Colorado Business Litigation Lawyer Blog

Judge Stephen Victor Wilson, U.S. District Judge in the Central District of California, on April 20, 2010, dismissed a complaint filed by persons who claim they were defrauded by Bernard Madoff’s pyramid scheme.

The investors’ complaint alleges that the Securities and Exchange Commission (SEC) woefully failed to discover Madoff’s scheme long before Madoff confessed that he was running a pyramid scheme and had defrauded investors of amounts totaling billions of dollars.

Readers will recall that I previously wrote about the SECs inaction, incompetence and inexperience in its failure to discover Madoff’s illegal investment scheme. To refresh your recollection on the details of those articles click here and here.

Judge Wilson, in effect, says that the SECs manner of investigation, even assuming “sheer incompetence,” was permissible and protected, given that its actions and failure to act were protected by the “discretionary exception” to the Federal Tort Claims Act. In other words, if the statutes creating and controlling the SEC require discretionary (may act) as opposed to mandatory (must act) powers, those acts or failure to act do not expose the SEC to any liability.

It is expected that the decision will be appealed by the plaintiffs to the U.S. Court of Appeals for the Ninth District.

I will follow this case in the event of an appeal.

Continue reading "California Federal Court Dismisses Investors’ Lawsuit Against SEC for Madoff Losses" »

In an April 28, 2010 Senate subcommittee hearing, Senator Carl Levin (D-Mich.) grilled Daniel Sparks, former head of Goldman Sachs mortgage department, about an email that Sparks received from Thomas Montag, Goldman’s former head of sales and trading. In the June 22, 2007 email, Montag made reference to a series of mortgage-backed investments Goldman was selling to its customers as one “shi**y deal.” Sen. Levin noted that even after the date of the email Goldman continued to sell the same investments to customers. Quite naturally, Goldman officials didn’t tell those customers that it was a shi**y deal.

Sparks continued to deny that the email said precisely what it meant. Instead, he claimed that the email had to be put into context. Sen. Levin observed that the context was “mighty clear,” and asked Sparks if he was at all bothered by the fact that Goldman continued to sell the investments after June 22 with knowledge that it was a bad (fooled you!) deal for the customer.

If corporate greed makes you wince, in the immediate future you should refrain from watching TV and reading newspapers.

Continue reading "Sen. Levin Knows a Shi**y Deal When He Sees One" »

We all know by now what a Ponzi scheme is. Some sharp hedge fund manager or other investment guru sells fund shares, usually to close friends and relatives, and friends and acquaintances of each, promising a higher rate of return than could reasonably be earned in a legitimate investment. Typically, the fund doesn’t generate earnings with which to pay the promised interest to the investors. Instead, money paid in by later investors is used to pay interest to early investors. It doesn’t take much imagination to deduce that this house of cards, so to speak, eventually will collapse. When it does, typically nobody gets paid back.

The Security and Exchange Commission (SEC) is the body with authority to investigate these monetary funds. The SEC can impose huge fines on these bogus companies and freeze and seize their assets. Unfortunately, recent history has shown that the performance of the SEC leaves much to be desired. Click here to read about the breathtakingly inept and careless oversight that the SEC exercised in the Bernard Madoff debacle. To make matters even worse, it recently has been discovered that high level SEC staffers were busy watching porn on their government computers instead of doing the job for which they were hired. One lawyer watched as many as 8 hours of porn during the day.

Now comes an April 28, 2010 Denver Post article that reports that yet another $122 million Ponzi scheme has been discovered operating in Colorado. Sean Miller, a Greenwood Village-based hedge fund manager, said he was the only person involved in the wrongdoing. Although phony financial statements claimed $120 million in assets, there was actually only $15 million in a Morgan Stanley account.

As in all con games, experts say the so-called victims are oftentimes not victims at all. Lured by the promises of unusually high rates of return, these “victims” rarely ask questions about why the investment is consistently making investors so much money.

Will this never end?

Here we go again. Another Wall Street giant has been accused of defrauding its investors. Goldman Sachs & Co., a global investment banking and management firm, allegedly failed to disclose conflicts of interest in mortgage investments it sold during the failing housing market. Fabrice Tourre, a Goldman Sachs vice president, has also been charged by the SEC for his involvement. The Securities and Exchange Commission announced the charges last Friday.

According to Marcy Gordon with the Associated Press, Paulson & Co. is the Goldman Sachs client being investigated. The AP identifies Paulson as “one of the world’s largest hedge funds” and reports them as having paid Goldman approximately $15 million in 2007 for structuring the deals. Losses by investors reportedly exceed $1 billion.

The SEC allegations suggest Goldman failed to disclose to investors that Paulson & Co.
played a part in selecting mortgages and were in a position to profit from the waning mortgage values. Investors were told an independent, objective third party selected the securities.

The Goldman Sachs website reported the following statement today: “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation.”

We will follow the saga and continue to report on it.

Continue reading "Goldman Sachs Faces Civil Fraud Charges" »

In my last blog, Bernard Madoff: An Epilogue - The SEC Looked but Failed to See (Part I), I touched on a few of the revelations made in the Executive Summary report issued by the SEC’s. The report attempted to summarize how Madoff and his company were able to run such a massive Ponzi Scheme for such a long period of time without being exposed. I would now like to discuss a few more of the eye-openers:

6. After conducting two investigations and three examinations from 1992 onward, relating to the “detailed and credible” complaints that Madoff was possibly operating a Ponzi scheme, at no time did the SEC follow the retained expert’s advice and verify Madoff’s trading with an independent third party, nor did it conduct a Ponzi scheme examination or investigation of Madoff. The SEC did request records from the Depository Trust Company (DTC) (an independent third party), but the record request was made to Madoff. Had the request been made directly to DTC, there was an “excellent chance” they would have uncovered Madoff’s Ponzi scheme in 1992.

7, SEC examiners drafted a letter to two different independent third parties requesting independent trade data, but never sent the letters because in one case, it would have been “too time consuming” to analyze the data, had they received it. No reason was given for not mailing the second letter. Again, if the letters had been sent, they would have provided information necessary to reveal the Ponzi scheme.

8. When examiners questioned Madoff, they took his evasive and sometimes inconsistent answers at face value and failed to request verification.

9. As excuses for the investigators’ and examiners’ abysmal record, the report says examiners were “inexperienced” and “confused,” failed to follow up inconsistencies, failed to verify information, disregarded incriminating evidence, gullibly accepted Madoff’s lies, inconsistencies and misrepresentations as fact, failed to trace funds and generally ignored almost indisputable proof of the existence of the grandest of all Ponzi schemes.

Just another example of your tax dollars at work.

To read the entire Executive Summary click here. For those of you who are detail-oriented with a strong stomach and nothing better to do, read the entire report by clicking here.

Earlier, I wrote some blogs on Bernard Madoff’s Ponzi scheme that defrauded investors of billions of dollars. At the time, securities regulators were trying to figure out exactly how Madoff and his company were able to perpetrate this massive fraud for such a long period of time without being exposed. On August 1, 2009, the SEC’s Office of Inspector General (OIG) issued an over 450- page report attempting to shed light on this ticklish issue.
Here are a few of the sometimes astonishing revelations contained in the 22-page Executive Summary of the report:

1. No SEC people who examined or investigated Madoff’s company, Bernard L. Madoff Investment Securities, LLC (BMIS) had any financial interest or other improper connection with Madoff or his family that influenced their conduct.

2, The former SEC Assistant Director’s “romantic relationship” with Madoff’s niece did not influence the conduct of SEC examinations of Madoff or his firm.

3. Between June 1992 and December 2008 when Madoff confessed, the SEC received eight substantive complaints that raised “significant red flags,” including specific accusations that Madoff was operating a Ponzi scheme. The report concludes that these complaints should have led to questions about whether Madoff was actually engaged in trading.

4. The SEC was aware of two articles published in reputable publications in 2001, questioning Madoff’s “unusually consistent returns” not duplicable by anyone else.

5. According to an expert retained by OIG to analyze the information the SEC, the most critical step in investigating whether someone is operating a Ponzi scheme is to verify the subject’s trading through an independent third party

In my next blog, I will note a few more of these revelations.

Perhaps inspired by the “successful” financial scams of Charles Ponzi and Bernie Madoff, Denver area business man Shawn Merriman recently bilked investors over a three state area of more than $20 million dollars by promising unusually high returns on his victims’ “investments”. It turns out that the only investments Merriman was making on behalf of his victims were in his own lavish lifestyle.

Like the traditional Ponzi scheme, Merriman promised returns of 20% or more even when it should have been obvious that these promises were too good to be true. Merriman was repaying old investors with money from new investors – just the way Charles Ponzi himself did it more than 100 years ago.

The Securities and Exchange Commission (SEC) and Department of Justice have commenced investigation and have taken steps to seize Merriman’s assets, such as millions of dollars in artwork, automobiles, guns and, even a baseball glove autographed by Lou Gehrig.

You know your asset management firm is a scam artist when:

1. The asset management firm boasts of returns two and three times larger than the market performance indicators.

2. The firm’s performance numbers steadily climb and don’t demonstrate downturns coincidental with market downturns.

3. The asset management firm cannot produce audits by a reputable accounting firm.

4. The asset management firm cannot provide you with an errors and omissions insurance policy covering acts of simple negligence.

5. The monthly statements from the management firm do not reflect all transactions you believe should have occurred. It is not enough to show beginning and ending balances with no documentation of how and why the values shifted over the statement period. You need documents reflecting each buy-sell along with documentation of dividends and interest earnings.

6. The management firm is not registered through applicable security regulations.

7. The firm does not maintain a custodial account for your investment. Putting your investment into a brokerage account is very risky.

8. The asset management firm comes recommended only by church friends, neighbors, and family. You need verifiable recommendations from knowledgeable observers.

9. The asset management firm discourages its investors from cashing in their profits.

10. The asset management firm does not want you to see the office building where the company is located. You need to visit the physical location and check it out.

If you, your company, or your pension fund have fallen victim to a Ponzi Scheme, its important to recognize your legal rights. Please contact a Colorado Business Litigation Lawyer for a free evaluation.

The simple Ponzi scheme, as drawn up by Charles Ponzi himself in the early 1900’s, involved one schemer recruiting suckers one by one. While this is effective, it is not nearly as efficient in an “earnings by the hour” analysis. To increase the scam’s efficiency, it requires big suckers, not little ones.

Bernie Madoff wanted to earn the big bucks. In order to do that, Madoff knew he would have to steal large sums of money from each victim. Using his sophisticated financial networking skills, he decided to go after large investment funds. With his background as an investment advisor and former president of NASDAQ he reviewed his old rolodex cards and began soliciting monies from familiar investment funds. Although he knew he could steal from his neighbor, why not steal from the whole neighborhood?

Individual investors in the funds funneled to Madoff lost tens of billions of dollars when Madoff’s scheme collapsed. Most of these investment funds were unable to repay their investors. These funds were the “feeder funds” that allowed Madoff to accumulate a dishonest personal wealth of billions of dollars.

One of the largest of these feeder funds was a custodian for IRA investments located in Denver, Colorado. NTC and Co. served as an investment depository for wealthy investors who preferred to self-direct their IRA investments. While traditional IRA’s invest in mutual funds, stocks or bonds, the self-directed IRA’s invest in riskier ventures such as hedge funds, limited partnerships and the like. Some of the NTC investors probably directed investments to Madoff. However, many others did so upon advice of NTC and financial consultants. Some of these feeder fund were licensed under security regulations but many others were not. And pity the investor seeking recovery against the unlicensed feeder fund.

There are many important ideas to keep in mind when litigating these types of claims. In a future post, I will discuss the legal roadblocks to claims against feeder funds.

~Jim Gilbert~

In a previous blog (Bernie Madoff: A Modern Day Ponzi), I discussed Bernie Madoff’s modern day Ponzi scheme. I would now like to look at the man who started this elaborate fraud system.

The scheme got its name from Charles Ponzi, born in Italy in 1882. Ponzi immigrated illegally to Boston when he was 21. He arrived in the United States virtually broke having gambled most of his savings during the voyage. He worked at menial jobs including dishwasher and waiter, but was fired for shortchanging customers and stealing from the restaurant that employed him.

In 1907 Ponzi traveled to Montreal to work in a bank that catered to Italian immigrants. The bank paid 6% on deposits rather than the normal 3%. Interest was paid from new deposits. The bank failed and the owner fled to Mexico with most of the bank’s assets. After spending three years in a Canadian prison for forgery, Ponzi returned to the United States in 1911. Once again he was arrested, this time for smuggling illegal Italian immigrants into the United States from Canada. He spent two years in an Atlanta prison.

Ponzi’s crime spree continued. He started a company in which his friends invested, after being guaranteed a 50% profit in 45 days. The demand was great. People couldn’t get their money to him quickly enough. By 1920 Ponzi was making $250,000 per day ($2.3 million in 2008 dollars). Old “investors” would be paid by money from new investors, but the business was not investing anything. Ultimately there was a run on the bank with not enough money to repay investors. He was arrested after defrauding 17,000 investors out of millions of dollars. Acting as his own attorney he was found not guilty of fraud and larceny in 1920. Later he was tried on additional charges and was convicted. He received jail time for being a “common and notorious thief”.

After his release, Ponzi moved to Florida where he started selling swamp land to gullible tourists. He was once again convicted and sent to prison. In 1934 Ponzi was released from jail and immediately deported to Italy. During World War II he was appointed by Mussolini to a financial division of the government, later fleeing to South America with stolen Italian treasury notes. He died in a charity hospital in Rio de Janiero in 1949, never having shown any remorse for his life of crime.

Sad but true.

~Jim Gilbert~

Sources: www.sec.gov/answers/ponzi.htm

Continue reading "Madoff’s Role Model: Charles Ponzi" »

The biggest financial fraud in American history was pulled off by a New York financier by the name of Bernie Madoff. Madoff (pronounced “made off”) made off with more than $50 billion of his clients’ money (for some, their life savings) by promising his clients higher returns on their investments than they could expect elsewhere. And he delivered on this promises with sixteen percent returns in years when the average investor was making less than half that. It seemed too good to be true – and it turns out it was.

None of Madoff’s investors were actually “investing” in anything. They were participants in an elaborately concealed Ponzi scheme. It worked this way: Investor A would give Madoff $100,000. Madoff would put it in his own bank account, not investing it in any securities. Then he would go out and collect $150,000 from Investor B. He would give $125,000 to Investor A which would represent a 25% return and Bernie would keep $25,000 to himself. Now he had Investor B to worry about. He would go out and get $200,000 from Investor C, giving $175,000 to Investor B and keeping $25,000 for himself. Now he had Investor C to worry about, and so on.

Madoff’s criminal enterprise is often referred to as a Ponzi’s scheme, named after Charles Ponzi, an Italian who immigrated to the United States in 1903. Also known as a pyramid scheme, the Ponzi scheme is a fraud whereby the schemer poses as a business financial advisor who promises investors high returns on their money. In reality this money is never invested at all. The schemer pays his investors with money obtained from later investor victims. The schemer's success is based on paying investors large returns in a short amount of time in order to attract more investors which in turn leads to more money. The scam ultimately falls apart when a schemer like Madoff is no longer able to feed the beast, i.e. pay off later investors, or legal authorities step in and shut down the operation.

In my next blog I will fill you in on some of the details of Charles Ponzi’s life.

~Jim Gilbert~