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.”

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In late October police in the U.S. and Germany made three arrests in connection with an on-going fraud investigation into the firm.

Additionally, two suspects were arrested by U.S. police in Miami (Stefan Seuss) and Nebraska (Thomas Meyer) in the probe.  Both face charges related to money-laundering in U.S. federal court in Philadelphia. Prosecutors say Seuss and Meyer were caught in a sting operation planned by the Federal Bureau of Investigation and Internal Revenue Service. The two men allegedly offered to move money for a software and CD/DVD pirate who turned out to be an undercover federal agent.

According to Finalternatives, German prosecutors said they have another suspect in their investigation, although it is unclear whether that unidentified individual has also been arrested. That suspect is a manager at a German K1 company, according to Bloomberg News. Helmut Kiener’s (a former telephone book ad salesman) arrest came amidst a flurry of activity in Germany as prosecutors from the city of Würburg (in the north of Germany) searched several houses, including Kiener’s, as well as the Swiss offices of Treukapital Treuhandverwaltung AG, K1’s administrator. It is also being reported that firm’s including Barclays, JP Morgan Chase and BNP Paribas may have lost millions in an alleged scheme which furnished Mr. Kiener’s lavish lifestyle including personal spending on planes, a helicopter and luxury properties.

Here is a video from CNCB regarding the investigation:

Reuters is reporting that Aurelia Frick (the justice and foreign minister of Liechtenstein) briefly worked for K1. Ms. Frick sat on the board of K1 Fund Distribution Ltd. from August 6,2008 to December 29, 2008 via her firm financial services firm, Fudaura Trust. Apparently, Ms. Frick resigned from the K1 board when her requests for more information were not met.

During the course of the operational due diligence process it is very advisable to  attempt to track not only the size of the board of any fund but also the identity of former board members. This information can sometimes yield very interesting information about a fund’s attitude towards it board and more broadly the type of governance in

place. Clearly Ms. Frick had enough concerns to resign from K1 and likely investors who may have performed their own operational due diligence in detail may have been able to detect some of these concerns via Ms. Frick’s departure.

Bloomberg is also reporting that he K1 Web site says Kiener’s investment system generated an 825% return from 1996 through last June. Here is a link to an interview with Army Yan, head of research with K1 Group in Hong Kong, describing the firm’s investment system. Here is a chart showing this performance:

It was reported earlier this month that the firm has hired Grant Thornton to liquidate the firm. More details are sure to emerge as the investigation continues.

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Early History

Jeffry Picower was born in Bronx, New York. He received a bachelor’s degree from Pennsylvania State University, a master’s in business from Columbia University and a law degree from Brooklyn Law School. He was also a certified public accountant. He worked as an accountant at the firm of Laventhol & Horwath in the 1980s during which time he established a series of tax shelters. The IRS challenged the validity of these shelters and Picower (and his firm) was later sued by client. The case settled out of court.

In 1983 the SEC rebuked Picower for late disclosure of his greater than 5% position in a company which was involved in a merger.

Picower Institute for Medical Research

In 1991 Picower and Anthony Cerami established a charity, the Picower Institute for Medical Research at North Shore University Hospital in Manhasset, New York. The charity was initially established with an endowment of $10 million. Researchers at this institute made a promising discovery with possible applications for Crohn’s disease, multiple sclerosis and rheumatoid arthritis. With the potential profitability the company was spun off into a for profit company called, Cytokine Networks. Cytokine later merged with a privately-held company called PharmaSciences to form a new entity called Cytkine PharmaSciences. The problem was that Picower owned 76% of PharmaSchiences stock and actually controlled 86.2% which put him in a major conflict of interest situation. The St. Petersburg Times Mary Jacoby wrote an article which in part outlined the relationship between Picower’s charities and his for-profit companies entitled, “Complex web benefits foundation founder: Set up to give to charities, the Picower Foundation indirectly enriches a drug company.” There were a number of articles written about the situation at the time including pieces in Forbes and a follow up piece in the St. Petersburg Times. This post by Ms. Jacoby’s

has a good overview of the whole situation including a discussion of a mysterious whistleblower who wrote a dossier to the SEC which they allegedly ignored (big surprise). The dossier, called “The Anatomy of a Stock Play” features a Colorado Potato Beetle on the cover which Ms. Jacoby’s describes as, “a virulent crop pest that is resistant to pesticide.”

Investigation by Madoff Trustee

Here is a link to the complaint filed by Irving Picard (Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC) against a number of parties including Jeffry Picower (individually and as trustee for the Picower Foundation) and his wife Barbara Picower (individually and trustee for the Trust FBO Gabrielle H. Picower and the Picower Foundation). Gabrielle is Jeffry and Barbara’s daughter. Some highlights from this complaint include allegations that:

1) Since 1995 the Picower’s and other defendants profited from the Madoff Ponzi scheme via the withdrawal of more than $6.7 billion dollars

2) At least $5 billion of this $6.7 billion figure was other people’s money

3) Picower was one of a handful of Madoff’s clients with special access to information

4) Picower and/or his agent may have used backdated document to direct backtrades themselves

5) Picower was closely associated with Madoff on both a business and social level for the last 30 years

Here is a statement from the Picower’s lawyer, William D. Zabel, regarding the work of Mr. Picard which outlines, in part,:

1) They are encouraged to no longer be alleged to be Madoff co-conspirators

2) The Picower’s were deceived by Madoff

3) They have entered in good faith discussions in attempt to reach a settlement

Why settle if they did nothing wrong? Well the statement clarifies, “in order to avoid years of extensive litigation.” With that said here is a list detailing some the disbursements to the Picower’s.

Relationship With Madoff

Supporting the claims of a relationship between Madoff and Jeffry, the Wall St. Journal recently reported that Madoff persuaded the president of an exclusive Park Avenue New York City co-op to approve Picower’s purchase of a 5,000 square foot apartment which takes up an entire floor of the building. It is also being reported that Regina Mylan, who helped oversee the Picower Foundation’s grants earlier this decade, that Madoff made regular visits to the Picower Foundation’s office and the Picower’s would speak about traveling with the Madoff’s to Florida for the weekend.

The Picower Foundation has since closed as a result of the foundation losses due to investments with Madoff. The  foundation was the 71st largest in the nation and supported a number of institutions including the New York Public Library, Human Rights First and another Picower charity, The Picower Institute for Learning and Memory at the Massachusetts Institute of Technology.

Here is a chart outlining trends in the over 700 withdrawals the Picower’s made from Madoff from 1995 to 2008 which totaled over $5 billion:

Death of Mr. Picower

Unfortunately it seems the truth regarding the exact dealing between Mr. Madoff and the Picower’s may never be known. Here is a video (a bit jumpy) which provides some perspective on how much information may be lost by Picower’s death:

Mr. Picower drowned in his swimming pool on October 25, 2009. According to his lawyer, the same Mr. Zabel mentioned above, an autopsy revealed that Mr. Picower drowned due to a heart attack. The Wall St. Journal is also reporting that Mr. Picower suffered from Parkinson’s disease as well as unspecified heart-related problems. Here is a video reporting on Mr. Picower’s death:

A few words about Mr. Zabel. He is an estate-planning lawyer by trade who numbered among his clients include Doris Duke and some Rockefeller and Chrysler heirs. He is the “Zabel” in the big hedge fund law firm Schulte Roth & Zabel LLP. Mr. Zabel is also the author of a book published in 1996 entitled, “The Rich Die Richer and You Can Too.” In their review of his book Publishers Weekly stated in part Mr. Zabel, “explains tax-avoiding (not evading measure available to the very rich in all the technical complexity of a modern democratic society’s financial legalities- including certain confidential notions the IRS ‘need not be troubled by.‘ ” (emphasis added). The review further goes on to state that, “He deals plainly with common wills, trusts and annuities, and expertly more sophisticated maneuvers like intrafamily gift deductions, “defective grantor trusts” and “foreign asset protection” in the Isle of Man-along with such devices as adopting one’s mistress or companion.” (emphasis added). Incidentally, for fans of the television program The Simpsons, Mr. Zabel’s book is included in C. Montgomery Burns’s Amazon.com Wish List.

It is also interesting that Mr. Zabel is the Chairman of Human Rights First. Remember this is the same organization the Picower Foundation made charitable donations too. Here is a video of him talking about the International Criminal Court:

Perhaps Mr. Madoff should have heeded the tax advice in Mr. Zabel’s book by adopting his mistress, Sheryl Weinstein, with which he had an affair.

Or perhaps this video provides the most insightful perspective on the whole Madoff situation to date:

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A restructuring firm named Zolfo Cooper has filed a petition seeking the appointment of a provisional liquidator to protect the assets of Dynamic Decisions Capital Management Ltd.’s primary hedge fund, the DD Growth Premium Mast Fund, according to Bloomberg.

The petition was filed in a Cayman Islands Court, which is a UK territory, and under UK law investors can push for a provisional liquidator to be appointed to safeguard assets.

The petition alleges, “gross mismanagement and misfeasance.” It seems a number of inconsistencies were present in the Dynamic Decisions organization – including a number of operational due diligence red flags:

1) Lack of board oversight -
Apparently the firm’s founder, Alberto Micalizzi (who had written some interesting options research including developing a theory called Growth Premium Analysis) said in a letter to investors he had significantly reduced holdings in equity and options and had invested in bonds. “The board had little information concerning the investment in bonds, and were not even sure if the bonds were genuine,” according to the investors’ petitions. The main fund holds illiquid, commodity-linked bonds that were organized and executed by Micalizzi, according to the petitions.

2) Conflicting marketing materials -
Micalizzi’s firm says in marketing documents that its strategy is to invest mainly in the shares of large U.S. and
European companies. According to the petitions for the DD Growth Premium and DD Growth Premium 2X funds, 55% of assets were held in commodity-linked bonds at the end of 2008.

3) Auditor change -
The funds changed its auditor to Deloitte & Touché LLP from PricewaterhouseCoopers LLP, according to the petitions.

4) Violation of notice provisions -
Dynamic Decisions failed to give five days’ notice to investors about the termination of its prime broker relationship with Morgan Stanley.

Stability and consistency of information is a key element in the operational due diligence process. Oversight of such matters can expose hedge fund’s to an unnecessary amount of operational risk. If a hedge fund is subject to UK law in certain circumstances it may be subject to a vocal investor seeking assistance from the court’s when operational risk gets out of hand as it seems to have in this case.

By conducting on-going operational monitoring investors have a better chance of detecting red flags sooner than other investors who do not perform this on-going monitoring – and perhaps being ahead of the queue to get their money back when operational problems or fraud arise.

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Federal prosecutors recently filed an Intent to Seek Forfeiture in New York court that they are seeking the assets of Ruth Madoff, Bernard Madoff’s wife. The list of items being sought includes:

NEW YORK PROPERTY-

1) Apartments 11 and 12A located at 133 East 64th Street, New York, NY 11954 (estimated $7 million value)

2) A property located at 216 Old Montauk Highway, Montauk, New York, 11954

3) A property located at 410 North Lake Way, Palm Beach, Florida 33480

FRENCH PROPERTY-

1) Chateau des Pins Villa 2, 279 Chemin de la Garoupe, Cap d’Antibes, France, 06600

BOATS-

1) Leopard 23M Sport Yacht known as “Bull” which is registered to a Grand Cayman Islands company called Yacht Bull Corp.

2) 40 foot Shelter Island Runabout fishing boat known as “Sitting Bull”

3) 1969 Rybovich 56 foot fishing boat (call sign WY7449)

4) 25 foot Pathfinder boat known as “Little Bull”

CARS-

1) 2007 BMW 530i

2) 1999 Mercedes Benz CLK Class

3) 2004 Volkswagen Touareg

4) 2001 Mercedes Benz E Class

Miscellaneous:

1) Steinway Piano (estimate value $39,000)

2) Silverware set (estimated value $65,000)

As well as “all insured and readily salable personal property” which is expected to include $2.6 million in jewelry and 35 sets of watches and cufflinks owned by Bernard Madoff.

Ms. Madoff’s lawyers have argued that the assets were not part of the Madoff fraud. Peter Chavkin, a lawyer for Ruth Madoff, from Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. declined to comment. Ruth Madoff recently had a much talked about trip to the grocery store which she abandoned halfway after being recognized.

Similar asset claims may be on the horizon for Madoff’s sons (Mark and Andrew)including $31.5 million in loans, as well as the assets of Bernard Madoff’s brother Peter. Many expect further criminal indictments are also likely. Stay tuned…

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The liquidation of Weavering Capital was recently announced. Weavering is a small but established British hedge fund manager which was established in 1988. The $639 million London based hedge fund has called in PricewaterhouseCoopers to liquidate the fund.

Weavering is likely going to be investigated by the UK’s Serious Fraud Office,which is part of the criminal justice system, as well as UK regulators including the Financial Services Authority.

It is rumored that Weavering’s downfall was a series of interest-rate swap deals between Weavering in the Cayman Islands and a British Virgin Islands based company which just so happened to be controlled by Weaving’s chief executive, Magnus Peterson, the former head of trading for Skandinaviska Enskilda Banken (SEB), a Swedish bank.

PwC said it had been told the BVI company’s assets were $10m of cash and $40m of private equity positions. It is unclear who the directors of the BVI company are, but PwC said on Thursday night that Mr. Peterson had told them he controlled it.

Mr. Peterson, his wife Amanda, James Stewart (a frequent TV commentator) and Chas Dabhia (Chief Operating Officer) were on the board of the UK company. Mr. Peterson’s stepfather and brother were directors of the Cayman fund revealed as the counterparty to the trades. The Mayfair (a UK hedge fund center) based fund’s research director is James Stewart, an economic commentator who has made regular television appearances.

As the Madoff scandal has demonstrated in abundantly clear detail the presence of a significant amount of family members, be they on the board of a hedge fund, or actually working on a daily basis at a hedge fund organization should raise a significant red flag during the due diligence process. This is not to say that the presence of any such family relationship should preclude in and of itself investing in an organization such as Weavering, but it should heighten levels of scrutiny of other things such as independence. A second, often-overlooked issue, during the hedge fund operational due diligence process is thoroughly investigating affiliated and/or related entities as well as their board members. In this case many, investors clearly missed this step.

The primary problem in Weavering’s case was that the main counterparty in the interest-rate swap was essentially controlled by itself (despite the legal fiction of different entities in different jurisdictions). It seems that once the firm was hit with a wave a redemption requests all at once, Weavering notified investors that it was “urgently” investigating the position. It should have been a fairly short investigation – since it was looking into itself.

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