Category Archives: Investor Beware

First there was Bernie Madoff, now Texas financier Robert Allen Stanford is making a name for himself by running an alleged $8 billion fraud scheme. On Feb. 17, the Securities and Exchange Commission (SEC) filed a civil lawsuit against Stanford and three of his companies on charges of orchestrating a fraudulent, multibillion-dollar investment scam that involved an $8 billion certificates-of-deposit program.

Stanford’s companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis, as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG), in the enforcement action. 

According to the SEC’s complaint, Stanford lured investors with promises of big returns on certificates of deposit but instead poured money into illiquid real estate and private equity investments. The complaint also alleges Stanford used false historical performance data to add $1.2 billion in revenues to a “proprietary mutual fund wrap program” called Stanford Allocation Strategy.

On Feb. 17, federal authorities raided Stanford Financial Group’s offices in Houston. A sign outside the office now reads: “Under management of receiver.” Currently, Stanford’s whereabouts are unknown. Many believe the money manager may be hiding out in Antigua.

Stanford International Bank is operated by a small group of family and long-time friends, according to a Feb. 17 article by Forbes. The firm’s investment committee, which oversees the bank’s portfolio, is made up of Stanford; his father, James Stanford; Pendergest-Holt, who, the SEC says, had no financial services experience prior to joining Stanford Financial Group; and James Davis, Stanford’s college roommate.

In 2008, SIB promised clients 12-month certificates of deposit paying interest rates of 4.5%. That rate represented a 3.5% premium over two-year U.S. Treasury bonds (which were paying just below 1%). In June of 2005, SIB was offering CDs paying 7.45%.

According to the SEC’s complaint, SIB showed a 1.3% loss on its investments last year while the S&P 500 declined nearly 40%.

The parallels between Madoff and Stanford are uncanny. Like Madoff, Stanford’s fraud appears to have global implications, reaching from the Texas to Caribbean and around the world.  Stanford also lived a lavish lifestyle. Known as “Sir Allen” after being knighted by Antigua’s prime minister, the Texas financier owned private jets and spent millions on sport sponsorships and charities.

Also like Madoff, Stanford offered too-good-to-be-true investment opportunities. Law enforcement agencies questioned his investing strategies as far back as 1998 but, just like the Madoff case, nothing was done until it became too late.

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted investment losses.

Investors may get a welcome shot in the arm if Florida’s attorney general and several state lawmakers have anything to say about it. On Feb. 11, Attorney General Bill McCollum joined Senator Garrett Richter and Representative Tom Grady to unveil a legislative proposal designed to strengthen Florida laws protecting securities investors.

According to the Florida Attorney General’s Office, the legislation – Senate Bill 1126 and House Bill 483 – would broaden the ability of state authorities to investigate and pursue securities fraud, as well as enhance registration requirements for investment advisors, dealers and other personnel.

In addition, the proposed legislation gives the Attorney General the ability to participate in civil investigations with the approval of the Office of Financial Regulation.

Grady, a securities attorney and expert in securities regulation, is the author and House sponsor of the bill. Richter, a banker and chairman of the U.S. Senate Banking & Insurance Committee, is sponsoring the bill in the Senate. The legislation is expected to be heard during the 2009 Legislative Session.

In recent months, thousands of Floridians have become victims of securities fraud, including the alleged $50 billion Ponzi scheme orchestrated by Bernie Madoff. On Feb. 11, the Securities and Exchange Commission (SEC) announced that a partial civil agreement had been reached with Madoff. Under the terms of the deal, Madoff cannot contest the SEC’s civil fraud allegations. Possible civil fines and restitution will be decided at a later date.

The civil proceeding is separate from the criminal case against the New York money manager. Today, Madoff remains free on a $10 million bond.

Only hours before money swindler Bernie Madoff was arrested on securities fraud charges, his wife pulled $15 million out of a brokerage account. According to a complaint filed Feb. 11 by Massachusetts Secretary of State William Galvin, Ruth Madoff withdrew $5.5 million on Nov. 25 and $10 million on Dec. 10 from Cohmad Securities. On Dec. 11, federal agents arrested her husband for allegedly running a $50 billion Ponzi scheme.

Cohmad Securities was founded by Madoff and friend and former neighbor Maurice “Sonny” Cohn some two decades ago. The company, whose name is combination of Cohn and Madoff, had offices in the same Manhattan building as Madoff’s so-called investment advising business, Bernard L. Madoff Investment Securities. 

As reported Feb. 11 in the New York Post, Cohmad Securities received millions of dollars in service fees and account maintenance from Madoff during the past eight years. According to documents from Massachusetts securities regulators, those payments totaled $67 million and made up 84% of Cohmad’s total income.

In December, both Cohmad Securities and its vice president, Robert Jaffe, were subpoenaed by Massachusetts authorities in connection with the federal investigation of Madoff.

Galvin is now trying to suspend Cohmad’s state license so that the company can no longer act as a broker in the state of Massachusetts.

Meanwhile, Madoff, the alleged mastermind behind the $50 billion Ponzi scheme, remains out of jail on a $10 million bond. So far, federal prosecutors have not charged Ruth Madoff – who’s been married to her husband for nearly 50 years – with any crimes.

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

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 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. 

Public officials of financially strapped states like California, Florida, Nevada, Ohio, Wisconsin and Michigan are outraged at New York-based securities firm Goldman Sachs for advising some of its biggest institutional clients to bet against state municipal bonds by purchasing credit default swaps. Meanwhile, Goldman has collected millions of dollars in fees to help those states sell some of the very same bonds.

According to a Dec. 10 story by Bloomberg, in the three months since Goldman recommended shorting municipal credit, the value of the Markit MCDX index of the derivatives’ price more than tripled – from 87.75 to as high as 278.33 basis points.

Goldman’s strategy of shorting municipal bonds of fiscally depressed states could ultimately result in even more problems for taxpayers. Concerns about a state’s credit quality often means bond prices go down. In turn, that can drive up the interest rate states and municipalities must pay to borrow money. And it all affects taxpayers. An increase of one percentage point on a $1 billion bond issue translates into a cost to taxpayers of an additional $10 million a year in interest. 

The added financial worries couldn’t come at a worst time. States, which already have closed $40 billion in fiscal year 2009 budget gaps, face at least an additional $97 billion that they must close over the next 18 to 24 months, according to a just-released national report by the National Conference of State Legislatures.

In a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman apparently advised buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks, according to the Bloomberg article. The firm went on to recommend the derivatives in states with heavily unfunded pensions and other retiree obligations.

Goldman is one of the top five municipal bond underwriters in the United States. Its latest trading strategy of betting against its own clients is a bad way to conduct business – period. In this case, Goldman is baking its cake and eating it, too, while states in which Goldman served as the underwriter of their securities can look forward to an even more troubled fiscal outlook in the months ahead.

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. 

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are on the Hill trying to sell their $700 billion bailout to lawmakers. Yesterday Secretary Paulson and Chairman Bernanke testified before Congress that the bailout must be passed quickly and cleanly in order to prevent further economic crisis.  Chairman Bernanke warned that inaction by Congress would lead credit markets to continue to seize up, meaning lost jobs, higher unemployment and more foreclosures.

While most parties freely recognize that these are unprecedented times and that the economy is on the brink, not all are willing to accept the Bush Administration’s bailout proposal.  Many commentators have labeled the plan a “knee-jerk” reaction being pushed using scare tactics.  Most in Congress want at least more time to evaluate the plan.  That certainly should be a reasonable expectation when one is talking for taxpayer money at these levels.

It is critically important that the plan be designed and implemented to succeed with its purpose-to assist in the recovery of the US economy and turn the current tide.  If the taxpayers are going to foot the bill for the mistakes and greed of Wall Street, they should be confident that whatever proposal is ultimately put in motion will have the desired effect.  This plan must benefit those on Main Street and not simply bailout the very parties responsible for the mess in the first place.

Wall Street and its executives made hundreds of millions of dollars by creating the exotic mortgage-related securities cited as the cause of the current financial crisis.  It is understandable that many in this country are suspicious of a bailout that in any way rewards the greed and bad behavior that created the mess we are in.  Unfortunately the plan as proposed does not seem to adequately address the concerns of either the common citizen or Congress. 

This plan must be properly vetted and Congress must be allowed to address its concerns before the taxpayers give the Treasury a $700 billion blank check.

Massachusetts Secretary of State William Galvin is coming down on Merrill Lynch, one of the largest securities firms in the U.S., for not disclosing to its investors the volatility of the auction-rate market.

Galvin claims that Merrill sold auction-rate securities to investors, even though it was aware that the market was collapsing. Galvin asserts that Merrill profited by $90 million over the past two years because of its program to sell auction-rate securities.  

Merrill’s research analysts were censored from disclosing the high risk of the market, which failed in mid-February this year and left many investors with illiquid holdings.  Galvin’s complaint also claims that Merrill pressured and often evaluated its analysts based on how they projected positive messages about auction-rate securities.

Galvin filed a complaint against UBS AG in late June for similar deceptive actions by the bank to sell auction-rate securities as money-market funds.  

This is not the first time Merrill Lynch has been accused of using questionable research to attract buyers. In 2000, Merrill was found to have published misleading research that encouraged investors to invest in two Internet companies, Interliant Inc. and 24/7 Real Media Inc., both of which held shares that plummeted in value over the course of one to two years. The SEC accused Merrill, along with nine other firms, in 2002 with using biased research to attract investors, which resulted in a $1.4 billion settlement.

The claim against Merrill Lynch urges the firm to compensate its investors for their investment losses and potentially pay a fine.  However, investors generally do not see any recovery from regulator actions.  The best (and often only) way for investors to seek redress is through an individual arbitration action.

Imagine, after the market collapsed you were forced to sell your auction-rate securities at a significant discount, even though you were advised beforehand that these securities were as safe as money-market funds. Then, at your arbitration hearing, one of the three panel members charged with deciding your case is an employee of another firm that also sold auction-rate securities. Do you expect you will receive a fair and unbiased hearing?  

That is the question posed by Jane Bryant Quinn in her commentary on today’s Bloomberg.com.

According to Ms. Quinn, the recent arbitration claims regarding auction-rate securities illustrate how the odds are stacked against investors in the securities-industry arbitration.

All claims exceeding $50,000 require that the panel of decision makers includes two public members and one industry representative. The industry rep often acts as the “talking head” for Wall Street. Their job is to explain the industry’s point of view to the others, but of course will likely be favoring the exact practices you are there to protest. To make matters worse, as a “specialist”, their opinion is considered superior and their input may be given greater weight.  

The industry and FINRA have always rejected investor lawyers’ wishes to rid the system of the industry position. However, last year when the Arbitration Fairness Act emerged in congress (containing a clause requiring all public members on panels) FINRA hedged their position, slightly. Just last week, FINRA announced a two-year pilot project that allows as many as 420 cases to be heard by the proposed all-public panel.

Many lawyers embraced the plan as a trivial, small step to fairness. But this path to fairness was interrupted by FINRA after the Public Investors Arbitration Bar Association (PIABA) asked that potential panelists who had worked for firms that originated or sold auction-rate securities be excluded from hearings on auction-rate cases. FINRA shot down the idea and decided arbitrators are merely required to disclose if they worked for firms that sold auction-rate securities, sold them themselves or supervised anyone who did after January 1, 2005. The decision to select those arbitrators will then be left in the lawyers’ hands.  

Though it sounds like a fair proposal, the decision has lawyers irritated. “The steam is coming out of my ears,” said Phillip Aidikoff of Aidikoff, Uhl & Bakhtiari. “Where are the people who speak for individual investors?” 

Panels are chosen by both sides of the case, and then ultimately named by FINRA. Each party gets three lists of eight names, randomly picked by a computer from the arbitrator pool (one list for the industry panel and two lists for the public members). Each side is permitted to strike up to four names for whatever reason they want, and rank the remaining four. Then FINRA chooses the arbitrators most acceptable for both parties.  Since the arbitrators involved with auction-rate securities are still in the panelists pool, it forces the lawyers to use up their challenges to get rid of them. These challenges may have been used for reasons such as ridding of someone whose awards consistently disfavor of the industry, or challenged for cause – meaning direct and definite bias or interest.

If you have an auction-rate case against a large brokerage firm and get an industry panelist from a different large firm, how can they award the investor damages when his company is up against the same charges? That question has yet to be answered by FINRA.