The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Today, the New York Times' Dealbook featured an article on the federal government's "crackdown" on Ponzi schemes.  The piece uses increasing numbers of FBI Ponzi investigations and CFTC enforcement actions as evidence of the tougher stance.  While the government's strategy appears successful, it targets the wrong folks.  Below is my comment on the piece, also posted at Dealbook's website.

Ho hum.  Nothing new, regulators will go after "low hanging fruit."  The easy targets.  Think about the drug dealer on the corner instead of the kingpin who travels around in a limousine, never soiling his leather-gloved hands in the day-to-day affairs of the criminal enterprise.  The cops can pick up the drug dealer and charge him with possession with intent to distribute the drug du jour, but by the time he appears for arraignment his "replacement" will be on the street -- making sure the "king pin" doesn't lose market share (and a valuable corner).

And so it goes with Ponzi schemes.  The CFTC and the SEC will make a few arrests of the most outrageous of "con men" // "flim flam artists" // "grifters" -- call them what you like.  But it's just a holding action, a finger in the dike.

The efforts of prosecutors instead must be on the "legitimate" financial institutions that assist these schemers.  Madoff didn't deal in cash.  He banked at the eminent JPMorgan Chase.  Sanford had a score of banks at his disposal as he syphoned billions offshore.  Nick Cosmo on Long Island was a Bank of America favorite.  These banks profited by their association with these hoodlums at the expense of the victims.  "Oh Mr. Madoff I see your balance in your account is $35 billion, can we offer you a free toaster?"

These banks knew and if they were held accountable by prosecutors... now that would be a real story.

• Print
• Comments
• Trackbacks
• Share Link

What?  After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?

On the surface, the 2nd Circuit Court of Appeals appears to have made a reasonable decision yesterday in the Madoff case.  By limiting the right to monetary recovery to those that were “net losers”—those whose payout from Bernie Madoff was less than their initial investment—trustee Irving Picard seems to have targeted the true “victims” to receive compensation.  After all, net winners have made money off Madoff’s scheme, so what right should they have to recovery?

It depends.  Say you and your spouse sold your family hardware store for a hard-earned $1 million in 1990.  Hoping to live and retire off that $1 million, you invest in the highly-recommended and reportedly successful Bernard Madoff.  You don’t know Madoff; you have no reason to believe his fund is anything but legitimate.  Over nearly 20 years, you use the interest to pay for your children’s college (and of course, law school), and a house remodel you’ve wanted for years.  Eventually, your total interest earnings eclipse $1 million, so when the $1 million principal unexpectedly evaporates in 2008, you’re considered a “net winner”.

What?  After decades of work building up the family store and making the difficult decision to sell, you’re a “winner” when the money you earned disappears overnight?  Sure, you’ve earned interest, but the funds you’d kept invested were for the future, and you had every reason and right to expect that money to be there.

Tough luck, says Mr. Picard.  His decision seeks to recover less than one-third of the total losses due to the Madoff scheme, ignoring the often massive losses of the so-called “net winners”.  All of these 2,000 or so investors are without recourse, and what’s more: Mr. Picard has filed hundreds of lawsuits seeking to recover funds from those investors.  Sadly, many of these so called “winners” are broke, as most if not all of their money was placed with Madoff.

The 2nd Circuit agrees with Mr. Picard.  I do not.  The division between “net winners” and “net losers” should not be sacrosanct.  Each request should be evaluated on a case-by-case basis.  “Net winners” should be granted the opportunity to prove they had no knowledge of the scheme and implicitly relied on the FBI, SEC and other regulatory entities, who year-in and year-out gave Madoff the seal of approval.  If they can prove they were unwitting victims, the “net” win or gain should only be the amount they received in excess of a standard rate of return.  In other words, their ill-gotten gains (or winnings) are those amounts in excess of the rate they could receive in the market generally.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

Pull a Madoff -- in that the Commission will miss the shenanigans that are right underneath their noses, just as they did with Bernie years ago.

Yesterday the SEC announced a proposed set of regulations that would curb some of the abuses of the rating agencies (Moody's Corp. (MCO), Standard & Poor's, a McGraw-Hill Cos. (MHP) subsidiary, and Fitch Ratings).

First, let’s talk about the basic problem.  The issuer of debt pays for the rating.  It’s a naked conflict of interest.  Here’s an oversimplified example.  Bank of America has a bunch of sub-prime mortgages it securitizes in a bond offering it wants to offer for sale to pension funds, university endowments, charitable trusts and the like.  They need an Aaa rating or something close to it; it is called investment grade, since many institutions cannot invest in anything lower.

They go to Moody’s where they’ve had some luck before (wink, nod).  Moody’s, being a bit “moody” after all the bad publicity post-2008 disaster, says: “You know BofA there is a lot of risk in these underlying bonds (“really”).  Sorry, best we can do is Ba1.”

Bank of America, undaunted, and knowing how to play the game, comes back with: “Come on guys, how ‘bout if we sweeten the deal a little and increase your fee... and we’ll throw in some Legend Seats at Yankee stadium.”

“Against the Red Sox?”

“Fine, against the Red Sox.”

“You know those bonds are looking more Aaa every day,” says the Moody analyst, as he pulls his favorite Red Sox cap off the shelf.  It’s a conflict of interest at its simplest.  And guess what, if a BofA bondholder wants to sue the rating agencies after the bonds default, good luck.  The rating agencies have a “get out of jail card” at the ready.  “We were merely exercising our First Amendment right to render an opinion.”  Wins every time in court.

Second major problem: the Revolving Door.  That same Moody’s analyst who loves the Red Sox and will see them up close on BofA’s dime has already sent her resume to Bank of America and hopes to enjoy a 100% salary increase when she takes a job as a newly minted Vice President in the debt securities division.

Dodd-Frank provides the SEC with new authority to fix these conflicts.  What is the Commission doing?  A little window-dressing is all, nothing more.  For instance, the SEC has suggested rules that would have rating agencies clearly define and disclose the meaning of any symbols used by the rating agency.  The proposed rules attempt to directly address conflict of interest issues, but half of the section is devoted to exemptions and exceptions.  It is also seeking to set up qualification standards for credit analysts, to make sure they meet new training and experience standards.  Ho hum.  And indeed, the rating agencies are fighting even these minor reforms.

What the SEC must put on the front burner instead is the organization of a government-mandated clearinghouse intermediary through which credit raters would be assigned blindly to work on various bond offerings.  (No more Legend Seats.)  This intermediary was called for in Dodd-Frank and is being pushed for by Senator Franken.  Alas, in the way of Washington, the SEC will study the issue and issue a report, next—yes next—summer.

I can see the headlines a year in advance: SEC Misses Trillion Dollar Losses Caused by Continued Rating Agency Conflicts.

• Print
• Comments
• Trackbacks
• Share Link

And if you think that the SEC can be influenced by a $1.5 million dollar investment, you might want to check your backyard for Martian tracks.

Mr. Picard’s latest effort at headline grabbing is a lawsuit against David Becker, the SEC’s General Counsel (yes that SEC) for “profits” Mr. Becker’s parents made in connection with investments from Madoff funds.  According to various news reports, Mr. Becker made approximately $1.5 million as an executor of his parents' estate with his brother.  First, it is hokum, complete nonsense, to believe the SEC was somehow diverted from the Madoff trail because Mr. Becker influenced the process to protect his family’s investments.  Mr. Becker is a longstanding public servant who has served his country with great distinction and honesty.  And if you think that the SEC can be influenced by a $1.5 million dollar investment, you might want to check your backyard for Martian tracks.

Second, the importance of this story is Mr. Picard’s continued assault on what I would characterize as innocent investors.  These are folks who were not in the Madoff inner circle and had no basis to believe there was a fraud.  In my humble opinion they should be able to keep their money.  To claw back funds years later, Mr. Picard must show some level of fraudulent conduct or knowledge.  I applaud Mr. Picard’s suit against JPMorgan Chase because if he is right, they “knew” of the fraud and drove the getaway car; or in this case, a fleet of armored cars.  A predicate to every suit brought by the trustee must be knowledge and fraudulent intent.

Indeed, if we adopt Mr. Picard’s definition of profit (taking out more than you put in), we might as well try to clawback his firm’s fee, which now stands at a cool $128 million.  Hasn’t he “profited” from the Madoff fraud?  You bet; maybe its time for Mr. Picard to look in the mirror.

• Print
• Comments
• Trackbacks
• Share Link

Despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this subject - fraud - must be given some weight.

I’ve been mulling what Bernard Madoff said the other day in a prison interview with the New York Times.  He has been mostly silent for over two years since his incarceration, so at a certain level it’s interesting to just hear what is important to the world’s most notorious thief.  Would his first utterances be devoted to sympathy for his son Mark who tragically committed suicide earlier this year; surely a desperate act linked to the legal and emotional turmoil resulting from the crimes of the father?  Or would his short time on the bully pulpit be devoted to an apology to his many victims, including all those charitable foundations that are now either penniless or (at best) have been forced to cut back dramatically on the services they provided to the poor, disabled and others in need?  Nope.  Instead his words, as reported in the Times, focused on JPMorgan Chase, and his contention that “they had to know” about his fraud and Ponzi scheme.

In some ways, I want to shake his hand and buy him a carton of cigarettes (or whatever the currency de jour is of the North Carolina Federal Prison where he will spend the rest of his life).  But this is Bernie Madoff, the Hanibal Lecter of financial criminals.  Turn your eyes for a second, and he has stolen your wallet; turn your back and he has control over your IRA; try to walk away and he’s now gotten your kids' college fund and the proceeds of your life insurance policy.

Nevertheless, despite my utter disdain for Mr. Madoff, and obvious mistrust for this miscreant, his words on this issue - fraud - must be given some weight.  He is by any estimation an expert on the subject.  Wouldn’t it be wonderful to see Mr. Madoff put on the stand by Mr. Picard at a trial of JPMorgan Chase?  Both the direct and cross examination would be fascinating.  I’m confident though that in the end, Madoff’s testimony would be credible.  There is no way he could have been moving billions in cash without raising some suspicions.  But he was a “good” customer and no questions were asked.

Sadly for Madoff’s victims, JPMorgan Chase’s phalanx of high-powered lawyers will likely keep Madoff off the stand and the case will never reach a jury.  (But that, friends, is a story for another day.)

(Full Disclosure and Disclaimer: My firm is counsel to victims of several Ponzi schemes where it is being alleged that a bank, including JPMorgan Chase, is liable for all or some of their losses).

• Print
• Comments
• Trackbacks
• Share Link

As stated in these pages weeks ago, Madoff’s scheme, like all Ponzi Schemes, depended on the creation of an artifice of legitimacy and success.

This past Sunday Frank Rich wrote - in his elegant and insightful manner - about the lawsuit brought by Madoff receiver Irving Picard against JPMorgan Chase for its role as Madoff’s central banker.  He highlighted that Chase bankers way back in 2007, eighteen months before Madoff’s arrest, were discussing “a well-known cloud” over Madoff, including speculation that he was “part of a Ponzi scheme.”  Despite these concerns, Madoff continued to funnel billions of dollars of his clients’ money through Chase accounts while the bank carefully divested itself of $241 million of its $276 million in Madoff investments.  Nice guys.

As stated in these pages weeks ago, Madoff’s scheme, like all Ponzi Schemes, depended on the creation of an artifice of legitimacy and success.  Hence, the fancy Wall Street and London addresses, and key to the creation of that fiction, the participation of a first rate bank.  JPMorgan Chase was happy to play that role.  Without asking questions and despite the growing risk to investors, large and small, Madoff’s accounts remained open and under little to no scrutiny.

And it’s just going to happen again.  We need stronger self regulation (“Excuse me Mr. Madoff, wondering if you could answer a few questions from Larry in our compliance department.  Ok.  Why haven’t you bought a security, a stock, a bond, nothing in, oh, 12 years and instead just pass the new cash received to an older investor”).  Alternatively, we need more and tougher financial cops.  That ain’t happening.  The JPMorgan Chases of the world, with their phalanx of lawyers, will continue to be untouched by their often reckless conduct (or at a minimum turning a blind eye) in connection with the shenanigans of one future Ponzi scheme after another.  And with Congress under the spell of the Tea Party and its "cut government spending" mantra blaring from K Street and supported by the latest polling data, money for enforcement will not be forthcoming no matter the risks.  I can hear Fed Chairman Bernanke somewhere in the future, like a déjà vu moment, saying “we need a trillion dollars to save the financial system and I can’t tell you if that will even be enough.”

Who then is left to protect the small investors?  Well there is Mr. Markopolos, of course, and Mr. Picard is doing his share, to be sure, but they merely represent fingers in the dike.  Sadly, we are not better prepared for the next inevitable run up of greed and manipulation of say: “sub-prime mortgage backed securities 2.0” or some new “synthetic derivative” that is being concocted at some white shoe Wall Street law firm charging $900/hour that will become the latest rage for hedge fund managers from coast to coast.

• Print
• Comments (3)
• Trackbacks
• Share Link

At long last, the SEC has taken measures to electronically streamline the tips and complaints it receives.  Information, no matter how it is received by the SEC, will now enter a searchable and cross-referenced database that is to be ready for use by the end of the year.  Sadly, this constitutes a major change from standard operating procedure.  Notably, the SEC received multiple tips regarding Bernard Madoff’s scheme.  The commission launched two different investigations at separate SEC offices which were mutually unaware of each others’ efforts—the NEXT Madoff will not be so lucky.

Enforcement director Robert Khuzami has taken his title seriously, although as with every bureaucratic process it has taken some time.  Streamlining the SEC complaint process and the Dodd-Frank Bill’s whistleblower incentives allow for effective self-policing, which is essential in a field where (as previous experience shows) the SEC can’t possibly oversee every company and transaction effectively.

This shift in focus to efficiency and incentivizing self-regulation are a major step forward.  But the Commission must continue to vigilently maintain its commitment to a more practical, nimble and effective form of regulation.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

There was news earlier this week of Madoff Lieutenant Frank DiPascali’s expansive guilty plea (to 10 felony counts).  This broad plea accompanied by loud hints of expansive cooperation with the federal government raises the question of whether Mr. DiPascali was Madoff’s main man; his aide de camp, his Tonto, his Robin, his Hutch, his Watson or his Sundance Kid. 

 DiPascali admitted under oath he fictionalized customer statements for over 20 years.  Using various mechanisms, they together wrote one novel (phony account statements) after another – each more fanciful than the last.   No doubt DiPascali worked closely with Madoff and knows where many of the bodies are buried.

 But was this the guy who repeatedly stumped the SEC, an array of other regulators, scores of investors and the street for all those years. 

 I think not. 

 Nothing in his background suggests the level of genius required in:

finance

math

technology;

politics; and

fiction

DiPascali attended Archbishop Molloy High School in Briarwood Queens.  Everything he learned about Wall Street – he learned from Madoff who took him in as a “research analyst” in 1975.    His genius was his loyalty– but did he have the stuff of a mastermind or even an number 2. 

I don’t think so. 

Not that mastermind criminals need an advanced degree from MIT.  (think Jesse James and John Dillenger).

My gut (and a little experience as a  federal prosecutor) says this isn’t the guy -- this scheme had too many moving parts.  Over 6000 investors and $65 billion just for starters.  Remember, since Madoff was not buying stocks or bonds or any securities for that matter

– they had a lot, a lot of money to move.

So I put DiPascali at VP of Operations -- an inside guy.  He likely knows no more than Peter Madoff, Chief of Compliance or the Madoff sons but likely less than Ruth Madoff and other “friends of Bernie”.  I would keep my eye on Madoff’s banker at JPMorganChase.  In all those years, they had to know – securities were not being purchased and money was just circling from new to old investors. 

 So maybe that explains why Judge Sullivan denied Dipascali his release:

a release that the government had agreed to. 

Maybe Judge Sullivan recognizes Dipascali has every reason to flee – 125 years of reasons to flee – and he has nothing more to give the feds.  But surely someone else does?

Steve Berk, August 12, 2009

• Print
• Comments
• Trackbacks
• Share Link