San Diego Ponzi Schemer Sentenced to 10 Years in Prison

A San Diego man who swindled investors out of $26 million was sentenced to ten years in federal prison.  Matthew "Beau" La Madrid, 44, had pled guilty in January to several charges, including conspiracy to commit mail fraud, wire fraud, bank fraud and conspiracy to commit money laundering.  His brother, Lance La Madrid, also pled guilty to mail fraud and is awaiting sentencing along with several other co-defendants.

From 2004 to 2008, La Madrid operated "Plus Money Return Premium Funds" that purported to engage in covered-call stock option trading yielding above-average returns to investors.  To convince investors that the operation was legitimate, La Madrid mailed fictitious monthly account statements depicting appreciation in investors' accounts.  Instead, a large amount of investor money was used to make monthly payments to earlier investors and fund a lavish lifestyle that included luxury cars, art, and gambling.  La Madrid also was a principal in several other companies, Real Estate Investment Group and E&M Property Management, which sold promissory notes to investors supposedly secured by deeds of trust in real estate investments.  Instead, these deeds were never recorded, and investors' notes were rendered worthless when the properties were sold.

La Madrid was also ordered to pay $23.5 million in restitution to defrauded investors.  

Former FBI Agent Pleads Guilty to Alabama Ponzi Scheme

A lawyer and former-FBI agent has pled guilty to operating a Ponzi scheme in Trussville, Alabama that took in $4 million from swindled investors.  Cary Alan Burdette, of Trussville, had been under investigation by the Alabama Securities Commission since 2008 and has been the subject of numerous civil litigation filed by defrauded investors.

Burdette was arrested in April 2009 and charged with nineteen counts of selling unregistered securities, following the issuance of a cease-and-desist order by the Alabama Securities Commission in April 2008.  Burdette promised investors returns of up to twelve percent for their investment in real estate and medical ventures, often memorialized in a promissory note.  Instead of making these investments, Burdette used the majority of investor funds to pay returns to older investors and to pay personal and business expenses.  

Burdette, who is a licensed attorney and former member of the Federal Bureau of Investigation, is set to be sentenced next month.  

Madoff Trustee Reaches $1 Billion Settlement with Feeder Funds

The court-appointed trustee overseeing the liquidation of Bernard Madoff's defunct brokerage announced that he had reached a settlement with Tremont Group Holdings, Inc., one of the largest feeder funds providing money to Madoff's scheme.  The settlement resolves allegations by Irving Picard, the court-appointed trustee, that Tremont Group Holdings and various affiliate funds funnelled more than $4 billion to Madoff and enjoyed substantial profits while ignoring glaring signs of fraud.  The settlement also brings to nearly $9 billion the amount recovered by Picard to distribute to defrauded investors, more than half of the $17.3 billion estimated by Picard as total principal losses from Madoff's fraud.

In a 130-page complaint filed on December 7, 2010, Picard alleged that Tremont Group Holdings and its numerous investment funds and affiliates "substantially aided, enabled and helped to sustain" Madoff's scheme, ultimately receiving more than $2.1 billion in avoidable transfers that Picard sought to recover as well as up to $240 million in fees over the term of its relationship with Madoff.  Additionally, rather than conduct due diligence as Tremont and its affiliates increasingly increased their exposure with Madoff, Picard claimed that Tremont remained "blissfully ignorant" as its returns remained steady.  This ignorance came even as increasing skepticism over Madoff's operation arose within Tremont, including Tremont's statement in 2006 that Madoff's operation "does not represent the best industry practices."

According to court documents, Picard and Tremont have been engaged in good-faith settlement discussions since 2009.  Several defendants had filed proof of claims with Picard before the July 2, 2009 claim bar date, asserting account losses in the aggregate amount of over $4 billion based on final account statements provided by Madoff as of November 30, 2008.  Picard disputed the calculation of this amount, arguing that the claim determination should have been made under the net equity method of calculating claims that was later approved by United States Bankruptcy Judge Burton Lifland.  Under this method, Picard countered that the total claim amount should be slightly over $2 billion.

The terms of the settlement address not only Picard's claims for avoidable transfers against the Tremont defendants, but also resolve the uncertainty surrounding their filed customer claims.  Under the settlement, the Tremont defendants will pay Picard $1 billion in cash, which will be transferred to the "Customer Fund" for eventual distribution to defrauded investors.  In return, Picard will deem as "allowed" the customer claims of the Tremont funds in the amount of $2,186,177,715.88.  Doing so will also entitle the funds to protection afforded by SIPC, which includes an advance of $500,000 per customer claim.  Another fund, Insurance Portfolio LDC, will also have its customer claim deemed as "allowed" upon the receipt of $25 million to Picard to be held in escrow for a short period.

The settlement is unique in that it appears to be the first settlement in which Picard has accepted less than what he had claimed were traceable to Madoff's scheme.  While Picard alleged avoidable transfers under the Bankruptcy Code of $2.1 billion, he has agreed to forego over $1 billion in potential recovery, apparently taking the view that the prospect of prolonged litigation was outweighed by a quick and expeditious resolution of the claims.  Picard's stance differs from those taken against past notable settlements including those of Norman Levy, Carl Shapiro and Jeffrey Picower.  There, Picard demanded the return of all profits traceable to Madoff's scheme.  While avoidable transfers are certainly different than avoidable transfers, the apparent indication that Picard may be willing to negotiate may spur other feeder fund defendants to settle as well.

Picard may also be seeking to shore up resources as litigation heats up with several high-profile banking entities sued by Picard, including JP Morgan, HSBC, and UBS.  Recent weeks have seen a flurry of activity in these cases, including transfers from Bankruptcy Court to Federal Court and claims that Picard lacks standing to assert any of his claims.  

According to documents filed with the US Bankruptcy Court, objections must be made to the proposed settlement before September 6, 2011.  A hearing is currently scheduled for September 13, 2011 for approval of the settlement.

Petters Associate Pleads Not Guilty

After being indicted on new charges last week, one of the men accused of aiding Thomas Petters in a $3.6 billion dollar Ponzi scheme entered a not guilty plea to all charges.  James Fry, 57, was charged in a twenty-four count indictment that replaced an earlier indictment filed in April.  Another associate of Petters, Frank E. Vennes Jr., 53, was also indicted on twenty-four counts of fraud, money laundering, and making false statements on credit applications. 

Fry pled not guilty to five counts of securities fraud, four counts of wire fraud, and three counts of making a false statement to the SEC.  Each charge carries a potential maximum prison sentence of five years.  Trial is currently scheduled to begin in February 2012.

Government Accountability Office to Review Madoff Trustee's Performance

Bowing to pressure from a New Jersey Congressman, the Government Accountability Office ("GAO") formally agreed to review the SIPC Trustee's handling of the liquidation of Bernard Madoff's failed investment brokerage.  In response to a request by New Jersey Congressman and current chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises Scott Garrett (R-NJ), the GAO agreed to conduct a "comprehensive evaluation" of the multiple individuals and entities involved in the liquidation of Bernard L. Madoff Investment Securities LLC.  These include Trustee Irving Picard and his attorneys at Baker Hostetler, the Securities Investor Protection Corporation, and the Securities and Exchange Commission.  Chief among Garrett's concerns are SIPC's selection of Picard as trustee, methodology behind victim identification and compensation determination, and other aspects of Picard's work to date.

Congressman Garrett's office published a letter sent to the GAO on June 3, 2011 requesting a formal review of Picard.  However, while several reasons are provided as grounds for the review, it becomes clear that the primary impetus for such a review stems from Congressman Garrett's continuing disagreement with Picard over the method used to calculate losses of Madoff's victims.  Picard has utilized the so-called "net winner" method, in which an investor's losses are determined by calculating the difference between the initial principal invested and any subsequent distributions prior to the scheme's collapse.  Thus, an investor with an initial investment of $100,000 who makes withdrawals of $40,000 during the pendency of the scheme would have a net investment amount of $60,000.  Yet, according to Congressman Garrett, the victims' final account statements, rather than cash deposits minus withdrawals, should be used to calculate losses.

Such a position has already been rejected by United States Bankruptcy Judge Burton Lifland, who approved Picard's use of the "net winner" method in a March 2010 order.  According to Judge Lifland, Picard's approach was better supported by legislative history and superior to the "the false premise that customers’ securities positions are what the account statements purport them to be."  Both the SEC and SIPC supported Picard's interpretation, under which the so-called "net losers" stand to recover a larger percentage of their losses than had the "net winners" also been included in the calculation.  

In response, Congressman Garrett introduced the "Equitable Treatment of Investors Act" in February 2011.   In particular, the bill sought to 

"properly shield innocent individual investors who have already been defrauded and financially devastated by Bernie Madoff from further ‘clawbacks’ by the Securities Investor Protection Corp. (SIPC) Trustee.”

Under the bill, customers would be entitled to rely on their account statements as evidence of obligations owed them by their broker.  Thus, customer losses from Madoff's scheme would approach in excess of $50 billion according to customer's final account statements, rather than the $17 billion of customer losses estimated by Picard.  The benefits of such an approach come with an important caveat; while more investors will be entitled to distributions from Picard, each investor will ultimately receive less of a pro rata distribution.  

While Congressman Garrett's legislation is still pending, Picard is moving forward in making a first interim distribution to investors after recently obtaining judicial approval.  The GAO has stated that its review will start within one to three months.