The Market Crisis, Fraudsters And The Regulators

There is at least one positive side to the on-going market crisis – it is sorting out the fraud in the market and leaving it to the regulators to clean up. In the beginning, there was Madoff with what appears to be a $50 billion Ponzi scheme. His undoing seems to have been his inability to continue raising money, apparently because of the credit crisis. It certainly did not have anything to do with his securities trades, since it now appears that Mr. Madoff has not purchased any securities in years. That revelation leads one to wonder just what Mr. Madoff was doing in the rooms were he supposedly ran the scheme alone and just where all the money went.

Following the Madoff scandal, the SEC stumbled onto a series of Ponzi cases, discussed here, in probability for the same reasons they found Madoff — the funds were out of cash because of the current market crisis. Then came “mini-Madoff,” that is the case against R. Allen Stanford, a one time banking mogul whose foreign assets are apparently being seized in the wake of the SEC’s case. Again, in probability a victim of market illiquidity. Apparently even the promise of remarkable returns is not enough to keep the investor funds coming in.

Last week, the market turmoil churned up another illiquid fund that once made unbelievable claims to lure investors. In a complaint filed in Minnesota, the Commission made allegations which seem echo those of Madoff, mini-Madoff and others. The complaint claims that “Defendant John W. Lawton holds himself out as the manager of a wildly successful hedge fund, Defendant Paramount Partners, LP. Paramount is a hedge fund in which approximately 50 to 60 persons have invested as much as $9 million … Lawton, Paramount and Crossroad [the investment advisor] … represented to existing and prospective investors that Paramount has produced annual returns ranging from 65% to 19% since 2001.”

The SEC’s complaint goes on to detail what appears to be another illiquid fraudulent hedge fund. From 2001 to 2008, investors put about $10.8 million into Paramount. Some individuals invested portions of their individual retirement accounts. During the same period they withdrew about $1.8 million. Although investors were told in January 2009 that the fund had about $17 million in assets, the four brokers who supposedly held those assets confirmed that Paramount has less than $2 million. The Commission obtained an order freezing the remnants of the fund. SEC v. Lawton, Civil Case No. 09-368 (D. Minn. Filed Feb. 20, 2009).

Lawton, like Madoff, mini-Madoff and the others appears to have run out of cash. The lure of impossible returns no longer attracted investors who probably had little to invest in view of current market conditions. Credit markets were far too tight to lend assistance. In the end, the market crisis churned these fraudsters up for the regulators to clean up. At least there is something good about this crisis.