Whistle-Blowing Gets More Lucrative

With the economy double-dipping, bank profits screeching to a halt, and unemployment hovering at record high levels, where can enterprising folks look to make the big bucks? And fast? How about a job at the SEC? Not a salaried position. But how about as a consultant working for a contingency fee? One of the nifty new parts of the new Dodd-Frank financial law passed in July is the ability to net as much as 30% of the penalties and recovered funds collected by the SEC in fraud cases. Since the legislation passed in July, there has been a surge in tips from whistle-blowers looking to tip off the SEC to all that fraud that has been operating under its nose since the beginning of time.

"We've gotten some very high-quality tips," said SEC official Stephen Cohen.

Hopefully, it won't take the next financial crisis to unveil the next wave of ponzi schemes that build up during the proceeding bubble. And there will be a bubble. Because you can't have zero interest rates and QE without another bubble somewhere. And you don't have bubbles without hidden ponzi schemes and fraud. But maybe this time, with adequate incentives to folks looking to collect a bounty, the SEC will catch them before they morph into $65 billion ponzi schemes, or $8 billion frauds, or $650 million...well, you already know the story.

Madoff Trustee Goes After the Goods

Irving Picard, the hard working court-appointed trustee tasked with recovering assets for Bernie Madoff's victims, said in an interview that he might sue around half the estimated 2,000 individual investors who unwittingly made money investing in the ponzi scheme. Although Mr. Picard sent hundreds of letters last year to investors who withdrew money from their Madoff accounts before the fraud was exposed asking them to settle the matter amicably, few of them have chosen to do so. Now it's time to pay the piper. While it seems entirely reasonable (not to mention lawful) for Mr. Picard to go after those who accidentally profited from the scheme, it's not as easy to stomach when you are, say, an 87 year-old retiree who plowed all of her life savings, including the life insurance proceeds from her husband's passing, into what she thought was a safe investment.

Meanwhile, Mr. Picard accused one of the largest feeder funds, Fairfield Greenwich Group, of having "actual and constructive knowledge" of the ponzi scheme. Not sure why this took two years to figure out. When you get paid hundreds of millions in fees to perform due diligence for investors, and yet you are incapable of making a phone call to a single counterparty to make sure the firm is actually trading with somebody else. Or perhaps confirming that the auditing firm has the 20 partners it claims to have and isn't just one dude in an office in Florida. Or actually doing something, anything other than counting and spending all those fat fees on houses and cars and boats and PR agents to brag about all your houses and cars and boats in Vanity Fair, then you probably are more than just a lousy money manager. You are probably complicit in the scheme. But in either case, you need to give the money back so that those 87 year-old retirees can have something to split between them.

Former Taylor Bean CEO Arrested For Fraud

The phrase "failed Florida mortgage lender" may no longer raise eyebrows, but the story of the multi-billion dollar alleged fraud at Taylor Bean & Whitaker Mortgage is a doozy. The WSJ reports that the FBI has just arrested Lee Farkas, the former chairman of Taylor Bean, and "charged him with orchestrating a seven-year, multibillion-dollar fraud that contributed to the collapse of a major bank and targeted the US government." According to the charges, Mr. Farkas and his schemes have cost investors and government programs in excess of $2 billion. The good news is that Taylor Bean was never granted the $550 million in TARP funds it was hoping to snare, so at least one government program was spared the embarrassment of being swindled by a shyster. Unfortunately, our savvy folks at the FHA were outwitted by Mr. Farkas and his alleged co-conspirators. The government agency claims that it alone lost $3 billion because Taylor Bean had lied about the health of loans it was servicing. Sounds more like Taylor Bean cost the government in excess of $3 billion? I'm not following the math here, but maybe somebody somewhere made a billion to offset the FHA's loss? It wasn't the FDIC, which was tasked with cleaning up the mess left in the wake of the collapse of Colonial Bank. Colonial, one of the largest bank failures of the recent credit crisis, purchased around $400 million in "fake assets" from Taylor Bean. Perhaps Mr. Farkas profited handsomely? The guy did own a gym, which was where the FBI chose to make the arrest. They were nice enough to wait for him to finish his workout. Also, Mr. Farkas had the prerequisite fancy car collection. No doubt there were several obnoxious houses too? Yep, five of them. Oh, and he liked corporate jets.

If found guilty of the charges filed against him, Mr. Farkas will face up to 435 years in prison and fines of at $13.8 million as well as a forfeiture of $22 million. Once again, I'm not quite getting the math. This is a multi-billion dollar scheme. Where did all the money go? How is it that he only has to give up $35.8 million? In any event, the prison sentence sounds about right.

Merkin Forced To Sell Art

One of the many many leeches who fed off of the Madoff Ponzi scheme, J. Ezra Merkin, was forced to sell $310 million of Mark Rathko and Alberto Giacometti sculptures, potentially offering some payback to his defrauded investors. The sale was announced, curiously, by New York Attorney General Andrew Cuomo, who has sued Mr. Merkin and secured a freeze on his assets. Only in America can someone become rich enough to acquire over $300 million in art by charging fees to funnel money into a fraudulent investment scheme, all while helping to run a finance firm into the ground (Mr. Merkin was also Non-executive Chairman of GMAC.) The Merkins have agreed to place the proceeds of the sale, which only amount to around $192 million after liens and fees have been paid, in escrow while the litigation continues. Even if you aren't a criminal or an art lover, this is a fine example of why it is important to own a boatload of art if you are too lazy to actually manage the money you are entrusted with and simply hand it over to some other guy without performing any due diligence. If it weren't for the art that the Merkins can easily dispense with, maybe they'd have to give up one of their houses, or God forbid, Mrs. Merkins jewels or furs.

The best part of this article in my opinion, is the following quote by the reporters: " The deal shows how the credit boom, the Madoff fraud, returns on Wall Street and soaring art prices all fed off each other during the bull market-and collapsed at the same time." In other words, the stunning correlation between all asset classes, which rose smartly together during the boom, made alot of folk very rich, even though it was all a mirage. Unfortunately, everyone has to pay the price for the cleanup.

Madoff Sentenced to 150 Years

Bernie Madoff was sentenced to 150 years in prison today for orchestrating the largest Ponzi scheme in the history of Ponzi schemes. Although Mr. Madoff's attorney pled for leniency and a mere 12 years, the judge seems to have aimed for the maximum sentence, and that just short of what Mr. Madoff's victims wanted; public stoning or perhaps a more humane burning at the stake.

In honor of Bernie Madoff's sentencing today, the WSJ devoted the entire front page of the Money & Investing section to discussing a.) Where all the money went (Irving Picard has only scraped together $1.2 billion so far) and b.) How some of the hardest hit victims have adjusted their lifestyles to face their new financial reality. As for where all the money went, Jeffrey Picower and Stanley Chais may have some idea, as they collectively withdrew over $6.1 billion above and beyond their initial investment, despite claiming that they were victims. I'm sure the rest of Madoff's victims would have a few choice words to describe Mr. Picower and Mr. Chais, and none of them resemble "victim". Certainly Ms. Brown, the 60 year old profiled in the WSJ article who had to take in her 91 year-old mother and look for a job because both lost money, probably isn't particularly sympathetic to anyone skimming $6.1 billion off of the ponzi scheme that robbed them of their life savings. It seems that nobody has been immune to Mr. Madoff's inverse Midas touch. His wife Ruth, who enjoyed the high life for many many years, has just handed over all of her assets, including furs, jewelry and lush properties in Manhattan and Mantauk, is being forced to live off of a mere $2.5 million for the rest of her life. Anyone who lives in Manhattan will tell you that living the high life off of $2.5 million is preposterous. But then maybe she can go buy back her furs at half price in an auction.

You Too Can Live Like a Ponzi Schemer

If you're not doing anything today at around 1:00 PM ET and happen to be in the Hamptons, you should mosey on down to the bankruptcy auction being conducted by Maltz Auctions of Marc S. Dreier's former property.  Mr. Dreier, for those who have a hard time keeping up with all of the recent spate of con artists, was a well-respected lawyer who made off (pun intended) with around $380 million of his clients' money.  Why would anyone bother with running a complicated ponzi scheme when the stress is bound to get to you eventually?  Just click on the link and check out the properties that Mr. Dreier had the fortune to live in before the scheme was discovered.  First there is the 7,000 square foot ocean front 8 bedroom, 8 bath mansion on 2.4 acres.  But, of course, 8 bedrooms is never enough, so why not buy the 3,000 square foot ocean view home next door for guests that aren't good enough to stay in the main house?  To bid on the main house, you need a certified check of $400,000 made out to the trustee.  But for the smaller house, a shack really, a check for $100,000 will do.  Chump change.    

Madoff Victims Complicit in Fraud?

What's better than a ponzi scheme? How about an interactive ponzi scheme? According to the Wall Street Journal, some of Madoff's investors are under investigation for being complicit in the monumental fraud. Jeffrey Picower, Stanley Chais, and Carl Shapiro are three of the eight investors that are being accused, among other things, of instructing Mr. Madoff of the returns they wished to achieve for their investments. If only you could've called your broker last year and told him that you wanted a positive 14% return instead of the 40% loss, your financial situation would be so much better right now. Curiously, the accused Madoff investors weren't even happy with the boring low double digit returns that Mr. Madoff was fabricating for his other investors. No, they had far more ambitious financial goals, with some asking and receiving returns of 300% to 950% in a single year. Particularly vexing for Mr. Madoff's other victims may be the fact that Mr. Picower and Mr. Chais, who claim to be among Mr. Madoff's hardest hit investors, withdrew "profits" of $6 billion above and beyond the principal they deposited for themselves, their families and their foundations.



Naturally, the accused are denying the allegations, through their various legal representatives. But one has to wonder why Mr. Chais's accounts had average annual returns of 40% when Mr. Madoff's other investors were receiving more boring returns of 12% or so per annum. Furthermore, Mr. Chais allegedly requested fictitious losses to offset the fictitous gains for tax purposes. If you're going to participate in a ponzi scheme, at least have the decency to pay your damn taxes. Mr. Picower had several accounts with returns of 100% in 14 instances and some that reached 950%. Nothing fishy here.



At least Mr. Madoff was a meticulous crook, having kept records of much of his correspondence with his loyal ponzi investors. Evidence exists that these clients were requesting specific returns that Mr. Madoff was granting. The ponzi plot thickens.

Ezra Merkin: Criminal or Just Really Lazy?

New York attorney-general Andrew Cuomo filed civil fraud charges against Ezra Merkin for allegedly secretly channelling more than $2.4 billion of his client's assets to the Madoff ponzi machine. Curiously, no criminal charges have been filed and Mr. Cuomo isn't attempting to prove that Mr. Merkin knew about the Madoff fraud. Instead, Mr. Merkin stands accused of misleading investors by failing to inform them that he was merely funneling their money into one investment strategy; that of a fraudulent ponzi scheme. According to Mr. Cuomo's complaint, about 85% of investors in the the Ascot fund believed their assets were diversified and didn't know that most of their money was flowing directly to Mr. Madoff. Furthermore, Mr. Merkin informed investors in his two other funds, Gabriel and Ariel, that he was investing in distressed assets and bankruptcies, when he was investing it in a stock and option fund that was actually a ponzi scheme. It's one thing to declare that you are a feeder fund for another, and quite another to claim that you are actively investing when you are just in the business of wiring money. As in the case with Fairfield Greenwich and the other feeder funds, investors are angry that all of the advertised extensive due diligence didn't uncover the Madoff fraud. Mr. Merkin's victims, including an angry Mort Zuckerman who is filing a separate suit, are particularly irked that they were sold one investment strategy and received quite another in return. Mr. Merkin's fees were outrageous for the service he actually provided; that of a high-priced Western Union franchise with Mr. Madoff as the ultimate beneficiary.

The Wall Street Journal provides a great excerpt from the New York state attorney general's deposition of Mr. Merkin. In response to a question from the attorney general asking if Mr. Merkin took steps to conceal his relationship with Mr. Madoff, Mr. Merkin responds with the following classic quote: "I did not have a policy of not disclosing a relationship with Mr. Madoff or not." With eloquence like that and the work ethic of a three-toed sloth, it's a wonder that Mr. Merkin was ever able to amass billions of dollars to manage. Then again, bull markets are not particularly discriminating.

Fairfield Greenwich Charged With Fraud

Massachussets regulators charged Fairfield Greenwich Group, a Madoff feeder fund, with fraud. Regulators claim that the company breached its fiduciary duty to clients by failing to perform adequate due diligence. Meanwhile, a Connecticut judge on Monday froze the assets of the Madoff family members, as well as the feeder funds Tremont, Fairfield Greenwich, and Maxam Capital and their current and former top executives. The noose appears to be tightening around the neck of those that profited handsomely from the $50 ($65?, who really knows) billion Bernie Madoff ponzi economy. Investors who have been devastated by the Madoff ponzi scheme are sure to take some comfort from these measures, particularly those who read yesterday's Wall Street Journal article highlighting the fabulous life of Andres Piedrahita, Walter Noel's, Fairfield Greenwich's founder, son-in-law.



Mr. Piedrahita, by all accounts, particularly his own, had the lifestyle of the many rich people that were beeing fleeced by the Madoff ponzi scheme. Although Mr. Peidrahita was tasked with soliciting investment funds for Fairfield from the very wealthy Latin Americans and Europeans that he wooed with his impressive party skills, he once told a friend that his real job was "to live better than his clients." The article is filled with many juicy details of Mr. Peidrahita's lavish lifestyle. With homes in Manhattan, London, Madrid, a butler, a private jet, a yacht anchored off of Mallorca with accompanying hacienda, and an impressive art collection, Mr. Piedrahita, according to a friend, lived better than many billionaires. "I've never seen anybody live like him and spend like him and I know billionaires that are 10 times wealthier than him" said the friend. Needless to say, any Fairfield Greenwich investor's ire would be rising to dangerous levels by the third paragraph of the WSJ article.



The fabulous life of Walter Noel and his extended family had been closely chronicled by Vanity Fair and the society pages. It was all grand and enviable before the truth was revealed; they were merely parasites feeding off of one of the largest investment scams in history. If it's indeed the case that the Noels considered it their job "to live better than their clients" then they certainly suceeded, although they probably should've disclosed their primary objective to their clients. Just think of all the money Fairfield Greenwich wasted on marketing documents that detailed the extensive due diligence that the fund of fund was performing on behalf of its clients.


The article ends with a curious quote from Mr. Piedrahita, who doesn't appear to have gotten the message that the party is over: "I look at myself in the morning and I am very proud of what I've done, and so are my partners." In reference to the Madoff scandal he says "Nobody knew anything about anything." The problem for Mr. Piedrahita, and the other bozos at Fairfield, is that they were paid alot to know alot. That excuse is not going to fly with regulators.

SEC Talking Tough, Taking Little Action

While the SEC was busy plotting and scheming to punish short sellers for single-handedly taking down the US financials, at least two major investment frauds were operating right under its regulatory nose.  Bernie Madoff had the decency to confess his sin of somehow misplacing $50 billion of his investors' life savings.  The Madoff debacle was an embarrassing scandal for the SEC, which  had investigated the firm several times over the years to no avail, after receiving a detailed outline from a whistle blower which pointed to an obvious ponzi scheme.  Mr. Madoff is under house arrest after basically handing himself over to authorities.  

In an effort to improve its public image, the SEC made a big announcement that it had unearthed a major fraud.  The problem is, once again, the major fraud had been operating for years without any action from the SEC, and would have more than likely continued to do so if it wasn't for Bernie Madoff's confession.  Nevertheless, with much fanfare, the SEC pointed its accusatory finger at Stanford Investment Bank.  Only they forgot to arrest Stanford's Chairman, Sir Allen Stanford.  The SEC has no idea of his whereabouts.  Sometimes, it's prudent to make the arrest BEFORE you issue the press release.  But for an agency that is prone to stupidity and posturing, rather than its actual mission of protecting investors, it is not the least bit surprising.

Bloomberg reports that Stanford lured clients with promises that their investments were safe.  The CDs, which are ordinarily FDIC-protected with US institutions, had no such protections for its clients.  In fact, Stanford specifically instructed its financial advisors to tell clients that the FDIC provided relatively weak protection.  Stanford told its clients that their funds would be placed mainly in easily sellable financial instruments monitored by more than 20 analysts and audited by regulators on the Caribbean nation of Antigua.  I have never been to Antigua, but I did have the pleasure of spending a year in the Cayman Islands in my youth, working for a bank to help facilitate off-balance sheet partnerships (a long, but interesting story for another time.)  I was one of three employees of the bank that worked downtown in a small three story building with perhaps 15 offices.  The three of us would go for weeks at a time without seeing any other human being enter or exit the building.  Furthermore, in the lobby of the building, the names of all of the companies that were registered to that address were listed via a bunch of spiffy plaques in a lovely display case.  I would estimate that there were over 500 companies registered at the address of the three story, 15 office building where I worked and rarely saw another human being other than the friendly FedEx guy.  This, my friends, is the hallmark of off-shore tax havens.  It's an address, period.  The odds of there being 20 analysts that monitor anything financial on the entire island of Antigua are slim to none.  Furthermore, the idea that there is a regulatory agency in Antigua that would actually monitor anything but the tides seems preposterous to me.  In any event, many people fell for it, as people have a tendency to do when an investment sounds too good to be true.  This is why we have the SEC, to prevent these types of schemes from ensnaring unwitting investors.  Too bad that our well-funded regulatory authorities in the US are about as effective as the imaginary ones on the island of Antigua.  

    

The Ponzi Report: Stanford Edition

Our crack investigators at the SEC have unveiled another mind-boggling ponzi scheme, somehow this time without the aide of a full confession from the perpetrator.  The US regulator accused Stanford International Bank, based in Antigua of an $8 billion fraud.  According to the Financial Times report, the SEC believes that Stanford falsely claimed that customers' deposits were safe and that the bank re-invested client funds primarily in "liquid" financial instruments.  It also said that the bank had falsely claimed no "direct or indirect" exposure to the Madoff ponzi scheme.  You've got to love a ponzi scheme that invests in other ponzi schemes and then denies involvement.

Naturally, the SEC was tipped off to the potential fraud by an analyst note that was critical of Stanford's claims to deliver consistent market beating returns on its $8 billion portfolio of depositors' assets.  When you have a market like this one, where every asset class is taken to the woodshed, claims of consistent market-beating returns are considered a red flag.  Any fund with a plus sign in the returns column better look out.  The SEC is on to you. 

News of Stanford's demise is sure to cause even more skepticism among investors of the safety of their financial assets.  Because if you can't put your money in a supposedly super-safe CD, where can you put it?  Perhaps this will cause a flight to quality back into money-losing hedge funds?  After all, if your fund manager was down 40% last year then he was no dumber than the average investor, and at least you know he's not using liquid paper to alter your confirms.  Then again, the mattress strategy is looking more and more appealing by the minute.  Little wonder that gold has rallied sharply in the past few weeks.   

The Ponzi Report

Yet another alleged financial fraud was revealed yesterday when a New York financier, Nicholas Cosmo, head of the $300 million (well, maybe) Agape World investment fund, turned himself in to authorities to face charges.  Mr. Cosmo was MIA when the news of the alleged ponzi scheme hit the tape, leading authorities to wonder if he was hatching a complicated scheme to skip town.  For those of us who are amused by the ludicrous attempts of these financier clowns to evade authorities, Mr. Cosmo's uneventful surrender was a huge disappointment.  No melodramatic suicide note (ala Samuel Israel?)  Can't we at least get another fake mayday call and plane crash (like that boob Marcus Schrenker?)  

What I find most interesting about Mr. Cosmo is that he was convicted of a federal charge of felony fraud and swindle in 1999 and sentenced to 21 months in prison.  However, according to Agape's website, the firm was founded in 1999 in order to make commercial bridge loans, construction loans and the like.  Since Mr. Cosmo was not released from custody until August 2000, he was apparently structuring deals from prison while serving time for felony fraud charges.  Although potential investors had expressed their concerns, somehow this goon managed to raise $300 million from people who didn't seem to care that he was a convicted white collar criminal.  Or perhaps this was just a minor detail when weighed against guaranteed returns of 13% to 15%?  

No doubt many more of these money-making schemes that will be revealed as frauds soon enough.  Perhaps investors will perform more due diligence in the future before throwing their money at anything with purported double digit returns.  Until the next bubble, of course.