Madoff Family Targeted in $30 Million Lawsuit

Irving Picard, the court-appointed trustee who has been working to recover the billions of dollars lost in the historic Bernard Madoff Ponzi scheme, has just filed three lawsuits, said The Associated Press (AP).

Madoff, 72, pleaded guilty to running the biggest Ponzi scheme in history. He has long maintained that he acted alone and no one—no family members, friends, or colleagues—were aware of his fraud. Madoff is now spending 150 years in prison for orchestrating the massive scam that is estimated to have cost duped investors an incomprehensible $65 billion.

Bernard L. Madoff Investment Securities is the investment firm that served as a ”front” for the scam, noted CNN previously.

Picard filed the recent lawsuits in an attempt to recoup over $30 million that he alleges the Madoff family invested—primarily in oil and gas properties and technology companies—said the AP. The lawsuits were filed in U.S. Bankruptcy Court in Manhattan by Irving Picard and follow another lawsuit he filed in November, said the AP. The November filing seeks about $200 million from Madoff family members who, Picard said “lived lavishly while using the family finance business like a ‘piggy bank,’” wrote the AP.

According to the AP, Picard wrote a so-called sarcastic statement regarding the recent lawsuits describing the shamed financier as being “quite generous” with the funds he took from thousands. “Foremost among the recipients of Madoff’s gifts of customer funds were his closest family members, including his wife Ruth Madoff, his brother Peter, his two sons Andrew and Mark and his niece Shana,” Picard said, quoted the AP.

The AP said that defendants named in the lawsuits include Madoff Energy Holdings LLC, Conglomerate Gas Resources, Madoff Technologies, Madoff Brokerage & Trading Technology LLC, Primex Holdings LLC and Madoff Family LLC. According to Picard, said the AP, the entities were controlled by Madoff family members, many of whom were Madoff employees.

The lawsuits seek over $22 million that was invested in technology companies, over $5 million invested in oil and gas properties, and $3 million from the Madoff Family Fund that also included hedge fund and a biotechnology company investments, noted the AP. According to the filings, the investments were allegedly used to move money from Bernard L. Madoff Investment Securities, said the AP. The lawsuits also allege that Madoff’s business investment arm issued statements as far back as December 2008 for some 4,900 open customer accounts and were claimed to have been valued at $68 billion, said the AP. In truth, all but $20 billion were lost by Madoff, said the lawsuit, wrote the AP.

Since news broke of Madoff’s scheme, the SEC has been faulted for failing to detect the historic fraud since 1992 and for not fully going after tips, having inexperienced staff handle reviews, not looking into unbelievable and sustained profits, not pushing when Madoff was clearly caught in lies, and not pursuing trading records that would have pointed them to the scam.

The disgraced financier apologized at his sentencing in June for lying to thousands of investors and deceiving his wife, brother, and sons.

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KIA rejects insider trading allegations

The Kuwait Investment Authority (KIA) has reportedly prepared a report in response to parliamentary allegations by MP Musallam Al-Barrak that some of its officials had been involved in insider trading. A KIA insider said that the report has now been completed, adding that Finance Minister Mustafa Al-Shamali will present it to the cabinet when His Highness the Prime Minister Sheikh Nasser Al-Mohammed Al-Sabah returns to Kuwait.

The insider said that the report includes detailed answers to the points raised by the MP and refutes the accusations made against the KIA. The official said that the KIA’s staff are upset as these accusations are made every year whenever its budget is discussed in parliament. KIA staff believe that these allegations are only made for political gains, and must be strongly refuted, so that they are not repeated.
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Zamansky: Goldman Sachs and the SEC Take the Easy Road

The SEC deserved a lot of credit for filing the case against Goldman Sachs for its dubious creation of the ABACUS CDO transaction.  To recall, Goldman created the ABACUS deal so that a hedge fund manager could short the mortgage market, and then sold the securities to an unsuspecting client without disclosing the investment was built to fail.

But while the SEC deserves plaudits for filing a challenging case, settling the case without requiring Goldman to address whether fraud was committed misses the point entirely.  Moreover, this allows Goldman Sachs to avoid turning over potentially incriminating documents about the ABACUS deal, other CDO transactions and the failure by Goldman to disclose the Wells Notice it received after the SEC initially launched its investigation.  Having filed a  shareholder class action case against Goldman Sachs, it was a slight disappointment to see Goldman pay a fine rather than be truly held accountable for its actions.  Speaking of which, while the fine appears to be substantial, its a drop in the bucket for Goldman Sachs, and the “admission” of a mistake was crafted by Goldman lawyers to be later able to deny liability.

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Finra Panel Orders JP Morgan To Pay Customer More Than $2M

A securities arbitration panel ordered J.P. Morgan Securities to pay a customer more than $2 million, including sanctions, for allegedly failing to adequately respond to the customer’s requests for certain documents.

Michael Hannon, the customer, alleged civil fraud, breach of fiduciary duty and failure to supervise against J.P. Morgan Securities, the retail brokerage unit of J.P. Morgan Chase & Co. (JPM), according to the award.

The claim, filed in 2009 on behalf of Hannon and a revocable trust in his name, related to the purchase of various securities, including Citigroup (C), ING Groep N.V. (ING), Fannie Mae (FNMA), and Freddie Mac (FMCC), according to the award. Hannon originally sought $3.5 million and other relief.

A Financial Industry Regulatory Authority arbitration panel in Richmond, Va., awarded Hannon $1.8 million, plus interest from May 2008. The Finra panel also made an additional–and rare–award of sanctions in the form of $218,000 in legal fees, $25,000 in expert witness fees, and $9,000 in costs, according to the award, dated July 8.

It found that J.P. Morgan and its lawyer, Stephanie Karn of Richmond, Va., allegedly weren’t “wholly forthcoming,” in responding to the customer’s requests for certain emails and other important documents during a phase of the proceedings when parties typically exchange information. The panel had ordered J.P. Morgan to produce the emails and certain correspondence, according to the award.

A J.P. Morgan spokeswoman and Karn declined to immediately comment.

The sanctions against J.P. Morgan are “highly unusual,” says Jonathan Uretsky, a New York-based securities lawyer who represents brokerages. The award may have reflected the panel’s dissatisfaction with the alleged extent of J.P. Morgan’s compliance with its order, he says.

Finra panels that order sanctions don’t typically provide reasons in writing for the basis of the award, says Dale Ledbetter, a securities lawyer in Fort Lauderdale, Fla. who represents investors. “It’s extremely rare, but it should be done in every case where there’s wrongdoing,” he says.

Andrew Park, a lawyer in Richmond, Va. who represented the customer, declined comment.

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SEC Aggressively Policing Swaps After Recent Loss

The Securities and Exchange Commission recently lost its first battle to enforce insider-trading laws over the vast business of credit default swaps, but compliance departments should take note: The agency still won the right to police such trading generally.

The SEC saw its case—one of the first filed under its new system of specialized, fast-acting enforcement teams—dismissed in federal district court when the judge determined that no insider trading actually occurred between the two defendants in question. But, crucially, the judge did rule that trading in credit default swaps is governed by Section 10(b) of the Securities Exchange Act, and that the SEC can at least try to bring insider-trading cases involving credit default swaps if it chooses.

Henning

That conclusion could have serious implications for hedge funds, financial institutions, and even corporations that trade in credit default swaps, a business that exploded in popularity in the 2000s and then crashed back to earth after the financial crisis. At the moment, swaps are essentially unregulated financial instruments (expect regulatory reform pending in Washington to change that soon) and enforcement has been non-existent. Peter Henning, a securities law professor at Wayne State University and a former SEC lawyer, describes the swaps trade as “a complete Wild West.”

The SEC tried to change that last year when it first filed charges against Renato Negrin, a former portfolio manager at hedge fund investment adviser Millennium Partners, and Jon-Paul Rorech, a salesman at Deutsche Bank. The SEC alleged that Rorech tipped Negrin to confidential information about changes to a bond offering by Dutch media company VNU, which was expected to inflate the price of credit default swaps on VNU bonds. Negrin then allegedly purchased swaps on VNU for one of Millennium’s hedge funds ahead of the news; the bond restructuring was announced, the price of VNU swaps soared, and Negrin sold Millennium’s holdings for a $1.2 million profit.

After a three-week bench trial in June in the Southern District of New York, however, federal judge John Koeltl ruled that the SEC failed to establish the necessary elements of its insider-trading claim against Negrin and Rorech. He concluded that the agency failed to prove that the information Rorech shared was material or confidential and said Rorech didn’t breach any duty he had to Deutsche Bank.

Referring to SEC allegations that insider information was passed between the two men during two unrecorded cell phone calls, Koeltl wrote: “While the SEC attempts to attribute nefarious content to those calls through circumstantial evidence, there is, in fact, no evidence to support this inference and ample evidence that undercuts the SEC’s theory that the defendants engaged in insider trading.”

“This case is a statement by the SEC that it is going to police this largely unregulated area.”
—Thomas Gorman,
Head of Securities Litigation Practice,
Porter Wright

There is no word on whether the SEC may appeal. An agency spokesman says the SEC is reviewing the decision.

Henning says the case shows the challenges of “trying to apply the traditional fraud analysis to a market that’s very different than the traditional stock or bond market.” Typical insider-trading cases involve stocks or bonds widely traded on public exchanges and sensitive information related to a significant transaction (a merger, for example) or corporate earnings report. But credit default swaps and other derivative instruments are quite different, Henning says.

“When you get into more exotic securities like credit default swaps, that aren’t heavily traded and where there’s a lot of contact between the players in the market, with information being exchanged … almost on a minute-by-minute basis, it’s harder to prove any insider information got passed,” he says.

Broader Implications

Koeltl’s 122-page decision does have a silver lining for the SEC: It meticulously explains why credit default swaps are governed by Section 10(b), subject to insider-trading and anti-fraud laws generally.

Rorech and Negrin’s lawyers had argued that the SEC had no jurisdiction because the credit default swaps in question weren’t securities-based swaps, and therefore were exempt from SEC oversight as stipulated in the Commodity Futures Modernization Act. Koeltl rejected that. Instead, he concluded that the material terms of the swaps hinged on the price, yield, value, or volatility of VNU’s securities—which meant the swaps were indeed securities-based instruments, subject to the antifraud provisions of Section 10(b) of the Securities Exchange Act.

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Lenko settles over insider trading allegations

The Alberta Securities Commission has reached a settlement with Charles Lenko and his Calgary company Kylskap Creek Holdings Ltd. in relation to insider trading allegations.

Under the settlement agreement, Lenko and his company admitting to breaching Alberta securities laws when Lenko caused his company to purchase 20,000 shares of oil and gas company Profound Energy Inc. with knowledge not generally disclosed that his employer, Paramount Energy Trust, was in talks to acquire Profound Energy.

The settlement requires Lenko and Kylskap to pay the commission $15,600 to settle the allegations and contribute a further $4,750 towards costs. Lenko and Kylskap also agreed to cease trading in or purchasing securities for a period of two years.

The commission said Kylskap Creek realized a profit of $10,400 when it sold its Profound Energy shares four days after a news release announced the acquisition of Profound Energy by Paramount Energy Trust.

According to the settlement agreement, Lenko was the sole director and shareholder of Kylskap. It also described Lenko as an Alberta resident, who began working for Paramount as an evaluations engineer in December 2008. He was later promoted to become manager of mergers and acquisitions.

In that role, Lenko led a team that conducted business valuations on oil and gas companies that were potential acquisition targets for Paramount.

News of the settlement comes just weeks after Paramount Energy Trust completed a conversion to become Perpetual Energy Inc. (TSX: T. PMT, Stock Forum). Under a plan of arrangement, unitholders of the trust received shares of Perpetual in exchange for the cancellation of their trust units.

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Fin Reg: Wall Street Wins Decisively

If you want to know who got the upper hand when it comes to the Financial Reform Bill, follow the money. Bank stocks are currently trading higher and financials are out-performing all other sectors. As Dick Bove, a high-profile analyst that covers Wall Street put it, “I think I would be buying bank stocks this morning.”

That’s because the Financial Reform Bill Washington is touting didn’t protect investors in any substantive way. Congress failed to address the Supreme Court’s “Stoneridge” decision, which would have afforded investors protection against Ponzi Schemes and other large scale frauds commonly aided and abetted by large financial institutions. And don’t let the headlines fool you, Congress totally punted on the requirement that brokers put their clients’ interests ahead of their own - the so-called “fiduciary” standard. Failing to address these two issues is a one-two punch in the gut for investors.

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Goldman Told to Pay Bayou Fund Creditors

Goldman Sachs Group Inc. was ordered to pay $20.6 million, the largest arbitration award levied against the securities firm, to unsecured creditors of Bayou Group LLC who accused Goldman of ignoring signs of fraud at the hedge-fund firm.

Bayou collapsed in 2005, and the firm’s former chief executive, Samuel Israel III, is serving a 20-year prison term for fraud. He pleaded guilty to misrepresenting the value of Bayou’s funds and defrauding clients out of more than $400 million.

Goldman cleared trades for the Connecticut hedge-fund firm before it collapsed. In 2008, Bayou’s unsecured creditors’ committee filed an arbitration claim against two Goldman units.

“Through either gross negligence or a willful choice to ignore the signs of fraud, [Goldman] failed to diligently investigate the red flags it was made aware of, to contact Bayou’s auditors to request additional information, or to alert the appropriate authorities of what it had learned,” lawyers for the committee alleged in the claim.

A three-person Financial Industry Regulatory Authority arbitration panel didn’t provide an explanation for its ruling, issued Thursday. A Goldman spokesman said the panel didn’t conclude that the firm committed any wrongdoing or violated any rules.
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Judge Dismisses Charges in Major ‘Swaps’ Case

A federal judge dismissed a high-profile insider-trading case against a Deutsche Bank salesman and hedge-fund trader, finding the Securities and Exchange Commission offered “no evidence” to support its allegations.

In a 122-page opinion, U.S. District Judge John Koeltl rejected key components of the SEC’s case against Deutsche salesman Jon-Paul Rorech and Renato Negrin, a manager of the Millennium hedge fund.

The SEC sued both men, alleging they shared confidential information about a debt restructuring and then traded swaps, a type of derivative, based on that information. The defense maintained no inside information was exchanged.

Richard Strassberg, a lawyer for Mr. Rorech, called the decision a “complete vindication” for his client. Mr. Negrin said in a statement, “I’m grateful the court was able to reach the right decision based on all of the evidence. I look forward very much to putting all of this behind me.”

An SEC spokesman said the agency is reviewing the decision.

The case represented the SEC’s first attempt to extend its reach beyond stock and other securities and into the murky field of swaps and other derivatives contracts. The judge found the SEC did have jurisdiction over swaps in this context but didn’t agree with the allegations that the contracts were bought based on inside information.

The decision doesn’t appear to impair the SEC’s jurisdiction over swaps. The financial regulation bill heading toward passage in Congress also makes clear the SEC’s authority.
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Merrill Lynch’s CDOs: The Thundering Herd Tramples Its Wealthiest Clients Yet Again

Individual investors who choose to do business with Merrill Lynch would be wise to take the time to read the complaint filed two years ago by Massachusetts regulators. They outlined, in impressive layman’s language, how the firm deceived its clients into believing that auction rate securities were safe, liquid, cash equivalent investments when in fact they were risky and illiquid.

“Time after time, when confronted with conflicts of interest, Merrill Lynch was consistent in that it placed its own interests ahead of its investor clients,” the complaint alleged.

An excellent compendium to that complaint was an article recently published by the Wall Street Journal about how Merrill brokers duped a bevy of the firm’s high net worth investors into buying high risk collateralized-debt obligations with assurances that they were also risk free.

“This was a great chance to participate with the big boys,” one client whose family lost millions because of Merrill’s CDOs recalls a broker as saying.

CDOs are indeed for the big boys and Merrill was the leading issuer of these toxic products.  But what Merrill clients clearly didn’t understand  — perhaps because they were never told — was that the CDOs they were buying were the lowest-rated slices; the higher rated slices were sold to more sophisticated institutional investors, the Journal says.

The Journal says that Merrill targeted investors with a net worth in excess of $5 million, and, therefore met the SEC standard of what constitutes a “sophisticated investor.”   That standard should have been altered long ago. For example, one of Merrill Lynch’s victims was a hair-salon entrepreneur - should someone who can leverage an expertise in shearing and coloring hair into a multi-million dollar business, automatically be qualified to evaluate highly sophisticated financial products?

Merrill’s defense is that the offering documents disclosed that the CDOs carried considerable risk, but that warning statement is contained in virtually every financial product the firm sells.  That’s why investors rely heavily on the representations made by their brokers.  And those representations will figure heavily into arbitration claims; if clients can prove that their brokers misled them, Merrill will likely need more of a defense than hiding behind it’s standard legal boilerplate.

Merrill ultimately was forced by the SEC to make whole the clients it fleeced with auction rate securities.  Buyers of CDOs likely have similarly strong claims and should aggressively pursue arbitration or court cases.  And investors who choose to continue doing business with Merrill should be wary of any product their brokers pitch that can’t be readily understood.  If a financial product sounds too good to be true, it probably is.

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