Judge freezes Madoff family, 'feeder fund' assets: reports - MarketWatch

From MarketWatch:

A Connecticut judge froze the assets of Bernard Madoff's relatives and feeder funds that invested in the disgraced financier's Ponzi scheme, according to media reports Tuesday. Connecticut Superior Court Judge Arthur Hiller reportedly froze assets of sons Mark Madoff and Andrew Madoff, as well as assets of wife Ruth Madoff and brother Peter Madoff. The judge also froze the assets of hedge fund Fairfield Greenwich founders Walter Noel and Jeffrey Tucker; Fairfield Greenwich managing director Andres Piedrahita; Maxam Capital manager Sandra Manzke; and Robert Schulman, who once ran Tremont Group Holdings, according to Reuters

 I would really like to see THOSE motion papers. Sounds a bit odd to me.

Peter Madoff Agreed to Asset Freeze in December

We thought that the TRO freezing Peter Madoff's assets last week (see here) was big news. While it should have been, after the court refused to lift the freeze, Madoff appealed, and according to the WSJ, his attorney disclosed to the court that Peter Madoff had already agreed to an asset freeze with federal prosecutors in December of last year.

That makes for an interesting turn of events, but probably only interesting to litigation attorneys. Civil plaintiff moves to freeze assets of a defendant that the government has already frozen. While I do not know enough about the case, that should mean that the civil plaintiff's asset freeze is unnecessary and meaningless. Which is what Madoff's attorneys apparently argued, if the WSJ article is correct.

It is unnecessary, unless of course you are the civil plaintiff. Without your own injunction, you have no control over the disposition of the assets, if the government decides to "unfreeze" the assets. Apparently the appellate court agreed, and refused to overturn the civil plaintiff's injunction (or restraining order, the article is unclear.)

If anyone has copies of the court papers, I would love to see a copy - email address is astarita@beamlaw.com.

Court Dismisses ARS Class Action Against UBS

Judge Lawrence M. McKenna of the SDNY dismissed the securities class action against UBS, which alleged that the bank misled investors when it sold them auction rate securities.  The court ruled that the case could not continue because UBS had already reached a $19.4 billion settlement in the matter in August with the SEC and several state regulators in which UBS agreed to buy back nearly that amount of securities and pay a fine, the NYT reports. From Securities Docket.

Merrill socked with $39.8 million arbitration award

A FINRA arbitration panel hit Merrill for 39.8 million dollars for a claim arising from it's Advest brokerage unit.

According to InvestmentNews.com, the award arises from conduct at Advest before Merrill's purchase of the firm, but the award is against Merrill.

Under FINRA rules Merrill will have to pay or appeal within 30 days.

While this is on a completely different scale, I keep telling clients that buying a brokerage firm in fraught with risk, since you are responsible for the obligations and conduct of the firm from before your purchase. There is much more involved when a Merrill buys an Advest, but a 39 million dollar arbitration award does help make the point.

FBI Close to Arresting AIG's Cassano?

This should be interesting, and hopefully it will be handled more professionally than the House's knee-jerk 90% tax pandering. According to ABC News, Cassano ran the Financial Products Division of AIG, which is the unit largely blamed for bringing down AIG, and the FBI and federal prosecutors are getting ready to bring charges against him.

I am still having trouble with the concept of an insurance company running a massive financial trading operation, but I guess we have Phil Graham to thank for that. (Is he still whining about whiners? Why haven't we heard from him recently?)

There hasn't been much talk of criminal conduct, but who knows what an FBI investigation will turn up. ABC reports that Cassano said on a conference call in 2007 that the credit defaul swaps were foolproof and that it was hard to imagine that they could even lose a dollar on any of those transactions.

Others say that the swaps were toxic and anyone dealing with them knew they were toxic.

If it happens, it will be an interesting case. But the feds better make sure they are correct however. The last thing we need is a half-assed witch hunt designed to appease the masses which ultimately becomes another hit to the government's credibility.

The Executive Who Brought Down AIG

Friday Q&A - A Trading Account has accused me of Churning!

Question: For a number of years I had a very active client, who traded frequently, multiple times in a week. Most of the investment ideas were his, but some where mine, and we spoke constantly about the activity and the trades. I provided him with deep discounts on commissions, and followed his instructions, but now he is claiming that I churned his account! What can I do to defend myself and to prevent this from happening again.

Answer: First, and this has become a near mantra for me, you need to document your conversations, and activities in the account. While this may not help with this particular account, keeping notes about your customers will help to prevent this type of claim, and will help in the defense of the claim should it arise. The first column that I wrote for Research Magazine was on keeping records, and is a must read for every registered representative - For the Record.

My article, Churned or Traded, provides an analysis of the claim, and the defense to the claim, and I recommend a review of the article, which is posted at SECLaw.com. For the moment, the definition is important.Churning is excessive trading in a customer's account by a broker taken in the context of the customer's financial situation and investment objectives. Churning requires three elements, first, excessive trading, and second, control of the account by the Registered Representative, and three intent to defraud the customer.

The most difficult part of a churning analysis is a determination of whether the broker had control over the account, and notes and written communication between the broker (or firm) and the customer is important. The fact that the customer was picking the stocks is important, and documentation of that fact will be a great benefit in defending the claim. The customer's new account form is important, as it documents the investment objectives of the customer, as well as his investment experience and financial condition.

Although not frequently done, when an account that is going to be actively traded is opened, the customer can be asked to confirm, in writing, the trading strategy that is going to be used in the account, before the account is established. Periodic confirmations of that strategy during the life of the account can easily establish that the customer was directing the level of activity, and was therefore in control of the account.

Alternatively, many brokerage firms use activity letters in accounts with a high level of trading. Once the compliance department has identified an account as having a high level of trading, the branch manager or compliance officer will discuss the account with the registered representative, to determine the accounts goals and objectives. Assuming that the supervisor finds the level of trading to be suitable, or that the account is in the control of the customer, the firm then sends a letter to the customer, informing the customer that the trading in the account is more frequent than in a typical account, and seeking written confirmation from the customer that he is aware of the trading, and that the trading account is being handled to his satisfaction.

These letters, known as "activity letters" by some, and "suicide notes" by others, are sent to the customer and the written response is then kept in the customer's file. The activity letters are called suicide notes since the letter often becomes important evidence against the customer when he attempts to claim that his account was churned, or that he was unaware of the high level of trading in the account. A customer who has signed an activity letter has a very difficult time establishing the control aspect of a churning claim.

At the same time, if an account that has been actively trading does not return an activity letter, the customer should be contacted by the branch or compliance department, and the trading ceased, until everyone concerned is convinced that the customer is aware of, or directing, the trading.

Often broker's complain about activity letters, arguing that the letter will generate a complaint or will be sending the message to the customer that his broker is going something wrong in the account. While it is true that the wording of the letter may make a difference, the customer's refusal to sign the letter may very well identify a customer who did not truly understand the activity in the account. If that is the case, it is in everyone's interest to have the issue resolved sooner rather than later.

British authorities expect to file charges against others, believing that Madoff's UK operations played a significant role in the operation of Madoff's Ponzi scheme.

Madoff's U.K. Business 'Played Significant Role' in Operation

Investor Freezes Madoff's Brother's Assets

A state judge in NY has frozen Peter Madoff's assets, at the request of a law student who claims that his trust fund was depleted by the payment of fictitious returns to other Madoff investors.

The complaint alleges that Peter Madoff had "full knowledge that it was a fraudulent Ponzi-scheme and nothing more than an unprecedented fraud."

Justice Stephen A. Bucaria of Nassau County Wednesday ordered that Peter Madoff be "prohibited and restrained from removing any funds" from any of his accounts, pending an April 3 hearing.

Apparently this is only a temporary restraining order, which will expire at the April 3 hearing, where the court will hear arguments from both sides. TROs that freeze assets are tough to get, so this law student must have some decent evidence of Peter Madoff's involvement in the Madoff fraud. We will see what happens on the 3rd.

The full story is at Law.com.

Dreiert Trustee Recovers $100 Million in Assets

In his report to the court, the Dreier Trustee says that he has recovered over $100 million in assets, including an 18 million dollar yacht and 39 million in artwork.

The story is at DealBook, take a look at this lifestyle, apparently all financed by selling fraudulent notes. The interesting part is that the theory is that he kept selling the notes to continue the lifestyle! How about selling the 39 million in art work?

Well, the New York Times gets it. We have much bigger problems than the AIG bonuses.

And why do Merrill executives get to keep their bonuses when everyone else is going to have it taxed away? Because they were paid in December. Another piece of lunacy of the AIG bonus bill.

The Problem With Flogging A.I.G

Congressional Pandering and the 100% Income Tax on Compensation

Congress does a number of things very well. Pandering to the populace is one of them, and nothing demonstrates this as well as the House's attempt to punish AIG. The other thing they do well is pass a bill that has popular appeal, and then hope that someone else stops them, or there is a presidential veto, or the courts strike it down. Then they get to say "we tried to fix it but the [opposing party][the President][the Courts] wouldn't let us!"

We all know that Congress screwed up on the AIG bonuses. They prevented the use of bailout funds for bonuses, but exempted any bonus payable pursuant to a contract that existed prior to February 2009. That might not have been a screwup, on some levels, it makes sense. However, as we all know, there was a huge backlash from the public, since the bailout money was going to pay "executive bonuses." Congress, in its usual pandering, fueled that fire. Ignoring the fact that they expressly permitted those bonuse payments, they began railing against "bonuses" to "executives" at AIG too.

Mixing terminology is another thing Congress does well, since those "bonuses" are not really "bonuses" and the majority of people getting those bonuses are not "executives" but rather technical staff, analysts, assistants, in-house counsel, etc.

Then the House passed legislation on Thursday to impose a 90% surtax on bonuses granted to employees with household income of more than $250,000 at companies that received at least $5 billion from the government's financial rescue program.The Senate is considering a similar plan that could be up for a vote as soon as next week.

Let's follow the bouncing ball. First, the tax is on HOUSEHOLD incomes over $250,000. That covers a whole host of families. Two professionals, a nurse and a lawyer; a stock broker and a teacher.

Second, almost everyone on Wall Street has a compensation package that is salary plus "bonus." Wall Street structures its compensation packages this way intentionally. You see, they don't pay the "bonus" until March of the following year. Not only do they keep the float on the employee's money for the extra months, if you are not at the firm when the "bonus" is paid, you don't get it. So, folks stay until bonuses are paid in March. By then, the employee has worked three months, receiving a vastly reduced "salary" and is 1/4 of the way towards earning next year's bonus. Makes it hard to quit, since you will lose 1/4 of your compensation if you do. And round and round it goes.

Back to the tax. The tax applies to any bonus paid to any employee of any company who received more than $5 billion from the TARP funds, which includes Citi, JPMorgan, BofA, Goldman Sachs Group Inc., Morgan Stanley, PNC Financial Services Group Inc. and U.S. Bancorp.

Morgan Stanley staff gets paid salary plus bonus. Secretaries, IT folks, internal accountants, attorneys, all get bonuses as part of their overall compensation. It is almost guaranteed that most of those folks who are married with a working spouse make over $250,000 a year, combined. It's relatively easy, given the cost of living in a major city these days. An in-house attorney makes something on the order of $200,000. Her husband probably makes over $100,000 and BAM, they get hit with a 90% tax on her bonus, and she has absolutely nothing to do with the bank's current problems. Some of the IT professionals make over $200,000. Same situation. There are assistants who make significant amounts of money working at these firms, who get paid with a bonus, and the government is going to tax them too at 90%.

Congress cannot possibly justify this. They have created this mess and they are now pandering to the public. AND, they are too lazy to write a bill that actually addresses what they are trying to address. While I wouldn't agree with it, if you want to get the bonuses that were paid to executives, use the power of additional TARP funds to do it, not the tax code.

If you want to use the tax code, then apply the tax to bonuses over one million dollars. I would still have a huge problem with that, but you would not be taking money from the innocent secretary, bookkeeper and IT guy.

Don't believe it? Read it yourself, it's only one page long - The House Bonus Bill

Madoff's accountant has been charged with securities fraud and related charges arising from an alleged failure to conduct audits.

They are NOT charging him with knowing of the scheme, but rather for falsely certifying that he audited the financial statements.

Interesting legal distinction, undoubtedly the same punitive result, cumulative maximum sentences are 105 years.

The SEC also filed a civil suit against him.

Accountant Charged in Madoff Ponzi Scheme

Dreier’s Lawyer Expects Guilty Plea

Enough with AIG, Dodd, politicians and Madoff.

Various news sources are reporting speculation that Marc Dreier is going to plead guilty to money laundering charges, and that creditors are contemplating suits against Dreier's "partners."

Dreier’s Lawyer Expects Guilty Plea; Firm Lawyers at Risk in Bankruptcy Case

Liddy Says Geithner Knew About Bonuses

AIG Chief Edward Liddy says that Geithner knew about the pending bonuses to its employees as far back as November 2008 when he was the Federal Reserve Chairman. This directly contradicts the timeline put forward by Geithner and the Administration,who claims that they only found out this month.

OK, which one is it. Did Geithner know about the bonuses in November, and is simply conducting an outrageous diversion for the public's amusement, or is he a dolt who didn't know until last month. Either one is not good, but if we are going to get into a situation where another Administration starts lying to us, there is going to be a severe collapse of confidence by the American public, the likes of which we have never seen.

The reality is that Geithner screwed up. I understand, or as our President says "I get it." There are thousands of employees at AIG, thousands of employees with different compensation packages. What undoubtedly happened is during the original TARP discussions and Geithner's involvement under the Bush Administration, the focus was on the "big" compensation packages, not the hundreds of others. (Keep in mind that the $165 million we are talking about, while a huge amount of money, is less than 1% of the 170 billion that AIG has received),

I get it. You were not looking at compensation packages that constituted less than 1% of the total bailout. I understand. In the grand scheme you were saving the country and the economy, and in context, $165 million was not a big deal. Completely understandable.

So why are you now screaming about AIG taking the bonuses, when you have already acknowledged that the amount of the bonuses is insignificant in the grand scheme of things?

You are not a liar, you are a politician doing what politicians do far too often. Pandering.

USNews.com has the details - AIG Chief, White House Statements At Odds?

Naked Short Sales Hint Fraud in Bringing Down Lehman

As many as 32 million shares of Lehman were sold and not delivered as of the day of Lehman's demise, indicating the potential for a massive naked short of the stock.

Naked shorting is illegal. While shorting a stock (selling it without owning it) is legal, the seller must borrow the stock from someone else, and deliver the stock that he sold to the borrower.

Unfortunately, those who complain about naked short selling have become the boy who cried wolf, since so many CEOs claim it is occurring, but are never able to prove that it is occurring.

However, with Lehman, the proof may be available. According to Bloomberg News, the 32 million fails to deliver were more than a 57 fold increase over the prior year's peak in fails.

Naked Short Sales Hint Fraud in Bringing Down Lehman - Bloomberg.com

AIG Executive Start Returning Bonuses

Good for them. More honorable than the politicans...."Under intense pressure from the Obama administration and Congress, the head of bailed-out insurance giant AIG declared Wednesday that some of the firm's executives have begun returning all or part of bonuses totaling $165 million."


http://news.yahoo.com/s/ap/20090319/ap_on_go_co/aig_outrage_168

More Details on the AIG Bonuses

NYS Attorney General Andrew Cuomo has some details on the AIG bonuses, and the situation is not getting any better for the Administration or AIG.

First, please understand my ire. The details of these bonus payments are not yet public. Some reports say they are for executives, others say that 400 employees are included in the bonus payments. Some reports say they are retention bonuses, others say they are performance bonuses. All reports say that AIG entered into these contractual obligations in early 2008. The details make a difference, and I am not in favor of simply abrogating those contracts, nor of creating a retroactive tax on them. Ex post facto and all that other legal mumbo jumbo. In our system of jurisprudence, you simply cannot do that, and any court would strike down such attempts. Arguing for 90% taxes and intentional breaches of contract makes for some very nice pandering to the public, but it is not going to work.

My anger is directed at this Administration and the Bush Administration. I cannot fathom how they gave AIG 170 billion dollars without knowing where the money was going to go, and how it was going to be used. And forget about conditioning the use of the money. They could have conditioned that money on renegotiated bonuses. Not a problem at all, and we can assume it would have worked, since no bailout money, no AIG, no bonuses at all.

Mr. Cuomo has released some facts about the payments. It seems that his office, an outsider in the transactions, was able to do what the Fed and Treasury was unable or unwilling to do - get the details.

According to Mr. Cuomo's letter to the House Committee on Financial Services:

1. The top recipient received more than $6.4 million;
2. The top seven bonus recipients received more than $4 million each;
3. The top ten bonus recipients received a combined $42 million;
4. 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million;
5. 73 individuals received bonuses of $1 million or more; and
6. Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million.

First the retention bonuses. My understanding is that the agreement is "stay with us another year, and at the end of the year we will pay you $X since you agreed to stay." If that is the case, AIG needs to pay those bonuses. The parties entered into an agreement, the employee did what hew as supposed to do, and is entitle to the payment. This really can't be an issue, and yes, it is a lousy agreement, AIG management is a bunch of irresponsible fools, etc. But hindsight is wonderful, those are agreements that were entered into over a year ago, and should be honored.

Mr. Cuomo has identified payments of approximately 1/2 the $165 million, but without the details, it is difficult to comment on the payments, except to remind everyone, again, that these are contracts that were entered into over a year ago.

Do you really want the government forcing companies to breach employment contracts? Think about your own employment or business situation. You enter into a major agreement, do everything the agreement calls for, and when it comes time to get paid, the company refuses to pay. Or the government enacts a new law that puts a 90% tax on that type of contract.

Not in our system of jurisprudence. We need competent government leaders, not proponents of illegal and unconstitutional "fixes."

Madoff Claims Florida As Legal Residence

The story is about the Florida homestead exemption. If you are a Florida resident, it is difficult, if not impossible, for a creditor to take your home from you. It is basically exempt from seizure. We can debate the proprietary of that till the cows come home. It's the law there, it ain't gonna change any time soon, and tons of people have taken advantage of the rule. (Think Bowie Kuhn and the bankruptcy of Myerson & Kuhn.)

So no big surprise that Ruth Madoff claims her Palm Beach mansion to be her primary residence. Shielding the 9 million dollar home from creditors is not a bad idea.

But the gem in the story is the timing of that claim. In Florida, one needs to claim the "homestead exemption" in order to have the home be your residence and exempt from creditors. According to this article, after living in New York for 60 plus years, Ms. Madoff filed for the exemption in September of 2008, only three months before Madoff's arrest, according to The Business Insider. Coupled with the other pre-arrest allegations, including the allegation that she withdrew 15 million dollars or so prior to his arrest, we have an interesting set of allegations coming together for the government's forfeiture proceedings.

The Search for Madoff Assets Continues

For those who worried that Madoff's guilty plea would stop the hunt for assets, have no fear. Prosecutors have announced that they would seek to recover more assets from the Madoffs, including those held by his wife Ruth Madoff.

An interest in a real estate fund (unvalued), 31 million in loans to Madoff's sone, interests in 20 businesses, 2.6 million in jewelry. Another article mentioned 600,000 in silverware.

I don't know why the image of the government taking the Madoff's silverware strikes me a funny, but it does. But $600,000 in silverware is not funny at all).


Interesting aside. The real estate fund investment is owned by Fred Wilpon, Madoff victim and owner of the NY Mets. How the heck does that happen? They invested with each other? That is certainly interesting.

The NYT has more.