Securities Fraud Cases Can Be Criminal Cases

Defending a SEC securities fraud case is not simply about the civil charges and penalties. Most securities law violations are also criminal violations, and violators can be charged both civilly and criminally.

As securities litigators, we are aware of the issue, and sometimes the cases are not brought together. When resolving an SEC case, or even a FINRA enforcement case, we are always mindful of the potential for a criminal case, or  an enforcement proceeding from a state agency.

In the usual case, if a criminal case is going to be filed, it is filed at or about the same time as the civil charges. Or, there is at least notice that a prosecutor is interested in the case. However, not always.

Case in point -  as a result of the investigation of Bernie Madoff's massive fraud, the SEC found that a former deputy dean of MIT's business school and his son were running a Ponzi scheme of their own. The father-son team settled fraud charges with the SEC in 2012 for $4.8 million and a permanent bar.

Last week, over two years later,  federal prosecutors announced that the duo are going to plead guilty to criminal charges. According to CNN they face between two and five years in prison. They could also be forced to pay as much as $290 million in fines plus payments to victims.

According to the government the duo falsely told clients that their hedge fund was delivering annual returns between 16% and 23%, enticing investors to entrust more than $500 million with them. They also falsely claimed that the money would be invested using a complex trading model based on research they conducted at MIT. In fact, they placed investor money with Bernie Madoff and the Petters Group Worldwide, both of which were later found to be Ponzi schemes.

Nearly $5 million in fines with the SEC, and then, two years later, up to 5 years in jail plus $290,000,000 in fines, PLUS repayment to victims.

Most of these schemes do not start out at schemes - they become schemes when the manager, trader, owner suffers a loss and thinks he can trade it way out of it. Regardless of how the scheme evolves, or what the oringinal good motives were, securities fraud cases carry significant civil and criminal consequences, and  require representation by securities law attorneys, with the knowledge and skill that only decades of experience can provide.

One side note - I continue to be amazed at what defendants say in emails.  Sending emails can sometimes be worse than a phone tap. In this case, the government alleges that emails between the defendants included these two gems:

We have mislead [sic] a lot of people with a range of statements that were incorrect simply to increase our income. . .

We are certainly sharing equally in this dad … Lots of our problems were caused by my good intentions but very poor actions when it came to true honesty.

 If you have an issue, if you need to respond to a subpoena or "voluntary" request from the SEC, call us.

And don't send emails to your co-workers or friends discussing the case.

Related Articles:

Ex-MIT dean and son plead guilty to hedge fund scam - Aug. 12, 2014

SEC Charges Father-and-Son Hedge Fund Managers April 20, 2012


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If you are the victim of a Ponzi scheme or the subject of an SEC investigation, call our office. Our attorneys include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, We represent investors, financial professionals, and investment firms. For more information contact Mark Astarita at 212-509-6544 or email us.

Report: Wealthiest Clients Want to Consolidate Advisors

Here is an interesting report - the World Health Report 2013 found that the majority of wealth managers are keeping their richest clients happy. More than 60% of high-net-worth clients expressed a high degree of trust in both their wealth managers and their firms.

More good news - 52.6% of high-net-worth clients prefer to work with a single firm to “manage all of their financial needs,” according to the report.

World Wealth Report: Wealthiest Clients Want to Consolidate Advisors

Reviewing Advisor Custody Issues

The SEC has just released a Risk Alert calling attention to the results of its recent examinations of investment advisor firms. Incredibly, the SEC found that 1/3 of the firms that were reviewed had significant issues with custody of their customers' securities.

The SEC found that a significant number of firms did not even realize that they had "custody" of a client's funds or securities within the meaning of the custody rule (Rule 206(4)-2 under the Advisers Act). According to the Alert, the SEC found advisors failing to comply with the custody rule in the following circumstances:

• The Role of Employees or Related Persons:The adviser’s personnel or a “related person” serve as trustee or have been granted power of attorney for client accounts.

• Bill Paying Services: The adviser provides bill-paying services for clients and, therefore, is authorized to withdraw funds or securities from the client’s account

• Online Access to Client Accounts: The adviser manages portfolios by directly accessing online accounts using clients’ personal usernames and passwords without restrictions and, therefore, has the ability to withdraw funds and securities from the clients’ accounts

• Adviser Acts as a General Partner: The adviser serves as the general partner of a limited partnership or holds a comparable position for a different type of pooled investment vehicle.

• Physical Possession of Assets: The adviser has physical possession of client assets, such as securities certificates.

• Check Writing Authority: The adviser or a related person has signatory and check writing authority for client accounts.

• Receipt of Checks Made to Clients: The adviser received checks made out to clients and failed to return them promptly to the sender

Advisors who have actual, physical custody of securities, as well as advisors in these situations, must comply with the custody rules. Failing to do so can have significant ramifications for the advisors, and places customer funds at risk.

If you have any questions or concerns regarding compliance with the custody rule, or any other rule or regulation under the Investment Advisers, send us an email. Our attorneys have decades of experience in securities regulation and compliance and include former in-house attorneys and former SEC enforcement attorneys. Email us at astarita@beamlaw.com with your questions or concerns.

The Secrets Behind Becoming an Elite Advisor

Great article for advisors, but it leaves out one important point - before leaving your firm, joining a new one, or starting an RIA, consult a securities attorney who knows the business. Too many advisors come to us after the fact, when a couple of bucks in the beginning could have avoided or minimized the problem.

The Secrets Behind Becoming (and Remaining) an Elite Advisor

SEC Charges Longtime Madoff Employee with Falsifying Documents to Deceive Regulators

The SEC charged a longtime Bernie Madoff employee with falsifying books and records in order to hide Madoff’s fraudulent investment advisory operations from regulators.

The SEC alleges that the employee, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 30 years, assisted in falsifying BMIS’s internal accounting records in order to misclassify hundreds of millions of dollars of income purportedly generated by BMIS’s investment advisory operations. The employee also falsified financial statements filed with the SEC and other regulators, as well as materials that were prepared to deceive SEC staff examiners, federal and state tax auditors, and other external reviewers.

“To keep his massive fraud alive, Madoff had to hide as many facts about his advisory operations as possible,” said George S. Canellos, Director of the SEC’s New York Regional Office. “Cotellessa-Pitz along with other senior BMIS personnel played a critical role in this effort by creating false documents to deceive federal and state regulators.”

The SEC previously charged BMI's Director of Operations with falsifying books and records to hide and obfuscate Madoff’s advisory operations. According to the SEC’s complaint against the employee, she played a central role in falsifying these records as directed by Madoff and the Director of Operations. Madoff used the false records to artificially improve the firm’s reported revenue and income as well as to deceive regulators who sought to review the firm’s operations and financial results.

SEC Charges Longtime Madoff Employee with Falsifying Documents to Deceive Regulators

But He Said He Did It Alone - SEC Charges Longtime Madoff Employee With Fraud

No one believed Madoff when he claimed that he conducted his massive fraud by himself without any help. now the SEC has charged Eric Lipkin, with helping Bernard L. Madoff and his firm deceive and defraud investors and regulators about the massive Ponzi scheme.

“Eric Lipkin helped create the detailed and entirely phony trading and business records that contributed to the success of Madoff’s fraud,” said George S. Canellos, Director of the SEC's New York Regional Office. “The SEC is committed to holding accountable those who helped to perpetrate and conceal Madoff’s scheme.”

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Additional Materials

• SEC Complaint

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The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that for more than a decade, Lipkin helped Madoff defraud investors and mislead auditors and regulators about Madoff’s fraudulent, multi-billion dollar advisory operations. According to the complaint, Lipkin processed payroll records for “no-show” employees, falsified records of investors’ account holdings, and played a role in executing the entirely fictitious investment strategy that Madoff and BMIS claimed to be pursuing on behalf of its clients. In fact, Madoff used investors’ funds to enrich himself, his family, and his associates, and to pay off other investors. Lipkin also helped Madoff deceive regulators by preparing fake Depository Trust Clearing Corporation (DTCC) reports showing the sham investments for clients. Lipkin received annual bonuses from the firm, including for his work to mislead auditors and examiners, and he received $720,000 from Madoff to purchase a house, an amount he never paid back.

Without admitting or denying the allegations of the SEC’s complaint, Lipkin has consented to a proposed partial judgment, which, if entered by the court, will impose a permanent injunction against Lipkin and require him to disgorge ill-gotten gains and pay a fine in an amount to be determined by the court at a later time.

The SEC’s complaint against Lipkin alleges that he violated Section 17(a) of the Securities Act of 1933; violated and aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; aided and abetted violations of Sections 204, 206(1) and 206(2) of the Investment Advisers Act of 1940 and Rule 204-2 thereunder, and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder.

The SEC Press Release and Related Documents

 

Madoff Investor Returns $7.2 Billion to the Bankruptcy Estate

The widow of deceased philanthropist Jeffry Picower has announced an agreement with the Madoff Trustee to return 7.2 billion dollars to the bankruptcy estate, which, according to the press release, represents "every penny received from almost 35 years of investing with Bernard Madoff."

In a press release through her attorneys, Ms. Picower expressed confidence that her husband, who was an extremely successful investor, was not involved in the fraud. She said that his investment prowress allows her to make the payment, which exceeds the estate's legal liability (presumably on a claw back claim), and "return to the philanthropic work that was so important to Jeffry and me."

With estimated cash losses of approximately 20 billion dollars, this 7 billion, together with the 2.3 billion the Trustee has recovered should translate into repayment of half of the investors out of pocket losses. Of course, that does nothing to address the billions in profits reflected on those investors fraudulent brokerage statements.

Court Affirms Arb Award Against Madoff Feeder Fund

We have always been of the opinion that Madoff feeder funds have potential exposure to investor claims for not disclosing or monitoring the feeder funds investments with Madoff. That exposure is heightened in some instances, where the feeder fund simply turned over the funds to Madoff, took a piece of the management fees, and did little else.

A New York court has confirmed a AAA arbitration award against Ascot Partners in favor of an Ascot investor for failing to disclose Madoff's exclusive role in managing the investor's assets.

Professor Jill Gross, at the ADR Blog, has an analysis of the decision. The arbitration panel, which rendered a 23 page decision in the arbitration, was chaired by none other than David Robbins, a well known investor attorney.

Madoff Trustee Ready to Sue Investors

rving Picard, the court-appointed trustee overseeing the liquidation of Bernard Madoff's investment firm, is preparing to file new lawsuits to recover funds from investors who were also duped by the Ponzi scheme, the Wall Street Journal said.
 More...

Phony Web Site Targets Madoff Investors

The SEC has issued a press release warning investors of a phony web site that is attempting to obtain information from Madoff victims. The site asks for information in order to obtain a refund from funds allegedly collected by the fraudulent company.

The company's website and name is very close to SIPC's name and web site, and hopefully investors will not be fooled by the scam. Investors who are looking to recover their funds should already have been in touch with SIPC, and an experienced securities attorney.
 More>>>

Report Cites Finra Lapses in Fraud Probes

FINRAhas repeatedly denied that it had any responsibility for the Madoff Mess, claiming earlier this year that  "[n]one of the fraudulent activities that have been alleged deal with the activities of the broker-dealer or come under the jurisdiction of FINRA" according to Reuters. But today a special FINRA committee has release a report that addresses teh failure of FINRA to uncover the Stanford CD program issues, and yes, the Madoff Mess. The report states "FINRA examiners did come across several facts worthy of inquiry with the Madoff scheme that, with the benefit of hindsight, should have been pursued."
More>>>

EXCERPT: 'The Madoff Chronicles'

If you simply can't get enough Madoff, ABC News correspondent wrote a book which examines the personal and business life of the Madoff Family. More>>>

Madoff Losses May Be Covered Under Homeowner’s Policies

Madoff investors who believe they are without any remedy to recover their losses should look to their homeowner’s insurance to determine if they are covered by the Madoff fraud.

Some homeowner’s policies contain a provision which covers the homeowner from loss of money, securities or properties that results from fraud, typically defined as an intentional act by someone other than the homeowner designed to induce the homeowner to part with something of value.

At least one suit has been brought under such a policy against AIG in California. As investors check their own policies, more suits may follow.

For more information contact us at 212-509-6544 or 973-559-5566.

Madoff CFO To Plead Guilty To Criminal Charges

Frank DiPascali, self-proclaimed chief financial officer at Bernard Madoff’s investment advisory business, will be charged by the U.S. in connection with the multibillion-dollar Ponzi scheme. The announcement came Friday afternoon from the U.S. attorney’s office in Manhattan.

DiPascali has been under investigation by federal prosecutors since Madoff was arrested Dec. 11 of last year. The government’s notice, signed two days ago, said that DiPascali will waive the right to an indictment. More>>>

Bernard Madoff is sentenced to 150 years in prison

Bernard Madoff was sentenced to 150 years in prison Monday. Judge Chin issued the maximum sentence that was permissible under the sentencing rules for the fraud.

Madoff Sentencing Today

Facing 150 years in prison, Madoff will be sentenced today by US District Judge Denny Chin. The sentencing comes on the heels of an announcement on Friday that all of Madoff's property had been seized as part of an effort to obtain compensation for his victims. The property is said to be worth nearly 80 million dollars.

The details are at CNN.com

Santander, a Madoff Feeder Pays the Trustee

Banco Santander is paying the Madoff Trustee 235 million dollars to settle claims against it, according to the WSJ.

Feeder funds - hedge funds who sent investments to Madoff in return for a share of the fees came to the forefront of the Madoff litigation once it became clear that Madoff didn't have the 17 or 20 or 50 billion dollars.

Santander is the first to fold. Watch for the rest follow.

Santander, a 'Feeder,' Pays a Price - WSJ.com

Feeder Fund Manager Charged with Madoff Fraud

The manager of a Madoff feeder fund has been charged with civil fraud by the New York Attorney General's office for steering 2.4 billion dollars to Madoff.

We have not seen the complaint, but Reuters is reporting that he is accused of ignoring red flags regarding Madoff's investments because of the fees he was receiving. The manager claims he has been fully cooperative, performed extensive due diligence and was misled by Madoff just like everyone else.

http://news.yahoo.com/s/nm/20090406/bs_nm/us_merkin

As we noted here, this fraud is too large for the securities regulators and prosecutors to ignore the potential liability of the fund managers who placed investments with Madoff. It remains to be seen how much liability, if any, these managers have for Madoff's fraud, and no one is alleging that the manager knew of the fraud, only that they should have known of the fraud.

We expect that other managers will be the subject of similar civil suits. Massachusetts has already filed against Fairfield Greenwich.

We can expect to see cases against other managers, and suits by individual investors who invested through these funds.

Madoff's Boats Seized

The AP reports this afternoon that Madoff's 55 foot yacht "Bull" was seized by federal authorities from a Florida marina, along with a 24 foot boat. The yacht is reported to be worth 2 million dollars.

Authorities Seize Bernard Madoff's 2 boats in Fla.

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.