Judge freezes Madoff family, 'feeder fund' assets: reports - MarketWatch

From MarketWatch:

A Connecticut judge froze the assets of Bernard Madoff's relatives and feeder funds that invested in the disgraced financier's Ponzi scheme, according to media reports Tuesday. Connecticut Superior Court Judge Arthur Hiller reportedly froze assets of sons Mark Madoff and Andrew Madoff, as well as assets of wife Ruth Madoff and brother Peter Madoff. The judge also froze the assets of hedge fund Fairfield Greenwich founders Walter Noel and Jeffrey Tucker; Fairfield Greenwich managing director Andres Piedrahita; Maxam Capital manager Sandra Manzke; and Robert Schulman, who once ran Tremont Group Holdings, according to Reuters

 I would really like to see THOSE motion papers. Sounds a bit odd to me.

Peter Madoff Agreed to Asset Freeze in December

We thought that the TRO freezing Peter Madoff's assets last week (see here) was big news. While it should have been, after the court refused to lift the freeze, Madoff appealed, and according to the WSJ, his attorney disclosed to the court that Peter Madoff had already agreed to an asset freeze with federal prosecutors in December of last year.

That makes for an interesting turn of events, but probably only interesting to litigation attorneys. Civil plaintiff moves to freeze assets of a defendant that the government has already frozen. While I do not know enough about the case, that should mean that the civil plaintiff's asset freeze is unnecessary and meaningless. Which is what Madoff's attorneys apparently argued, if the WSJ article is correct.

It is unnecessary, unless of course you are the civil plaintiff. Without your own injunction, you have no control over the disposition of the assets, if the government decides to "unfreeze" the assets. Apparently the appellate court agreed, and refused to overturn the civil plaintiff's injunction (or restraining order, the article is unclear.)

If anyone has copies of the court papers, I would love to see a copy - email address is astarita@beamlaw.com.

Court Dismisses ARS Class Action Against UBS

Judge Lawrence M. McKenna of the SDNY dismissed the securities class action against UBS, which alleged that the bank misled investors when it sold them auction rate securities.  The court ruled that the case could not continue because UBS had already reached a $19.4 billion settlement in the matter in August with the SEC and several state regulators in which UBS agreed to buy back nearly that amount of securities and pay a fine, the NYT reports. From Securities Docket.

Merrill socked with $39.8 million arbitration award

A FINRA arbitration panel hit Merrill for 39.8 million dollars for a claim arising from it's Advest brokerage unit.

According to InvestmentNews.com, the award arises from conduct at Advest before Merrill's purchase of the firm, but the award is against Merrill.

Under FINRA rules Merrill will have to pay or appeal within 30 days.

While this is on a completely different scale, I keep telling clients that buying a brokerage firm in fraught with risk, since you are responsible for the obligations and conduct of the firm from before your purchase. There is much more involved when a Merrill buys an Advest, but a 39 million dollar arbitration award does help make the point.

FBI Close to Arresting AIG's Cassano?

This should be interesting, and hopefully it will be handled more professionally than the House's knee-jerk 90% tax pandering. According to ABC News, Cassano ran the Financial Products Division of AIG, which is the unit largely blamed for bringing down AIG, and the FBI and federal prosecutors are getting ready to bring charges against him.

I am still having trouble with the concept of an insurance company running a massive financial trading operation, but I guess we have Phil Graham to thank for that. (Is he still whining about whiners? Why haven't we heard from him recently?)

There hasn't been much talk of criminal conduct, but who knows what an FBI investigation will turn up. ABC reports that Cassano said on a conference call in 2007 that the credit defaul swaps were foolproof and that it was hard to imagine that they could even lose a dollar on any of those transactions.

Others say that the swaps were toxic and anyone dealing with them knew they were toxic.

If it happens, it will be an interesting case. But the feds better make sure they are correct however. The last thing we need is a half-assed witch hunt designed to appease the masses which ultimately becomes another hit to the government's credibility.

The Executive Who Brought Down AIG

Friday Q&A - A Trading Account has accused me of Churning!

Question: For a number of years I had a very active client, who traded frequently, multiple times in a week. Most of the investment ideas were his, but some where mine, and we spoke constantly about the activity and the trades. I provided him with deep discounts on commissions, and followed his instructions, but now he is claiming that I churned his account! What can I do to defend myself and to prevent this from happening again.

Answer: First, and this has become a near mantra for me, you need to document your conversations, and activities in the account. While this may not help with this particular account, keeping notes about your customers will help to prevent this type of claim, and will help in the defense of the claim should it arise. The first column that I wrote for Research Magazine was on keeping records, and is a must read for every registered representative - For the Record.

My article, Churned or Traded, provides an analysis of the claim, and the defense to the claim, and I recommend a review of the article, which is posted at SECLaw.com. For the moment, the definition is important.Churning is excessive trading in a customer's account by a broker taken in the context of the customer's financial situation and investment objectives. Churning requires three elements, first, excessive trading, and second, control of the account by the Registered Representative, and three intent to defraud the customer.

The most difficult part of a churning analysis is a determination of whether the broker had control over the account, and notes and written communication between the broker (or firm) and the customer is important. The fact that the customer was picking the stocks is important, and documentation of that fact will be a great benefit in defending the claim. The customer's new account form is important, as it documents the investment objectives of the customer, as well as his investment experience and financial condition.

Although not frequently done, when an account that is going to be actively traded is opened, the customer can be asked to confirm, in writing, the trading strategy that is going to be used in the account, before the account is established. Periodic confirmations of that strategy during the life of the account can easily establish that the customer was directing the level of activity, and was therefore in control of the account.

Alternatively, many brokerage firms use activity letters in accounts with a high level of trading. Once the compliance department has identified an account as having a high level of trading, the branch manager or compliance officer will discuss the account with the registered representative, to determine the accounts goals and objectives. Assuming that the supervisor finds the level of trading to be suitable, or that the account is in the control of the customer, the firm then sends a letter to the customer, informing the customer that the trading in the account is more frequent than in a typical account, and seeking written confirmation from the customer that he is aware of the trading, and that the trading account is being handled to his satisfaction.

These letters, known as "activity letters" by some, and "suicide notes" by others, are sent to the customer and the written response is then kept in the customer's file. The activity letters are called suicide notes since the letter often becomes important evidence against the customer when he attempts to claim that his account was churned, or that he was unaware of the high level of trading in the account. A customer who has signed an activity letter has a very difficult time establishing the control aspect of a churning claim.

At the same time, if an account that has been actively trading does not return an activity letter, the customer should be contacted by the branch or compliance department, and the trading ceased, until everyone concerned is convinced that the customer is aware of, or directing, the trading.

Often broker's complain about activity letters, arguing that the letter will generate a complaint or will be sending the message to the customer that his broker is going something wrong in the account. While it is true that the wording of the letter may make a difference, the customer's refusal to sign the letter may very well identify a customer who did not truly understand the activity in the account. If that is the case, it is in everyone's interest to have the issue resolved sooner rather than later.

British authorities expect to file charges against others, believing that Madoff's UK operations played a significant role in the operation of Madoff's Ponzi scheme.

Madoff's U.K. Business 'Played Significant Role' in Operation

Investor Freezes Madoff's Brother's Assets

A state judge in NY has frozen Peter Madoff's assets, at the request of a law student who claims that his trust fund was depleted by the payment of fictitious returns to other Madoff investors.

The complaint alleges that Peter Madoff had "full knowledge that it was a fraudulent Ponzi-scheme and nothing more than an unprecedented fraud."

Justice Stephen A. Bucaria of Nassau County Wednesday ordered that Peter Madoff be "prohibited and restrained from removing any funds" from any of his accounts, pending an April 3 hearing.

Apparently this is only a temporary restraining order, which will expire at the April 3 hearing, where the court will hear arguments from both sides. TROs that freeze assets are tough to get, so this law student must have some decent evidence of Peter Madoff's involvement in the Madoff fraud. We will see what happens on the 3rd.

The full story is at Law.com.

Dreiert Trustee Recovers $100 Million in Assets

In his report to the court, the Dreier Trustee says that he has recovered over $100 million in assets, including an 18 million dollar yacht and 39 million in artwork.

The story is at DealBook, take a look at this lifestyle, apparently all financed by selling fraudulent notes. The interesting part is that the theory is that he kept selling the notes to continue the lifestyle! How about selling the 39 million in art work?

Well, the New York Times gets it. We have much bigger problems than the AIG bonuses.

And why do Merrill executives get to keep their bonuses when everyone else is going to have it taxed away? Because they were paid in December. Another piece of lunacy of the AIG bonus bill.

The Problem With Flogging A.I.G

Congressional Pandering and the 100% Income Tax on Compensation

Congress does a number of things very well. Pandering to the populace is one of them, and nothing demonstrates this as well as the House's attempt to punish AIG. The other thing they do well is pass a bill that has popular appeal, and then hope that someone else stops them, or there is a presidential veto, or the courts strike it down. Then they get to say "we tried to fix it but the [opposing party][the President][the Courts] wouldn't let us!"

We all know that Congress screwed up on the AIG bonuses. They prevented the use of bailout funds for bonuses, but exempted any bonus payable pursuant to a contract that existed prior to February 2009. That might not have been a screwup, on some levels, it makes sense. However, as we all know, there was a huge backlash from the public, since the bailout money was going to pay "executive bonuses." Congress, in its usual pandering, fueled that fire. Ignoring the fact that they expressly permitted those bonuse payments, they began railing against "bonuses" to "executives" at AIG too.

Mixing terminology is another thing Congress does well, since those "bonuses" are not really "bonuses" and the majority of people getting those bonuses are not "executives" but rather technical staff, analysts, assistants, in-house counsel, etc.

Then the House passed legislation on Thursday to impose a 90% surtax on bonuses granted to employees with household income of more than $250,000 at companies that received at least $5 billion from the government's financial rescue program.The Senate is considering a similar plan that could be up for a vote as soon as next week.

Let's follow the bouncing ball. First, the tax is on HOUSEHOLD incomes over $250,000. That covers a whole host of families. Two professionals, a nurse and a lawyer; a stock broker and a teacher.

Second, almost everyone on Wall Street has a compensation package that is salary plus "bonus." Wall Street structures its compensation packages this way intentionally. You see, they don't pay the "bonus" until March of the following year. Not only do they keep the float on the employee's money for the extra months, if you are not at the firm when the "bonus" is paid, you don't get it. So, folks stay until bonuses are paid in March. By then, the employee has worked three months, receiving a vastly reduced "salary" and is 1/4 of the way towards earning next year's bonus. Makes it hard to quit, since you will lose 1/4 of your compensation if you do. And round and round it goes.

Back to the tax. The tax applies to any bonus paid to any employee of any company who received more than $5 billion from the TARP funds, which includes Citi, JPMorgan, BofA, Goldman Sachs Group Inc., Morgan Stanley, PNC Financial Services Group Inc. and U.S. Bancorp.

Morgan Stanley staff gets paid salary plus bonus. Secretaries, IT folks, internal accountants, attorneys, all get bonuses as part of their overall compensation. It is almost guaranteed that most of those folks who are married with a working spouse make over $250,000 a year, combined. It's relatively easy, given the cost of living in a major city these days. An in-house attorney makes something on the order of $200,000. Her husband probably makes over $100,000 and BAM, they get hit with a 90% tax on her bonus, and she has absolutely nothing to do with the bank's current problems. Some of the IT professionals make over $200,000. Same situation. There are assistants who make significant amounts of money working at these firms, who get paid with a bonus, and the government is going to tax them too at 90%.

Congress cannot possibly justify this. They have created this mess and they are now pandering to the public. AND, they are too lazy to write a bill that actually addresses what they are trying to address. While I wouldn't agree with it, if you want to get the bonuses that were paid to executives, use the power of additional TARP funds to do it, not the tax code.

If you want to use the tax code, then apply the tax to bonuses over one million dollars. I would still have a huge problem with that, but you would not be taking money from the innocent secretary, bookkeeper and IT guy.

Don't believe it? Read it yourself, it's only one page long - The House Bonus Bill

Madoff's accountant has been charged with securities fraud and related charges arising from an alleged failure to conduct audits.

They are NOT charging him with knowing of the scheme, but rather for falsely certifying that he audited the financial statements.

Interesting legal distinction, undoubtedly the same punitive result, cumulative maximum sentences are 105 years.

The SEC also filed a civil suit against him.

Accountant Charged in Madoff Ponzi Scheme

Dreier’s Lawyer Expects Guilty Plea

Enough with AIG, Dodd, politicians and Madoff.

Various news sources are reporting speculation that Marc Dreier is going to plead guilty to money laundering charges, and that creditors are contemplating suits against Dreier's "partners."

Dreier’s Lawyer Expects Guilty Plea; Firm Lawyers at Risk in Bankruptcy Case

Liddy Says Geithner Knew About Bonuses

AIG Chief Edward Liddy says that Geithner knew about the pending bonuses to its employees as far back as November 2008 when he was the Federal Reserve Chairman. This directly contradicts the timeline put forward by Geithner and the Administration,who claims that they only found out this month.

OK, which one is it. Did Geithner know about the bonuses in November, and is simply conducting an outrageous diversion for the public's amusement, or is he a dolt who didn't know until last month. Either one is not good, but if we are going to get into a situation where another Administration starts lying to us, there is going to be a severe collapse of confidence by the American public, the likes of which we have never seen.

The reality is that Geithner screwed up. I understand, or as our President says "I get it." There are thousands of employees at AIG, thousands of employees with different compensation packages. What undoubtedly happened is during the original TARP discussions and Geithner's involvement under the Bush Administration, the focus was on the "big" compensation packages, not the hundreds of others. (Keep in mind that the $165 million we are talking about, while a huge amount of money, is less than 1% of the 170 billion that AIG has received),

I get it. You were not looking at compensation packages that constituted less than 1% of the total bailout. I understand. In the grand scheme you were saving the country and the economy, and in context, $165 million was not a big deal. Completely understandable.

So why are you now screaming about AIG taking the bonuses, when you have already acknowledged that the amount of the bonuses is insignificant in the grand scheme of things?

You are not a liar, you are a politician doing what politicians do far too often. Pandering.

USNews.com has the details - AIG Chief, White House Statements At Odds?

Naked Short Sales Hint Fraud in Bringing Down Lehman

As many as 32 million shares of Lehman were sold and not delivered as of the day of Lehman's demise, indicating the potential for a massive naked short of the stock.

Naked shorting is illegal. While shorting a stock (selling it without owning it) is legal, the seller must borrow the stock from someone else, and deliver the stock that he sold to the borrower.

Unfortunately, those who complain about naked short selling have become the boy who cried wolf, since so many CEOs claim it is occurring, but are never able to prove that it is occurring.

However, with Lehman, the proof may be available. According to Bloomberg News, the 32 million fails to deliver were more than a 57 fold increase over the prior year's peak in fails.

Naked Short Sales Hint Fraud in Bringing Down Lehman - Bloomberg.com

AIG Executive Start Returning Bonuses

Good for them. More honorable than the politicans...."Under intense pressure from the Obama administration and Congress, the head of bailed-out insurance giant AIG declared Wednesday that some of the firm's executives have begun returning all or part of bonuses totaling $165 million."


http://news.yahoo.com/s/ap/20090319/ap_on_go_co/aig_outrage_168

Madoff Claims Florida As Legal Residence

The story is about the Florida homestead exemption. If you are a Florida resident, it is difficult, if not impossible, for a creditor to take your home from you. It is basically exempt from seizure. We can debate the proprietary of that till the cows come home. It's the law there, it ain't gonna change any time soon, and tons of people have taken advantage of the rule. (Think Bowie Kuhn and the bankruptcy of Myerson & Kuhn.)

So no big surprise that Ruth Madoff claims her Palm Beach mansion to be her primary residence. Shielding the 9 million dollar home from creditors is not a bad idea.

But the gem in the story is the timing of that claim. In Florida, one needs to claim the "homestead exemption" in order to have the home be your residence and exempt from creditors. According to this article, after living in New York for 60 plus years, Ms. Madoff filed for the exemption in September of 2008, only three months before Madoff's arrest, according to The Business Insider. Coupled with the other pre-arrest allegations, including the allegation that she withdrew 15 million dollars or so prior to his arrest, we have an interesting set of allegations coming together for the government's forfeiture proceedings.

More Details on the AIG Bonuses

NYS Attorney General Andrew Cuomo has some details on the AIG bonuses, and the situation is not getting any better for the Administration or AIG.

First, please understand my ire. The details of these bonus payments are not yet public. Some reports say they are for executives, others say that 400 employees are included in the bonus payments. Some reports say they are retention bonuses, others say they are performance bonuses. All reports say that AIG entered into these contractual obligations in early 2008. The details make a difference, and I am not in favor of simply abrogating those contracts, nor of creating a retroactive tax on them. Ex post facto and all that other legal mumbo jumbo. In our system of jurisprudence, you simply cannot do that, and any court would strike down such attempts. Arguing for 90% taxes and intentional breaches of contract makes for some very nice pandering to the public, but it is not going to work.

My anger is directed at this Administration and the Bush Administration. I cannot fathom how they gave AIG 170 billion dollars without knowing where the money was going to go, and how it was going to be used. And forget about conditioning the use of the money. They could have conditioned that money on renegotiated bonuses. Not a problem at all, and we can assume it would have worked, since no bailout money, no AIG, no bonuses at all.

Mr. Cuomo has released some facts about the payments. It seems that his office, an outsider in the transactions, was able to do what the Fed and Treasury was unable or unwilling to do - get the details.

According to Mr. Cuomo's letter to the House Committee on Financial Services:

1. The top recipient received more than $6.4 million;
2. The top seven bonus recipients received more than $4 million each;
3. The top ten bonus recipients received a combined $42 million;
4. 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million;
5. 73 individuals received bonuses of $1 million or more; and
6. Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million.

First the retention bonuses. My understanding is that the agreement is "stay with us another year, and at the end of the year we will pay you $X since you agreed to stay." If that is the case, AIG needs to pay those bonuses. The parties entered into an agreement, the employee did what hew as supposed to do, and is entitle to the payment. This really can't be an issue, and yes, it is a lousy agreement, AIG management is a bunch of irresponsible fools, etc. But hindsight is wonderful, those are agreements that were entered into over a year ago, and should be honored.

Mr. Cuomo has identified payments of approximately 1/2 the $165 million, but without the details, it is difficult to comment on the payments, except to remind everyone, again, that these are contracts that were entered into over a year ago.

Do you really want the government forcing companies to breach employment contracts? Think about your own employment or business situation. You enter into a major agreement, do everything the agreement calls for, and when it comes time to get paid, the company refuses to pay. Or the government enacts a new law that puts a 90% tax on that type of contract.

Not in our system of jurisprudence. We need competent government leaders, not proponents of illegal and unconstitutional "fixes."

The Search for Madoff Assets Continues

For those who worried that Madoff's guilty plea would stop the hunt for assets, have no fear. Prosecutors have announced that they would seek to recover more assets from the Madoffs, including those held by his wife Ruth Madoff.

An interest in a real estate fund (unvalued), 31 million in loans to Madoff's sone, interests in 20 businesses, 2.6 million in jewelry. Another article mentioned 600,000 in silverware.

I don't know why the image of the government taking the Madoff's silverware strikes me a funny, but it does. But $600,000 in silverware is not funny at all).


Interesting aside. The real estate fund investment is owned by Fred Wilpon, Madoff victim and owner of the NY Mets. How the heck does that happen? They invested with each other? That is certainly interesting.

The NYT has more.

Obama Admin Didn't Know About AIG Bonuses Until This Month!

Something is drastically wrong. Geithner cannot possibly be this stupid. Frank and Dodd cannot possibly be this stupid. What responsible person, using billions of dollars in taxpayer money does not know that the entity receiving the money has contractual commitments that are coming due?

Sorry, I don't buy it. It's impossible for anyone to be that stupid. And if Geithner is that stupid, he should be run out of office on a rail.

This is simply outrageous. ABC News has a run down of who knew what when.

The Case for Bonuses at A.I.G.

Dealbook at the NYT points out the legal arguments, and policy reasons behind honoring contracts. If we let the government retroactively abrogate valid employment agreements, what is the impact on business in the US?

Still, was the fact that bonuses were part of AIG employee's compensation really a surprise to the administration? If so, we have really big problems ahead.

The Case for Bonuses at A.I.G.

Why all the Moaning over AIG Bonuses?

In case you missed it, there is quite a bit of consternation over AIG's bonus payments to its executives and employees. With AIG accepting bailout funds, the fact that they are paying $165 million to executives and employees after accepting the money has become a rallying point for the Obama administration and for a segment of the general public.

While creating diversions is a favorite sport of politicians, it appears that they are simply missing jumping on a publicity bandwagon that they themselves created.

Those bonus payments are contractual. The company entered into employment agreements and severance agreements with its executives and employees long before this economic crisis, and the government had no right, and no ability, to interfere in those contractual arrangements. The general public can object to executive compensation all it wants, but (and excuse my bluntness) it is none of the public, or the government's business. These are matters for shareholders and boards of directors, not senators and politicans.

However, that all changes with the bailout money. When the government gives you money to help your business, in my view, it has the right to condition that money in reasonable and necessary ways. One condition could have been to limit bonuses and executive compensation, much as the administration attempted to do with the bailout money for the investment banks.

However, that did not happen here. While moaning and whining about the bonuses, even the Obama administration acknowledges that these are pre-existing contracts. Lawrence Summers, President Obama's chief economic advisor is quoted in the NYT as saying - "[w]e are a country of law... There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.”

The first half of the statement is correct. A private contract between a private employer and his employee is not something the government should be meddling with. But what about the last sentence? Is the government really doing everything it can?

What is it with government officials? The Bush administration gave out TARP money without sufficient regulation and monitoring, and much of it was wasted. Now we have the Obama Administration doing the same thing. Are our politicians this stupid? Undoubtedly not. In my view, they did not "overlook" the bonus and compensation issue. The President talks about it often, and does so often enough to be accused of starting class warfare.

So why wasn't the renegotiation of these contracts discussed during the bailout process? Did anyone try to condition bailout funds on the scaling back of those bonuses by agreement with the employees? If not, why not?

If the decision was made not to do so, why do we have all of this posturing by government officials when they did in fact have the ability to negotiate these items before turning over the TARP and bail out funds?

Friday Q&A: Should I used my firm's attorney?

Question: My firm and I have both been sued in arbitration by a customer. The firm is offering to have its attorney represent me, as well as the firm in the arbitration. Should I use the firm's attorney, or hire my own?

Answer: This is a recurring question from brokers who are named in an arbitration proceeding by a customer, and whose firm offers to provide the attorney to represent both the broker, and the firm.

Unfortunately, the answer is not simple. In the 18 or so years that I have been handling securities arbitration matters I have been on both sides of the issue – representing a broker with another attorney representing the firm, representing the firm without representing the broker. However, far more common is the situation where I represent both the broker and the firm.

Sometimes there is a conflict between the broker and the firm, and joint representation is simply not possible. However, such conflicts are rare, and in the overwhelming majority of cases, it is possible to use one attorney.

For the broker, the remaining question is whether the attorney will zealously represent the broker’s individual interest, as well as the firm’s interest. In the largest sense, the broker and the firm both have the same interest – to defend the claim. The facts and legal principles which work in the broker’s favor also work in the firm’s favor. Additionally, in the usual case, the firm is only liable if the broker is liable, as the firm itself is not accused of committing a wrong, it is the broker who is so accused. In that instance, the firm is only liable if the broker is liable, and there is truly a united interest.

In more complicated cases, the interest of the firm and the broker may be different. For example, in a case where there are the usual sales practice allegations mixed with a market manipulation case, the broker may feel that the case will focus on the market manipulation theories, for which he has no responsibility, and impact his defense of the sales practice case. Separate representation may be desirable in that instance.

In other situations, such as where the broker has left the firm, even if a dispute does not exist, joint representation may be precluded by a simple lack of trust between the firm and the broker. Another cause for concern is where the broker, by his contract with the firm, is responsible for the loss, and, regardless of the outcome of the arbitration proceeding, he will be forced to pay the award, as well as the attorneys’ fees.

In this instance, the broker is sometimes concerned that the firm will force him to settle the matter when he wants to defend himself, and that the attorney, selected by the firm, will take the firm’s “side” in a settlement dispute. Other times, the broker simply feels that having an attorney who was responsible for his aspect of the case would give him better legal advice.

There are compelling reasons not to use separate attorneys. In cases where the broker is still employed by the firm, the usual practice is for both to use the same attorney. Deviating from this norm may send the wrong signals to the customer and his attorney, inadvertently telling them that there is a dispute between the respondents. If the customer believes that such a dispute exists, he may press his claim with more zeal, he may not be willing to discuss settlement, or he may simply make unreasonable settlement demands because he thinks he has discovered a weakness in the defense.

Cost is also a factor. While using two attorneys does not necessarily mean that the costs are doubled, there is an obvious increase in the defense legal bill, and in the costs. While defense counsel will decide which attorney is going to take the lead, and will divide the work, there is an obvious overlap in effort.

The reality is that in most cases, one attorney can, and does, represent the firm and the broker, and usually the other respondents in the arbitration who are employed by the same firm, and there is no reason to do otherwise.

The most important factor in making the decision is to be represented by an attorney who you trust and who you have confidence in. You also need an attorney who knows the securities laws, who understands the regulations and practices at issue, and who understands the arbitration process. Typically, that will be the firm’s attorney, whether he is in-house, or outside counsel. However, if the firm’s attorney does not meet this description, I suggest a frank and honest conversation with the attorney, to iron out any issues or concerns. If that does not work, brokers should not hesitate to retain their own attorney, and deal with the costs and appearance issues later.

After all, the money spent on a second attorney pales in comparison to the money that can be lost in an arbitration.

The full article on this topic is available at SECLaw.com - The Firm's Lawyer or Your Own.

More Madoff Civil and Criminal Suits to Come...

Madoff's guilty plea to 11 felony counts is just the beginning of what will be a long and complicated process to identify the full scope of the fraud, and to recover assets from Madoff, and others who profited from the fraud.

One point that may or may not be significant is that the fraud was not 50 billion dollars, but is between 10 and 17 billion, which is what we suspected when the story first broke. Either way, with only one billion having been recovered, there is much more work for the Trustee and the SEC staff to do to identify, and recover those assets.

With no plea agreement, we can expect the Trustee to attempt to attach the rest of Madoff's assets, and to go after the assets that are in his wife's name. According to press reports, Mrs. Madoff has significant assets in her name, including the $7 million penthouse on Manhattan's Upper East Side, $45 million in municipal bonds at a brokerage firm partially owned by Madoff, $17 million at Wachovia Bank, and she withdrew $15.5 million from the brokerage firm shortly before Mr. Madoff was arrested. Details are at the WSJ.

There is nothing in the press reports that indicates that Mrs. Madoff was a participant in the fraud, but she does not have to be if assets obtained by the fraud were transferred to her. That will be difficult to prove, but there is enough there to interest a prosecutor, a SIPC Trustee and a bunch of securities attorneys representing investors.

More indictments? I am sure that the prosecutors are not finished. There are the Madoff employees who allegedly helped the fraud by creating false account statements, and whatever else was done to assist the fraud. Given Madoff's plea allocution, it is clear he did not do this alone.

Some commentators are speculating that other family members will be indicted, but those claims are based on incorrect or incomplete facts. According to the information currently available, the brokerage firm employees had nothing to do with the investment advisory business. Therefore, we can expect to ultimately learn that the compliance officers at the brokerage firm had no involvement with, or knowledge of, the fraud. And no one would expect that they would - a brokerage firm compliance officer has no duty to supervise or control, the operations of the related investment advisory firm. However, prosecutors and the SEC will certainly be looking into them to determine if there is a case there.

Then there are the civil cases against those who received funds from the fraud, but those cases will undoubtedly be civil cases, not criminal.

Next up will be the feeder funds, who funnelled money to Madoff and accepted "fees" for doing so. We can expect to see indictments or at least SEC civil actions to recover those fees against them. We have been investigating claims against some of those funds, and at least on the civil side, there appear to be viable claims. Whether those rise to a criminal level remains to be seen.

Then there are the banks and financial entities in England, where Madoff was sending money to provide an appearance of activity. Those institutions may have liability for their assistance, if any, in the fraud.

After that, suits against profitable investors, for a return of those profits. We have also been reviewing those claims. Based on my prior experience in ponzi scheme cases and other fraudulent conveyance cases, there are some viable defenses for those investors. However, there have been no estimates of how much money those innocent investors received from the fraud, but their innocence may not be enough to protect them. Profitable investors have been contacting our firm and others for advice as to how to proceed going forward, and those lawsuits will be filed at some point in time.

We can be certain that the SIPC Trustee and the SEC will make every effort to locate and obtain funds obtained from the fraud. Whether those funds make it back to the investors remains to be seen. Past experience tells us that relying on the government to recover lost funds is a process that requires a great deal of patience. Investors should consider retaining their own counsel to examine their options, rather than wait for the government.

Details of Madoff Ponzi Scheme from Madoff

According to Madoff's allocution (where the defendant details his crime in connection with his guilty plea) provides some of the details that have been missing from the story thus far.

According to Madoff, the fraud started in the early 1990s, when the markets were not doing well. He began the fraud as most Ponzi schemes start - continuing to pay dividends to existing investors, thinking that the markets would turn, and all would eventually be alright.

Well, that didn't happen. He kept the money at Chase Manhattan Bank, and despite the passage of years, and the delivery of account statements to clients, he did not make any trades, but rather spent his time moving money around to give the appearance of activity, lying to the SEC (that should make Chairman Cox happy) and fabricating account statements.

According to the allocution, he lied to clients, lied to regulators, filed false accounting statements, fabricated a trading stragegy and more, to continue the fraud for over 15 years.

Madoff when out of his way to say that the brokerage firm's business was legitimate and profitable. That may be true, but the emphasis is undoubtedly to protect his brother and sons who ran that business.

The details of the allocution are at JDSupra - Madoff Plea Allocution

According to my calculations, the sentence will be a minimum of 50 years, undoubtedly more given the plea to 11 different felony counts.

Madoff to plea Guilty

Madoff is expected to plea guilty today to all 11 felony charges brought against him, with a maximum sentence of 150 years.

There is plenty of speculation surrounding this plea, since one would expect that there would have been a deal that included protecting his sons and wife from civil and criminal charges. However, according to press reports the judge and prosecutors have confirmed that there is no plea agreement, and no deal. Madoff is simply pleading guilty to all charges, as if he lost at trial.

The Return of the UpTick Rule

The SEC is considering restoring the uptick rule, which requires that a stock trade at a price higher than its previous price, before a short sale can be made.

The rule was abolished by the SEC in 2007, but was designed to prevent short sellers from beating a stock into the ground by continous short selling. Some pundits are claiming that the rule will give the market a shot of confidence, and help to drive a recovery.

The WSJ reported the story today.

The Credit Crisis Visualized

Very well done explanation of the credit crisis. Given the medium and a running time of 10 minutes, there are some oversimplifications, and one could quibble with some of the underlying assumptions, but if you want a good overview of what happened, spend 10 minutes here. No politics, no fingerpointing, just an explanation.

Friday Q&A: Can I sell stocks in a foreign country?

Friday Q&A - I am licensed in the US with all of the applicable securities licenses. I would like to being servicing customers in England, France and Spain. Do I need any additional licenses?

Having a license to provide investment advice in the United States does not mean that you can automatically charge for that advice everywhere else. Most countries (though not all) have their own securities laws and rules which govern the activities of persons offering or selling securities in their country. Many countries have adopted regulations similar to those in the United States, some have very different regulations, and others have very few.

Despite the fact that you do not reside in the foreign country, you need to comply with their regulations regarding the offer and sale of securities. It might be tempting to believe that a US broker-dealer is beyond the reach of a foreign securities regulators, but that is simply not the case, as doing business in a foreign country subjects you to the jurisdiction of that country. This issue is really just theoretical, since FINRA and the SEC may consider violation of another country's securities laws a violation of US securities laws.

FINRA has previously released two Notices to Members regarding these issues. The first, NASD Notice to Members 98-91, was titled "NASD Alerts Members To Their Obligations Concerning Cold Calling And Advertising To Persons In The United Kingdom" and was apparently released by the NASD at the request of the securities regulators in the United Kingdom. Two years later a second Notice to Members was released, again reminding members of their obligations in foreign countries. NASD Notice to Members 00-02 - NASD Alerts Members To Their Obligations Concerning Soliciting Business In Foreign Jurisdictions.

On December 10, 2001, the NASD released NASD Notice to Members 01-81 titled "NASD Provides Interpretive Guidance On The Conduct Of Business Abroad." The release is an attempt to provide an overview and interpretation of the NASD's rules regarding overseas operations, and is in a question and answer format, dealing with some of the more common issues in foreign business operations.

Current NASD rules on the topic include:

* The NASD permits firms to register certain persons working in foreign offices as Foreign Associates without requiring qualification examinations (NASD Rule 1100).

* The NASD authorizes member firms to maintain registrations for persons who are engaged in the investment banking or securities business of a foreign securities affiliate or subsidiary (NASD Rules 1021(a) and 1031(a)).

* The NASD allows, in limited circumstances, member firms and persons associated with a member to pay transaction-related compensation to non- registered foreign persons, or foreign finders (NASD Rule 1060(b)).

* The NASD permits persons registered in certain foreign countries to work in the U.S. as general securities representatives after taking an abbreviated examination (NASD Rule 1032).

A careful reading of the Notice, and other comments from the NASD reflect a growing concern with operations in foreign countries. Readers are advised to move carefully into these markets, as violation of the applicable regulations can subject one to civil and criminal prosecution in the foreign country, as well as disciplinary action in the United States.

FINRA Raises Limit for Single Arbitrator Cases

For cases filed after March 30, 2009, FINRA has raised the threshold for a three arbitrator panel to $100,000.

I am not so sure this is a wise decision. While I understand that the single arbitrator will be "chair-qualified" there are plenty of "chair-qualified" arbitrators with little or no experience.  For a case where the damages are $90,000, I think I want the benefit of three arbitrators.

Watch for the number of cases with inflated damage claims to get inflated. That $90,000 case is going to have a damage claim of $125,000 to avoid this change.

FINRA Notice 09-13

The Inside Story on the Breakdown at the SEC

A tough piece from Time Magazine. Starting with this quote: "[l]ong an evangelist for deregulation, the affable 56-year-old conservative former California Congressman took a custodial approach to a job that called for muscular leadership."

It doesn't get any better for Chairman Cox from there. According to the article, he was absent during the discussions and bailout of Bear, he let Commissioner Atkins run loose, his policy that required staff to seek permission to seek penalties demoralized the agency.

I am not so sure that we can lay the entire blame for the SEC's failures at the feet of Chairman Cox, but Time sure gives it a try.

Amended SEC Complaint Accuses Stanford and CFO of Running Ponzi Scheme

The Securities and Exchange Commission has filed an amended complaint against R. Allen Stanford that alleges the Texas billionaire ran a huge Ponzi scheme and took at least $1.6 billion of investor money in personal loans. The original complaint made allegations of misrepresentation regarding the CDs, and did not make allegations of a Ponzi scheme.

Amended SEC Complaint Accuses Stanford and CFO of Running Ponzi Scheme

Stifel Nicolaus to Buy Back ARS from Clients

According to the St. Louis Business Journal, Stifel may buy more auction rate securities from its clients, pursuant to its voluntary repurchase plan. Earlier this month Stifel said it planned to spend between $35 million and $40 million to repurchase some of the illiquid auction rate securities held by investors