklist, forbidding its investment bank from doing business with him, and also strongly discouraging wealthy clients at its private bank from his investments.

The red flags at Madoff's firm were so obvious, said one banker with direct knowledge of the case, that
Société Générale "didn't hesitate. It was very strange.

According to the article, the due diligence team was told that the strategy consisted of balancing holdings in large S&P funds with puts and calls, producing low volatility and minimized risk. However, according to the article, and other reports, when the due diligence team tried to backtest the strategy, they could not match the results
that Madoff was claiming.

Unfortunately, the bank kept its findings to itself, and it had no obligation to tell anyone else as far as I can tell. But the story is important, because this is a major bank who has blacklisted the firm 5 years ago.

Is this a case of perfect hindsight? If not, how was Madoff able to fool so many other advisers?




http://www.iht.com/articles/2008/12/17/business/17exposure.php

NY Gov Proposes 88 New Taxes

wcbstv.com - Paterson Proposes 88 New Taxes On Fees In 2009 Budget Proposal: "Paterson's New 88-Tax Plan Stuns New Yorkers"

Madoff Investors Facing Possible Lawsuits - Reuters

Reuters is reporting what we wrote about earlier - Madoff investors will soon become defendants.

"Disgraced money manager Bernard Madoff's suspected $50 billion fraud scheme looks set to burn even those who pulled their investments out long before the scandal rippled into the global financial system." http://www.reuters.com/article/ousiv/idUSTRE4BG0DT20081217

I wasn't clairvoyant. I have been down this road before. Back in the 80's we represented individuals who were accused of profiting from the demise of a brokerage firm, and we recently represented investors in the then-largest securities fraud in NJ. Similar facts, a well know money manager finds himself in a Ponzi scheme, and turns himself in, leaving his investors in the lurch, and those who got in early as well as those who got out early, as defendants in lawsuits by the money manager's receiver, to obtain repayment of their gains.

Our firm has already been contacted by investors who lost money through investments made indirectly with Madoff, and is investigating those claims. We expect that we will soon hear from investors who liquidated their accounts at a profit before the scandal broke.

Truly a massive and complicated fraud, with innocent investors, third party managers and others being drawn into the litigation.

Here they come...Madoff Third Party Lawsuits

The lawsuits against third parties involved with Madoff have started. Even my law school has filed suit:

New York Law School sued Ascot Partners LP, an investment firm, general partner J. Ezra Merkin and auditor BDO Seidman LLP on Tuesday over investments with Madoff.
Madoff tries to stay out of jail as probe widens | Reuters

SIPC to Liquidate Madoff Broker-Dealer. Why?

We are not getting the whole story. If the Ponzi scheme involved 25 investment adviser clients, why is SIPC liquidating the broker-dealer? Why is the broker-dealer out of business if the scheme involved on the investment adviser clients?

One answer is that this scam involved the brokerage firm, which means to me that Madoff could not possibly have pulled this off by himself.

Brokerage firm customers receive confirmation slips and monthly account statements. If accurate statements were sent out, surely someone would notice that there was a billion dollars missing from their account. That leads to the conclusion, that at a minimum, statements were not going out, or someone was doctoring them before they went out.

There is also the issue of commingling of funds, I suppose. There is an allegation that Madoff's "ill gotten gains" are in the brokerage firm. That would support the appointment of a receiver, but not the liquidation of the firm.


S.I.P.C. Moves to Liquidate Madoffs Firm - Mergers, Acquisitions, Venture Capital, Hedge Funds -- DealBook - New York Times

The Securities Investor Protection Corporation announced Monday that it would be liquidating the investment firm run by Bernard L. Madoff, the trader accused of running a $50 billion Ponzi scheme, in an effort to return cash and securities to the firm’s clients.

Failure to Support Lehman a Major Blunder?

We all know that the government refused to support Lehman, and let it go into bankruptcy. While many folks believe that the bailouts are entirely wrong, given the scope of the bailout, and the impact of the Lehman bankruptcy, there is no dispute that given the course of action chosen by the Government, the Fed and Treasury, the failure to assist Lehman was a huge blunder.

And apparently Paulson, Benake, et al know it, because they have offered conflicting reasons for not assisting Lehman. First it was that Lehman did not have the assets to support a bailout, then it was that there was some unidentified legal prohibition.

The NY Times is now reporting that right after stating that it would not use taxpayer money to support Lehman, the Fed turned aroudn and lent tens of billions of dollars to support a Lehman subsidary, using the same assets to secure the funds, that the Fed only days earlier said were inadequate to support Lehman.

Something is fishy here. And Lehman investors, customers, brokers and employees are paying the price.

http://www.nytimes.com/2008/12/16/business/16sorkin.html?_r=1&ref=business

Next Up - Investors As Defendants

Here is a prediction........watch for the receivers appointed to oversee and manage Madoff's firm to start talking about filing lawsuits against his investors.

No, I have not lost my mind. If this is in fact a Ponzi scheme, there is a cause of action available to the receiver, where he can sue investors who had a profit in their accounts. The theory is called fraudulent conveyance, and it has absolutely nothing to do with a fraud, knowledge or even participation by the investor. If the investor was an investor in the Ponzi scheme, and got back more than he put in, he can be sued.

That is an oversimplification of course, but that is exactly what happened when a receiver took over a New Jersey private equity fund - the receiver sued every investor who had a profit.

There are a number of defenses available to the investor, but talk about adding insult to injury.

Watch for it. If the press reports are correct, this will be the next step.

Investors To Sue Madoff's Introducing Advisers?

I blogged about the issue this morning. According to press reports, there were a number of investment advisers who were managing client's money, who in turn invested that money with Madoff.

Those advisers get paid based on the assets in the account, including the assets given to Madoff to invest. Now, investors are questioning those advisers as to how, and why, their funds wound up in a Ponzi scheme.

Add to the mix the other investment advisers and hedge fund managers who are now claiming that they reviewed Madoff's investments or investment strategy and did not believe that anyone could generate the returns that he did.

Investors are going to start asking their advisers, if this adviser understood that the investment was a fraud, why didn't you?

This Is Not "Hedge Fund Fraud"

Can we please get off the hedge fund bandwagon when talking about Madoff. There is absolutely nothing in the indictment or the SEC complaint, or any of the main stream press or Madoff's filings (as reflected in the press) that would lead one to the conclusion that Madoff's investors money was in a hedge fund.

In fact, there reports are the opposite; that Madoff's clients had their own individual accounts at his brokerage firm. According to the WSJ reporter who reviewed Madoff's Form ADV (which is the registration form for an investment advisor) Madoff had less than 25 clients and 17 billion under management in January 2008. Other reporter have reviewed individual customer account statements.

A lot of this is still unclear, and perhaps won't be clear for a while. Quite frankly, some reporters are simply misinformed and confusing the advisory business with the brokerage business. Or maybe not, and maybe it doesn't make any difference.

However, if the fraud extends to brokerage clients, this will be a whole 'nother ball game, with lots of defendants and lots of investors involved. As shocking as the complaints are, that magnitude of fraud would involve so many people and entities as to make it truly earth shattering.

But, it is clear, this is not the case of an unregulated hedge fund committing a fraud. If these allegations are true, the fraud was committed by a REGISTERED investment advisor, clearing customer accounts through a REGISTERED broker dealer.

And while I am at it, there is a lot of blame to go around here. While everyone is jumping on the SEC, no matter how well deserved that criticism is, lets not forget that the PRIMARY regulator is FINRA, not the SEC, and FINRA is apparently too busy reviewing the books and records of small broker dealers to find $10,000 bookkeeping errors to possibly uncover a 50 BILLION dollar fraud.

These events, coupled with our current financial crisis, Marc Dreier and even Blagojevich are going to have a significant impact on investor confidence.

We don't need to add new groups or investment vehicles to the mix.

Not Funny - SEC Sues National Lampoon, Inc.

From the Commission's press release:

The Securities and Exchange Commission announced that today it charged seven individuals and two corporations with engaging in three separate fraudulent schemes to manipulate the market for publicly traded securities through the payment of prearranged kickbacks. The defendants include National Lampoon, Inc. and its CEO, Daniel S. Laikin, as well as stock promoters, a consultant, and an officer of another company. The United States Attorney for the Eastern District of Pennsylvania today separately announced criminal charges involving the same conduct.

The Commission's actions, filed in federal district court in Philadelphia, allege that, in each case, individuals who controlled the stock of a public company arranged with corrupt promoters and others to generate purchases of the company's stock in exchange for cash kickbacks. In each case, a witness secretly cooperating with the government (the "CW") was paid a kickback to make purchases in the stock. The goal of the manipulators was to create the appearance of market interest, induce public purchases of the stock, and ultimately increase the stock's trading price. For example, the Commission alleges that Daniel Laikin and another defendant paid at least $68,000 in cash kickbacks for the purchase of National Lampoon stock in order to artificially inflate the stock price.


National
Lampoon, Inc., et al.; Advatech Corporation, et al.; and Alex
Kanakaris, et al.: Lit. Rel. No. 20828 / December 15, 2008

Madoff Investors Look to Other Advisers

The Madoff mess is truly a mess, and while investigators and private attorneys attempt to sort out what happened and who is liable, a secondary class of potential defendants is coming into focus - investment advisers who invested their client's money with Madoff.

It appears that a substantial portion of the assets that Madoff was "managing" was given to him not by investors, but by other investment advisers.  Yes, there are investment advisors whose only advise is which investment advisor to use. Those advisors select other advisors, and collect a portion of the advisors fee.

With the Madoff losses anticipated to reach $50 billion (although current government estimates are closer to $20 billion) it is clear that there is not going to be enough money to go around. However, many of those "secondary" advisors are solvent, liquid, and in business. Investors are starting to look to those advisors for their losses.

There is, in theory, liability for an investment advisor who recommends another investment adviser, but that liability is going to be quite limited, and subject to a number of viable defenses. However, when you are trying to recoup 50 billion dollars, the tough liability cases don't seem so daunting to an attorney.

Dick Fuld Plans Investment Advisory Firm?

Dick Fuld, the former chief executive of Lehman Brothers, is planning a
comeback and has told friends he might launch a small advisory firm to
harness his contacts in US companies once the dust settles on
Lehman’s bankruptcy, according to an article in Financial Times.

The man certainly has the contacts to get introductions to clients, but will clients have the confidence in his management skills they will need to make the investment? Many feel that Fuld was unfairly blamed for the demise of Lehman, as we discussed earlier in Is Dick Fuld a Villian?

Time will tell

http://www.ft.com/cms/s/0/5022fd98-c89a-11dd-b86f-000077b07658.html

Dreier Update: Bail Denied, Prosecutor Pegs Fraud at $380 Million

It keeps getting worse for Marc Dreier. From Securities Docket: Dreier Update: Bail Denied, Prosecutor Labels Dreier “Houdini of Impersonation” and Pegs Fraud at $380 Million

Dreier Case Gets Really Weird

I wish I hadn't said the Dreier case was weird, because now I don't know what to call it. Is "weirder" a word? How about really, really weird.

Sealed federal indictment released, charging him with one count of securities fraud, and one count of wire fraud.

I wouldn't be able to do the story justice - the complaint is here. It's short, its amazing. Read it.

SEC Files Injunctive Action against Dreier

The SEC filed a complaint against Marc Dreier today. I held off on mentioning his arrest in Toronto because it was all too weird. I figured that there was something wrong with the press reports, or another story underneath.

Well, there is another story, but it doesn't make the whole thing any less weird.

Google Marc Dreier for the stories about his arrest. The SEC Complaint is at
http://www.sec.gov/litigation/complaints/2008/comp20823.pdf

Thanks to Securities Docket for alerting us to the filing!

Reserve Primary Fund Threat Ices Shareholder Claims

You remember the Reserve Fund, it broke the buck last month, and everyone sued. Now it has told its shareholders, take 98.5 cents on the dollar (the broken buck price) or we will defend ourselves, using your money - the assets in the fund.

Yup, the trustees of the fund entered into an agreement with the fund manager to pay legal expenses, so the shareholders' own money will be used to defend the shareholders' suit.

The provision is actually not at all unusual. Its application is bizzare.

SEC Spends $4 Million For Staff Convenience

What the heck is going on? Does the SEC have so much money (read "so much of YOUR money") that it doesn't know what to do with it?

They are spending over FOUR MILLION DOLLARS to move the staff's offices around, to make it more convenient for them to get to their files. Imagine that, they are being inconvenienced because their physical files are not on the same floor as their office, and some of their co-workers are not on the same floor.

One of my co-workers not only doesn't work on the same floor as me, he is about 500 miles away from me! Some of my files are in storage about 5 miles away. For 10 bucks Fred brings them to me.

Maybe someone should introduce the SEC IT staff to email and Remote Desktop.

Nah, just spend another 4 million dollars of our money. After all, that is nothing compared to the 20 million in cost overruns that they spent when they put up their new office building three years ago.

Yes, they just moved three years ago. No problem, it's not their money, and no one is going to tell them that they can't spend it.

So gee, lets spend 4 million to shuffle everyone around.


Al Kamen - As Investment Banking Keeps Changing, SEC Regulators Keep Moving - washingtonpost.com

FINRA Arbitration Filings Up 49% Over Last Year

The market downturn is only a few months old, and FINRA filings are already up 50%. Through October, 3,972 cases were filed. We won't see the levels of 2001 to 2004...yet, but we will wait to see what is filed after everyone goes to their accountant for taxes in the next few months.

No big surprises in the controversies - the constant favorite "breach of fiduciary duty" tops the list, despite the fact that most brokers are not fiduciaries to their clients. Second is "Misrepresentation", "Breach of Contract is third, "Negligence" is number 4.

I have no idea how FINRA pulls those statistics together, but the one that I found interesting is that there were only three cases filed, all year, regarding online trading and only 44 regarding margin.

In the types of securities, involved, it is no surprise that "Common Stock" leads the pack, but there are three new categories this year, Variable Annuities (38) Derivative Securities (674) and Auction Rate Securities (264).

Half of the cases are still resolved by settlement (actually 58% between settlement and mediation) and only 23% by hearing. The rest are withdrawn, stipulated awards, and other reasons.


FINRA - Dispute Resolution Statistics

Changing Executive Compensation

Executive compensation has always been the domain of the company's shareholders, as it should be. While it is hard to argue with the concept that corporate CEOs are overpaid, for most of us, it really is none of our business. Shareholders, through their board of directors, set executive compensation.

And that is the way it should be, this being a capitalist society and all. But the bank bailout is changing all of that. Now taxpayers are the shareholders, and those millions and millions of dollars are cutting into our pockets, not just the "regular" shareholders.

An interesting view of the new world of executive compensation from Andres Sorkin at Dealbook - Putting a Value on a C.E.O.

Mark Cuban and the SEC Improper Trading Investigation

I blogged about the SEC investigation of suspicious trading by its employees. An unusual story, and something that you would excpect a securities attorney to be interested in, and to be blogging about.

But Mark Cuban is blogging about it too! Yes, the billionaire Maverick owner and defendant in an insider trading case is blogging about the investigation.

After complimenting the SEC for "casting such a critical eye at itself" he made a point of repeating, and highlighting, the allegation that the staff engaged in a retaliatory investigation of a company after it publicly complained about naked short selling.

That would get an SEC defendant's attention, and it did.

The SEC « blog maverick

Reporters' Opinions as News?

Interesting commentary on the mixing of news reporting and opinion, where reporters interject their opinion into their "news" stories. Think Gretchen Morgenson at the NYTimes.

Ideoblog: "Multitasking at the Times"