While private companies are gradually withdrawing from their addiction to risky investments, public pension funds have been slow to follow suit. Following the market’s downturn - which produced about $1 trillion in losses - state and local governments faced a Catch 22 situation: Slash retirement benefits or try to boost returns with high-risk investments.

As it turns out, the latter option is becoming the option of choice for more public pension funds.

“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, in a March 8 article in the New York Times. “Double up to catch up.”

Among the strategies public pension funds are gambling on with workers’ retirement money: Commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. Hedge funds, which were once cast aside as an investing strategy, are now gaining favor, as well.

Examples of public pension funds in crisis because of risky investments are not hard to find. Last month, the Atlanta firefighters’ pension fund sued the custodian managing its plan, Chicago-based Northern Trust, accusing it of making several risky investments that could cost the fund millions of dollars.

The lawsuit claims that Northern Trust breached its contract and fiduciary duty with mortgage-backed securities investments - investments that ignored the warnings of the company’s chief economist. The Chicago Public School Teachers’ Pension and Retirement Fund also joined lawsuit, which was filed Jan. 29 in a federal court in Chicago.

Investment giant Morgan Stanley also is the subject of a high-profile case involving pension funds and risky investing strategies. A December 2009 article in the New York Times first reported the story. According to the article, a Virgin Islands pension fund sued Morgan Stanley based on allegations it defrauded investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail.

The lawsuit, which was filed Dec. 24 in a Manhattan federal court, also accused Morgan Stanley of collaborating with the credit rating agencies Moody’s Investors Services and Standard & Poor’s to obtain AAA ratings for notes sold in 2007 as part of a collateralized debt obligation known as “Libertas.”

Ralph Cioffi and Matthew Tannin, the two former Bear Stearns executives who are on trial for allegedly lying to investors about the fiscal health of two hedge funds, will soon find out their fates. On Nov. 9, the month-long trial comes to a close, and a jury will begin deliberations on the charges of securities fraud, wire fraud, conspiracy and insider trading brought by the Office of the United States Attorney for the Eastern District of New York against the two men.

The charges against Cioffi and Tannin are tied to the management - and eventual implosion - of two Bear Stearns hedge funds known as the Bear Stearns High Grade Structured Credit Strategies Fund and the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage Fund.  Prosecutors contend Cioffi and Tannin told “black and white lies” to investors about the financial state of the two funds despite the fact they were seeing some of the worst market conditions on record.

Over the course of the past few days, prosecutors and defense counsel have presented their closing statements to the jury - and the differences in their approach are notable.

Assistant United States Attorney Ilene Jaroslaw provided the jury with a methodical chapter and verse of the mountain of lies and web of deception that resulted in more than $1.5 billion of investors’ capital being wiped out.  Meanwhile, counsel for Cioffi and Tannin responded in a way that can best be summarized as the “you should believe us and trust our interpretation of the facts because we’re Wall Street” defense.

Whether such a defense will resonate with members of the jury remains to be seen - as does the obvious question as to why Cioffi and Tannin chose not to testify in their own defense if, in fact, they had a plausible explanation for the explosive emails that are at the core of the government’s case.

We may never know that answer. But if we’ve learned one thing from the recent crisis on Wall Street, it’s this: When Wall Street tells us - either directly or through its hired guns - that we can and should trust it about anything, it’s a sure sign we need to button the pockets on the back of our pants and secure our wallets.  And fast.

Our affiliation of 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.

Two Nobel laureates have entered into the valuation debate and are calling upon financial institutions to provide a more accurate portrait of their illiquid assets to investors. Robert Merton first commented on the issue in a column for the Financial Times on Aug. 18 in which he said banks that opposed mark to market accounting were simply looking to conceal depressed prices.

Myron Scholes echoed those comments in an Aug. 19 interview with Bloomberg, with both men urging banks to mark more securities to market and put any hard-to-value securities on public exchanges wherever possible.

According to Scholes and Merton, such a move would give investors better data on prices to more accurately reflect the value of an institution’s debt and equity securities.

Scholes and Merton shared the Nobel Prize for economics in 1997 for helping invent a model for pricing options. They also learned about the danger of leverage firsthand. Merton and Scholes were the creators of Long-Term Capital Management, whose collapse in 1998 was the largest-ever hedge fund failure at the time.

At one point, Long-Term Capital Management held more than $100 billion in assets. However, the firm was highly leveraged, borrowing billions to make big bets on esoteric securities. When the markets took a turn for the worse in 1998, the bets backfired and Long-Term Capital Management lost most its money. Fearing that its collapse could set off a full-scale market meltdown, the U.S. Federal Reserve stepped in to orchestrate a bailout by 14 lenders.

Ironically, there was only one naysayer among the 14 banks that agreed to the rescue: Bear Stearns.

Ira Sorkin, the lawyer for disgraced money manager Bernard “Bernie” Madoff, says his client will plead guilty to 11 criminal charges on March 12. His punishment: a potential prison term of 150 years.

On Dec. 11, Madoff, a former Nasdaq chairman, was arrested by federal authorities and accused of running a $50 billion Ponzi scheme in which billions of dollars from new investors allegedly were used to pay off older ones.

Madoff’s March 12 court appearance, where he is expected to enter a guilty plea and avoid going to trial, has been anticipated for months. At least 25 of Madoff’s victims are expected to speak.

On Monday, the Wall Street Journal reported that one of Madoff’s assistants directed employees to produce fake trading tickets to mislead clients into thinking their investment returns were legitimate.

To date, authorities have located about $1 billion for investors burned by Madoff’s scam. 

Former high-profile executives with Merrill Lynch, including two CEOs, invested in hedge funds that lost huge amounts of money to disgraced money manager Bernard Madoff and his $50 billion Ponzi scheme. According to a March 5 report from Reuters, one-time chief executive officers Daniel Tully and David Komansky, along with former investment-banking chief Barry Friedberg, personally invested millions in the hedge funds, which were set up by former Merrill Lynch brokerage chief John “Launny” Steffens.

Steffens’ connection to Madoff was tied to Ezra Merkin, who, along with Steffens, is a partner in Spring Mountain Capital LP. Spring Mountain managed nine of Steffens’ hedge funds, and invested in three Merkin-led funds. Steffen reportedly was aware of their heavy Madoff exposure in at least one.

Shortly after Madoff’s arrest on Dec. 11, Steffens announced plans to shut down the Spring Mountain funds of hedge funds. It is unclear exactly how much money the Merrill Lynch executives lost.

Daniel Tully served as president and chief operating officer at Merrill Lynch from 1985 to 1996, and was named chairman in 1993. Succeeding Tully was David Komansky, who held the top spots from 1997 to 2003. John Steffens spent nearly four decades at Merrill Lynch, ultimately rising to vice chairman in charge of overseeing the company’s global assets division. He retired in 2001 to launch Spring Mountain Capital.

Revelations that several former top Merrill Lynch executives personally invested with Madoff and his alleged $50 billion Ponzi scheme are unsettling on several fronts. At one time, these men were CEOs and senior-level management, responsible for managing and overseeing billions of dollars of investors’ money during their tenure at Merrill Lynch. If they can put due diligence on the backburner when it comes to investing their own personal wealth - i.e. fail to perform the legwork necessary to fully understand exactly how Madoff and those associated with him made money - what does it say about the job they did in protecting the investments of Merrill Lynch’s own clients?

Hedge fund managers Paul Greenwood and Stephen Walsh lived the life of Riley - and they did it on investors’ money. Lavish mansions, horse farms, paintings, cars, even a rare collection of Steiff teddy bears were bought courtesy of a decade-long con game that has left investors, pension funds and universities out millions of dollars.

On Feb. 25, the swindle came to an end with the arrest of Greenwood and Walsh by federal agents for allegedly misappropriating $550 million from investors. The two men face charges of conspiracy, securities and wire fraud charges.

In addition, the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission brought separate civil charges against the pair. In its complaint, the CFTC says that beginning in 1996, Greenwood and Walsh fraudulently solicited approximately $1.3 billion from individuals and entities through their Westridge Capital Management and WG Trading Investors, LP hedge funds.

The arrest of Greenwood and Walsh comes just days after the Iowa Public Employees’ Retirement System reported that nearly $340 million in Iowa pension funds had been frozen following the suspension of Greenwood and Walsh’s trading privileges by the National Futures Association (NFA). 

From at least 1996 through February 2009, federal authorities believe Greenwood and Walsh operated a fraudulent commodities trading and investment advisory scheme using WG Trading as their front. The two men reportedly enticed investors with promises of a conservative trading strategy called “enhanced stock indexing,” which they claimed had outperformed results of the S&P 500 Index for 10 years. 

A number of institutional investors, including the Sacramento County Employees’ Retirement System, the Iowa Public Employee’s Retirement System, the University of Pittsburgh and Carnegie Mellon University took the bait and invested more than $668 million. In exchange for their investment, investors received promissory notes that Greenwood and Walsh said would pay interest at a rate equal to the investment returns earned by their enhanced stock indexing strategy.

However, a February 2009 audit conducted by the National Futures Association shows approximately $812 million on the books of WG Investors, with more than $794 million claimed as receivables due from Greenwood and Walsh and investments in entities that they two men controlled.

Instead of investing money, Greenwood and Walsh are believed to have spent more than $161 million on “personal expenses,” including purchases of lavish mansions, rare books, horses and horse farms, a $3 million residence for Walsh’s ex-wife and Steiff teddy bears costing as much as $80,000.

Greenwood and Walsh remain out of jail on a $7 million bond. If convicted, both men face up to 20 years in prison on each of the fraud counts and five years for conspiracy. 

Another chapter has been written in the saga on auction-rate securities - and this time it’s a win for institutional investors.  On Feb. 13, the Financial Industry Regulatory Authority (FINRA) ordered the Credit Suisse Group to pay STMicroelectronics NV more than $406 million to settle claims that the brokerage misled the semiconductor maker into buying auction-rate securities.

FINRA’s ruling may well provide additional legal fuel to kick start future auction-rate settlements, with institutional investors more likely to file claims and lawsuits for their own losses in the investments. Said Thomas Hargett, a partner at Maddox Hargett & Caruso PC, in a Feb. 13 article by Reuters:

“FINRA’s ruling is a clear signal that there are opportunities for corporate and individual investors to recover their losses from broker-dealers. The evidence is so compelling against the major broker-dealers that sold this garbage.”

In total, the FINRA arbitration panel ordered Credit Suisse Securities to pay $400 million in compensatory damages, and more than $6.6 million in legal costs, financing fees and interest.

STMicroelectronics’ win against Credit Suisse is the biggest ARS award to date for an investor not covered by last year’s regulatory settlements.

According to the Feb. 13 ruling, STMicro initially instructed Credit Suisse to invest in student-loan securities backed by U.S. government guarantees. Instead, Credit Suisse brokers invested into high-risk collateralized-debt obligations (CDOs), many of which turned out to be backed by toxic subprime real-estate loans. When the housing market ultimately collapsed, those CDOs plunged in value.

STMicroelectronics (NYSE: STM) is an Italian-French electronics and semiconductor manufacturer headquartered in Geneva, Switzerland.

To date, STMicroelectronics has been forced to take a $75 million charge stemming from losses tied to auction-rate securities. 

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.

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.”

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.