The Complexity of Bernie Madoff's Ponzi Operation is Coming to Light

The Wall Street Journal published an article this week with more information about how Bernie Madoff's Ponzi scheme could operate with so few people. I've always been skeptical that anyone could pull off such a massive fraud without a team of people involved. It looks like the government is now putting together a case showing that a team was behind the fraud and it ran for a much longer time than previously estimated: nearly four decades.

Going After the Deep Pockets in the Madoff Case

If you are looking for a break from today's coverage of the Supreme Court's ruling on ObamaCare, the NYTimes has an interesting article on the legal doctrine that is making it hard for Irving Picard to recover money from the banks that helped enable Madoff's historic Ponzi scheme.

Madoff and Merkin: A $410,000,000 Resolution

Photo from NY Times

We've written before about Ezra Merkin's hedge funds that fed Madoff billions of investor dollars. Merkin collected his fee and then apparently went to the beach to rest from his hard work. Occasionally he took a break from the beach and the golf course to write to his investors and tell them how he actively managed the funds.

Merkin has now settled part of the lawsuits against him for claiming to actively manage his funds and then giving Madoff the money. Here are some details from the NY Times...

Sir Allen Stanford gets life sentence

Well, the US Justice Department comes through on Ponzi schemer, Allen Stanford and sentenced him to 110 years for running his $7 billion Ponzi scheme. 

Unless you follow fraud like I do, you probably have never heard of Stanford. That is one bizarre effect of the Bernie Madoff fraud. If Madoff hadn't come to light about two months before the Stanford fraud came to light, everyone would know Sir Allen since his Ponzi scheme would have been known as the largest in history, by far. If you want to learn more about Sir Allen, including why I refer to him as "Sir" you can read the posts linked here.

Now, I just hope the Justice Department decides to prosecute some of the fraudsters who caused the mortgage meltdown and put the world economy in a the great recession...

Mets Owners Settle Willful Blindness Case

Just as jury selection was about to begin, the New York Mets owners have opted to settle the $303 million lawsuit against them.  While the article is a bit unclear, I believe the settlement amount of $162 million is in addition to the $83 million in fictitious profits that the Mets owners already had to return per a ruling by Judge Rakoff.  

The SEC's Record with Large Ponzi Schemes: Not So Hot

I've been listening to Harry Markopolos's book, "No One Would Listen: A True Financial Thriller" (I recommend it by the way) and have been surprised at how much of the book is devoted to criticizing the SEC. From Harry's account, the SEC totally dropped the ball and was incompetent, corrupt or both in how it handled the Madoff case. I personally think he has a pretty good argument and that the SEC has managed to avoid serious consequences even though the Madoff case was a tragedy that they could have prevented.

Well, now that the Stanford Ponzi scheme is being tried, we are learning that the SEC also dropped the ball with Sir Charles. It may be that the SEC really doesn't understand Ponzi schemes or that they are underfunded, undereducated, understaffed and under-incentivized. All we know for sure is that they appear to be underperforming. Reuters has an article that talks about how Sir Charles was able to keep the SEC at bay for so many years while he built his Ponzi empire, complete with retail offices in the U.S. I recommend it for further insight.

One claim by Markopolos is that the SEC staff are all basically looking for a job in industry to make more money. As such, when they go to investigate a firm, they also ask for a job application. The Reuters article seems to add a second witness to this claim as it describes a former SEC investigator by the name of Barasch and his role in helping Stanford stay out of the SEC's crosshairs:

Barasch was told at the time by an SEC ethics officer that he was legally precluded from representing Stanford. Barasch went to work for Stanford anyway. In a later investigation of the failure to catch Stanford earlier, the SEC Inspector General asked Barasch why he did so. His reply, according to the Inspector General's report: "Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines." 

FBI agents and prosecutors also uncovered evidence that on at least two occasions Barasch sought confidential information regarding the SEC's probe of Stanford during his brief representation of the banker, Justice Department officials said in court records and a press release. 

In agreeing to pay the fine, Barasch denied any misconduct, settling the matter "to avoid the expense and uncertainty of protracted litigation," his attorney, Paul Coggins said.

Another claim by Markopolos is that the SEC seemed to avoid taking on the Madoff case because it was too large and complex. Instead, they went after cases that Harry describes as fleas while the elephant (Madoff) was running free. This Reuters article also seems to bear this out in the following quote:

In 1997, 1998, 2002, 2004, and 2005, according to internal agency records seen by Reuters, examiners for the SEC recommended that the agency investigate Stanford. In three of those instances, Barasch, at the time an SEC official in Ft. Worth, personally overruled the examiners' recommendations, according to those records. Those decisions helped the Ponzi scheme to continue unabated for several additional years, costing investors additional billions of dollars, according to a report by the SEC's Inspector General. 

Barasch told the SEC Inspector General that he made those decisions because he was not sure the SEC had the statutory authority or jurisdiction to investigate. He blamed his superiors and a broader culture within the SEC for pressuring the staff not to pursue complex and difficult cases, according to the Inspector General report. 

Apparently, Barasch was able to help Stanford both while he worked for the SEC and after he went to work for Sir Allen (i.e. Stanford) himself. Sounds like a bad case of a corrupted fraud investigator. I have a feeling I will be reading another book in the future about how the SEC dropped the ball in the Stanford Ponzi scheme too, costing thousands of people billions of dollars.

Another Link Dump

Here are a few more links to keep you up to date on the latest fraud-related news:

Happy New Year and A Few Links

Happy New Year! While I've never really been one for New Year's resolutions, I do intend to post more often over the next year. In the meantime, I've been collecting links to write about on FraudBytes and I've fallen a bit behind. In an effort to purge my queue, here are a few articles worth reading: 

Madoff and Watergate

No, Bernie Madoff didn't play a role in the Watergate scandal (at least as far as we know) but it turns out that his Ponzi scheme may have been going way back then. If so, it will go down in history as not only the largest Ponzi scheme we know of but also the longest running scheme too (by far!). This new revelation is according to the guilty plea of 66 year old David L. Kugel who was apparently associated with Madoff even back when Richard Nixon was in the Whitehouse. Here are a few quotes:

Widow of Mark Madoff Talks

ABC News has an article about Mark Madoff's widow, Stephanie Madoff Mack, and her view of what Bernie did to her. Here are a few quotes I found interesting:

Madoff and the SEC: Serious Conflicts Existed

The NY Times recently discussed the results of a report on the SEC showing that a lawyer with heavy involvement in the Madoff case had serious conflicts of interest. Here are a few key quotes from the article:

Madoff Claims He's Teaching at Harvard

It sounds like Bernie Madoff is telling stories again. According to this short article on Fox, Bernie said:

The Latest on Bernie Madoff's Victims

An excellent NYT editorial discusses the latest in the Bernie Madoff saga.  For those of you who may not be following the story very closely, last Thursday the judge overseeing the civil suits brought against alleged beneficiaries and enablers of the Madoff fraud threw out a suit against HSBC, dealing a pretty substantial blow to the efforts to recover funds for Madoff's victims.  The entire editorial is worth reading, but here are a few tidbits that stood out to me:

Fraud Professionals are the Real Winners in Madoff Case

The fees paid to fraud professionals such as attorneys, consultants and accountants to clean up the mess that Bernie Madoff's famous Ponzi scheme left is projected to reach over $1 billion! According to the Washington Post the fees paid to such professionals last year were almost $300 million and an additional $800 million is projected. Almost half of the fees went to the law firm of the trustee, Irving Picard. These fees are being criticized by those overseeing the case as described in the following quote from the Washington Post:

Ponzi Schemes and Sophisticated Investors

So when you read about a small, $50 million dollar, Ponzi scheme coming to light, you almost always read about some gullible investors who had no idea they couldn't make 50% returns in a legitimate business deal. The list of victims was recruited from friends or family in an affinity fraud and almost always includes a bunch of doctors and dentists who have too much money and think they need a bunch more but don't understand risk and return. It is very rare that the so-called sophisticated investors who understand risk and return get duped. The following story was sent to me by a former student, Robert Madsen, who pointed out that this is what makes this story incredible...

Madoff's Dealings with the Mets: Lookin' Shady to Me

The New York Mets have made the news recently but, unfortunately for them, it's not because their spring season is boding well for the rest of the season. Instead, the Mets are finding serious opposition is coming from the trustee in the Madoff case, Irving Picard, who is suing the Mets' owners, the Wilpon and Katz families, for $1 billion.

As it turns out, the Mets may have thought their biggest rivals were  the Yankees or the Phillies, but this year, they may start wondering if Picard is working for one of their rivals. Picard's amended case is 381 pages long and is likely to be a bigger challenge to the organization than any of those teams can muster. From what I can tell, the most potentially damning allegation in the case is Picard's contention that the Mets' owners knew Madoff was accustomed to doing shady business and that he transacted some such business with the owners. Here are some details that may pose a challenge to the owners as stated in a recent NY Times article on the matter:

Winners and Losers in the Madoff Case

Irving Picard

Irving Picard, the trustee in the Madoff case, was in court last week as a panel of three judges heard arguments on whether net winners in the Madoff case ought to be able to collect money from the government. Net winners are those who took more cash out of Madoff's funds than they put in. Apparently, there are several of these guys who think they should get more money. Hmmmm.....

The WSJ had this to say about the case: "The judges' decision is likely to determine which Madoff customers may collect up to $500,000 apiece from the Securities Investor Protection Corp., an industry association created under federal law to insure investors in failed brokerages. It is also expected to affect how to divide billions of dollars Mr. Picard is recovering through legal settlements with people who withdrew money from the Ponzi scheme."

Now, it seems just a bit greedy to me that investors who got more money from Madoff than they put in would also be trying to collect from the taxpayers simply because Madoff sent them a statement showing they had more fictitious profits than they had already withdrawn! Apparently, the judges showed signs of wonder too as the WSJ reported the following:

Bernie Madoff Implicates Banks and Hedge Funds

The Correctional Facility that Houses Bernie Madoff

The NY Times is reporting that Bernie Madoff was interviewed in prison and has said that, at least some of, the banks and feeder funds knew he was operating a Ponzi scheme. This is not going to be well received by JP Morgan Chase who is being sued by the Madoff trustee who asserts the bank should have known or did know that Madoff was operating a Ponzi scheme. Here are some key paragraphs from the article:

Sir Allen Stanford: Prison Beating and Drug Treatment

Allen Stanford--Accused of $7 billion Ponzi Scheme

Although it's been some time since I've posted anything on Sir Allen Stanford and his $7 billion Ponzi scheme investigation (see this link for prior posts mentioning Stanford), I've been following his case and thought I'd share the latest news on the Knight from Antiqua or the Scammer from Texas, depending on who you talk to.

Stanford was supposed to go to trial last month. However, it appears now that his trial will be postponed for several months. The reason is because he's recovering from his cushy life in prison (not). Just yesterday, in my fraud class, I talked about the myth that white collar criminals have a cushy life in prison. I showed my class what Mark Morze, the former ZZZZ Best fraudster, said about white-collar-prison life.

In an interview several years ago, Morze explained his five years in prison in Lompoc, California. Here are some quotes from an article describing Morze's experience:

Bernie Madoff News: NY Mets and JP Morgan Chase

The past week has led to two new stories related to Bernie Madoff's massive Ponzi scheme. I'm going to provide a short blurb and a link to an article in case you want to read more.