There has been new developments regarding the ongoing case of Bernard Madoff. While Madoff is serving a 150 year sentence in prison, his daughter-in-laws will now be paying the price for him and his son’s infamous Ponzi scheme.

Just last week, new claims were filed against the Madoff family in an Irving Picard $255 million complaint. The case has been revised to include both Deborah Madoff and Stephanie Mack to the “$54.5 million in claims for unjust enrichment,” The Washington Post reported. The wives are also being sued for $3 million that was given to them.

Although it has been said that a judge might end up barring these claims, Picard could still sue for unjust enrichment and constructive trust, said US Bankruptcy Judge Burton Lifland in Manhattan. It is, however, too late to charge the Madoff son’s wives with all of the other past charges brought up on the family.

Picard is still trying to retrieve investor money lost during Madoff’s Ponzi scheme.

Mark Madoff, the son of Bernie Madoff, committed suicide in December 2010.

Stephanie Mack, Mark Madoff’s wife, speaks out about her husband’s suicide after Madoff Ponzi Scheme

Click here to discuss this post.

Permalink

The actor has recently teamed up with the FBI to create a video which encourages would be tipsters to come forward with any insider trading news, and outlines, that greed is not good. Here is the video:

Tipsters who decide to turn into rats and go to the government might do better then to follow Douglas’ advice. Whistleblower lawyer David K. Colapinto outlines that, “If they just go to the FBI, they are probably going to get zero,” Colapinto said. “The FBI’s not obligated to do anything for them.”

Colapinto said that if informants want a reward for information that exposes financial fraud, they should consult a lawyer — and file a whistleblower claim with the SEC.

Under the SEC’s , tipsters are entitled to 10 to 30 percent of the money the SEC collects if the whistleblower’s information leads to an enforcement action in which sanctions of more than $1 million are ordered.  The bounties were ordered by Congress in the aftermath of the financial crisis and were intended to be powerful weapond in the war on Wall Street fraud. That being said Harry Markopolos, who reported the Madoff fraud to the SEC for years, got nothing.

Attempting to diagnose whether or not a hedge fund has the potential to be exposed to insider trading scandals can be a critical part of analysis of a fund’s compliance and trading functions during the operational due diligence process. Investors should attempt to evaluate such risks during a review of operational risk factors including personal trading policies.

Click here to discuss this post.

Permalink.

Reuters is reporting that Britain’s Financial Services Authority (FSA) said on Wednesday it had fined Einhorn 3.64 million pounds ($5.67 million) and his Greenlight Capital 3.65 million pounds for market abuse.

Greenlight rose to  prominence in credit crunch for shorting Lehman Brothers bank.

The story goes that Einhorn (a prolific poker player) learned from a telephone conversation, held with a broker in 2009, that British pub company Punch Taverns was on the verge of a significant equity fundraising, prompting Einhorn to sell down his holdings before an expected fall in the shares, the FSA said in a statement.

This decision allowed Einhorn (who wrote a book called Fooling Some of the People All of the Time, A Long Short Story) to avoid losses of around 5.8 million pounds, the FSA said. “The FSA accepted that Einhorn’s trading was not deliberate because he did not believe that it was inside information. However, this was not a reasonable belief,” the FSA said. “This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn’s prominent position as President of Greenlight and given his experience in the market.”

According to the Wall St. Journal, Mr. Einhorn stated, “We believe that this action is unjust and inconsistent with the law and with prior FSA enforcement precedent. However, rather than continue an arduous fight, we have decided to put this matter behind us and concentrate on managing our business.”

Mr. Einhorn continued, “We have always strived to set an example of good conduct and ethics, and we take compliance very seriously. We didn’t believe in 2009, and we don’t believe now, that there was anything wrong with our conduct and our actions. The fine is for trading in advance of a decision that had not been made, and the FSA concedes we did not believe we had any inside information. We did not enter into any confidentiality agreement, we explicitly requested that we not be given confidential information, and we do not believe we were given any such information. Further, all the witness testimony supports our view.”

Reportedly, ts he FSA said Einhorn gave instructions to sell all of Greenlight’s holdings in Punch a “matter of minutes” after the telephone call, on June 9 2009. At the time these instructions were given Greenlight held 13.3 percent of Punch’s issued equity, and over the next four days Greenlight sold 11,656,000 Punch shares, thereby reducing its holding in Punch to 8.89 percent.

Punch announced a fundraising of 375 million pounds on June 15 2009. Following the announcement the price of Punch shares fell by 29.9 percent, the FSA said. While the regulator said the trading infraction was inadvertent and not deliberate, the fine may put some tarnish on 43-year-old Einhorn, a stalwart of the hedge fund community who is known for public crusades against abuses by public companies.  Einhorn has targeted Green Mountain Coffee Roasters, claiming the company’s accounting practices and long-term earnings power are questionable.

Here is a video calling his views about Green Mountain Coffee into question:

While the average U.S. hedge fund lost about 5 percent in 2011, last year Einhorn’s flagship fund rose 2.9 percent. However, the hedge fund manager lost out on a high-profile bet last year when his effort to buy a significant minority stake in the New York Mets broke down over the summer. He is a life-long fan of the baseball team.

Einhorn isn’t the first fund manager to be fined in the UK for insider trading. In 2006 the FSA fined former GLG fund manager Philippe Jabre a then-record 750,000 pounds after he was found guilty of insider trading on a convertible bond sale for Japan’s Sumitomo Mitsui Financial Group. ($1 = 0.6416 British pounds)

Here are some videos of Einhorn talking about his investing style and views:

Understanding a hedge fund’s compliance procedures and the way in which it deals with and may be exposed to material non-public information is an important part of the operational due diligence process.

Click here to discuss this post.

Permalink.

A jury recently handed down a sentence which found that the Galleon Group’s founder Raj Rajaratnam was convicted of insider trading. Bloomberg is reporting that jury never argued during 12 days of secret deliberations that he was innocent.  Instead the focus was on what sentence to give Rajaratnam. Here is a post about the Galleon verdict entitled, Galleon’s Fait Accompli : Investor’s Move the Dial Towards a Conservative Approach to Hedge Fund Research, on the Corgentum Consulting blog and some videos from the trail and verdict:

http://youtu.be/YKbqdE_BA5w

Click here to discuss this post.

Permalink.

The Galleon Case:

Or perhaps so-called insider trading should be legalized?

And then of course there is the Wilpons and Madoff:

From CNBC:

ESPN’s take on the Wilpon / Madoff scandal (which the Wilpon’s claimed would not affect the NY Mets baseball team they own) including Larry King’s take on the subject:

Interesting Irving Picard’s lawsuit to clawback capital centers around the issue of operational due diligence red flags. Another interesting argument made Picard is that the Wilpon’s should have been even more aware of Madoff’s red flags because of their previous experience with Ponzi schemes. The Wilpon’s have a history of of investing with Ponzi’s schemes before – they invested in Sam Israel’s Bayou – perhaps Mario Cuomo may be able to mediate a settlement…

Click here to discuss this post.

Permalink.

The New York Times reports that wearing a dark suit, black tie and starched white shirt, he stood impassively while the verdict was read, betraying no emotion.

Here is a video from CNBC about the verdict:

Since leaving Societe Generale Kerviel, took a job with Lemaire Consultants & Associates an information systems and computer security consulting firm.

Here is Reuters take on the story:

At the end of Kerviel’s high-profile three-week trial in June, his defense team pleaded guilty to computer abuse but rejected the other charges.The public prosecutor has recommended Kerviel serve at least four years behind bars, with a fifth year suspended. Tuesday’s verdict is critical for SocGen, which has worked hard to clean up its image since the scandal.

Caroline Guillaumin, a spokeswoman for Société Générale, said the damage award was a “symbolic” sum that the bank did not expect would be paid. “But it is important, and we are satisfied, because it recognizes that the entirety of the bank’s losses are attributed to Jérôme Kerviel’s actions,” she said.

Mr. Kerviel’s lawyer, Olivier Metzner, said he would appeal immediately. “This judgment is totally unreasonable,” he said outside the court. “It suggests that the bank is not responsible for anything, that no system of control could have prevented this.”

Dominique Pauthe, the presiding judge, agreed that the former trader could remain free until the outcome of the appeal, which legal experts said was unlikely to be heard before late next year.

The prosecutors, Jean-Michel Aldebert and Philippe Bourion, had requested that Mr. Kerviel spend at least four years behind bars. The maximum penalty possible on the charges faced by the former trader — breach of trust, forgery and unauthorized use of the bank’s computers — was five years.

The unwinding of an estimated €50 billion in unauthorized open positions on Mr. Kerviel’s trading book in late January 2008 cost Société Générale €4.9 billion, the equivalent of about $7 billion at the time.

Mr. Kerviel acknowledged at his trial that he had falsified documents and entered fake trades to hide his activities, but he maintained that his bosses had deliberately turned a blind eye to what he was doing and had tacitly encouraged him as long as it was profitable.

Specifically, around 2002 Kerviel created a fictional rugby loving hedge fund friend name “Matt” in response to inquiries from broker, Moussa Bakir, who had asked him about his trading strategy. Kerviel told Bakir all about “Matt”, but whom Kerviel had imagined into a wanna-be billionaire hedge fund manager who loved rugby.

Reading from excerpts of the 73-page ruling, Judge Pauthe said Société Générale’s failure to detect Mr. Kerviel’s dealings for more than two years did not absolve the trader of primary responsibility for the bank’s huge losses.

“The lack of vigilance by the bank in monitoring the only existing limits, acting as alert signs, hardly exempted Jerome Kerviel from his duty to inform his hierarchy of the reality of his excesses or to come back within the limits imposed,” Judge Pauthe said. “By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part, and whose future he mortgaged.”

The case continues to attract intense interest in France, though outside financial circles it has been largely overshadowed by the sequence of events that has shaken the world economy since the collapse of Lehman Brothers in September 2008.

Some have portrayed Mr. Kerviel’s activities as emblematic of the very culture of excessive risk at the root of the global financial crisis.

During the trial, he described himself as “someone who tried to do his job the best he could, in the interests of the bank.” He added: “My objective was to help it make money.” In a newspaper article last year, he was quoted as saying that he had taken “crazy risks” for “astronomical gains that brought me, sometimes, great joy.” Daniel Bouton, the former chief executive and chairman of the bank, has described Mr. Kerviel as “a crook, a fraudster and a terrorist” who acted alone and nearly destroyed the bank.

Mr. Kerviel had been placing bets outside his trading limit for more than two years. The bank has said it booked €1.4 billion in profit in the fourth quarter of 2007 from his unauthorized dealings. In the aftermath of the scandal, Mr. Kerviel spent five weeks in pretrial detention and became something of a French folk hero. He even wrote a book in French (L’engrenage : mémoires d’un trader) about his exploits in which he states, “I was only a prostitute in a great banking orgy.” In the French media much was made of the fact that someone from such a modest background — his mother was a hairdresser, his late father a metal-shop teacher — could dupe so many of his bosses, many of them well-bred graduates of France’s best schools.

Mr. Kerviel’s conviction follows the dismissal last week of a U.S. shareholder lawsuit accusing the French bank of concealing losses linked to the trading scandal, as well as the extent of its exposure to subprime mortgages. Citing a U.S. Supreme Court decision in June, a U.S. court in New York ruled that the investors — including several pension funds — could not sue in the United States for losses linked to their investments in foreign companies.

It will be interesting to see if the judge reconsiders Kerveil’s sentence on appeal…

Click here to discuss this post.

Permalink

Stanley Chais was a Beverly Hills, California investment advisor who operated feeder funds which allocated capital to Madoff funds. He passed away on September 26, 2010 from a rare blood disease at the age of 84.

The Chais death is the third major death surrounding the Madoff scandal. The first was investor’s Rene-Thierry Magon de la Villehuchet’s suicide and the second being the death of Jeffry Picower (see previous post regarding Picower).

Chais was accused in a pending Securities and Exchange Commission lawsuit of feeding about $1 billion — virtually all the funds he collected from investors — into Madoff’s multibillion Ponzi scheme. Specifically Chais managed three funds which invested with Madoff: 1) the Lambeth Company, 2) the Brighton Company and the 3) Popham Company. Although he withdrew $500 million before the collapse of the Madoff funds, Chais maintained that he was also a victim and was not complicit. Here is the SEC complaint against Chais.

Chais also facing a lawsuit from the Madoff trustee, Irving Picard which was filed on May 1, 2009 Irving Picard, bankruptcy trustee for Madoff Securities, filed a lawsuit against Stanley Chais.  The complaint alleges he “knew or should have known” he was deep in a Ponzi scheme when his family investments with Madoff averaged 40% and
sometimes soared as high as 300%. It also claims Chais was a primary beneficiary of the scheme for at least 30 years, allowing his family to withdraw more than $1 billion from their accounts since 1995 – money that belonged to Madoff victims. The Picard complaint is here.

Chais was also facing a lawsuit from filed on September 23, 2009, California Attorney General Jerry Brown seeking $25 million in penalties and restitution for victims.

Chais was a large philanthropist and his philanthrophy, the Chais Family Foundation, closed in December 2008 as a result of losses associated with Madoff.

Here is a video from CNBC about the Chais death:

In other Madoff news, Bernard Madoff’s wife Ruth Madoff has been spotted in New York City at Midtown’s Le Pain Quotidien. Here’s the video:

Ruth Madoff had a new red harido (previously her hair was blond). Ms. Madoff was so dedicated to her previous blond hairstyle that she visited her salon, Pierre Michel, every six weeks for the last 10 years. After the Madoff scandal broker she was told that she could no longer enjoy her routine of sitting with a glass of Poland Spring water while Giselle, a colorist often cited in Vogue and Allure, wielded the foils. “Oh my g-d,” Madoff uttered, as ABC News advanced towards her. This video also features Madoff victims advocate Ronnie Sue Ambrosino. By the way the a website for the Madoff victim’s network is: http://bernardmadoffvictims.org.   When Ruth Madoff was asked if she had any words regarding her husband’s victims, she said nothing. Perhaps it makes sense she’s keeping mum, since no one knows what federal prosecutors may or may not be up to….

Click here to discuss this post.

Permalink.

The Huffington Post is reporting that in jail Madoff applied to run the budget of the Butner Prison’s landscaping crew, he didn’t get the job. “Yeah right I’d hire him as a clerk,” remarked the inmate in charge of the crew. “All our money’d be missing!”

Nicknamed “Camp Fluffy“, Madoff’s prison even features a soundproof music room — and periodic “special treats” like popcorn and cotton candy.

Madoff apparently spends his time reading law books, John Grisham, and Dean Koontz–when he’s not working his job in the prison cafeteria. Here is a clip of the show:

I wonder who else might be joining him in prison shortly…..

In other Madoff news, it is being reported that Judge Burton Lifland (the US judge overseeing the liquidation of Madoff’s assets) has asked a court in Gibraltar to transfer seized funds to pay victims, according to a court documents.

Specifically the judge issued a a judgement ordering Vizcaya to pay 180 million dollars to government-appointed trustee Irving Picard overseeing the liquidation of Bernard L. Madoff Investment Securities (BLMIS). Vizcaya had allegedly deposited180 million dollars in off-shore accounts in the months before the Madoff scam was revealed. The judge, in perhaps an interesting letter rogatory example and display of the principles of comity ,  asked the Gibraltar court to release $73.08 million dollars it had seized from local Vizcaya accounts last year.

“I ask for your support to ensure the successful enforcement of the default judgement by transferring the funds… within your court’s jurisdiction to this court or to Irving H. Picard,” Burton wrote. “I believe that it would be in the best interest of the BLMIS estate to turn the Gibraltar funds over.”

Click here to discuss this post.

Permalink.

Proponents of this increased taxation argue, in part, that it is a good way to raise additional revenue for the government and that it is a technique to further align the interests of investors and managers.

Here is a link to a Reuters article which explains that under current law, profits earned by investment fund managers at hedge fund and private equity firms are taxed as capital gains, a 15 percent tax rate, instead of as ordinary income, which would subject them to the highest 36 percent marginal income tax bracket.

To learn more about carried interest you can visit this bizarre website put up by Representative Eric Cantor from the Seventh District of Virginia. While it seems Representative Cantor’s heart might be in the right place by showing us the adventures of Seth, Jason and Caitlin to protect “America’s retirement resources at risk” via this educational resource the introductory warbly robot voice, odd graphics, and grainy pictures remind me of those sci-fi movies of the 50′s  like Forbidden Planet. Eerie to say the least. America’s tax dollars at work….

Those against this tax argue (as does law professor Darryl Jones in the clip below) that the hedge fund manager is performing services and not investing capital so the capital gains tax rate should not apply to the management fees earned by the hedge fund.

One of the key questions, from a purely tax perspective, is whether carried interest is truly ordinary income. Here is a nice discussion about this point on Forbes.com.

Those who point to the fact that this tax has not gained much traction is due to the large political donations made by hedge fund managers.

Here is a CNBC clip in which Daniel Mitchell of the Cato Institute and Darryl Jones discuss the issue. My favorite quote from Mr. Mitchell is, “we have to take the keys to the liquor cabinet away from the alcoholics.” It is unclear to me who Mr. Mitchell is calling an alcoholic – investors, the U.S. government or hedge fund managers?…

Click here to discuss.

Permalink.

The clip is available here:

This segment was part of a larger segment of the uptick rule which can be viewed in full on CNBC’s website here.

Click here to discuss this post

Permalink