by T. GormanPosted on Posted in SECActions

Since the Madoff Ponzi scheme scandal emerged, key questions have been “how” and “who.” How did he bilk so many people for so long? Who else knew and helped him? Mr. Madoff, whose sentencing is scheduled for Monday, June 29, 2009, has said little about how it was done except to insist he acted alone. It’s fair to say that everyone wants to know how, and few believe Mr. Madoff about the who.

To date, the authorities have said little. Some insights came from the suit by the New York AG against Ezra Merkin and his feeder fund Gabriel Capital, discussed here. Other insights come from the actions by the SEC and DOJ against the auditors, SEC v. Friehling, Civil Action No. 09 cv 2467 (S.D.N.Y. Filed Mar. 18, 2009) and U.S. v. Friehling, Case No. 09-mj-00729 (S.D.N.Y. Filed Mar. 18, 2009), both of which are discussed here. Still, little is known about what has been called the Ponzi scheme of the ages.

More pieces are emerging however, with two new suits by the SEC, SEC v. Cohn, Civil Action No. 09 cv 5680 (S.D.N.Y. Filed June 22, 2009) and SEC v. Chais, Civil Action No. 09 cv 5681 (S.D.N.Y. Filed June 22, 2009). The Cohn case names as defendants New York broker dealer Cohmad Securities, its chairman Maurice Cohn and registered representative Robert Jaffee. The firm, located in the same building as Madoff’s securities operation, is owned by Maurice Cohn, Marcia Cohn, Bernard Madoff, Madoff’s brother, Maurice Cohn’s brother, Robert Jaffee and another Cohmad employee.

For more than two decades the defendants in Cohn facilitated Mr. Madoff’s fraudulent operations by aggressively marketing the Ponzi scheme. According to the complaint, defendants projected a “false aura of exclusivity and privilege that came to be associated with the opportunity to invest with the great Madoff. Madoff’s secret marketing operations were housed within the office of Bernard L Madoff Investment Securities Corporation LLC (“BMIS”) under the façade of a separately registered broker-dealer, defendant Cohmad.” The marketing targeted affluent, but financially unsophisticated investors, according to the SEC. The firm’s extensive dealings with Madoff were concealed from regulators by falsifying its filings with the SEC — acts which furthered Mr. Madoff’s efforts to evade detection. In fact, Mr. Madoff directed defendants to maintain secrecy about their arrangements.

During their years of marketing the Ponzi scheme king, the Cohmad defendants ignored numerous red flags suggesting the true nature of the fraudulent operation they were selling unsuspecting victims. Those included the fact that BMIS employees were generating false confirmation and statements that reflected backdated trades in Mr. Jaffe’s own personal accounts at the Madoff firm.

The Cohmad defendant faired far better than the investors they lured into the scheme. Their marketing efforts yielded them more than $100 million paid through Cohmad. Maurice Cohn and Robert Jaffee were paid, in addition, millions of dollars directly from Madoff’s brokerage firm.

The complaint alleges violations which include Section 17(a) and 10(b) of the Securities Act and the Exchange Act as well as Section 206 of he Advisers Act. The case is in litigation. See also Lit. Release No. 21095 (June 22, 2009).

The Chais defendants also fed the Madoff money abyss. The suit is against a California investment adviser who has funneled money to the Ponzi operation since the early 1970s. Mr. Chais, according to the SEC, held himself out as an “investing wizard, purporting to execute a complex trading strategy on behalf of hundreds of investors . . .” Mr. Chais claimed to operate three investment funds, Lambeth Company, the Brighton Company and the Popham Company.

Contrary to the representations he made to his investors, Mr. Chais lacked any real investment skills. The money he raised from investors was, unknown to them, simply turned over to Mr. Madoff for use in his fraudulent scheme. Despite clear indications of fraud, Mr. Chais continued to distribute account statements to the investors in his three funds based on the purported returns of the Madoff scam. By November 2008, Mr. Madoff claimed that the investors in the three funds had over $900 million invested, all of which has been wiped out.

Mr. Chais and his family however profited from the Madoff relationship. Through an array of accounts Mr. Chais and his family received about a half a billion dollars over a thirteen year period according to the SEC.

The complaint in Chais, alleges violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Section 206 of the Advisers Act. The case is in litigation. See also Lit. Release No. 21096 (June 22, 2009).

Two more Madoff complaints. More defendants who were paid handsomely to ignore the repeated warnings that those whose money they gave to Mr. Madoff were being defrauded. Slowly the “how” and the “who” is emerging. There undoubtedly will be more.

by T. GormanPosted on Posted in SECActions

Based on what sound more like a page out of Hollywood script than court actions, the Department of Justice and the SEC detailed fraud charges against financier Robert Allen Stanford and his confederates on Friday. The newly unsealed criminal charges and amended SEC complaint chronicle a years-long scam built on misleading investors, concocted financial statements, phony loans to cover the theft of investor funds, years of bribing an Antiguan official and efforts to thwart the SEC through the use of a foreign regulator even as the scheme began to unravel and ooze to the surface.

DOJ brought charges in two indictments and one criminal information. One indictment named as defendants: Robert Allen Stanford, chairman of Sanford Financial Group (“SFG”); Laura Pendergest-Holt, SFG’s chief investment officer; Gilberto Lopez, the chief accounting officer; Mark Kuhrt, global controller; and Leroy King, the former chief executive officer of the Antigua’s Financial Services Regulatory Commission (“FSRC”). The charges include one count of conspiracy to commit mail, wire and securities fraud; seven counts of wire fraud; ten counts of mail fraud; and one count of conspiracy to commit money laundering. Messrs. Stanford and King, along with Ms. Pendergest-Holt (who was previously indicted as discussed here) were also charged with conspiracy to obstruct an SEC proceeding.

In an information, James Davis, SFG’s CFO, was charged with conspiracy to commit mail, wire and securities fraud, mail fraud and conspiracy to obstruct an SEC investigation. A separate indictment charges Bruce Perraud, former SFG global security specialist with destruction of records relating to a federal investigation.

The SEC’s amended complaint adds as defendants Messrs. Kuhrt, Lopez and King. Mr. Stanford, James Davis, Laura Pendergest-Holt and various Stanford controlled entities had been named as defendants in the initial complaint (discussed here). SEC v. Stanford International Bank, Ltd., Civil Action No. 3:09-cv-0298 (N.D. Tex. Filed Feb. 17, 2009).

The fraudulent scheme had two major components, according to the court papers. In the first Defendants Stanford and Davis, operating a decade long Ponzi scheme under the guise of a bank based in Antigua, convinced investors to pore more than $7 billion into what were supposed to be bank certificates of deposit. Defendants claimed the certificates would pay investors an above average return on their investment. As bank certificates of deposit, the investment was touted as safe, conservative and monitored by banking regulators in Antigua.

A second component of the scheme involved a proprietary mutual fund wrap program. Shares in this program were sold from 2004 through 2009 based on a fraudulent track record of so-called “historical performance.” This scheme garnered over $1 billion from investors for defendants, according to the SEC’s complaint.

Central to the schemes was the bank and the profits claimed from its investment portfolio. The success of this portfolio was chronicled in regulatory filings, financial statements and the public pronouncements of various defendants. The claims however, were based not on successful investing, but reverse engineered fraud according to the court papers. As part of the scheme to make the portfolio appear profitable, a rate of return was selected for each period and then financial statements were crafted by calculating the necessary numbers back from the pre-selected result. This permitted the defendants to present the Stanford group as very successful, when in fact its financial statements were fabrications.

As the market deteriorated Mr. Stanford and his confederates realized they could not continue to report high rates of return. In late 2008, they understood that reporting a loss may require a contribution to regulatory capital. Accordingly, they announced that Mr. Stanford would make a capital contribution to the bank to ensure its soundness in the turbulent times.

In early 2009, as the markets continued to deteriorate, Mr. Stanford and others sought to reassure the markets and stem concern that the group did not experience losses related to Ponzi scheme king Bernard Madoff. Ms. Pendergest-Holt thus gave a speech assuring investors and the public that the Stanford group was financially sound. Investors were told that the group had not suffered Madoff related losses.

In fact, the Stanford bank is a Ponzi scheme, according to the SEC. Over a period of years Mr. Stanford has taken over $1 billion of investor funds for his own used, booked as loans which are not reported in the related party transaction section of filings. The 2008 capital contribution was sham. And, the group did in fact suffer Madoff-related losses through various investment funds.

As the SEC inquiry unfolded, the Commission contacted the Antiguan banking authorities. Mr. King, who had been taking bribes from Robert Stanford for years, coordinated the response to the SEC, assuring the agency that the Stanford bank was financially sound. Indeed, Mr. King had made sure over the years that the Antigua regulator has “looked the other way” as he collected bribes from Mr. Stanford, according to the court papers.

The SEC’s freeze order over all of the assets of the group remains in effect. Its web site contains links for investors to contact regarding their investments. The criminal cases and the SEC’s enforcement action are in litigation. See also DOJ Press Release, June 19, 2009; SEC Lit. Release 21092 (June 19, 2009).