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

Fred Wilpon

The Madoff trustee, Irving Picard, filed suit some time ago against renowned nice guy and Mets owner Fred Wilpon, seeking what are often called “claw back” profits.  According to Picard and other trustees (who try to unscramble Ponzi schemes) profits “earned” by winners of the scheme must be returned to those who are “losers.”  The problem often is that those “winners” don’t have the money anymore.  For Wilpon and his partner Irving Katz the “profits” were substantial—we are talking big money folks: $386 million big.

Our repeat person of the week, the Honorable Jed Rakoff, presiding over the case, threw much of it out.  But a portion remains and both sides are lining up hired guns (oops: “experts”) to support their positions.

Although I’m a friend of investors and have specifically represented thousands of them in connection with Ponzi schemes, I’ve never liked these “clawback “ cases.  Yes, I see the logic.  At some level, they make perfect sense.  Winners of illegal profits pay back losers and the Trustee tries to “minimize” the gap.  But Fred Wilpon was duped too.

Of course there were whispers on Wall Street for years about Madoff’s legitimacy.  Someone besides Harry Markopolos smelled a rat.  But those rumors were just that and no one, from the SEC or DOJ, was putting together a case.  So why should Wilpon take the hit.  I say no “clawbacks” unless the trustee can establish the net winner (someone like Wilpon) had actual knowledge of the scheme and provided the bad guy (in this case Madoff) with substantial assistance.

Jury Decides Mr. Perelman Is Not Entitled to A Nickel or “That Explains How He got all His Money.”

Five time divorcee Ronald Perelman, is an icon of American Business.  With a net worth in excess of $2 billion he has had some huge successes.  But his decision to sue his deputy Donald Drapkin for $16 million for Mr. Drapkin’s failure to secure some records of the company he had built with Perelman is just plain over the top.  Of course something else might be at play, but the jury wasn’t buying it.  To reach a verdict in less than one hour means they hardly got through their lunch.  In my experience, it takes more than an hour to just pick a foreperson. 

Mr. Perelman needs another $16 million like I need a new caviar spoon.  Just because you can sue someone doesn’t mean you must.  How can people that rich be so stupid?

• Print
• Comments
• Trackbacks
• Share Link

The defense will claim—get this—that the SEC's freeze of his assets led to the downfall of Stanford’s empire.

It’s finally showtime for one of the greatest grifters, flim-flam artists and con men of the century.  Yep.  Allen “who wants to play cricket with me” Stanford began his trial yesterday.  After a curious and all-too-convenient case of depression-induced amnesia, this cowboy finally stands trial for running a $7 billion Ponzi scheme.

So, who is to blame for the some 20,000 people who were robbed of their money?  What will be the theory of his defense?  Well, the regulators, of course!  Postponing his trial gave his defense team plenty of time to cook up a doozy of a strategy.  They must have taken a poll or something.  It’s the old claim, it’s all about those evildoers at the Securities Exchange Commission.  You see, after determining Stanford was a fraud (all those jets and private Caribbean Islands were a good clue), the SEC froze Stanford’s assets in 2009 and charged him with fraud.  The defense will claim—get this—that this freeze led to the downfall of Stanford’s empire.

Mr. Stanford, sorry to be the one to break it to you, but you cannot blame the regulators.  In fact, only one group really can—those who lost their money in what they believed were safe investments in certificates of deposit.  They have every right to blame the SEC and other financial regulators for letting you get away with this.  These regulators failed to act promptly and in the face of mounting evidence, turned a blind eye to the activities of Stanford’s firm until it was too late for many investors.

Well sit back and get comfortable, this is not going to be over any time soon.  P.T. Barnum—er, Allen Stanford—may just pull a rabbit out of his hat...

Assisted by Setareh Ebrahimian

• Print
• Comments
• Trackbacks
• Share Link

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

Source

It's one thing to cheat the securities markets—the "system"—by cajoling and paying friends for inside information.  Getting an edge.  It's done everyday in every walk of life.  In school, it might be taking a glance at your neighbor's test—just a glance—to confirm your multiple choice selections.  In sports, it might be taking steroids to make a long fly ball into a three run homer; with a little juice, next year's salary might just include another zero.  Or for the aging former ace pitcher who after losing his best stuff, hides a small dollop of Vaseline in his mitt so that when applied to his finger, the curve ball he had ten years ago once again confounds batters.  These things are wrong of course, and they should be punished accordingly.  And in the case of Raj Raratanam, the league's leading insider trader, he has been punished severely: 11 years' worth of punishment.

But what Nicholas Cosmo did was evil.  Pure, unadulterated evil.  He preyed on people he knew, people who (for whatever misguided reason) trusted him.  And he stole their money.  Not their extra money, not money they could afford to lose.  No, he stole their life savings.  Every penny in some cases.  These victims were hardworking people of middle income, who invested their entire life savings into Cosmo’s "company."

At an emotional sentencing hearing, some of those victims spoke out:

“I’m going to be working until they put me in the grave.” - Ellen Gabriel, Hairdresser, lost $130,000.

“There are times when we are lucky to be able to eat one meal a day... We were looking at making money, but we thought we were dealing with a legitimate businessman.” - Paul Priore, lost $25,000, currently on disability from a car accident and caring for a hospitalized father.

These folks and the others like them have not only lost their money, but in some sense their dignity and self-esteem.  They will wonder for the rest of their lives why they trusted Cosmo and made such an awful misjudgment.  They will live with the knowledge that they were somehow complicit.  They could have said no.  But that surely does not absolve Cosmo one iota.  His evil scheme was the catalyst.  He destroyed lives and he is being punished accordingly.

• Print
• Comments
• Trackbacks
• Share Link

Last night the New York Mets lost their third straight on the diamond, dropping them to 25 games back of rival Philadelphia.  This afternoon their ignominious season comes to a merciful end; it will be the third straight season they’ve failed to win half of their games and the fifth straight in which they’ve missed the playoffs.  Nevertheless, the Mets higher-ups are no doubt rejoicing.

Why?  Yesterday, Judge Jed Rakoff hit a three run homer for the Mets.  Not quite a walk off grand slam, but close.  Mets owners Fred Wilpon and Saul Katz, all-around nice guys, were facing a lawsuit filed by Madoff trustee Irving Picard.  This suit alleges... a string of bad free agent signings.  Okay, not really.  Rather, the suit claimed they willfully ignored the fraudulent source of “dividends” coming from their investments with Bernie Madoff.  Rakoff would have none of it and dismissed nine counts; with the remaining two claims, he imposed a standard of “actual fraud”, making it virtually impossible for Picard to prevail.

“The Bankruptcy Code precludes the Trustee from bringing any action to recover from any of Madoff's customers any of the monies paid by Madoff Securities to those customers except in the case of actual fraud," concluded Judge Rakoff.

Rakoff decided to allow the case to proceed on the two remaining counts of actual fraud.  But instead of being on the hook for almost $300 million, the ruling limits Wilpon and Katz’s potential exposure to $83 million.  That’s a $200 million plus decision.  And that remaining "exposure"?  That's potential exposure.  They haven’t paid a nickel yet and likely will not.  The fraud claims will be nearly impossible to establish absent an insider.  Picard must prove Wilpon and Katz had knowledge of the fraudulent activity, and decided to capitalize on the Ponzi scheme at the expense of other investors.  Good luck.  Judge Rakoff has already called Picard’s evidence “less than convincing in this regard.”  After all, Wilpon invested with Madoff because their sons played baseball together, and because he heard of the lucrative returns Madoff promised and, for all appearances, achieved…

They may not be popping champagne in the Mets’ clubhouse this afternoon, another non-playoff season (five in a row??), but they almost certainly are in the owner’s box.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

This is a tough one to be sure.  The law favors the banks but we applaud the DOJ for trying.  It strains credulity that a sophisticated banker wouldn’t know what was going on with the flamboyant Stanford.  If banks are held accountable, the Stanfords of the world won’t exist, or at least cannot flourish.

As if a bad case of depression was not enough to delay a trial and no doubt a lengthy prison sentence to follow, billion-dollar Ponzi schemer, cricket player and nobleman (by bribe not birth), Sir Allen Stanford, is now—get this—claiming he has amnesia.  Yep.  Can’t remember a darn thing, nothing, nada, before his arrest in June of 2009.  Not the jets, not the wine, not all those billions. How convenient...  I think my kids once tried to claim this once when the kitchen window was mysteriously broken.  For this Allen you receive a second Corporate Observer Chutzpah Award.

But what’s even more interesting than Mr. Sanford’s latest tactic is the game being played by his bankers at SG Private Banking (Suisse SA), a subsidiary of the Swiss giant Societe Generale.  Turns out, they seem to also have a case of amnesia.  “Allen Stanford, hmmm… name sounds very familiar, can’t place him though, do you happen to have a picture?”  According to a recent article in the WSJ, SG Private Banking is being investigated by the Department of Justice for the vast assistance it provided Sir Allen.  Apparently, he had a secret numbered bank account at SG where he was able to tap directly into a hundred-plus million dollar account to fund his lavish lifestyle (that would be an understatement) and pay bribes to his Antiguan auditors and bank regulators.

You know those Swiss, they never said a peep, even though this stunk all the way to Basel.  The US Department of Justice wonders “what they knew and when they knew it.”  No doubt the bankers will say, “we were merely providing banking services.  How can we be expected to police and guarantee all of our customers?”  But it shouldn’t be that easy to avoid liability.

Think back to the 1920s when the likes of John Dillinger and Pretty Boy Floyd roamed the land “hitting” banks with reckless abandon.  Historians now surmise that many of these seemingly well-planned and courageous capers were “inside” jobs.  Someone (likely mob connected) opened the back door of the bank for these fellas or they were tipped off when money would be arriving and the guards would be on a smoke break.  That assistance, despite being subtle and carried out without a mask and gun, was nothing short of substantial given the circumstances.

This is a tough one to be sure.  The law favors the banks but we applaud the DOJ for trying.  It strains credulity that a sophisticated banker wouldn’t know what was going on with the flamboyant Stanford.  If banks are held accountable, the Stanfords of the world won’t exist, or at least cannot flourish.

Stay tuned.

• Print
• Comments
• Trackbacks
• Share Link

Social Security is not a Ponzi scheme.  My firm represents victims of four Ponzi schemes, totaling nearly a billion dollars in losses.  We know something about Ponzi schemes.  All such schemes begin with a bogus investment vehicle and the promise of a significant return on that investment.  In Madoff, it was a portfolio of stocks and other securities that didn’t really exist.  The schemes my clients have fallen for include the purchase of phony certificates of deposit, participations in phantom bridge loans, and the sale of nonexistent commodities.

At the outset the scheme pays what appears to be a hefty return on investment, but that return is merely funded by the proceeds of investments from new entrants joining the scheme.  There are no real returns.  There is no investment.  It is all just hot air.  And eventually, it runs out of new investments and crumbles.

I suppose Governor Perry finds it politically expedient to claim the Social Security system is a Ponzi scheme.  Best I can figure, his conclusion about Social Security is based on the fact that today’s contributors are not putting their dollars toward their own retirement, but rather funding the pensions of current retirees.  And when baby boomers retire they are going to need to rely on tomorrow’s workforce to fund their retirement and so on and so on.

Clever, Governor, but not a Ponzi scheme; just a system that is underfunded and needs reform.  I’m not a politician, but what’s the benefit of using the moniker of “Ponzi scheme”?  Why not simply address the issue with thoughtful analysis and intellectual rigor.  Seems to me we need a President with real ideas and concrete solutions and not phony slogans that in the end only consist of hot Texas air.

• 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

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

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

Let’s take a short ride back in time, not to the renaissance in Europe or even our own civil war.  No, just 5 years ago, February of 2006 in New York City.  All you need to bring is your common sense. 

February 2006

Chase (later to become part of JPMorgan Chase) does its first risk analysis on Bernard Madoff’s account.  The report expresses concern because returns were recorded as much higher than those of the actual contents of the portfolio.

June 15, 2007

A high-ranking Chase officer emails numerous colleagues stating his distress over client Bernard Madoff.  In it, he refers to the “cloud” over Madoff’s head and speculation that the account is “part of a Ponzi scheme.”

December 11, 2008

Mr. Madoff is arrested for allegedly operating a $50 billion Ponzi scheme.

March 12, 2009

Bernard Madoff admits in court that he ran a decades-long Ponzi scheme stretching back to the early 1990s.

June 30, 2009

At the age of 71, Bernie Madoff is sentenced to 150 years in prison for his crimes.

--------------------------------------

Folks, we just gave you the highlights.  You merely need to apply your common sense.  Big Bank has huge customer (with credentials, friends and lots of money).  They smell something is fishy in early 2006.  Do you think they just forgot about this multi-billion dollar customer?  Hardly, they became more worried in 2007; worried enough to utter the words “Ponzi scheme”.  But did they do anything?  Nope.  It was a huge account and at the end of the day, no one was going to rock the boat.

Claims against banks like JPMorgan Chase for aiding and abetting are difficult to be sure.  Irving Picard, the Madoff trustee, is pursuing such a claim against JPMorgan Chase; a recent New York Times article on his case is the source of much of the information above.  My firm is involved in several similar cases.  We seek only to hold banks accountable for their willful ignorance.

No these banks did not receive billions in fees, but they played an integral role in the scheme’s success.  Remember your common sense.  How many fancy and sophisticated investors would willingly invest with Mr. Madoff if he stored their earnings in a padlocked trunk under his bed?  A reputable bank makes all the difference in the world.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

This past week, Attorney General Eric Holder announced hundreds of criminal indictments of perpetrators of Ponzi schemes.  A rouge's gallery of con-men, grifters, lawyers turned bad, greedy securities brokers, and money “managers”.  But guess what?  They are not the problem.  Sadly these folks will always be around, making money the easy way: lifting it from the pockets of those who actually earned it.  Though Charles Ponzi dates back less than one hundred years to the roaring 1920s, there have been snake oil salesman and bogus land deals and the like dating to the roots of Capitalism.

It was Irving Picard, the Bankruptcy Trustee for the Madoff firm that struck closer to the heart of the matter with his civil lawsuit against JPMorgan Chase, Madoff’s banker.  As alleged in a still sealed lawsuit (where many details remain shrouded from public scrutiny), the bank – one of the largest and most powerful in the land – “turned a blind eye” and “ignored obvious red flags” as billions flowed in and out of the Madoff accounts.  They were happy to take their fees and use those multi-billion dollar deposits for lending reserves, but never asked a question.  Never a whisper:  “what’s this guy up to?”  Instead of buying securities for his clients, which we now know included hundreds of charitable foundations, Mr. Madoff and company simply laundered money: in one day, gone the next.  Not to buy securities, but to pay that magical return of 10-12% no matter what the markets were doing. 

No doubt JPMorgan Chase helped Madoff flourish.  While his accountant was located in a strip mall, Madoff needed a reputable money center bank to handle the cash.  He had a willing ally in JPMorgan Chase.  And surely other banks sought his business.

So Attorney General Holder, focus the great talents of your department on those banks and financial institutions that were home to so many Ponzi Schemes.  They provided aid and comfort to the fraudsters, at a minimum looking the other way and in some cases actively assisting in the operations of the fraud.  In either case, the banks willingly took fees and paid bonuses from the very profits they earned housing these thieves.  If the banks were out of the picture, Madoff and his colleagues would be forced to use some offshore facility (The Royal Bank of Trinidad and Tobago) which should give investors pause.

Some may be skeptical of my conclusion, but recall that these are the same banks that lost billions gambling on nearly worthless subprime debt, only to be bailed out by tax-payers. 

(Berk Law, my firm, is currently counsel to investors of several Ponzi Schemes who have filed claims against Bank of America and JPMorgan Chase).

• Print
• Comments
• 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

Yesterday SEC Inspector General David Kotz called the timing of the SEC’s recent lawsuit against the infamous Goldman Sachs “suspicious,” but this statement should be viewed in context (see WSJ story).  Yes, it coincided with the release of Kotz’s “scathing” report about the Commission’s handling of the Stanford Ponzi scheme.  And yes, I have been critical of my former colleagues at the Commission in the past. From my recent experience they can be plodding and overstaff even the smallest of matters (it’s not hard to see how they missed Madoff and Stanford).  But this most recent claim of “suspicion” is really rather petty and belies the facts.

First, the case against Goldman was bold and creative.  Perhaps it was akin to a makeup call by a sports referee.  (Missing Goldman’s more flagrant fouls over years, they frustratingly called a foul for a rather convoluted deal that touched on Goldman’s often duplicitous conduct that has made it the most powerful player on Wall Street).  But the result was swift and decisive.  Goldman quickly agreed to pay $550 million.  Over a half a billion dollars – even by Goldman standards that is nothing to sneeze at.  So I say: so what that the case was brought on the eve of another “scathing” report by Mr. Kotz?

Second, the new enforcement chief, Robert Khuzami, is a tough former federal prosecutor who needs more time to assemble his team and begin changing the culture of the enforcement staff.

Third, and most importantly, the SEC alone cannot both police and set the ethical tone for the entire financial sector.  Let’s not forget the role of the banks (who provided safe havens and substantial assistance for Ponzi schemes), accountants (signing off on the value of worthless assets to the tune of many, many billions), and the rating agencies (AAA ratings for Subprime Debt – how wrong were they?).

So Mr. Jonathan Kotz, Inspector General, let’s not issue reports merely to conclude conduct was “suspicious,” which simply undermines the progress of the Commission.  If you have something bring it on, otherwise let your colleagues focus on the hard work ahead.

Assisted by David Martin

• Print
• Comments
• Trackbacks
• Share Link

WAMU’s complicity in the scheme resulted in the defrauding of millions of dollars from thousands of investors.

Berk Law, the Law Offices of Keith L. Miller, in tandem with Cotchett Pitre & McCarthy filed an action in the United States District Court for the Northern District of California on behalf of victims of a $150 million Ponzi scheme involving thousands of defrauded investors and the promise of safe, high yield CDs. The scheme, centered in Napa, California, was the brainchild of William Wise, who has a long a record of securities violations. The defendant in the case is Washington Mutual Bank, which Wise used to facilitate the operation of his scheme[1].

Specifically, Wise used two branches of WAMU located in Napa California to deposit, transfer and wire throughout the world the money earned from his illicit activities. Eventually, as Wise’s account grew, WAMU’s branch manager in Napa suggested he obtain a remote deposit facility (often referred to as a reverse ATM). Before that device was provided, WAMU was required to audit Wise. WAMU also suggested Wise obtain software offered to the bank’s larger clients to direct and manage a high volume of wire transfers. This tool again required a WAMU audit. This second audit was run from WAMU’s treasury department in Seattle, Washington. By providing these special services, WAMU knowingly provided Wise with his own private “bank within a bank”.

As the complaint alleges, WAMU learned of Wise’s illicit scheme thorough two audits by two different managing departments, but nevertheless allowed Wise’s activities to remain unchecked. WAMU’s complicity in the scheme resulted in the defrauding of millions of dollars from thousands of investors.

During this time period, WAMU had been operating under a Consent Decree issued by the US Office of Thrift Supervision in 2007. The decree was in direct response to WAMU’s previous failures to comply with numerous federal anti-money laundering statutes including the International Money Laundering Abatement and financial Anti-Terrorism Act of 2001, the Money Laundering Control Act of 1986, and the Bank Secrecy Act of 1970. The Consent Decree, among other things, ordered strict compliance with bank secrecy and money laundering requirements, and called for new and improved policies for maintaining compliance with federal banks secrecy and money laundering laws.

Steven N. Berk, Counsel for the plaintiffs remarked, “WAMU’s history of putting profits above compliance to capitalize on the mortgage bubble is well documented, but only now are we seeing that same corporate culture spilling over into taking risks in other areas such as the support of illegal and shady investment schemes.”

Assisted by Zach Kady

• Print
• Comments
• Trackbacks
• Share Link

The SEC is getting aggressive on Ponzi and Prime Bank schemes.

Here we go again.  The SEC has shut down another Ponzi scheme.  When will it end?  It will only end when big banks stop sponsoring, assisting, and ignoring schemes that are operating within their banks.

From October 2006 until the summer of 2009, William Graulich IV of Henryville, PA was operating a fraudulent “Prime Bank” scheme under the nose of the SEC and through JP Morgan Chase bank accounts.  Graulich and his firm, iVest Inc., allegedly convinced at least 5 investors to deposit more than 13 million dollars into his accounts, mostly with JP Morgan Chase.  Graulich promised weekly returns from 22%-140%.  Graulich never made any of the investments that he had claimed, and was brazen enough to use a substantial portion of the funds for personal expenses, payment of back taxes, repayment of creditors, and other miscellaneous expenses.

Schemes like Graulich’s, which promise exorbitant returns with little or no risk to the investor, are exactly what we need to be watching for in today’s financial market.  The SEC refers to these schemes as “Prime Bank” schemes, or “High Yield Investment Schemes”.  The SEC warns that these programs often promise high returns with no risk, purport trading in sound financial instruments such as standby letters of credit and medium term bank notes, and murky language to disguise the source of financial gain.

It is nice to see that the SEC is getting aggressive and proactive in fulfilling its duties.  We hope this aggressive behavior continues, but for now ask a lot of questions.  To read the full SEC complaint, click here.

Assisted by: Zach Kady

• Print
• Comments (1)
• Trackbacks
• Share Link

It is time to return the term 'Ponzi scheme' to the microfiche headlines of the 1920s where it belongs.  To do so, regulators must start regulating and courts must start finding banks liable.

Over the past year or so, the term “Ponzi scheme” has sadly become as common as “Let’s have lunch” or “Text me.”  Yes, these schemes are emblematic of good old greed and the over-exuberance and blind optimism seen in all markets, but they also illustrate a serious failure in our banking system.  With leading reputable banks at their side, Ponzi schemes have the means to grow, metastasize, and take hard-earned (often retirement) monies from hundreds of thousands of victims.  Change needs to come in the form of enhanced regulation and the courts’ willingness to hold banks accountable.

One notable example is the case of an online Ponzi scheme called ADSURF.  Participants in this scheme were told in compelling YouTube videos, religious-type rallies, and internet ads that they could earn money by simply surfing the web.  When it sounds too good to be true, it is too good to be true.  All ADSURF was doing was recruiting new participants to pay into the scheme; this allowed the organizers to profit wildly while the unlucky newcomers got left holding the bag—just like all good Ponzi schemes.  

Contrary to core compliance requirements recently expanded and tightened in response to funding made available to the 9/11 terrorists, Bank of America placed itself at the heart of the ADSURF Ponzi scheme.  With the help of Bank of America, the ADSURF scheme went on to victimize over 100,000 participants who lost hundreds of millions of dollars.  Bank of America was privy to a slew of information that inexorably led to the conclusion that ADSURF was one big scam:

*         ADSURF was the brainchild of Thomas Bowdoin, a convicted felon with a history of securities fraud violations and failed business ventures.

*          ADSURF sold no products or services, held no intellectual property rights, and had no successful business professionals in management or on its Board.

*          ADSURF had no colorable, legitimate means to produce the massive profits (365% per year) Bowdoin and his co-conspirators promised investors.

*          ADSURF also lacked the means to legally generate the tens of millions of dollars a month flooding its tiny office—a former floral shop—in the small town of Quincy, Florida.

While unthinkable just a few years ago that one of the nation’s largest and most respected financial institutions could act so irresponsibly, their conduct is sadly consistent with a range of lax business practices.  A corporate culture that placed increased profits, seven-figure bonuses, and a higher stock price above sound banking judgment—this is the same culture that caused the Bank’s near-failure last fall (requiring a $45 billion dollar federal bailout because they were deemed “too big to fail”).

It is time to return the term “Ponzi scheme” to the microfiche headlines of the 1920s where it belongs.  To do so, regulators must start regulating and courts must start finding banks liable for knowingly assisting Ponzi schemes and other obvious fraudulent schemes.

• Print
• Comments
• Trackbacks
• Share Link

As harsh as it was, the Madoff sentence does virtually nothing to protect investors on Main Street.  What will?  Cleaning up the banks is a good start.

By now it’s old news: Bernard Madoff sentenced to 150 years in jail.  While news agencies and pundits debate ad nausea the deterrent effect and importance of this “symbolic sentence” (with good behavior Mr. Madoff will be released when he is 221 years old), a critical issue remains out of the public glare.  What about the bank Madoff and company used to support the largest and longest-running Ponzi scheme in history?  Remember that Madoff’s scheme relied upon him not buying any securities for his money management clients for over two decades.  Let me say it again, Madoff did not buy any securities for his clients since 1986.

So what did he do with the billions flowing in from feeder funds and a worldwide network of well-heeled promoters from around the world?  The simple answer is he put the money in the bank.  Not just any bank, but one of the world’s largest and most respected financial institutions: JPMorgan Chase.  Month after month, year after year, Madoff deposited billions.  Surely if he was running a legitimate money management firm those deposits would have been a mere fraction of that amount.  Why?  Because the money would be needed to buy securities and stocks for investors.  But he never bought those securities or stocks.  Statements given to his clients were no more real than a romance novel.  The stocks and bonds listed were never purchased, held or traded.  It was all a big lie.

Did JPMorgan Chase ever hush a word of this to the SEC or other regulators?  Did anyone say “this ain’t right”?  Probably not—the bank had huge accounts to service and there was plenty of money to be made.  Despite strict regulations placed on JPMorgan Chase by the Patriot Act, Anti-Money Laundering Act and Bank Secrecy requirements to be on the lookout for suspicious activity, the beat went on until the music finally stopped.

As harsh as it was, the Madoff sentence does virtually nothing to protect investors on Main Street.  What will?  Cleaning up the banks is a good start.  Empowering regulators, prosecutors and private attorneys to go after the banks is a good start.  Because without the banks' complicity, Madoff would have had no ability to take in billions every year.  Even he could not have gotten away with accepting cash or banking at anything less than a large money center bank.  Unless we clean up the banks, the chances are good, indeed certain, that we will see many more Ponzi schemes blossom before Mr. Madoff hobbles out of jail at the ripe old age of 221.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

• Print
• Comments
• Trackbacks
• Share Link

"A novel in quarterly installments"

I recently had the opportunity to review one of the quarterly statements Madoff sent regularly to victims of his odious crime.  They are rather chilling: 

• You begin from the top with those addresses: very legitimate.  Just off Wall Street and London’s exclusive Mayfair neighborhood; but as you go down the page it gets even more interesting.
• Exact stocks are listed, good blue chip companies: Coca Cola, Hewlett Packard, ExxonMobil (household names) with precise shares and values.
• You then see those Treasury Bills and a purported transfer (transfer numbers included) between long and short positions in stocks to bonds. Truing up at the end of the month in some elegant cosmic unified theory (he touted as a “split strike or conversion strategy used no less to “reduce risk”).
• No penny stocks, middle market unknowns, or exotic derivatives or futures on Manchurian sawdust.
• All the numbers add up – or so they seem.

But it was all a fiction, “a novel in quarterly installments." According to the court-appointed receiver, Madoff hadn’t purchased a security since 1992. These statements were written, devised and distributed to deceive. They did so masterfully; month after month, year after year.  In many cases they were sent to sophisticated investors.  But when you are winning it's only natural to congratulate yourself and not look too hard for problems (“I’m invested with Madoff and I’m making money”). It’s like a poker player who wins three or four hands in a row; it’s not luck or someone feeding him the cards – no it's skill, experience and pure gravitas.

My first reaction to seeing these statements was this could hardly be the work of one man. Surely not a 70 year old man without computer training who likely couldn’t program his cell phone; maybe a computer geek-extraordinaire (think Napster in Italian Job), but that’s only possible in the movies (poor Steven Spielberg, prominent Madoff investor).

No it had to have taken the work of a small – very loyal – cadre of confederates at many levels (heck Danny Ocean needed 11 to steal $150 million). These detailed quarterly statements, tell me it was the work of an IT department and many more generating these lies of a comfortable retirement and money enough for generations. You’d think years ago someone would have cracked and spilled the beans.

But my overriding reaction to seeing those statements (besides empathy for my client) was how true – how accurate – is my own brokerage or IRA statement? Do the stocks listed really exist somewhere and what if I need the cash one day – that day. In fact, how many statements are true?

You’d think the SEC, with its expertise and subpoena power could have asked to see a few of those “transfers” or verify all those purchases detailed in Madoff’s quarterly novellas. And what about the third party custodians controlling at least 1000 IRA accounts invested with Madoff? They surely never checked the basics: custody.  Where were these t-bills and stock certificates listed on those statements? Who had custody? One simple audit would have unraveled this house of cards.

We have long been in an electronic age with trillions of securities transactions daily. Investment houses and banks don’t have to have stock certificates in a big old vault (like the one visited by Harry Potter before heading off to Hogwarts) – but we have the technology to check, to verify, to audit, to ask the right questions, to design the right software to ferret out fraud. We need to use it.

Why not use some of those stimulus dollars to improve technology, coupled with stricter compliance regulations at the state and federal level. Private rights of action that hold banks, custodians and anyone allowed who is entrusted with someone else’s assets accountable are also key. Finally, courts must judge these entities as fiduciaries – requiring them to exercise the highest duty recognized by law.

Creating those protections will not eliminate the next Madoff, but it might just reduce the number and size of future schemes. We will always have swindlers but we must do everything possible to reduce the sheer volume of these schemes, making less likely the enormity of pain and ruined lives Madoff and his confederates left in their wake.

Finally, more protection for all investors will create a higher level of confidence: critical to getting Main Street back into the markets and the financial system back on its feet.        

* Steven Berk is currently co-lead counsel against FiServ and other entities that served as the exclusive third party IRA custodian for Madoff Securities.

• Print
• Comments
• Trackbacks
• Share Link

"It’s time to stop protecting the banks”

Ponzi schemes seem to be everywhere these days. Yes of course, there is Bernie Madoff and upwards of $50 billion he stole from the rich, the famous, and scores of charities and philanthropic foundations. But Madoff was hardly alone. There are plenty of lunch bucket schemes robbing hard working middle class people around the country.

On Long Island, convicted felon Nicholas Cosmos (no not Kramer from Seinfeld) fleeced firemen, municipal employees, and blue collar workers of likely $400 million claiming he was putting their money in high interest bridge loans for construction projects. Nope. He was instead lavishly spending those hard earned dollars and speculating on high risk commodities trading.

Where did he deposit all that money? Bank of America.

In another scheme operated from Quincy, Florida, another convicted felon, Andy Bowdoin, had the clever idea to pay people to “surf” the Internet. But what they were really doing was operating a multi-level marketing scheme, which had no actual investments and paid participants for not “surfing the web” but signing up new participants. ADSURF fooled over 100,000 people hoping to earn a little extra money from home in an economy where jobs are often hard to come by.

Where did he bank: Yep. Bank of America.

All these schemes need a bank to thrive: a financial institution accepting deposits and funneling monies to the schemers and their confederates. Victims think the scheme is legitimate when they can wire transfer their “investment” to Bank of America.

But the law and Judges almost without exception shield banks from liability in connection with a Ponzi scheme. In most cases the perpetrator of the scheme is gone (sipping rum drinks on some distant island) or in jail awaiting sentencing. Victims look to the bank. However, even if they can establish the bank had actual knowledge of the Ponzi scheme and had “violated its own internal policies and repeatedly violated the anti-money laundering provisions of the Patriot Act”, the bank will not be held liable.   Mazzaro De Abreu, et al. v. Bank of America 525 F.3d 381 (S.D.N.Y 2007).

The legal hurdles victims of a Ponzi scheme must surmount make it nearly impossible to hold the bank liable regardless of their assistance to the fraud.

To be sure, the banks should certainly not be responsible for every bit of illegal conduct flowing from monies held in deposit. But when the bank takes affirmative steps to help the scammers they must be held liable. They cannot gain fees and other income by sponsoring the scheme – without the risk of liability.

If the courts get tough on the banks they will be more vigilant and Ponzi schemes will be shunned to the back alleys of the financial, system where they belong.

There – they are less likely to grow and ruin the financial lives of so many thousands.

*Steven Berk is currently counsel to victims of Ponzi schemes who have filed cases against Bank of America for their alleged substantial assistance to perpetrators of these schemes.

• Print
• Comments
• Trackbacks
• Share Link