Category Archives: Hedge Fund Failures

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. 

One of the first tasks greeting lawmakers in the new year will be to examine Bernard (Bernie) Madoff’s alleged $50 billion Ponzi scheme and why the Securities and Exchange Commission (SEC) appeared to be asleep at the wheel before detecting the fraud. On Jan. 5, members of the House Financial Services Committee plan to hold a lengthy discussion on the Madoff scandal as part of an effort to radically reform the impaired U.S. regulatory structure that oversees banks and financial service firms. 

On Dec. 11, federal agents arrested Madoff at his luxury Manhattan apartment on charges of securities fraud. The 70-year-old hedge fund manager is accused of running a massive Ponzi scheme – a rob-Peter-to-pay-Paul scam in which early investors are paid off with money from newer investors. The nickname of “Ponzi” is coined after Charles Ponzi, who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s.  

Investors scammed in Madoff’s modern-day Ponzi scheme include numerous foundations and charities, universities, some of the world’s biggest banks, actors Kevin Bacon and Kyra, director Steven Spielberg, Dreamworks chief Jeffrey Katzenberg Sedgwick, former Salomon Brothers Chief Economist Henry Kaufman and countless others. 

Flushed with investors’ cash, Madoff built a massive financial empire for himself over the years, with mansions in Manhattan, the Hamptons and Palm Beach, Florida. Many of the clients Madoff later duped were recruited from the country clubs that the money manager belonged to.   

The allure of exclusivity may have, in part, allowed Madoff to keep his scam undetected for so long. A client had to “know” someone to get a meeting with Madoff.  Even in the face of too-good-to-be-true financial results and lack of account transparency, people still clamored to get on board with Madoff.  

Now, after having lost their life savings, many of those investors are wishing they had jumped ship long ago.   

On Dec. 30, the trustee placed in charge of Madoff’s money management firm, Bernard L. Madoff Investment Securities LLC, obtained court approval to use $28.1 million out of its accounts as it begins the liquidation process.  

Shortly before his arrest, Madoff told employees that his own financial worth had deteriorated from billions to approximately $200 million to $300 million. Madoff has until midnight Dec. 31 to provide the SEC with a detailed list of his assets. 

Only a few months ago, Madoff’s firm ranked as the 23rd-largest market maker on Nasdaq, handling an average of about 50 million shares a day. Now, instead of taking orders for some of the largest companies in the United States, Madoff faces the likely prospect of spending the rest of his life behind bars. 

For Madoff’s investors who have lost everything because of the decades-long fraud swindle, it’s a fitting end for the so-called legend of Wall Street. 

Our securities lawyers are actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The disgraced New York hedge fund manager responsible for bilking investors out of some $50 billion in the world’s biggest Ponzi scheme has until New Year’s Eve to provide a detailed list of his investments, assets and financial holdings to the Securities and Exchange Commission (SEC). For investors duped by Bernard (Bernie) Madoff, the financial catalog may at least give them some idea as to what they stand to potentially recover from their losses.

As reported Dec. 26 by Bloomberg, Madoff’s firm, Bernard L. Madoff Investment Securities LLC, began liquidation proceedings immediately following the money manager’s arrest on Dec. 11. If convicted on securities fraud charges, Madoff faces up to 10 years in prison and a $5 million fine.

Already lawsuits have begun to pile up against 70-year-old Madoff, who confessed to federal agents that his investment advisory business was nothing more than a giant Ponzi scheme in which he paid off old investors with money garnered from newer ones.

Investigators have since uncovered a who’s who list of individuals and entities scammed by Madoff. Oscar-winning film director Steven Spielberg, the owner of the New York Mets professional baseball team, charities, global hedge fund managers, universities, Nobel laureate Elie Wiesel and L’Oreal cosmetic empire heiress Lilliane Bettencourt among others all lost fortunes in the Madoff fraud.

Last week, the Madoff scandal took an even deadlier turn. Rene-Thierry Magon de la Villehuchet, who lost more than $1 billion of his clients’ money to Madoff, as well as his own family’s fortune and that of friends, was found dead in an apparent suicide. 

Meanwhile, investment brokerages that conducted business with Madoff and Bernard L. Madoff Investment Securities LLC may have legal issues of their own to contend with from clients who incurred losses because of Madoff’s fraud. On Dec. 20, Celfin SA, a Chilean brokerage firm, became one of the first firms to accept accountability in the Madoff case by agreeing to repay a total of $10 million to clients who lost money with Madoff.

As more details unfold in the Madoff story, it’s likely the lawsuits will continue to grow, as well. In addition to investment firms, accounting firms also may be targeted – including PricewaterhouseCoopers and KPMG, which oversaw many of the feeder funds that channeled billions of dollars of investors’ money to Madoff yet failed to take note of the many red flags surrounding his business over the years.

Our securities 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. 

The enormity of the Bernie Madoff scandal and the massive losses hitting investors was underscored this past weekend when the Federal Bureau of Investigation (FBI) announced that the $50 billion Ponzi scheme and other frauds would take priority over counter-terrorism cases. 

A Dec. 22 Bloomberg article confirmed that the FBI is reassigning agents in New York to focus on efforts that pose the “greatest threat” to Americans. According to FBI official David Cardona, the threat is to the financial system and Wall Street.

On Dec. 11, following Madoff’s arrest by the FBI on charges of securities fraud, the disgraced 70-year-old reportedly confessed that he was the sole person responsible for bilking investors out of $50 billion in a worldwide Ponzi fraud scheme. Victims of the scam not only include Madoff’s direct clients, but also investors in so-called third-party feeder funds and funds of hedge funds that provided billions of dollars in capital to Madoff’s investment business.

The inability of these feeder brokerage firms, which includes OppenheimerFunds’ Tremont Capital Management, to detect Madoff’s fraud in the face of numerous red flags is a sure-fire sign of poor risk management and a failure to perform proper due diligence on behalf of clients and their money. After all, these funds charge investors significant fees for the privilege of their services, typically 1% of the assets under management and up to 10% of the profits. In the end, their negligence of failing to protect investors renders them guilty right along with Madoff.