The plot continues to thicken in the saga of Bernard (Bernie) L. Madoff. Earlier today, authorities placed the mastermind behind a $50 billion hedge fund Ponzi scheme under house arrest. Now, instead of late-night Manhattan parties, the once-revered Wall Street legend will be subjected to electronic monitoring and 7 p.m. curfews.

At the center of the Madoff controversy is the Securities and Exchange Commission (SEC) and questions as to why it took so long for the agency to detect Madoff’s misdeeds. As far back as 1999, the SEC apparently had knowledge that all was not right in the house of Madoff. Returns in his fund were consistently and unusually high: 15% to 22%. A decade ago, memos from competitor manager Harry Markopolos and others even went so far as to allege Madoff’s business was nothing more than a “Ponzi scheme.”

In true ‘a-day-late and a-dollar-short fashion,’ Christopher Cox, chairman of the SEC, is now admonishing his agency’s inactions for failing to rein Madoff in when it had the chance. Yesterday, Cox publicly stated that the SEC failed to act on “credible allegations” when it was presented with the information nine years ago.

Madoff’s world came crashing in only when redemption requests, totaling some $7 billion, started to pile up and he was unable to meet investors’ demands for their money.

As it turns out, Madoff’s scam lured every kind of investor imaginable, from the super rich to the ordinary. Pension funds, global financial firms, hedge funds, higher education institutions, charities, the co-owner of the New York Mets, even a Senator bought into Madoff’s hype. Now, they’re collectively $50 billion poorer.

Shortly before his arrest on Dec. 11, Madoff was living life large. As reported Dec. 17 by Bloomberg, the disgraced money manager had recently made his usual stop for a $65 a haircut, a $40 shave, a $50 pedicure and a $22 manicure. If convicted of securities fraud, Madoff could spend the rest of his life in jail, where personal etiquette might not be so glamorous.

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. 

From humble beginnings as a lifeguard to a storied investment leader on Wall Street, Bernard (Bernie) L. Madoff has seen and done it all. Or, so he thought. Following Madoff’s arrest by federal agents last week for running a giant Ponzi scheme and losing at least $50 billion of his clients’ money, the next stop for the now-infamous hedge fund manager may be jail.

According to the criminal complaint, Madoff revealed his bogus investing business to his sons on Dec. 10. The two men, Andrew and Mark Madoff, then contacted their lawyer, as well as federal authorities. It was later revealed that Madoff apparently had been running the scheme since at least 2005, and only recently did problems surface when he became unable to meet redemption requests from clients for some $7 billion.

A Ponzi scheme is coined after Charles Ponzi, an Italian immigrant who swindled investors out of millions of dollars in the 1920s through a modern-day pyramid scheme in which early investors are paid with money from newer investors.

Madoff’s rise to Wall Street fame began innocently enough. He opened his investment firm in 1960, with $5,000 he had saved from working as a lifeguard during the summer. His star continued to rise over the next half century; his positions of authority included chief of the Securities Industry Association’s trading committee, vice chairman of the National Association of Securities Dealers and a member of the Nasdaq Stock Market’s Board of Governors and its Executive Committee.

To no one’s surprise, Madoff also did exceedingly well in his personal life, amassing a multimillion-dollar fortune that included mansions in New York and Palm Beach, as well as a 55-foot yacht ironically named “Bull.”

Prior to Madoff’s Dec. 11 arrest, there apparently had been several warning signs over the “fiscal soundness” of Madoff’s managed funds. Competing hedge fund managers had long questioned how Madoff was able to consistently generate exceedingly high returns year and year, while investors themselves regularly claimed that the account statements Madoff provided were too complex for them to understand.

Meanwhile, the SEC itself appears to have been asleep at the wheel regarding Madoff and the inner-workings of his so-called investment business. Nine years ago, the agency received a letter from Boston financier Harry Markopolos, who at the time warned that Madoff’s firm was the world’s largest Ponzi scheme. Markopolos went on to conduct his own investigation, turning his findings, which apparently were largely ignored by the SEC, over to agency’s New York and Boston bureaus.

Now the SEC’s inaction during the past nine years may well have shattered the last remaining remnants of investor confidence. As for Madoff, when FBI agents went to his Manhattan home at 8:30 a.m. Thursday morning to make their arrest, they asked if he had an innocent explanation for what had happened, according to statements provided in the criminal complaint. Madoff, dressed in a blue bathrobe and slippers, simply said: “There is no innocent explanation.”

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.

Public officials of financially strapped states like California, Florida, Nevada, Ohio, Wisconsin and Michigan are outraged at New York-based securities firm Goldman Sachs for advising some of its biggest institutional clients to bet against state municipal bonds by purchasing credit default swaps. Meanwhile, Goldman has collected millions of dollars in fees to help those states sell some of the very same bonds.

According to a Dec. 10 story by Bloomberg, in the three months since Goldman recommended shorting municipal credit, the value of the Markit MCDX index of the derivatives’ price more than tripled – from 87.75 to as high as 278.33 basis points.

Goldman’s strategy of shorting municipal bonds of fiscally depressed states could ultimately result in even more problems for taxpayers. Concerns about a state’s credit quality often means bond prices go down. In turn, that can drive up the interest rate states and municipalities must pay to borrow money. And it all affects taxpayers. An increase of one percentage point on a $1 billion bond issue translates into a cost to taxpayers of an additional $10 million a year in interest. 

The added financial worries couldn’t come at a worst time. States, which already have closed $40 billion in fiscal year 2009 budget gaps, face at least an additional $97 billion that they must close over the next 18 to 24 months, according to a just-released national report by the National Conference of State Legislatures.

In a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman apparently advised buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks, according to the Bloomberg article. The firm went on to recommend the derivatives in states with heavily unfunded pensions and other retiree obligations.

Goldman is one of the top five municipal bond underwriters in the United States. Its latest trading strategy of betting against its own clients is a bad way to conduct business – period. In this case, Goldman is baking its cake and eating it, too, while states in which Goldman served as the underwriter of their securities can look forward to an even more troubled fiscal outlook in the months ahead.

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. 

When stock markets plunged to their lowest level in four years in October, it quickly became news that margin calls were a key culprit to the problem. In the weeks since, the volume of margin calls has steadily increased, exacerbating issues for investors and adding turmoil to an already battered financial environment.

Investors who buy stock on margin – meaning the money is borrowed from a brokerage or lender – stand to reap big returns if their bets turn out positive. On the downside, if the value of a stock plummets, as they have recently, investor losses can grow fast and furious.

Margin calls affect more than just the wealthy. When the stock market is overloaded with sell orders, stock prices often fall further in value, thereby causing additional financial losses for ordinary retail investors who sell their shares at deflated prices. 

Hedge funds also are feeling the effects of margin calls these days, particularly funds with billions of dollars worth of positions in Lehman Brothers Holdings. Despite the fact the funds cannot touch their assets at Lehman, which are frozen because of the firm’s Sept. 15 bankruptcy, they nonetheless may be forced to meet margin calls on their positions. 

PricewaterhouseCoopers, which is handling Lehman’s bankruptcy and liquidation, confirmed in mid-October that it would not rule out demanding additional collateral via margin calls on some $60 billion in frozen Lehman assets if the value of those securities falls.

Making a bad situation even worse is it may take months, or even years, for PricewaterhouseCoopers to determine which assets clients actually are entitled to and which they are not.

Our affiliation of 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 downturn in the economy is shedding new light on two dreaded and unwanted words no investor wants to hear: margin calls. Recent margin calls – in which shares of stock are bought using borrowed money – have created a margin blowout lately, sounding the alarm for CEOs and fund managers at companies from Chesapeake Energy to Williams-Sonoma and forcing them to sell billions of dollars worth of stock in order to make good on their loans with lenders.

Meanwhile, investors in companies whose executives must meet margin calls often learn after the fact about the selling sprees and ultimately bear repercussions of their own. Why? Because a margin call can subsequently mean investors are forced into liquidating their portfolios at a time when a company’s stock is at its worst possible low.

Moreover, when CEOs or other senior-level management borrow heavily against their portfolios to buy large amounts of stock, it can send a false message to other investors, who may believe the buying is reflective of a company’s financial position or future performance potential. Should a margin call arise, the investors are at risk when the stock price plummets.

An Oct. 23 article in Forbes reports on how margin calls sealed the fate recently for some of the world’s richest people – and the not-so-rich people who invested in their companies. On Oct. 8, Aubrey McClendon, CEO of Chesapeake Energy, owned more than 32 million shares in the nation’s largest natural gas producer. Forty-eight hours later, most of it was gone.

McClendon had bought a majority of his Chesapeake Energy shares on margin. When the stock began to tank in value, he was forced to meet margin calls. According to the Forbes article, “McClendon sold 1.8 million shares of Chesapeake for $12.65 per share in one of his Oct. 10 transactions. Just four months earlier, those shares traded as high as $74 each.”

Our affiliation of 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.

Over the past several months, both with the election and the credit crisis, much has been written and spoken about Wall Street vs. Main Street. But what has been largely overlooked is how the current financial crisis is affecting the individual, small investors on Elm Street.

 

Everyday it seems the headlines highlight the poor economic conditions in this country and the previous day’s new record Wall Street losses.  We read ample coverage of what the Treasury and Fed are doing (or going to do) to fix the problems. We read what policies President-elect Obama is likely to enact. We read about the Big Three and more financial institutions than you can name facing bankruptcy.  But there has been a noticeable lack of coverage on the pain being felt by the millions of individual investors suffering through these unprecedented times.

 

The financial services industry has spent tremendous amounts of money over the last two decades convincing all Americans that they need to invest in the markets.  The expansion of investing through 401(k)s and IRAs has paralleled these marketing efforts.  Today, unlike during the Crash of 1987, investors are not only the rich and sophisticated.  Investors are grandmothers, college students, single mothers and blue collar workers.  It is these individuals who truly suffer when the market losses 50 percent of its value in a year.

 

Too many of these small investors do not fully understand the markets and are confused by what is going on currently.  In response, most place all their trust (and their life savings) with the “professionals” they hire to assist and guide them. Unfortunately, all too often, these investors are not given suitable advice, are sold products they do not comprehend and are in many instances simply overlooked. They are told to “hold tight” even as they tell their advisors they cannot take any more losses. These small, individual investors are not likely to question or challenge the people deemed to be the experts. 

 

In times like these, it is imperative that all investors pay attention to their investments and make sure that their needs, objectives and desires are being met.  Failure to do so will result in losses that many simply cannot withstand. When losses do occur, investors need to seel legal counsel to determine whether an action exists to seek to recover those losses. 

    

With the abrupt liquidation of the widely held short-term investment fund managed by Connecticut-based Commonfund, more than 1,000 colleges across the country suddenly confront serious financial problems. With Wachovia Corp. as trustee, the $9.3 billion Commonfund for Short Term Investments Fund basically provided colleges with a “checking account” out of which they could pay for salaries, supplies and other expenses.

Without any prior warning, Wachovia sent an e-mail to schools on September 29 explaining that ongoing market turmoil forced the firm to give up its role as trustee of the Commonfund. Approximately 20% of the fund’s mortgage and asset-backed securities suffered because of market conditions.

According to the terms of the liquidation, participants could withdraw approximately 34% of their funds as of October 1. The amount grows to as much as 57% by the end of the year. Any remaining funds can be withdrawn as other securities mature.

Unfortunately, as of September 29, hardly any of the fund’s non-government securities could be sold at par.

How will colleges cope? The University of Vermont, just one participant in the Commonfund, invested almost $80 million. Right now, the school can only withdraw $16 million. The withdrawals allowed over the next few months won’t provide enough cash to pay the school’s operating costs for the rest of this year, according to the Burlington Free Press in an October 2 article. Because of Wachovia’s decision to liquidate, administrators at the University of Vermont and many other schools now must scramble to find other financing sources.

The PIMCO High Income Fund (NYSE:PHK) has lost 55% of it value in one very turbulent month.  On September 10 this Fund closed at $11.49.  By October 10 its value had plummeted to $5.07.  

According to its disclosures, the PIMCO High Income Fund operates as a closed-end management investment company. It primarily invests in the U.S. dollar-denominated corporate debt obligations and other income-producing securities. The fund primarily invests in various companies operating in the areas of energy, real estate, telecommunications, manufacturing, and utilities, as well as invests in various foreign investments. Allianz Global Investors Fund Management LLC serves as the investment manager of the fund. PIMCO High Income Fund was founded in 2003 and is based in New York City.

The Fund’s Market Cap is currently 850.64M.

We are investigating the way this Fund was marketed and sold to investors. If you are an investor in the PIMCO High Income Fund and have suffered losses, we would like to speak with you.

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke are on the Hill trying to sell their $700 billion bailout to lawmakers. Yesterday Secretary Paulson and Chairman Bernanke testified before Congress that the bailout must be passed quickly and cleanly in order to prevent further economic crisis.  Chairman Bernanke warned that inaction by Congress would lead credit markets to continue to seize up, meaning lost jobs, higher unemployment and more foreclosures.

While most parties freely recognize that these are unprecedented times and that the economy is on the brink, not all are willing to accept the Bush Administration’s bailout proposal.  Many commentators have labeled the plan a “knee-jerk” reaction being pushed using scare tactics.  Most in Congress want at least more time to evaluate the plan.  That certainly should be a reasonable expectation when one is talking for taxpayer money at these levels.

It is critically important that the plan be designed and implemented to succeed with its purpose-to assist in the recovery of the US economy and turn the current tide.  If the taxpayers are going to foot the bill for the mistakes and greed of Wall Street, they should be confident that whatever proposal is ultimately put in motion will have the desired effect.  This plan must benefit those on Main Street and not simply bailout the very parties responsible for the mess in the first place.

Wall Street and its executives made hundreds of millions of dollars by creating the exotic mortgage-related securities cited as the cause of the current financial crisis.  It is understandable that many in this country are suspicious of a bailout that in any way rewards the greed and bad behavior that created the mess we are in.  Unfortunately the plan as proposed does not seem to adequately address the concerns of either the common citizen or Congress. 

This plan must be properly vetted and Congress must be allowed to address its concerns before the taxpayers give the Treasury a $700 billion blank check.

The John Hancock High Yield Bond Fund has made the list. Just not the list its fund managers would like.

On September 8, 2008, the Wall Street Journal listed its Leaders and Laggards. The Hancock Fund ranks near the top in the worst-performing bond fund category. It shares this distinction with three Morgan Keegan bond funds and Charles Schwab’s YieldPlus fund.

The Hancock High Yield fund (JHHBX) holds $644.7 million in assets. In the past year, the fund has lost 17.8% of its value. For typical bond fund investors seeking income, these returns are tremendously shocking and unacceptable.