Petters Group Worldwide LLC

The Petters Group owned Polaroid, an interest in Sun Country Airlines and at its peak employed over 3,200

employees. The whole thing was a $3.5 billion Ponzi scheme. Here’s a great old video for Polaroid commercial with James Garner (I’m sure he would be very proud of Mr. Petters…):

“The defendant’s fraud is beyond comprehension,” prosecutors said in a court filing. “A life sentence is wholly deserved and justified given the defendant’s corrupting influence on individuals and institutions, and his strident refusal to accept any responsibility.”

Here is a video where Petters discussed the importance of maintaining core values in corporate America:

Perhaps these were the kind of core values Petters was talking about:

Petters’ lawyers said their client should be sent to the Federal Medical Center in Rochester, Minnesota, because of his health and because the national notoriety of his case would make him a “marked man” in prison. He has a pituitary adenoma (or tumor) and  faces the risk of blindness and paralysis. Sentencing is scheduled for April 8. Stay tuned to see if the judge sends a message or takes sympathy….

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U.S. District Judge Richard Lazzara in Tampa had previously ordered Nadel’s two companies, Venice Jet Center LLC and Tradewind LLC, into receivership. These were two aviation businesses that were allegedly involved in some questionable proposed deals with Newnan-Coweta County Airport in Georgia.

This is a perfect example of a hedge fund manager being involved in outside business activities. This a topic that should be covered during the operational due diligence process. If this had been uncovered by investors performing operational due diligence on Nadel some logical questions, which might have received answers which likely would have raised red flags could have included:

• Why are you involved in these aviation businesses?

• How much time do you devote to these aviation businesses?

• Where does the money come from to support these businesses?

Tampa lawyer Burton Wiand (pictured left), who was appointed by the judge as receiver for Nadel’s funds, said in a court filing that the businesses were bought with fraudulently obtained money. Nadel ran three different funds the Victory IRA Fund Ltd., Scoop Real Estate LP and Victory Fund Ltd. from about 2002 until his January 2009 arrest.

Here is a video from CNBC about Nadel’s jail time:

Nadel, is 77 years old and according to the The New York Daily News reportedly got a kick out of being called, “a mini-Madoff.”

Nadel said he is now filled with “regret and sorrow… more and more every day” for the grief he caused his family and former investors, the New York Daily News reported.

“I will carry this burden with me every day for the rest of my life,” Nadel said in Manhattan Federal Court as he pleaded guilty to securities, mail and wire fraud.

His plea agreement with prosecutors requires Nadel to forfeit $162 million in gains as well as several properties and other valuable assets. He will receive a sentence of between 151 months and 293 months in prison, the judge said. This works out to a month in jail for every $552,000 to $1.07 million he stole. With only $162 million stolen I doubt Nadel ever made that much in a month – maybe that’s why he decided to steal it.

Here’s another video about the mini-Madoff sentencing:

The Wall St. Journal is reporting that Nadel also said he acted as a trader for three other funds run by Neil V. Moody and his son, Christopher D. Moody, during the period, also committing fraud in those. Why weren’t the Moody’s trading for their own fund? Who was responsible for oversight of Nadel’s trading activity?

Apparently, the U.S. Securities and Exchange Commission had similar questions when they brought civil fraud charges against the Moodys in federal court in Florida in January. Here is a link to the SEC press release and the affidavit in the case. The Moodys have agreed to be barred from associating with any investment adviser for five years as part of a consent agreement with the SEC. They didn’t admit or deny wrongdoing as part of that agreement. “Neil adamantly denies any knowledge that this was a Ponzi scheme,” said James Felman, a lawyer for Neil Moody. Montieth M. Illingworth, a spokesman for both Moodys, and the apparently a Mike Tyson scholar, declined further comment.

No criminal charges have been filed against the Moodys….

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According to court paper filed in Manhattan Supreme Court Ms. Madoff is seeking to change her name to avoid the, “embarrassment, harassment and endangerment associated with the name.”

Here is a link to the court filing. As a result, the filing says, she was “notified of certain death and other threats made against the Madoff family … Though the threats were deemed unfounded, your petitioner fears for her safety and the safety of her children.”  The New York Post is reporting that  upon filing the papers, Stephanie was  notified of certain death and other threats made against the Madoff family. Mark Madoff gave consent in court papers to he name change.

Don’t worry I’m sure the Madoff trustee Irving Picard will still be able keep track of the name change.

In other Madoff news, the FBI has arrested Daniel Bonventre. Mr. Bonventre, who is 63, is the ex-director of operations for Bernard Madoff Investment Securities LLC. Prosecutors said that, with Bonventre’s knowledge, hundreds of millions of dollars were siphoned out of accounts belonging to Madoff’s clients and used to support other aspects of his business. In some cases, Madoff’s company used client money as collateral to obtain loans. Prosecutors also accused him of failing to report hundreds of thousands of dollars in income to the IRS.

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This is the story of Milton Balkany, the dean of Bais Yaakov day school in Borough Park (Brooklyn), New York.  Mr.

Balkany, who is an Orthodox rabbi, allegedly tried to extort a hedge fund with knowledge that the fund was allegedly participating in insider information. Mr. Balkany is charged with wire fraud, extortion, blackmail and making false statements. The wire fraud count alone carries a sentence of up to 20 years.

This case was being led by U.S. Attorney Preet Bharara, who also led the investigation into Galleon.

Looks like Mr. Bhara is looking to make a name for himself like the infamous Sherrif of Wall Street, Eliot Spitzer (aka: Client #9)

Here is an alleged quote from Mr. Balkany from the complaint (which is available here):

“I think it’s a very minor price for the package over here. I think if this ever got into what [the government] wants to bring, it would cost [the Hedge Fund Manager] ten million [dollars] in lawyers…It’s a very inexpensive way out. You know what I mean? …I’m not holding up anybody here”

Mr. Balkany apparently has a past with the government. A few years ago, Balkany walked away from another federal arrest for stealing $700,000 in federal grants intended to help disabled students at his Brooklyn girls school. The feds cut a rare deal, allowing Balkany to pay back $400,000 and pledge not to seek any more federal grants.

In a criminal complaint filed in federal court in Manhattan, prosecutors said that Mr. Balkany, 63, had recently been serving as a “spiritual adviser” to a federal inmate who told him that a Connecticut hedge fund had used inside information to profit from a number of stock trades.

The complaint alleges that Mr. Balkany went to lawyer for the fund and demanded $4 million ($2 million of which would go to Bais Yaakov) or he would tell the inmate to tell the authorities about the insider trades. In total Mr. Blakany received two checks totalling $3.25 million, he was arrested this afternoon.

Mr. Balkany’s lawyer, Benjamin Brafman, would not comment on the complaint. Mr. Balkany has been released on bail.

Unfortunately, the name of the fund was not released in the complaint. This article has some suggestions… With the name of the fund not yet being released, I would be very curious if investors in the fund:

1) Knew the fund had connections with incarcerated inmates?

2) Know about the insider trading allegations?

3)  Knew that Mr. Balkany approached the fund regarding these allegations?

4) Have the ability to redeem from the fund in a timely manner when the fund name is released and there is likely a flood of redemptions?

As these questions demonstrate, on-going operational due diligence is extremely important. For all we know an investor may have performed due diligence on this fund and at the time it may have been operationally sound. Yet hedge funds, like most things, evolve over time. With this evolution a shifting operational risk profile also develops. Without monitoring the on-going operational risks of the hedge fund all the initial work is of decreasing value over time.

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According to Bloomberg, Mr. Stein admitted today to four counts of securities fraud and one charge of wire fraud. Stein told the court:

“I used very poor judgment and I know what I did was wrong, I want to explain to the court how sorry and ashamed I am. Somewhere in the last 10 years I lost my sense of reality and as a result, everyone has suffered. I do want to offer my sincere apologies. I do regret the bad decisions I made.”

Stein will remain free on $2 million bail. He is being represented by attorney Brian Maas.

He was initially accused March 31 of cheating a client out of $6.5 million. Stein faces as much as 19 years and seven months in prison. In April of last year the SEC froze Mr. Stein’s assets.

The SEC also filed a separate civil action that accused Stein, who controls Gemini Fund I hedge fund, DISP LLC and Prima Capital Management Corp., of moving millions of dollars from at least 83 investors through accounts he controlled, according to the complaint filed in federal court in Manhattan.

Stein, who founded DISP, a firm investing in life- settlement policies, deceived clients since 1992 and resorted to stealing their assets, the SEC said in its civil suit.

Here is a sample chart how the life settlement process works. So simple amazing more people couldn’t spot the fraud in this process via operational due diligence….. :

Without telling investors, Stein arranged for Gemini to make its main investment in Detour Media Group Inc., the fashion-magazine publisher that filed for bankruptcy in 2003, the SEC said. Since then, he has used money from new investors to pay returns to “selected” Gemini clients, the agency claimed. He also used investor funds to buy a $1 million condominium in Manhattan, the SEC said.

Stein ran Prima Capital Management Corp. from his offices in Roslyn, New York. He agreed in his plea that he won’t appeal if he’s sentenced to less than 21 years and nine months in prison. Sentencing by U.S. District Judge Jack B. Weinstein is scheduled for September 28.

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Operational Due Diligence Specialist (Abu Dhabi)

Bessemer Trust – Operational Due Diligence Analyst (NY)

KPMG – Manager, Operational Due Diligence (Chicago)

Operations Due Diligence Consultant (Stamford, CT)

RBC – CFO and Director of Operational Due Diligence (NY)

If you have an operational due diligence position you would like posted on this blog please submit them via email to
info@hedgefundoperationalduediligence.com

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They are giving up the property so that it and all salable personal property may be sold by the U.S. Marshal’s Service to help satisfy the forfeiture. Other personal property being given up by the DiPascali’s includes a home theater system, multi-station gym and circuit-training equipment, a snowblower, artwork, two all-terrain vehicles and a blue and white Yamaha motorcycle, according to the order.

Frank’s Fishy Ways:

I guess Frank DiPascali’s should have seen the writing on the wall. His 61-foot Viking sportsfishing boat the “Darling-Jo” was previously sold as part of an auction of Madoff’s property. Here’s a picture of the boat:

Apparently, Frank was so into fishing that he even put his boat’s captain, Christopher Warrin, on the Madoff payroll. It might have been a good investment, since Frank won over $55,000 in a 2007 South Jersery Mid-Atlantic Tuna Tournament. Here’s the award ceremony photo:

Frank and Joanne, are the managing directors of Dorothy-Jo Sportsfishing LLC, which registered in New Jersey in October 2002. According to this website and this website Joanne DisPascali is an employee of JP MorganChase National Association (the private banking arm of JPM) in their Iselin, NJ office. In 1998, DiPascali registered Dorothy-Jo Fishing Team LLC but the registration was allowed to lapse in 2005. Oh by the way, Dorothy-Jo Sportsfishing via Frank was a Madoff customer….

Peter Madoff in Hot Water:

In other news Peter Madoff, Bernies brother, is the subject of a federal criminal investigation. This news came to light in documents related to a civil lawsuit over losses by the Lautenberg foundation, which is the charitable foundation of U.S. Senator Frank Lautenberg. Interestingly, the lawsuit claims that Peter either “recklessly ignored” or “consciously disregarded” the red flags from his brother’s Ponzi scheme. I guess its a bad idea to steal from a Senator. During depositions related to the case led by a lawyer for the foundation Ron Riccio, Peter invoked the fifth-amendments right against self-incrimination over 250 times.  in the case. In frustration Mr. Riccio asked the judge to place Peter in contempt by even pleading the fifth in response to such questions as “Did you ever talk to him [Bernard] in your entire life?” Perhaps Peter’s next line of defense will likely go something to the effect of, “Am I my brothers keeper?”

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Mr. Scharfman will address topics including the increasing resources being dedicated towards due diligence, the evolving nature of operational due diligence and the effect of the global recession on due diligence.

The conference will take place on March 11, 2010 at the Princeton Club of New York .

For more information regarding the conference or to register please visit Opal’s website.

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For some perspective here is a video about Amaranth from CNBC:

The Huffington Post has a nice description of Mr. Hunter’s “trading strategy” which it refers to a banging the close:

“By flooding the NYMEX with Sell orders in Nat Gas in the last 10-15 minutes of trading (the Close), Hunter found that he could manipulate the price downward as there were no likely buyers for the type of size he was representing for sale.

Hunter concurrently held similar Nat Gas positions at the ICE that were much larger. Those positions are called look alikes, because they a not physically settled like their counterparts at the NYMEX are. After First Notice, those long contracts can be delivered against. This is true for any commodity.

Conversely, ICE contracts are settled financially, like the S&P 500 for example, so a trader does not have to worry about getting delivered against. Hunter was short his contracts, so he did not have to worry about delivery in this case. His goal, however, was to artificially depress NYMEX Nat Gas contracts so as to lower his larger ICE look alike Nat Gas contract position and burgeon his account balance. Herein is the manipulation.“

The notoriously secretive Mr. Hunter, he reportedly won’t allow his picture to be taken by journalists, is back. It should be known that accordingly to New York magazine (which refers to Mr. Hunter as an “international jerk of mystery”) denies that he is the root of all evil. This is (supposedly) one of the only pictures available of him (yet it remains unconfirmed) – nice catch!:

In July 2007 the Federal Energy Regulatory Commission (“FERC”) had  Amarath and two of its former traders Brian Hunter and Matthew Donohoe of violating federal anti-manipulation regulations in natural-gas futures trades in March, April and May of 2006 on the New York Mercantile Exchange.

In August 2009 FERC approved a settlement with Amaranth and Donohoe which required the parties to pay $7.5 million. Mr. Hunter did not participate in the settlement. Maybe he should have in light of these instant messages….

A federal administrative judge, Carmen Cintron, ruled last week that Mr. Hunter violated market-manipulation rules. Judge Cintron’s decision will now go onto the Federal Energy Regulatory Commission (“FERC”) for a final decision.

Mr. Hunter, who is certainly lawyered up, has been fighting FERC every step of the way since 2007 during which time there was his interesting attempt to reinvent himself at Solengo.

A recent example of Mr. Hunter trying to fight FERC was on August 14, 2009 he filed a motion seeking to disqualify Judge Cintron because she may have been engaged in improper ex parte consultations, citing certain sections of the Administrative Procedure Act. Mr. Hunter’s motion was denied.

It is anticipated that FERC could take about two months two make a decision but the Wall St. Journal, quoting a FERC spokeswoman, said the final timetable is set by the commission.

Matthew Menchel, a lawyer who represents Mr. Hunter said in repsonse to Judge Cintron’s ruling, “The FERC should never have presided over this matter which is outside its competence and jurisdiction. Its decision means nothing in our view, and the FERC will have to accept the consequences when we get to the DC Circuit, which the FERC has been trying to avoid for the last few years.” Sounds like fighting words to me and that this case is turning into the things’ Administrative and Constitutional Law Professor’s dream about at night.

Here is an interesting perspective arguing for trader’s personal responsibility, and subsequently Mr. Hunter’s personal responsibility for his own actions.

If that is the case, and the decision really does mean nothing to Mr. Hunter and Mr. Menchel, why indeed show up to defend yourself in from of FERC? or is this just another case of delaying the inevitable of what many feel are just desserts.

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This Washington Times article was written in the context of Attorney General Eric Holder Jr.’s testimony to the Financial Crisis Inquiry Commission. In his testimony, Mr. Holder’s stated that while there are thousands of prosecutions against so-called “small

time” frauds for running things like mortgage scams (and ahem, hedge funds) there is a noted lack of such prosecutions against major Wall St. firms. Which harkens back to the failed prosecutions of two Bear Stearns hedge fund managers which had been accused of fraud by the government.

Here is a video introducing the Financial Crisis Inquiry Commission:

What is interesting to me is that the government in its prosecutions is attempting to draw a correlation among multiple types of fraud. Their theory may go something like this:

1) Fraud is bad;

2) Mortgage “fraud” contributed to the housing crisis;

3) There was a great deal of mortgage fraud we can prosecute;

4) Banks and Wall St. firms are involved in the financial markets which are also involved with mortgages;

5) Where there is mortgage fraud there must be other types of fraud

Unfortunately, this big bath type of thinking attempts to throw out the baby with the bathwater. Just because one type of fraud is prevalent does not necessary lead to the conclusion that other types of fraud are present.

The fact that the government is having difficulty finding such fraud may suggest that fraud is more prevalent not at the large Wall St. firms but rather there is more opportunity for fraud (particularly in the areas of operational risk) in smaller, less regulated and more private investment vehicles . Perhaps the government will go back to these institutions with a more fine tooth comb rather than shake the tree of largest firms and see what frauds fall out…

In other news, there is a Madoff action figure out (made by the same company which makes other extremely distasteful action figures of Saddam Hussein and Kim Jong Il ), which may be a nice compliment to the Madoff devil bobblehead. I’m sure it will be a big seller….

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