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Recent SEC Releases

BNY Mellon Subsidiary Pays $210 Million to Settle Lawsuit Over Madoff Losses

An asset management subsidiary of BNY Mellon has agreed to pay $210 million to settle claims that it advised clients to invest in Bernard Madoff's massive Ponzi scheme despite suspecting Madoff of fraud.  Over the course of a ten-year period, Ivy Asset Management, LLC ("Ivy") received nearly $40 million in fees in return for conducting due diligence on Madoff.  The settlement with IAM represents the conclusion of multiple lawsuits brought by the New York Attorney General (the "NYAG"), the U.S. Department of Labor, and private plaintiffs.  Despite IAM employees voicing "deep" reservations about Madoff's operations, investors were given positive recommendations, with the only concern voiced relating to the difficulty of managing the enormous asset pool purportedly managed by Madoff.  Per its terms, the settlement applies only those investors who invested in "feeder funds" that funneled investor monies into Madoff's scheme.

In 2010, the New York Attorney General filed a lawsuit charging IAM with violations of the Martin Act for fraudulent conduct in connection with the sale of securities, as well as fraud in the conduct of business and breach of fiduciary duty.  The suit sought damages, payment of restitution, and disgorgement of all fees received by Ivy.  Private investors also filed suit against IAM alleging similar claims.  

The charges focused on the level of due diligence IAM purported to conduct on behalf of its clients.  During the course of this due diligence, authorities alleged that Ivy discovered Madoff was not investing funds as promised.  While Madoff's advertised trading strategy featured the purchase and sale of enormous amounts of options, Ivy's investigation revealed that the actual option trading volume fell far short of what would be required. When Madoff was pressed as to this discrepancy, he provided IAM executives with "three vastly different explanations" that failed to allay concerns.  Indeed, according to internal IAM documents, one executive piped:

 Ah, Madoff, you omitted one possibility – he’s a fraud!

Yet, despite the inconsistent explanations given by Madoff and misgivings by executives, IAM failed to disclose any of these suspicions to investors in an effort to prevent the steady stream of lucrative fees.  As a result, IAM's clients, which included individual investors as well as New York union pension and welfare plans, ultimately lost approximately $236 million when Madoff's fraud was uncovered in December 2008.  

The settlement sheds light on the "feeder fund" investors, who to date have not been recognized as victims entitled to participate in the Madoff claims process.  Irving Picard, the bankruptcy trustee appointed to liquidate Bernard L. Madoff Investment Securities, has made significant strides in marshaling assets and to date has made two distributions to victims.  However, Picard's determination that only those who directly invested with Madoff were victims meant that thousands of investors whose Madoff investment was via a feeder fund were not considered victims - and thus not entitled to participate in the claims process.  

Indeed, while Picard received 16,519 customer claims, only 2,436 of those claims were "allowed" - with many being denied due to their status as "feeder fund" investors.  Under Picard's reasoning, only the feeder fund itself was a victim, with the "loss" suffered by that feeder fund consisting of the cumulative value of investments that fund had with Madoff.  Any distributions would thus be made to the feeder fund itself, which would then have the option of making distributions to its investors.

The IAM settlement is welcome news for those investors, which will provide a near-total recovery of their losses.  Ironically, while shut out of the Madoff distribution process, these investors now stand to recover nearly triple the amount distributed to Madoff victims.  In the press release put out by the New York Attorney General's office,  it was estimated that investors were also "expected to receive substantial additional payments at a future date from" Picard.  However, any future distribution by Picard would likely not occur until other similar situated victims have received equal distributions.  

The settlement also marks the second significant recovery in recent efforts by the office of the New York Attorney General to prosecute those who were involved in the Madoff scandal.  Earlier this summer, the NYAG announced that it had reached an agreement with prominent hedge fund manager J. Ezra Merkin to return approximately $400 million to investors in four Merkin funds that lost over $1 billion with Madoff. Picard later objected to that settlement, claiming that it encroached on his exclusive authority to recovery assets for Madoff's victims.  According to Picard, if the settlement was approved, it would deprive Merkin of sufficient funds to satsify Picard's pending claims totaling $500 million and leave nothing for the majority of Madoff victims.  


Victims Cheer As Judge Hands Down 19-Year Sentence For $60 Million Silver Ponzi Scheme

A federal courtroom erupted in cheers as a South Carolina man learned he will spend the next nineteen years in prison for operating a massive Ponzi scheme that duped investors out of $60 million. Ronnie Wilson, 65, had pled guilty to two counts of mail fraud earlier this summer, and had faced a statutory maximum sentence of twenty years in prison. Wilson received a 235-month sentence - five months short of the maximum 20-year sentence - for what authorities called one of the worst financial frauds in state history.  Along with the sentence, Wilson was also ordered to pay $57,401,009 in restitution and serve three years of probation upon release. 

As detailed in an earlier Ponzitracker article leading up to the sentencing, Wilson operated Atlantic Bullion & Coin, Inc. since at least 2001, promising investors lucrative gains by profiting off the appreciation of silver without having to actually physically acquire the precious metal.  Investors were told that Wilson would purchase the silver and arrange for safekeeping at a Delaware depository.  Ultimately, over $90 million was raised from investors.  However, Wilson purchased very little actual silver, and instead used investor funds to make principal and profit distributions to existing investors - the classic hallmark of a Ponzi scheme.  

At the sentencing hearing, Wilson recounted that while the fraud began on a small scale, it soon spiraled out of control to the point where Wilson began stealing from his daughter and brother.  The court-appointed receiver, Beattie Ashmore, has indicated that his investigation thus far "would paint a very dim picture" of a meaningful recovery of assets for distribution to victims.  

The Receiver's website is here


Ponzi Schemer Receives 27-Year Sentence for $12.3 Million Scheme

A Georgia federal judge handed down a 27-year sentence - the longest of its its kind in Atlanta for a fraudulent investment scheme - to a New York man convicted of operating a Ponzi scheme that duped investors out of more than $12 million.  Andrew Mackey, 62, received the sentence from United States District Judge Bill Duffey, who noted that Mackey's case was the worst of all the Ponzi scheme cases he had presided over.  Earlier this summer, a federal jury had convicted Mackey and his common-law wife, Inger Jensen, on 15 counts of wire fraud, mail fraud, and conspiracy to commit wire fraud and mail fraud.  For her role, Jensen received a fourteen-year sentence.

According to authorities, Mackey and Jensen were the owners of ASM Financial Funding Corporation, which was marketed to potential investors as a "wealth enhancement club."  Holding themselves out to investors as experienced investment professionals, Mackey and Jensen promised investors lucrative returns of up to 20% per month by investing in several different ventures, including private and confidential offshore business deals and mortgage financing.  Per the terms of the mortgage financing investment, investors were told that they could pay off a 30-year mortgage in less than five years if they paid 17%-25% of the mortgage up front. Investors were told that these ventures were guaranteed, and lured by advertisements touting the lucrative terms:

"Please note the true beauty of this program: Your total out of pocket expenses after 5 years is only $109,960 and you now own a $200,000 home. That's right! YOU FINANCED $200,000, BUT ONLY PAID BACK $109,960!"

In total, Mackey raised more than $12 million from investors.  As is now known, the promised returns that seemed too good to be true were, in fact, too good to be true.  Instead, the returns were the classic hallmark of a Ponzi scheme - unsustainable returns made possible not through legitimate investments, but by making Ponzi-style payments consisting of redistributed investor principal.  

At his sentencing, Mackey refused to take responsibility for his crimes, instead noting that he "did not intend to steal" and that it was "hard to hear that people feel bitter."  While this likely played a role in the severity of the sentence handed down by Judge Duffey, Mackey was also a convicted felon due to a prostitution-related 1987 arrest for his role as one of the "biggest pimps" in New York.  


Mastermind of $60 Million Silver Ponzi Scheme Faces Sentencing

A South Carolina man accused of masterminding a $60 million Ponzi scheme, one of the largest schemes in state history, is scheduled to be sentenced Tuesday.  Ronnie Wilson, of Anderson County, South Carolina, was arrested in early April and charged with mail fraud in an alleged Ponzi scheme that held itself out as a silver investment company.  Wilson later pled guilty to two counts of mail fraud in July.  Mail fraud carries a maximum statutory sentence of twenty years per count, as well as a $250,000 criminal fine.  Typically, the US Probation Office prepares a sentencing report providing details on the calculation of a sentencing range, as well as estimated investor losses.  This recommendation is advisory, not binding, on the federal judge tasked with delivering the sentence.

Wilson operated Atlantic Bullion & Coin, Inc., ("ABC") for at least a decade, representing to potential investors that they could realize profits from ownership of silver without having to actually physically possess the silver.  To accomplish this, Wilson purported to purchase and warehouse silver on behalf of investors. Investors were told that their silver would be held in safe-keeping at a Delaware depository, and were provided with regular account statements allegedly showing regular appreciation in their holdings.   In total, Wilson raised approximately $90 million from over 1000 investors in 25 states.  

However, in reality, Wilson used the majority of investor funds not for the purchase of silver, but to perpetrate a massive Ponzi scheme in which "profits" paid to existing investors were simply the re-distribution of incoming investor funds.  While investors were told that Wilson kept nearly $17 million of silver at a Delaware depository, they later discovered that the depository had never heard of Wilson.  Of the $90 million raised from investors, authorities and the court-appointed receiver have since pegged investor losses at approximately $60 million.  The outlook for recovery of those funds remains dim; court-appointed receiver Beattie B. Ashmore, has indicated that he "would paint a very dim picture" of the chance of a large-scale recovery.

In a related development, a recent filing by the Receiver illustrates the possible location of some scheme proceeds.  In early October, the receiver sought to expand the scope of the receivership to include Wallace Lindsey Howell and Tracy Neily.  While Howell was recently charged by authorities, the emergence of Neily's name in the case is new.  In the filing, Ashmore explained that his investigation has revealed that

Tracy Neily, individually and through companies already subject to the Court Order, operated as an alter-ego of Wilson and/or AB&C and thus should be added to the Court Order. The Receiver is in possession of data showing that Neily, directly or indirectly, profited substantially from the Ponzi scheme and, in concert with Wilson, diverted funds directly to her and her family members.

Several days later, United States District Judge J. Michelle Childs granted the receiver's request, issuing an order granting Ashmore authority to, among other things, take immediate possession of all assets and property traceable to Wilson's fraud currently in possession of Wilson, Howell, and/or Neily's family members and acquaintances.


Former Madoff Controller Pleads Guilty To Fraud Charges

The first non-Madoff employed at Bernard Madoff's brokerage firm pled guilty to aiding and abetting Madoff's $65 billion Ponzi scheme for more than two decades.  Irwin lipkin, the former controller of Bernard L. Madoff Investment Services ("BLMIS") and the third employee after Madoff and his wife, entered a guilty plea to several fraud charges including conspiracy to commit securities fraud, to falsify records, and to make false filings with the SEC.  Pursuant to his plea agreement with authorities, Lipkin, 74, faces up to ten years in federal prison.

Lipkin was hired in 1964 as the first non-Madoff at BLMIS, and participated in maintaining the firm's financials in his job as Controller, as well as assisting Madoff in performing internal audits of the securities positions held by BLMIS.  Along with several other Madoff employees, Lipkin maintained the BLMIS General Ledger and Stock Record.  Beginning in the 1970's, Lipkin falsified entries in the General Ledger designed to manipulate the purported profits and losses realized by BLMIS, and were done at Madoff's behest.  Additionally, in connection with audits by the Internal Revenue Service ("IRS"), Lipkin and others backdated the General Ledger and other supporting documents to appear consistent with representations made to the IRS.  After his retirement, Lipkin also instructed other Madoff employees how to continue his duties to perpetuate the fraud.  

According to authorities, Lipkin also arranged for his wife to receive a regular paycheck from BLMIS despite the fact that she did not work at BLMIS or provide any services on its behalf.  Even though Lipkin retired in 1998, he continued to receive a salary and benefits until the scheme was uncovered in December 2008.  

As part of his restitution agreement, Lipkin has agreed to forfeit $170 billion, which includes all real and personal property owned.  He is scheduled to be sentenced on March 13, 2013.  

A copy of the criminal charging document against Lipkin is here.