Florida fund manager Arthur Nadel was indicted Tuesday on criminal charges for allegedly soliciting hundreds of millions of dollars in investor money under false pretenses and misappropriating client funds. Mr. Nadel, 76 years old, was charged in a 15-count indictment with mail fraud, securities fraud and wire fraud.
“It’s a much more complex story than the indictment may suggest,” said Mark Gombiner, Mr. Nadel’s lawyer. “We’re going to be evaluating what our defenses are.” Mr. Gombiner said his client will plead not guilty.
Previously, the SEC had filed a complaint against Mr. Nadel related to the same frauds perpetrated on his investors. “Nadel solicited prospective clients to invest in the funds by making various misrepresentations about the performance and value of the funds, including that the net asset value of each of the funds was tens of millions of dollars,” the U.S. Attorney’s Office in New York said in a statement. “Nadel also claimed to investors that his purchases and sales of securities in the Funds had generated cumulatively more than $271 million in gains. In truth, Nadel’s trading resulted in an overall net loss in the funds.”
Back in January, Nadel went on the run and spent two week in hiding. He had ditched his car in an airport parking lot. One of his investors had demanded an independent audit after the fallout form the Madoff scandal.
Next month, Frontline is running a report about Bernard Madoff on a PBS station near you. The episode premiers the week of May 12.
“Bernard Madoff’s success as a broker made the competition wonder how the man could produce such steady returns in good times and bad. The SEC investigated several times over the last two decades, but Madoff remained untouched until last December when he admitted it was all “one big lie.” Frontline producers Martin Smith and Marcela Gaviria unravel the story behind the world’s first truly global Ponzi scheme – a deception that lasted longer, reached wider and cut deeper than any other business scandal in history.”
We live in an age of white-collar villains. But of all the financial bad guys out there, Marc Dreier is arguably the single greatest character of them all. Bernie Madoff may have stolen more money. Dick Fuld may have caused more systemic damage. But it’s Dreier alone whose story reads like the stuff of Hollywood. Dreier isn’t just accused of swindling more than $400 million from thirteen hedge funds. Prosecutors say he carried out the deception by inventing $700 million in financial assets out of whole cloth, staging fictional conference calls, and impersonating executives, sometimes personally, sometimes with the help of an associate, all while snapping up Warhols and waterfront homes, partying with pop stars and football players, and chasing an endless parade of much-younger women. He also allegedly stole some $40 million from his clients’ escrow accounts, a brazen legal sin. Unlike Madoff, who worked from behind the scenes in the Lipstick Building, Dreier took a starring role in his own financial drama. Where Madoff was outwardly quiet and self-effacing, Dreier was openly egotistical, even smug. He seemed to think he could lie to his victims’ faces and get away with it, to thrill, even, in the art of deceiving people. It’s been suggested that Bernie Madoff was a pathological liar. With Marc Dreier, there appears to be little doubt.
This paragraph comes from a great article in New York Magazine by Robert Kolker: The Impersonator. Like Bernie Madoff, Marc Dreier bilked unsuspecting investors out of many millions of dollars. But Dreier did it with flair.
The photo of Dreier with Michael Strahan is from the free content collection of Newscom.
There is “rampant Ponzimonium.” Or is there a “virtual Ponzipalooza”?
Bart Chilton, a commissioner at the Commodities Futures Trading Commission coined these terms in his speech on March 20 before American Bar Association’s Committee on Derivatives and Futures Law Students.
Personally, I prefer Ponzimania.
The CFTC has filed charges against 15 alleged Ponzi schemes so far this year, compared with 13 during the whole of 2008. (If you do the math that would mean more than 60 cases for 2009, assuming the rate continues. ) In a search of the SEC litigation website I had 57 hits for Ponzi in 2009, compared to 92 for all of 2008. (I admit that it is less scientific than the CFTC research.) Clearly there are more enforcement actions against Ponzi schemes. We are hearing more about Ponzi schemes in the news.
Is this increase because there are more Ponzi schemes out there?
Or are we just uncovering a greater percentage of Ponzi schemes?
I think the investment tide has gone out, uncovering more Ponzi schemes and fraud in the market. The newscycle has switched from celebrating big gains to wallowing in the muck from the financial implosion.
It is easier to run a fraud when values are increasing. Even a terrible investor can make some money when most of the possible investment choices are rising in value. Plummeting markets decrease the value of the poor investment choices and increase the amount of redemptions by the investors/victims. It was the redemption activity that finally did in Madoff. He could not raise new money fast enough to pay out the redemptions.
Jim Cramer has gone from being a rock star of the investing world to being the punching bag of Jon Stewart. The media is now turning on investment industry looking for targets to aim the public’s ire over the financial implosion. Fraudsters make good news and good targets.
I don’t think there are any more fraudulent schemes currently out there than average. The downturn in the markets is bringing fraud schemes crashing down. The media is feasting on carnage.
I expect that we will be experiencing Ponzimonium, Ponzipalooza, and Ponzimania for awhile.
In the last six and half years the Securities and Exchange Commission has reached settlements with over 300 defendants in cases related to alleged Ponzi schemes. NERA Consulting has been tracking these SEC settlements since the Sarbanes-Oxley Act was enacted in July 2002.
Based on the settlement amounts shown in this report, things don’t look good for the Madoff investors. The settlement amounts are small, averaging less than 10% of the fraud size. Most of the total settlement amount is tied to the Private Capital Management, Inc. case where $112 million of the $145 was recovered.
Yesterday, Madoff’s auditor was arrested for falsely stating that the firm had audited the financial statements. No surprise that such a small firm could be auditing a supposedly large investment company like Madoff Investments.
Just in time, the AICPA (that’s the American Institute of Certified Public Accountants) has expelled Friehling from its membership following an ethics investigation.
“Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff’s business,” said acting U.S. Attorney Lev Dassin.
Like his client, Mr. Madoff, Mr. Friehling was released on bail. He apparently post a $2.5 million bail bond and walked free, for now.
With Madoff in jail, it is time for the rest of his crew of fraudsters to join him. Next up….
David G. Friehling, the sole practitioner at Friehling & Horowitz, CPAs, PC, has been charged with securities fraud, aiding and abetting investment adviser fraud and four counts of filing false audit reports with the Securities and Exchange Commission. The complaint alleges that Friehling enabled Madoff’s Ponzi scheme by falsely stating that the firm had audited the financial statements. Friehling & Horowitz also made representations that Friehling reviewed internal controls, including controls over the custody of assets, and found no material inadequacies. The complaint alleges that all of these statements were materially false because Friehling did not perform a meaningful audit. The SEC alleges that (1) Friehling merely pretended to conduct minimal audit procedures to make it seem like he was conducting an audit, (2) he failed to document his findings and conclusions, and (3) if properly stated, those financial statements would have shown that Madoff owed tens of billions of dollars in additional liabilities to its customers.
“Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff’s business,” said acting U.S. Attorney Lev Dassin.
If you are wondering about the Horowitz half of Friehling & Horowitz, he was apparently the Madoff auditor for many years before handing the account to his son David G. Friehling in the early 1990’s. If Madoff’s wrongdoing goes far enough back, Horowitz may need to worry about ending up in a prison cell next to his son-in-law. (UPDATE: Maybe not, since he passed away recently.)
You missed the warning signs and got suckered into a Ponzi scheme. Can the IRS help by giving you some tax relief? This is a critical issue for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. After all, they have been paying real taxes on fictional gains.
The IRS has stepped up with guidance on what to do. They clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.
The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money. Some of the older guidance from the IRS on these losses is somewhat obsolete.
The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.
The first question is whether a loss from a Ponzi scheme is a “theft loss” or a “capital loss” under IRC §165? With the criminal intent of a Ponzi scheme, it is a theft loss. That also results in it being an itemized deduction that is not subject to the deduction limits in IRC §67 or IRC §68. You can read further in Revenue Ruling 2009-9 for more information.
Even with the clarification in the revenue ruling there many factual issues that have to be addressed to properly take the deduction. Given the ongoing investigations, it is hard to know the facts. So the safe-harbor in the revenue procedure draws some bright lines around what you need to take the deduction.
The first thing you need to determine is whether the Ponzi scheme was a theft. The revenue procedure provides that the IRS will deem the loss to be the result of theft if:
the promoter was charged under state or federal law with the commission of fraud, embezzlement or a similar crime that would meet the definition of theft; or
the promoter was the subject of a state or federal criminal complaint alleging the commission of such a crime, and
either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.
That seems to work very nicely with the facts for the Madoff scheme.
Now that you can claim the theft loss, you need to calculate the amount of the loss. It may take years to find any assets and distribute them to the victims. Therefore, you have a problem figuring out the actual amount of the loss and the prospect of recovery. The revenue procedure generally permits taxpayers to take a deduction in the tax year they discover the loss and to deduct 95% of their net investment (less the amount of any actual recovery in the year of discovery and the amount of any recovery expected). If you are an investor suing persons other than the promoter (like the Madoff feeder funds), then your deduction is reduced by substituting “75%” for “95%”.
This new guidance seems to address the phantom income concerns, but are predicated on the victims not filing amended returns for prior tax years. Are there other concerns that the IRS did not address?
With Madoff, Nadel and Stanford in the news, people are wondering why the government does not prevent Ponzi schemes. The government should protect us from these frauds.
How can they?
Ponzi scheme sponsors are thieves. Common criminals. They just wear suits instead of black masks.
The government has not been able to prevent bank robberies, car-jackings or pick-pockets. (I lump Ponzi schemes in with these.) What government can do is deter and punish. An effective detection and prosecution program may deter some bad guys. If you feel certain you will get caught and punished then you are less likely to commit the bad act. On the other side, if you feel certain that you will not get caught or punished, then you are more likely to commit the bad act.
Don’t forget that Madoff and Stanford were both registered with the SEC and subject to some form of SEC oversight. Clearly registration and transparency were not effective at stopping them. They will increase the paperwork. They will make it harder for private investment funds to execute their business plans.
I guess as a compliance professional more regulation would be good for me. More regulatory oversight means more work for compliance. But I would rather focus my efforts on helping my company execute its business plan and making sure that nobody is cutting any corners to achieve that execution.
But with a new administration and issues in the financial marketplace, I expect to see some form of new regulatory requirements. Will they prevent Ponzi schemes? No, the government cannot prevent Ponzi schemes.
Investors prevent Ponzi schemes. If it sounds too good to be true, it probably isn’t true. Guaranteed returns with no risk? It better be a bank with FDIC insurance (or the equivalent).
Bernie Madoff filed past a sea of reporters and camera flashes to enter his guilty plea in front of Judge Denny Chin. Several victims spoke, asking the judge to reject the plea and force a trial. They want grueling trial to make Madoff suffer and to bring more facts out to the public.
Since he turned himself in to authorities back in December, Mr. Madoff has been living in his multi-million dollar penthouse. Back in December, the magistrate ruled that Mr. Madoff was not a flight risk and allowed him to stay confined in his palatial home.
But now Mr. Madoff is guilty. Mr. Madoff’s attorney, Ira Sorkin, tried to argue for bail. But Judge Chin would have none of it. Judge Chin revoked Madoff’s bail, calling him a “flight risk” in light of the severity of the charges for which he just entered a guilty plea. He granted the government’s request for remand. The prosecution did not even have to rebut Mr. Sorkin’s argument for bail.
According to the New York Law Journal’s Mark Hamblett, Mr. Madoff was taken out of court in handcuffs. I have not seen pictures of that yet, but I am sure there are many people looking to get a copy of that picture to frame. In handcuffs, he was delivered to Manhattan Correctional Center. (If you were thinking of sending some money to Bernie to help his cause, you should take a look at the Bureau of Prison’s Inmate Money Policy.”The deposit must be in the form of a money order.”)
Fox Business takes us on a tour of his new home until his June 16 sentencing hearing:
Presumably, Mr. Madoff’s lawyer will appeal the bail revocation. The chances of Mr. Madoff being released on bail are slim and none, and slim’s 401(k) has turned into a 201(k). After all, the appellate court gives lots of deference to the district court on bail decisions.
The next question will be how much time will Mr. Madoff serve and where. Lets add up the charges:
Count 1: Securities fraud. Maximum penalty: 20 years in prison; fine of the greatest of $5 million or twice the gross gain or loss from the offense; restitution.
Count 2: Investment adviser fraud. Maximum penalty: Five years in prison, fine and restitution.
Count 3: Mail fraud. Maximum penalty: 20 years in prison, fine and restitution.
Count 4: Wire fraud. Maximum penalty: 20 years in prison, fine and restitution.
Count 5: International money laundering, related to transfer of funds between New York-based brokerage operation and London trading desk. Maximum penalty: 20 years in prison, fine and restitution.
Count 6: International money laundering. Maximum penalty: 20 years in prison, fine and restitution.
Count 7: Money laundering. Maximum penalty: 10 years in prison, fine and restitution.
Count 8: False statements. Maximum penalty: Five years in prison, fine and restitution.
Count 9: Perjury. Maximum penalty: Five years in prison, fine and restitution.
Count 10: Making a false filing with the Securities and Exchange Commission. Maximum Penalty: 20 years in prison, fine and restitution.
Count 11: Theft from an employee benefit plan, for failing to invest pension fund assets on behalf of about 35 labor union pension plans. Maximum penalty: Five years in prison, fine and restitution.
That’s a maximum penalty of 150 years. Some of these may end up being concurrent sentences. But given that Mr. Madoff is 70, it would be a good guess that he will end up spending the rest of his life in prison.
It is good to see justice happening swiftly and effectively. After all the fear of prosecution is one of the better ways to stop Ponzi schemes. It seems like Mr. Madoff just wants this to end and accept his punishment.
The compliance officer in me wants to hear more about the underlying facts of what made Madoff go bad. In his allocution Madoff states that:
When I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible.
What made him begin the scheme? What would have stopped him from starting the scheme? What lessons can learn from Mr. Madoff to deter the next Madoff from going to the dark side? How did he think he could extricate himself?
