Search
Most Recent
AdSurfDaily Agape agent American Integrity Aronson asset sales Attorney av bar reg baker bank bank of america Bankruptcy baumann bermudez black diamond blackwell bridge loan bull cattle CD celebrity cftc charity china China Voice church cityfund claims claims process clawback commission commodities commodity pool computer program congress Crown Forex currency death sentence denver diamond bar disgorgement Distribution Dodd-Frank donnan Dreier dunhill e-bullion elderly E-M Management SEC england Fairfield family FBI FDIC Fees female ponzi scheme financial advisor fine FINRA football forex fraud fufta fugitive Full Tilt gift card guilty plea GunnAllen hawaii Heckscher HSBC india invers forex janvey John Morgan JP Morgan kansas ken bell kenzie las vegas lawsuit lawyer libya Lifland machado Madoff Marian Morgan metro dream homes mets milberg millers a game Morgan European Holdings mortgage multiple schemes NCAA Net Winner new jersey notes objection Oxford Patrick Kiley paul burks PermaPave Pettengill Petters Picard poker Ponzi ponzi scheme ponzi scheme database ponzi scheme list Prime Rate profitable sunrise prosun pta puerto rico Rakoff real estate receiver receivership regulation relief defendants religion remission repeat offender restitution Rothstein RRA sec sentencing simmons sipa sipc snelling standing stanford stettin subpoena td bank telexfree treasury bonds treasury strip Tremont Trevor Cook UBS UFTA uga utah venture advisors Wachovia wilpon wire fraud woman zeek zeek rewards zeekler zeekrewards
Social
Recent SEC Releases

Entries in Madoff (34)

Friday
Oct142011

New York 'Mini-Madoff' Receives Twenty-Five Year Prison Sentence

A New York man whose $400 million Ponzi scheme earned him the nickname of Long Island's Mini-Madoff was sentenced to twenty-five years in federal prison on Friday.  United States District Judge Denis Hurley handed down the sentence to Nicholas J. Cosmo, 40, along with an order to pay $179 million in restitution to more than 4,000 investors defrauded by the scheme.  Originally indicted on thirty-two counts of wire fraud and mail fraud, Cosmo pled guilty on October 29, 2010 to one count each of wire fraud and mail fraud.  He had faced a maximum sentence of forty years in prison at his sentencing.  

From October 2003 to January 2009, Cosmo owned and operated Agape World, Inc ("Agape") and Agape Merchant Advance ("Agape Merchant").  Potential investors were told that their money would be used to fund short-term bridge loans to commercial borrowers and loans to other businesses that accepted credit cards.  Investors were promised annual returns as high as eighty percent.  In total, Cosmo convinced thousands of investors to entrust approximately $413 million with Agape and Agape Merchant.  However, Cosmo used only $30 million of investor funds to make short-term bridge loans, and made roughly $80 million of unauthorized trades in commodities and futures positions.  The remainder was used to perpetuate a massive Ponzi scheme, using funds from new investors to pay returns to existing investors and create the appearance of a highly successful operation. Cosmo also used investor funds to support a lavish lifestyle and to pay over $60 million in commissions to Agape brokers for continuing to bring in new investors.

The scope of the operations were so large that Bank of America at one point established an unofficial branch within Agape headquarters in Hauppauge, New York, to provide on-site banking services.  The branch, staffed by one Bank of America employee, was dedicated solely to Agape's banking needs, and had access to Agape's business records.  After the fraud was exposed, Bank of America was named, along with several other defendants, in several lawsuits alleging claims of negligence, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty.  The suits alleged that Bank of America ignored many "red flags" that should have alerted them to Agape's fraud.  However, the standard in assessing liability against banking institutions such as Bank of America is a high one; actual, rather than constructive, knowledge is required.  The Eastern District of New York granted Bank of America's motion to dismiss based on this heightened standard, concluding that:

The Plaintiffs have failed to adequately allege that BOA had actual knowledge of Cosmo's scheme. Nor have they adequately alleged that BOA provided substantial assistance to that scheme. 

Additionally, this is not Cosmo's first fraud conviction.  In 1999, he was sentenced to a 21-month prison sentence after pleading guilty to a fraudulent scheme while employed as a stockbroker at Continental Broker Dealers.  Following that conviction, Cosmo was forbidden from associating with any other broker-dealers and was forced to surrender his broker's license.  The U.S. Commodity Futures Trading Commission has also instituted proceedings against Cosmo.

A copy of the complaint filed by the U.S. Commodity Futures Trading Commission is here.

A copy of the order granting Bank of America's motion to dismiss the civil lawsuit is here.

A copy of the 1997 criminal complaint against Cosmo is here.

Thursday
Oct062011

Madoff Trustee Seeks Over $200 Million in Latest Round of Clawback Lawsuits

The trustee overseeing the liquidation of Bernard Madoff's defunct brokerage firm continued his quest to recover funds from investors of Madoff's largest feeder fund, filing five lawsuits seeking over $200 million from five entities.  Irving Picard, the court-appointed trustee, is seeking over $1 billion from entities who invested with Madoff through Fairfield Sentry.  Picard reached a settlement with Fairfield Sentry earlier this year that allowed him to pursue clawback claims against Fairfield customers.  Fairfield received over $3 billion during its relationship with Madoff, $1.6 billion of which was subsequently transferred to Fairfield customers.  Picard has now filed suits seeking over $1 billion of the $1.6 billion allegedly transferred from Fairfield to investors.  

Today's suits seek the return of funds from ABN AMRO Bank, Bank Luxembourg, Lighthouse Investment Partners, Nomura International PLC, and KBC Investments Limited.  In total, the latest round of suits seeks nearly $220 million consisting of the following amounts from each entity:

  • ABN AMRO Bank - $25,469,129
  • Bank Luxembourg - $50,082,651
  • Lighthouse Investment Partners - $11,165,251
  • Nomura International PLC - $21,449,920
  • KBC Investments Limited - $110,000,000     

These clawback actions derive their authority from various federal and state laws.  Under Sections 550 and 551 of the Bankruptcy Code and various sections of the New York Debtor & Creditor Law, initial and subsequent transfers from a debtor within the six-year time period preceding the filing of a bankruptcy petition are subject to avoidance.  

Copies of each complaint can be found here:  ABN AMRO, Bank Luxembourg, Lighthouse Investment Partners, Nomura, and KBC.

Related Ponzitracker coverage:

Madoff Trustee Seeks $189 Million in Clawback Suits

Madoff Trustee Files Seven Clawback Lawsuits Against Feeder Fund Investors

Madoff Trustee Fires Next Salvo of Clawback Lawsuits

Madoff Trustee Files Five More Clawback Lawsuits Against Feeder Fund Investors Seeking Nearly $100 Million

Madoff Trustee Seeks $300 Million From Abu Dhabi Investment Arm

Tuesday
Oct042011

Madoff Trustee Set to Make Initial $312 Million Distribution to Victims on Wednesday

Victims of Bernard Madoff's massive Ponzi scheme are set to receive their first distribution of funds recovered in the wake of the fraud on Wednesday, five days after the initial distribution date was delayed.  Irving Picard, the court-appointed trustee, had originally intended to make the distribution by September 30th to investors holding claims as of September 15th.  However, the distribution was delayed after a federal judge dismissed most of Picard's claims against several owners of the New York Mets last week.  Along with the dismissal of nearly all of Picard's claims, United States District Judge Jed S. Rakoff also made several rulings that could potentially threaten the magnitude of any future recoveries in the approximately 1,000 cases filed by Picard thus far. Ponzitracker covered Judge Rakoff's ruling in greater detail here.  In a statement late last week, Picard announced that out of an abundance of caution, his legal team was delaying the scheduled distribution to evaluate the impact of the rulings.

The majority of lawsuits filed by Picard have sought to "claw back" false profits from investors who withdrew more funds than they invested with Madoff.  Based partly in equity, this procedure seeks to pool all recovered funds and make pro rata distributions to all investors, rather than allowing some investors, usually those that were able to invest in the scheme earlier on, to keep their profits while ignoring others who had invested later and had not received as many purported interest payments to offset their principal investment losses.  Because of the duration of Madoff's scheme, which Picard argues spanned several decades, thousands of investors had accounts with Madoff.  Some who were fortunate to invest in the early days of the scheme have since recouped their original investment by many times.  Picard's largest single recovery to date comes from the estate of one of these early investors, Jeffrey Picower, who agreed to return over $7 billion of false profits received during his relationship with Madoff.  

In the ruling last week, Judge Rakoff dismissed nearly all of Picard's claims asserted against several principals of the New York Mets.  Picard had taken the rare step of not only asking for any false profits, but also for the return of the original principal investment, arguing that the mens' close relationship with Madoff and investing knowledge should have alerted them to the fraud.  Judge Rakoff's ruling severely limited Picard's reach, holding that a "Safe harbor" provision in the U.S. Bankruptcy Code forbade Picard from seeking any false profits received over two years from the date Madoff's brokerage filed for bankruptcy.  This safe harbor provision restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents the interplay between bankruptcy and securities law.  While Picard had argued that the "safe harbor" provision did not apply, Judge Rakoff held otherwise.  

In his statement issued today, Picard stated that additional settlements had allowed him to increase the amount of the initial distribution from $272 million to $312 million.  This distribution would account for roughly 4.6% of allowed investor losses.  Picard also stated that the total funds recovered for victims thus far had increased to $8.694 billion - approximately 50% of the $17.3 billion amount Picard had estimated was lost by Madoff's victims.  Of the nearly $2.4 billion available for distribution, most remains tied up by pending litigation.  

Investors with allowed claims have also received over $700 million in total cash advances from the Securities Investor Protection Corporation ("SIPC"), a federally-mandated non-profit that protects investors if a broker-dealer fails.  Nearly all broker-dealers registered with the Securities and Exchange Commission are members of SIPC.  Under SIPC guidelines, investors holding securities or cash in accounts of failed broker-dealers are entitled to receive up to $500,000 in cash advances to cover their losses.

A copy of the Statement issued today by the Trustee is here.

Thursday
Sep292011

Ruling Limits Liability of Madoff 'Net Winners'; Interim Distribution to be Delayed?

Irving Picard, the trustee appointed to liquidate the now-defunct brokerage firm of convicted Ponzi schemer Bernard Madoff, was dealt yet another significant setback in his quest to collect funds for distribution to Madoff's defrauded investors.  On Tuesday, a federal judge rejected many of the claims in Picard's ongoing suit seeking $1 billion from owners of the New York Mets baseball team.  In addition to the dismissal of nearly all claims, United States District Judge Jed S. Rakoff narrowed the standard under which Picard could proceed in the case going forward.  Additionally, in the wake of the ruling, which many observers warned could severely limit Picard's potential recovery in the nearly 1,000 cases he has filed against those who withdrew more than they invested with Madoff, a lawyer for Picard stated that the first interim payment scheduled to be distributed to investors this month could likely be delayed.

In his suit, Picard had sought nearly $1 billion from various executives of the New York Mets baseball club, consisting of $300 million in principal investment and $700 million in so-called false profits. Consistent with the nearly 1,000 cases filed to date by Picard, the majority of which are the "clawback" actions, Picard has sought the return of funds withdrawn by the aptly-named net-winners within the six years prior to the filing date of the Madoff bankruptcy.  While federal bankruptcy laws only permit this lookback to seek funds withdrawn up to two years before the bankruptcy filing date, Picard has relied on the interplay between federal and state bankruptcy laws, which often permit a longer lookback period. Section  544(b) of the Bankruptcy Code defines this interplay, stating that the applicable state law can also be considered in expanding this lookback period.  Under section 213(8) of the New York Debtor and Creditor Law, fraudulent transfers can be avoided if they occurred within six years of the bankruptcy filing.

Under most bankruptcies and receiverships that parallel bankruptcy law, the use of state law to enlarge the applicable lookback period is routinely used and rarely challenged.  However, Judge Rakoff relies on the "safe harbor" provision codified in section 546(e) of the Bankruptcy Code that comes into play in the case of a registered securities brokerage firm and securities contracts.  This safe harbor restricts a bankruptcy trustee's power to recover payments that are otherwise avoidable under the Bankruptcy Code, and represents "the intersection of two important national legislative policies on a collision course - the policies of bankruptcy and securities law." In re Enron Creditors Recovery Corp., 2011 WL 2536101, *5 (2d Cir. June 28, 2011).  Section 546(e) covers an extremely broad definition of "settlement payments", which Judge Rakoff likens to a transfer made in connection with a securities contract, and "clearly includes all payments made by Madoff Securities to its customers."  Thus, by its "literal language," the Bankruptcy Code prohibits Picard from bringing any clawback action against Madoff customers except those paid in the case of actual fraud. 

Understandably, Picard argued that section 546(e) was inapplicable in the present situation, since its application would be inconsistent with the statute's purpose.  However, Judge Rakoff cites the purpose of section 546(e) in seeking to "minimize the displacement caused in the commodities and securities markets in the event of a major bankruptcy affecting those industries."  Here, Judge Rakoff relies on Picard's own characterization of the extent of Madoff's fraud in theorizing that the undoing of the transfers involving nearly 5,000 Madoff customers would have a substantial and similarly negative effect on the financial markets.  

However, it is the disparity between the current situation and the context in which that reasoning was previously invoked, the Enron fraud, that may serve as ammunition for the trustee's appeal.  Whereas Enron involved publicly traded shares of stock, which play a direct role in the interplay of the financial markets, Madoff customers invested in a private brokerage firm that was neither publicly traded nor a prominent market participant. The unwinding of transfers to potentially millions of Enron shareholders would have involved a complicated intertwining of numerous market participants.  Some will argue that the sheer volume of Madoff's purported trading qualifies it as a major participant in financial markets, but that purported trading, according to the trustee's extensive analysis of Madoff's business records, was as fictitious as the returns supposedly being generated.  But Judge Rakoff also bolsters his opinion using the constitutional principles of checks and balance by stating that, regardless of the legislative history, the judicial branch must only interpret what Congress has said, and may not deviate from what Congress clearly states.

The decision, arguably the most important legal decision in recent memory by Judge Rakoff, has immediate and severe ramifications for Picard.  Just as seen in the wake of Judge Rakoff's decision dismissing common law claims against HSBC, after which a plethora of 'piggback' motions were filed by similarly-situated financial institutions, one can expect the targets of Picard's current clawback suits to file motions on a much larger scale seeking the limiting of Picard's reach.  This limiting would be significant, in that it would effectively permit Picard to only seek funds withdrawn from Madoff in the two, rather than six, years prior to the unraveling of the scheme.  While many have struggled to estimate the true scope of these two scenarios, a lawyer for Picard estimated that up to $6 billion could be off the table if the ruling is upheld.  As noted by Allison Frankel in her excellent column, some high-profile beneficiaries of such a scenario would include Madoff's children, whose liability would decrease by $83.3 million, Bank Medici founder Sonja Kohn, whose clawback exposure would decrease by $27 million, and Frank Avellino and Michael Bienes, several principals behind a large feeder firm to Madoff, whose clawback liability would decrease by nearly $40 million.

Under an order issued the following day by Judge Rakoff, the decision cuts the possible liability of the Wilpons from nearly $1 billion to $386 million,  the total of all transfers made during the two-year period prior to the filing of the bankruptcy petition.

The ruling also affects the scheduled interim first distribution to victims scheduled to occur by the end of September.  According to Diana B. Henriques of the New York Times, who has authored a book on Madoff, an attorney for Picard stated that the initial distribution to victims would likely be delayed until the trustee has had an opportunity to determine the impact of the ruling on amounts owed to other victims of the fraud.  Victims were scheduled to share a pro rata portion of the first payment, which totaled $272 million.  

An attorney for Picard has already sought permission from Judge Rakoff to allow expedited review of the decision by the Second Circuit Court of Appeals. 

A copy of the Tuesday ruling is here.

A copy of the Wednesday order is here.

Monday
Sep262011

Madoff Trustee Seeks $45 Million in Fee Request 

Irving Picard, the court-appointed trustee tasked with dismantling Bernard Madoff's massive $65 billion Ponzi scheme, submitted a filing seeking over $46 million in compensation for legal fees and expenses.  The request is the seventh such filing by Picard and his firm, Baker & Hostetler ("B&H"), who have collectively billed $224 million in the ongoing liquidation of Madoff's firm, Bernard L. Madoff Investment Services ("BLMIS").  This upcoming December marks the three-year anniversary of the unraveling of Madoff's scheme. 

The ninety-seven page motion covers the four-month period from February 1, 2011 to May 31, 2011, during which Picard billed 783.4 hours at an average hourly discounted rate of $765 and B&H attorneys expended 117,501.8 hours at an average discounted hourly rate of $453.80.  Including expenses, the motion seeks over $46 million for fees and services.  As outlined by B&H, this amount includes numerous deductions and discounts totaling millions of dollars, including over $1 million of fees and expenses voluntarily written off by B&H.  Additionally, the fee request also includes a 10% public interest discount, resulting in a $5 million deduction of total fees and expenses.  The Court has also ordered that 10% of each fee request be held back and remain subject to later approval by the Court.   

The motion, through attached itemized summaries of time devoted to each matter, also provides a glimpse into the financial aspects of several high-profile matters that have become contentious.  Examples include litigation against HSBC, the Wilpons, and ongoing 'clawback' litigation seeking the return of amounts received by investors over their principal investment.  The legal fees incurred during the four-month period for each were $5,316,931, $4,109,799.50, and $9,515,373.50, respectively; this combined total of nearly $19 million accounted for nearly half of Picard's requested fees.  Both HSBC and the Wilpons have sought dismissal of all or part of Picard's claims, and Picard has faced strenuous opposition to his method of determining investor claim amounts that was recently affirmed by the Second Circuit Court of Appeals.  Picard has also recently filed a wave of clawback lawsuits related to his settlement with feeder fund Fairfield Sentry.  

Unique to the legal services provided by Picard as compared to similar Ponzi scheme receiverships is the fact that Madoff victims will not pay one cent of any legal fees or expenses.  Instead, these fees are paid by the Securities Investor Protection Corporation ("SIPC") by virtue of the fact that BLMIS, Madoff's brokerage firm, was a SIPC member.  This situation is usually not the case in a typical Ponzi scheme receivership, where memberships or certifications with regulatory authorities are rare and likely perceived as risky given the underlying fraudulent nature of the scheme. 

In addition to SIPC's payment of Picard's legal fees, which by comparison are roughly the same amount as the first interim distribution scheduled to be sent to investors by the end of September, SIPC has also covered investor losses of up to $500,000 as a result of its guaranty of member's customer accounts.  This alone has cost SIPC nearly $700 million.  Including Picard's fees to date, Madoff's scheme has now cost SIPC close to $1 billion, which some have speculated could lead to an increase in membership fees for associating brokerages and institutions.  Further, the agency also faces the possibility of opening its coffers again should it reverse its previous stance that investors in Allen Stanford's alleged Ponzi scheme are not entitled to SIPC protection.  The SEC has publicly voiced its opposition to SIPC's current stance, and a decision is expected by the end of September. 

A copy of the Fee Motion is here.