Category: Fraud

U.S. Senate Hears About Madoff

On Tuesday, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the background and implications of the Madoff scandal: Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform.

Video Archive

Member Statements

Witness Testimony

Madoff Liquidation and Suits Filed Against Madoff

On January 2, 2009, the trustee charged with liquidating Bernard Madoff Investment Securities, LLC issued a notice outlining the requirements for filing SIPC claims. Notice of Commencement of Liquidation Proceeding for Madoff Investment Securities

Anyone having a claim or potential claim against BMIS should read that notice. It provides that customers of BMIS must file their claims with the trustee on or prior to March 3, 2009 to receive the maximum protection.

It further provides that a first meeting of BMIS’s customers and creditors will be held on February 20, 2009, at 10:00 a.m., at the Auditorium at the United States Bankruptcy Court, Southern District of New York, One Bowling Green, New York, New York 10004.

The trustee also has established an official website [http://www.madofftrustee.com] to provide public information about the bankruptcy court proceeding.

Typical lawsuits that one might expect to see in a situation such as this one are those filed by investors against Madoff and his entities. The most notable of such actions filed to date include class actions Kellner v. Madoff [No. 08CV05026 (E.D.N.Y. filed Dec. 12, 2008)] and Chaleff v. Madoff ( No. 08CV08260 [C.D. Cal. filed Dec. 15, 2008)] and individual action Sciremammano v. Madoff [No. 08CV11332 (S.D.N.Y. filed Dec. 30, 2008)].

  • The Kellner case asserts a class action on behalf of all persons and entities who invested with Madoff, BMIS, or other selling agents affiliated with Madoff or BMIS, from as early as the formation of BMIS in the 1960s. The complaint alleges violations of the securities laws and related federal laws, including the Racketeer Influenced and Corrupt Organizations Act  and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, violations of New York General Business Law provisions concerning deceptive acts and practices, fraud, negligent misrepresentation, breach of fiduciary duty, conversion, and unjust enrichment.
  • In the Chaleff case, a class action was brought against Madoff, BMIS, Brighton Company and its general manager, Stanley Chais, alleging securities law violations on behalf of all persons or entities that invested through or in Chais or Brighton, had capital invested with Madoff or BMIS on December 12, 2008.
  • The plaintiffs in the Sciremammano case are individuals who began investing with Madoff in 1995. They seek injunctive relief to stop the alleged fraud and preserve assets, disgorgement of gains with interest, and civil monetary penalties. The alleged violations include fraud under the federal securities laws, fraudulent practices under New York state law, violations of the Investment Advisers Act of 1940, and breach of fiduciary duty.

Madoff Litigation: Can the Lost Billions be Recovered? How?

This post contains my notes from the webinar: Madoff Litigation: Can the Lost Billions be Recovered? How? The Webinar was sponsored by NERA Economic Consulting and produced by The Securities Docket. The slides are available on Securities Docket.com: Materials from Madoff Litigation Webcast.

Brad divides the world into those invested direftly through a Madoff account and those that invested through a feed fund or a fund of funds. The two groups of investors have different causes of actions and different approachs. Brad is representing both but focused his piece on direct investors.

The direct investors are in the worst position. Their biggest hope of recovery is from the SIPC. The limit is $500,000 for securities. The SIPC may also take the position that the limit is $100,000 (the cash limit) since Madoff apparently never invested in securities. Recovery is also limited to the dollars put in less the cash returned over time. Of course the direct investors will also have claims against the Madoff bankruptcy estate and should file a claim.

In an audience vote, 70% though Madoff should not be free on bail.

Gerald focuses on the issues arising from indirect Madoff investors.  The feeder funds offer a deep pocket for recovery. In the case of a limited partnership structure, they will need to prove gross negligence or willful misconduct. Recovery will be governed by the partnership agreement and related documents. The other problem is that the general partner may be able to use the assets of the limited partnership to defend and indemnify themselves.  You end up suing yourself.

Fred pointed out that there are lots of “losses”, but also lots of  “damages” and probably very little “recovery.” Among the factors are (1) choice of law, (2) allocation among the parties based on conduct and causation and (3) time at which damages are estimated. The starting point for damages is going to be the differences between the reported value on the account statement and the actual value of the securities in the account.

Losses Due to Fraudulent Reported Value = Loss on Subscriptions – Gain on Redemptions (similar to 10b-5 damage valuations)

Fred cites the case of Goldstein v. SEC (DC Cir. 2006):

If the investors are owed a fiduciary duty and the entityis also owed a fiduciary duty, then the adviser will inevitablyface conflicts of interest. Consider an investment adviser to ahedge fund that is about to go bankrupt. His advice to the fundwill likely include any and all measures to remain solvent. Hisadvice to an investor in the fund, however, would likely be tosell. …It simply cannot be the case that investment advisers are theservants of two masters in this way.

It was a great panel. Thanks to the panelists, sponsors and publishers of the webcast.

Irrational Exuberance

In an essay in the Wall Street Journal, Stephen Greenspan explains some of the psychology behind the success of Ponzi schemes: Why We Keep Falling For Financial Scams.

The basic mechanism explaining the success of Ponzi schemes is the tendency of humans to model their actions — especially when dealing with matters they don’t fully understand — on the behavior of other humans. This mechanism has been termed “irrational exuberance,” a phrase often attributed to former Federal Reserve chairman Alan Greenspan (no relation), but actually coined by another economist, Robert J. Shiller, who later wrote a book with that title. Mr. Shiller employs a social psychological explanation that he terms the “feedback loop theory of investor bubbles.” Simply stated, the fact that so many people seem to be making big profits on the investment, and telling others about their good fortune, makes the investment seem safe and too good to pass up.

In Mr. Shiller’s view, all investment crazes, even ones that are not fraudulent, can be explained by this theory. Two modern examples of that phenomenon are the Japanese real-estate bubble of the 1980s and the American dot-com bubble of the 1990s. Two 18th-century predecessors were the Mississippi Mania in France and the South Sea Bubble in England (so much for the idea of human progress).

Mr. Greenspan has model of four explanatory factors for “foolish action.”

  • situation – a social challenge you need to solve
  • cognition – a deficiency in knowledge and/or clear thinking
  • personality – trust and niceness
  • emotion – greed or the desire to not lose

See also:

ponzi

Gullibility

NPR’s Science Friday has an interesting broadcast on Gullibility. Ira Flatow interview Stephen Greenspan, author of Annals of Gullibility: Why We Get Duped and How to Avoid It.

Can science explain why some swindles are so successful? Why are some people more likely to try to buy the Brooklyn Bridge or send money to the heir of a deposed Nigerian prince online? In this segment of Science Friday, we’ll talk about gullibility and the psychological principles at work in scams, from the $15 ‘genuine Rolex’ watch to the Bernard Madoff Ponzi scheme.

Mr. Greenspan was also the author of an essay in the Wall Street Journal: Why We Keep Falling for Financial Scams.

One memorable quote was his take on the Madoff scheme.  Mr. Greenspan point out that the scheme was not focused on greed. Madoff was not offering the high returns of typical Ponzi schemes. Instead, Madoff was offering a steady return. Madoff was offering safety. Mr. Greenspan points out that gullibility can be driven by the fear of losing money as much as it can be driven by the greed for money.

Professor Frankel Testifies In Congress

Boston University School of Law professor Tamar Frankel testified before the Committee on Financial Services of the U.S. House of Representatives discussing Ponzi schemes, the importance of trust in the securities markets and the need for regulatory reform in light of the Madoff scandal.

See also: