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.