Wednesday, October 28, 2009

Madoff victims get some money

It was reported today that victims of Bernard Madoff's Ponzi scheme received $530 million which was guaranteed by the Securities Investors Protection Corp (aka SIPC). The SIPC guarantees brokerage accounts up to $500,000 and is similar to the FDIC which guarantees bank accounts. Apparently, this payout of over one-half billion dollars is a record which exceeded the combined payout of the SIPC from 321 previous payouts since 1970! Sad as it is, Bernie Madoff will definitely be remembered as a fraudster for the record books!

Monday, October 26, 2009

Madoff friend found dead in his pool

The Madoff case seems to get crazier each time a news report comes out on it! Last week's allegations were deemed too speculative for us to do a post. We want to see some confirmation about these allegations before wasting too much energy on them. They are definitely extreme but this is an extreme case so who knows?!

However, the most recent news is not speculative but involves a fact that Madoff's friend, Jeffry Picower was found dead at the bottom of his pool at his Palm Beach mansion. Here are a few claims from an article posted yesterday on
  • Picard is listed as one of the wealthiest Americans by Forbes magazine.
  • Madoff trustee, Irving Picard, claims Picower was complicit in the fraud.
  • Picard claims that "Picower was the biggest beneficiary of Madoff's scheme, having withdrawn either directly or through the entities he controlled more than $7.2 billion of other investors' money."
  • Picower was being sued by the Madoff trustee for $7.2 billion.
Today's WSJ and other reports say that Mr. Picower's lawyer said an autopsy shows Picower suffered a massive heart attack that caused his drowning while he was swimming.

Wednesday, October 21, 2009

Insider Trading Loss

More on Raj Rajaratnam's alleged insider trading scheme: the alleged scheme produced a net loss for defendants (from NYT):
Raj Rajaratnam, the authorities say, masterminded one of the biggest insider-trading schemes in a generation.

But if Mr. Rajaratnam was trading on insider information, apparently he was not very good at it.

A close examination of the trades that led to his arrest last week reveals a startling fact: In all, Mr. Rajaratnam lost millions from what prosecutors characterize as illegal trading.

Marc Dreier on 60 Minutes

This 60 Minutes segment on Marc Dreier is very candid and well worth the 13 minutes it takes to watch:

Tuesday, October 20, 2009

Catching Up: A Few Links

Another reminder that tax incentives and poor oversight are a great recipe for fraud (via WSJ):
...Des Moines, population 200,000, is dealing with a nasty hangover. A lavish tax-incentive program that brought Hollywood to its doorstep has come to a halt amid allegations of faulty oversight, poor record-keeping and potentially criminal abuse.
Charges were brought against 41 individuals allegedly involved in a widespread mortgage fraud scheme (via NYT):
“The fraud schemes alleged in the cases unsealed today reflect a veritable smorgasbord of scams,” Mr. Bharara said during a news conference in Lower Manhattan. “Whether the economy was going up or the economy was going down, these alleged fraudsters were working feverishly to game the system.” 
Other Madoff Aides Said to Be Tied to Fraud:
The trustee, Irving H. Picard, citing his own findings, asserted that 245 of the almost 5,000 active Madoff accounts were directly managed by other Madoff staff members, not by Mr. DiPascali.
Like Mr. DiPascali, these employees created records of fictional trades that maximized the reported profit in the accounts, the trustee’s filing asserted. Indeed, it claimed those accounts showed bogus profits in excess of the fictional gains recorded in the DiPascali accounts, which ranged from 10 to 17 percent.
According to the filing, the accounts included those set up for Stanley Chais, a Los Angeles investment manager whose clients lost millions in the fraud, and Jeffry Picower, a professional investor who withdrew billions from his Madoff accounts.
The special accounts also included ones set up by members of the Madoff family and employees at the firm, according to the document.
And finally, PCAOB Announces Ambitious Agenda; May Be Time to 'Dial Up' on Fraud, Silvers Says (HT FASRI):
In response to questions, Silvers said, "We should not expect that every audit is a forensic audit... that's absolutely not what I'm saying." However, he added, "I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud."

"This was subject to some extensive discussion in the Treasury committee (Treasury's Advisory Committee on the Auditing Profession or ACAP]," said Silvers, adding, "some people, [e.g.] Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don't find fraud, it's the auditors fault; but it's also not my view that looking for fraud is not related to the audit, that doesn't parse with the public's [perception] of the audit profession."

Alleged Insider Trading

You may have seen recent reports in the news of an alleged insider trading ring.  The WSJ points out that the "prominence of the alleged conspirators" is surprising:  
Why a purported billionaire would want to risk all of that for insider trades that prosecutors say yielded some $20 million in total gains is a mystery that we assume further evidence will explain.
I am interested in seeing how this case unfolds.  Based on what we know now, it seems that the potential costs of insider trading far outweighed the potential benefits to this group of individuals.  Since this appears to be a group of highly intelligent individuals, you have to wonder what would motivate them to participate in the alleged insider trading ring.

Tuesday, October 13, 2009

Enron Update

The WSJ reports that the Supreme Court will consider the appeal of Jeffrey Skilling, former President, CEO, and COO of Enron:
The justices agreed to look at two issues in the Skilling appeal. Both could have broader repercussions in criminal cases, say legal observers. One has to do with the government's contention that Mr. Skilling violated his legal obligation of providing "honest services" to Enron shareholders because he lied to the public about the company's financial condition. Enron collapsed into bankruptcy in December 2001. The second issue involves Mr. Skilling's claim that he wasn't able to get a fair trial in Houston, Enron's headquarters, because of anger in the community over the company's collapse.
I find it curious that eight years after Enron's collapse we still see some ambiguity regarding the legal consequences of the Enron scandal.  If nothing else, this highlights the increased opportunity that managers have to get away with fraud, as financial statement fraud appears to be a difficult crime to prove/prosecute.

Tuesday, October 6, 2009

Medicare fraud

Medicare fraud is a huge problem and has many dimensions. I've heard promises that the health care reform proposals will be partially funded by reducing such fraud. With those promises floating around, it's amazing to me to read in the WSJ that the Senate Finance Committee rejected a proposal to require immigrants to "prove their identity when signing up for federal health care programs." This makes absolutely no sense to me...

Friday, October 2, 2009

The Madoff trustee has been busy lately...

The WSJ has reported two major lawsuits filed recently by the Madoff trustee. The first was reported yesterday and involves a $7.2 billion claim against Palm Beach, Fla., investor Jeffry Picower. Apparently, Mr. Picower was able to specify the returns he wanted and Bernie gave them to him. The trustee claims that Picower took home profits totaling $7.2 billion! That's not a bad arrangement: I want a 50% return, compounded daily please! Of course, Mr. Picower claims he had no idea Bernie was operating a Ponzi scheme.

Then, today, the WSJ reported that the trustee is suing various Madoff family members for nearly $200 million. While it doesn't sound like a lot any more, this really is an incredible sum of money. Apparently, Bernie paid nearly 75% of these funds to family members in the last six months before the scheme unraveled. Peter and Shana Madoff held the titles of Chief Compliance Officer and Compliance Officer at Madoff's firm. As such, the trustee is saying they were essentially complicit in the fraud because if they would have done their job they would have prevented or detected the scheme.

Some other revelations that are coming out of the trustee's investigation include:
  • the trustee believes the total losses by Madoff investors is about $18 billion
  • approximately half of the investors took out more money than they put in
  • total deposits to Madoff were about $36 billion
  • total funds sought by the trustee in lawsuits to this point are $15 billion
This saga will continue for a long time. We do know one winner in it all: the attorneys will undoubtedly come away from it with plenty of money to invest with someone. I wonder who is eying their cash and soliciting their investments...maybe the next huge Ponzi scheme will get their funds!