Monthly Archives: January 2009

Marcus Schrenker’s past finally caught up with him. The Indiana financial manager was arrested by authorities on Jan. 13 after staging his own plane crash to escape financial ruin.

U.S. marshals located Schrenker late Tuesday night at a campsite in Quincy, Florida. Schrenker was then taken to a nearby hospital. Once released, he faces securities fraud charges for allegedly bilking clients out of hundreds of thousands of dollars.

This isn’t first time Schrenker, who heads Heritage Wealth Management, Heritage Insurance Services and Icon Wealth Management, has been on the wrong side of the law. Mark Maddox, a former Indiana securities commissioner and later a lawyer, approached county and state regulatory officials in 2002 over concerns about Schrenker’s business practices. No investigation, however, ever evolved from Maddox’s inquiries.

Seven years later, 38-year-old Schrenker is charged in what many are calling a mini Bernard Madoff scheme. In between providing financial advice and managing investors’ portfolios, Schrenker created a personal empire. In addition to a 10,000-square-foot luxury home in the exclusive Geist Reservoir area, Schrenker was an avid collector of rare cars and owner of two airplanes.

Now it’s likely Schrenker will be trading in his Armani suits for less-attractive attire. In addition to the avalanche of lawsuits expected from investors, Schrenker already was facing $10 million or more in potential and actual court judgments and legal claims when he departed Indiana in his Piper aircraft on Jan. 11. State regulators also have filed charges against Schrenker for operating as a financial manager even though his license had expired in Indiana.

“My heart goes out to victims who lost money,” said Maddox, in an interview for Fox Channel 59. “I think we’re going to see not just hundreds of thousands but millions lost before the final accounting is done.”

Madoff Recovery Questions Answered

How big is the Bernard Madoff scandal?

The Madoff fraud is being called the largest financial fraud in U.S. history. Following Bernard (Bernie) Madoff’s arrest on Dec. 11, authorities estimate that the scale of the alleged scam could be as much as $50 billion, with 4,000 or more investors suffering extraordinary financial losses. Among those investors: ordinary citizens, charities, foundations, pension funds, municipalities, college trusts, senators, wealthy celebrities, hedge funds, universities and global banks, even Madoff’s own sister.

At the time of his arrest on Dec. 11, investigators discovered more than 100 signed checks worth $173 million in Madoff’s office that he was ready to distribute to family members and friends.

How did Madoff operate his scam?

Madoff conducted what is known as a “Ponzi” scheme. Named after Charles K. Ponzi who used the technique after arriving in the United State in 1903, a Ponzi scheme entails paying early investors with proceeds from those who enter the the investment scheme later on. A Ponzi scheme is similar to a Pyramid scheme.

Madoff conducted his Ponzi scheme through his investment-advising business, Bernard L. Madoff Investment Securities LLC. 

Why wasn’t Madoff caught earlier by authorities?

A number of factors apparently were at play that allowed Madoff to remain under the radar for so many years. First, Madoff himself was an extremely savvy financial money manager. As the former president of NASDAQ, he was highly respected on Wall Street and in financial circles. His clients were equally influential, and included the Who’s Who of the wealthy, cultural organizations, higher education institutions, charities and global financial services firms, among others. 

Second, Madoff alone oversaw the accounting of his investment advisory business. There was no third-party oversight whatsoever.

Did any red flags exist regarding Madoff’s scam before his arrest on Dec. 11?

Unfortunately, signs of Madoff’s deceit may go back as far as the 1970s, when charges of misconduct were brought against the disgraced money manager. In terms of the $50 billion Ponzi scheme, several Wall Street whistleblowers made reports in 1992 and 1999 to the Securities and Exchange Commission (SEC) about Madoff and his operation of what they called a “modern-day Ponzi scheme.” 

Publication articles, including a 2001 story in Barrons’ magazine, also openly questioned as to how Madoff could produce such consistent high returns for investors when no other brokers seemingly could.

Can investors who lost money with Madoff recover anything?

Despite Madoff’s claims of financial insolvency, Irving Picard, the court-appointed trustee charged with liquidating Madoff’s assets, numerous individual attorneys, and the SEC all believe investors will be able to recover some of their lost funds.

If you invested money with Madoff, you can call a special FBI hotline at 212-384-2359. Investors also can contact the Securities Investor Protection Corporation (SIPC) at 888-727-8695.

In addition, the SEC provides regular updates regarding Madoff on its Web site at http://www.sec.gov/.

Where can I find additional information about investor recovery?

Our Web site, www.subprimelosses.com, offers a comprehensive library of articles on the Madoff case, as well as information on other investment-related issues.

If I decide to take legal action, what is the cost to file a suit?
First and foremost, our team of lawyers will work with you to review your situation. You are not responsible for any fees or expenses unless a recovery is obtained. To review your case, call us at 866-827-6537.

Are there other avenues for recovery?

The Securities Investor Protection Corporation (SIPC) serves as the FDIC of brokerage and investment firms in the United States. In the event a brokerage firm fails, this is an investor’s first line of defense to retrieve money missing from his or her account.

In the Madoff case, the SIPC may pay up to $500,000 to individuals who invested directly with Madoff. Indirect investors – those who invested in so-called feeder funds that then funneled money to Madoff’s funds – also can file claims with SIPC.

However, the reserve funds held by SIPC can in no way cover the entire $50 billion that investors allegedly lost in the Madoff scam. The SIPC’s fund, which is supported by broker-dealer assessment fees, currently has a balance of $1.6 billion.

The trustee handling the liquidation of Madoff’s business also has identified more than $830 million in liquid assets that may be subject to recovery.

Where is Madoff today?

Madoff remains free on a $10 million bond. On Jan. 13, United States Magistrate Judge Ronald L. Ellis ruled Madoff to be confined to his Manhattan penthouse with an electronic ankle bracelet and 24-hour monitoring. In addition, the judge ordered searches of Madoff’s outgoing mail. Prosecutors in the case continue to argue that Madoff’s bail should be revoked because Madoff violated previous restrictions when he sent more than $1 million worth of jewelry as gifts to friends and family over the holidays.

Madoff has yet to enter a plea in the case. Both the New York Times and the Wall Street Journal have suggested that Madoff’s lawyers are actively negotiating a plea agreement that could result in the case never going to trial.

The story began in 2006, when five Wisconsin school districts – Kenosha Unified School District, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District and Whitefish Bay School District – went looking for investment advice to shore up its teachers’ retirement plans. David Noack, a local investment banker with Stifel, Nicolaus & Company, had the perfect solution. It involved hedge funds and investments in complex collateralized debt obligations (CDOs).

According to Noack, the investment was simple, safe, even conservative. There was no way anyone could lose. The school districts’ board members knew very little about CDOs; they did know Noack, however. He had been a trusted advisor to them for years.

The five Wisconsin school districts ultimately took Noack’s advice and borrowed $200 million from the Depfa Bank of Ireland. In addition, they invested some $35 million of their own money to purchase three CDOs sold by the Royal Bank of Canada (RBC), which also had a relationship with Noack. Under the arrangement, the Wisconsin school districts would receive the spread between the interest rate they were paying on their loan from Depfa and the interest rate received from their CDO investments, according to a Nov. 8 article in the St. Louis Business Journal. The spread itself was lucrative: “several million dollars” over the seven-year life of the investment.

Everything worked – for awhile. Then, the districts began to notice something was off. Bonds are expected to deliver consistent, steady returns, yet the value of the districts’ investment kept fluctuating wildly.

The school districts found their answer after hiring a lawyer. They discovered the AA/AAA-rated corporate bonds that had been touted by Noack and Stifel, Nicolaus & Company at the beginning of their deal didn’t exist. Instead, the “safe” investment described to them consisted of synthetic CDOs that purchased high-risk subprime mortgage-backed securities and other toxic investments.

In addition to the CDOs, the districts learned that another part of their investment consisted of a credit default swap. Unbeknownst to them, they were in the insurance business, responsible for guaranteeing about $20 billion on a pool of corporate bonds. If the bonds did OK, so did their investment. However, if just a handful of companies in that CDO pool were to default, the school districts could lose all of their money.

The inevitable happened. Lehman Brothers, American Insurance Corporation (AIG), Washington Mutual, Fannie Mae and Freddie Mac all were part of the districts’ CDO pool. So far, the Wisconsin school districts’ $200 million investments have lost $150 million of their value. 

The districts are now suing Stifel, Nicolaus & Company and the Royal Bank of Canada. In addition to fraud, negligence and breach of contract, the districts allege that both firms intentionally misrepresented the CDOs and the credit default swap as safe, low-risk investments.

Meanwhile, the people and the companies responsible for orchestrating the deal for the school districts – David Noack, Stifel, Nicolaus & Company and the Royal Bank of Scotland – have raked in millions of dollars in fees for their services.

 

The plot concerning hedge fund manager Bernie Madoff continues to thicken. And this time the news may benefit the growing number of investors trying to recover some of the $50 billion that the disgraced 70-year-old and former Nasdaq stock market chairman scammed from them as part of a massive Ponzi scheme.

On Jan. 5, the Securities Investor Protection Corp. (SIPC) reported that Irving Picard, the trustee charged with overseeing the liquidation of assets from Madoff’s investment firm, had identified $830 million in liquid assets. Both Picard and the SIPC subsequently mailed more than 8,000 claim forms to investors who lost money in the investment fraud. The deadline for claims to be filed is March 4.

Claim forms and instructions also are available on the SIPC’s Web site at http://www.sipc.org/cases/sipccasesopen.cfm.

 

Meanwhile, prosecutors in the Madoff case are asking a federal judge to immediately revoke Madoff’s $10 million bail and place him behind bars. Their reasoning is based on the fact that Madoff apparently transferred various items totaling $1 million in value to a third party following his arrest on Dec. 11. The allegation, if true, violates a previous freeze on Madoff’s assets by the Securities and Exchange Commission (SEC).

As the case continues to build against Madoff, more investors are coming forth with accounts of their financial losses. As reported Jan. 5 by Bloomberg, Harley International Ltd., a hedge fund run by Cayman Island-based Euro-Dutch Management Ltd., invested all of its assets – $2.76 billion – with Madoff. Other Investment firms that have lost billions in the Madoff swindle include Tremont Group Holdings and Fairfield Greenwich Group. 

One of the first tasks greeting lawmakers in the new year will be to examine Bernard (Bernie) Madoff’s alleged $50 billion Ponzi scheme and why the Securities and Exchange Commission (SEC) appeared to be asleep at the wheel before detecting the fraud. On Jan. 5, members of the House Financial Services Committee plan to hold a lengthy discussion on the Madoff scandal as part of an effort to radically reform the impaired U.S. regulatory structure that oversees banks and financial service firms. 

On Dec. 11, federal agents arrested Madoff at his luxury Manhattan apartment on charges of securities fraud. The 70-year-old hedge fund manager is accused of running a massive Ponzi scheme – a rob-Peter-to-pay-Paul scam in which early investors are paid off with money from newer investors. The nickname of “Ponzi” is coined after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s.  

Investors scammed in Madoff’s modern-day Ponzi scheme include numerous foundations and charities, universities, some of the world’s biggest banks, actors Kevin Bacon and Kyra, director Steven Spielberg, Dreamworks chief Jeffrey Katzenberg Sedgwick, former Salomon Brothers Chief Economist Henry Kaufman and countless others. 

Flushed with investors’ cash, Madoff built a massive financial empire for himself over the years, with mansions in Manhattan, the Hamptons and Palm Beach, Florida. Many of the clients Madoff later duped were recruited from the country clubs that the money manager belonged to.   

The allure of exclusivity may have, in part, allowed Madoff to keep his scam undetected for so long. A client had to “know” someone to get a meeting with Madoff.  Even in the face of too-good-to-be-true financial results and lack of account transparency, people still clamored to get on board with Madoff.  

Now, after having lost their life savings, many of those investors are wishing they had jumped ship long ago.   

On Dec. 30, the trustee placed in charge of Madoff’s money management firm, Bernard L. Madoff Investment Securities LLC, obtained court approval to use $28.1 million out of its accounts as it begins the liquidation process.  

Shortly before his arrest, Madoff told employees that his own financial worth had deteriorated from billions to approximately $200 million to $300 million. Madoff has until midnight Dec. 31 to provide the SEC with a detailed list of his assets. 

Only a few months ago, Madoff’s firm ranked as the 23rd-largest market maker on Nasdaq, handling an average of about 50 million shares a day. Now, instead of taking orders for some of the largest companies in the United States, Madoff faces the likely prospect of spending the rest of his life behind bars. 

For Madoff’s investors who have lost everything because of the decades-long fraud swindle, it’s a fitting end for the so-called legend of Wall Street. 

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.