Accounting Firm Wins Request for $20 Million of Frozen Stanford Assets

A United Kingdom judge has granted a request by an accounting firm overseeing the liquidation of Stanford International Bank ("SIB") to use $20 million in previously-frozen assets to fund litigation pursuing the return of assets from individuals associated with the scheme.  Judge Elizabeth Gloster, a judge in the Commercial Court, granted the request of Grant Thorton, the global accounting firm appointed to liquidate Stanford's failed operations in England, ruling that the funds could be used to fund litigation against financial institutions who worked with Stanford and in clawback actions against investors who received profits exceeding their invested principal.  These efforts would center on the Caribbean region, including Antigua, where Stanford International Bank had extensive ties.

Grant Thorton had asked for $20 million, with $5 million to be available immediately, out of an estimated $100 million in SIB's assets currently held in several hedge funds.  The United Kingdom Serious Fraud Office, acting on behalf of the Justice Department, had opposed the request, arguing that the assets should instead be returned to the United States, where court-appointed receiver Ralph Janvey is leading efforts to recover funds for victims of Stanford's fraud.  

Stanford has maintained his innocence, and is currently scheduled to stand trial in January 2012.

Bankruptcy Judge Denies Cohmad Motion To Dismiss

The trustee for Bernard Madoff's failed Ponzi scheme scored a victory when a United States Bankruptcy Judge denied a bid to dismiss claims seeking $245 million in fraudulent transfers.  Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities ("BLMIS"), had sued Cohmad Securities Corp. in June 2009, asserting that the broker-dealer formed by Madoff and his close friend Sonny Cohn functioned primarily to divert billions of dollars into Madoff's scheme.  Cohmad later filed a motion to dismiss Picard's claims, asserting that Picard had failed to plead his claims with requisite particularity, and thus warranted dismissal.  United States Bankruptcy Judge Burton R. Lifland denied Cohmad's motion to dismiss, finding that Picard had sufficiently pled his claims.

In his complaint, Picard had alleged that Cohmad, its registered representatives, its co-founder Cohn, and certain relatives of Cohn all held investment advisory accounts with BLMIS.  Collectively, these individuals withdrew over $100 million from their accounts at BLMIS before the fraud was discovered.  Under federal bankruptcy laws, Picard sought to avoid these withdrawals as fraudulent transfers.  Under Rule 9(b) of the Federal Rules of Civil Procedure, actual fraudulent transfer claims brought under the federal Bankruptcy Code or under New York law must satisfy heightened pleading requirements.  Judge Lifland found that Picard's attachment of seventeen exhibits detailing each withdrawal of fictitious profits satisfied these heightened pleading requirements.

Picard also sought return of fees or commissions paid as incentive for the referral of victims to Madoff's scheme. As a result of referring several billions of dollars in investor funds, Cohmad received a substantial amount of commissions from BLMIS.  By instituting a dual system of payments, in which BLMIS would pay monthly commissions to Cohmad, who would in turn distribute commissions to individual representatives, Picard alleged this was indicative of Cohmad's knowledge of the fraud.  From January 1996 to 2008, Picard alleged total commission payments totalling nearly $100 million.  These payments, alleged Picard, constituted nearly all of Cohmad's income during the eight years leading up to 2008.  In ruling that Picard had satisfied pleading requirements for the commissions, Judge Lifland again cited exhibits attached by Picard detailing these payments with requisite particularity. 

Finally, Judge Lifland rejected Cohmad's contention that Picard was only entitled to seek fraudulent transfers from the date of the filing of the complaint against Cohmad in June 2009.  Instead, as asserted by Picard, the proper 'look-back' date to determine the amount of fraudulent transfers was the date Madoff was arrested and charged with securities fraud, on December 11, 2008. 

The case number is 09-01305-brl.

Court Dismisses Dreier Trustee's Suit Against Wachovia

A New York Bankruptcy Judge has rejected the latest attempt to hold a banking institution liable for its failure to detect a client's Ponzi scheme.  In an order entered on August 3, Southern District Bankruptcy Judge Stuart M. Bernstein denied the bid by Sheila M. Gowan, the trustee for Marc Dreier's failed $700 million Ponzi scheme, to hold Wachovia Bank liable for failure to detect the scheme while it lent Dreier millions of dollars.  According to Sheila M. Gowan, Wachovia was bound to investigate the "inklings" it began to have concerning Dreier's financial health:

Without Wachovia’s assistance, MSD’s fraud would likely have been revealed years earlier, thus preventing losses totaling hundreds of millions of dollars suffered by late investors in the scheme and other DLLP creditors. Wachovia was ideally-situated to discover the sources of the funds MSD was using to finance his lavish lifestyle while pursuing exponential growth at DLLP, yet Wachovia refused to ask the probing questions that it believed would cause Dreier to take its banking business elsewhere. 

The lavish lifestyle Gowan refers to centers on Dreier's purchase of a $17 million luxury yacht using funds from a Wachovia account.  Soon after the purchase, Dreier sought a $8 million loan from the bank using the newly-purchased yacht as collateral.  The employee tasked with reviewing the request noted several abnormalities with Dreier's finances, saying she was unable to verify his income for several years and surmising that Dreier had misrepresented his business assets as personal assets.  Further review by her superiors supported this observation, with Wachovia's national managing director saying that Dreier's cash flow "doesn't add up."  

Despite these "inklings," Wachovia made the loan, and in the following year, allegedly violated numerous Wachovia internal banking procedures to accomodate various requests by Dreier, who by then was one of the firm's most valuable clients.  According to Gowan, Wachovia knew or should have known that this loan was going to be used to repay investors in Dreier's scheme.

Under the trustee's legal theories, Wachovia can be held liable if it had actual or constructive knowledge of Dreier's fraud.  While Gowan did not allege that Wachovia had actual knowledge of the fraud, she argued that the weight of evidence and "inklings" should have alerted Wachovia to Dreier's fraud.  Echoing the difficulty of succeeding under such theories, Judge Bernstein concluded that Wachovia did not have actual or constructive knowledge of Dreier's fraud and granted Wachovia's motion to dismiss.  In her opinion, she concluded that:

While Wachovia may have had reason to question Marc’s honesty and the accounting for and source of all of the funds used by him and Dreier LLP, this does not add up to actual or constructive knowledge that (1) Marc was running a Ponzi scheme through Dreier LLP’s account at Chase, or (2) the October 2008 Loan proceeds were destined for a Ponzi scheme investor. Wachovia did not invest in the Ponzi scheme; it loaned money to Dreier LLP, a seemingly legitimate enterprise which, unlike Marc, apparently paid its obligations on time. The Complaint refers to only one overdraft, and does not attribute any late payments or defaults to Dreier LLP. Further, Marc did not run his fraudulent scheme through Wachovia. Thus, the inflow and outflow of funds connected with the Ponzi scheme transactions would not have come to Wachovia’s attention or sounded any alarms. 

Additionally, because Wachovia received new value for the loan it made to Dreier - the securing of the yacht as collateral - Judge Bernstein rejected Gowan's claim that the loan could be avoided under fraudulent transfer laws.  Gowan was, however, permitted leave to refile her claims concerning preferential transfers.  

Wachovia is the latest banking institution to prevail against claims that it was under a duty to detect a client committing fraud.  Judge Jed S. Rakoff recently dismissed claims in the Soutnern District of New York brought by the trustee of Bernard Madoff's massive Ponzi scheme alleging HSBC ignored "red flags" and aided and abetted Madoff's crimes.  

A copy of the Complaint is here.

A copy of Wachovia's Motion to Dismiss is here.

A copy of the Order dismissing the trustee's claims is here.

Arkansas Lawyer Pleads Guilty to $47 Million Ponzi Scheme

An Arkansas lawyer pled guilty to a Ponzi scheme thought to be the largest fraud in Arkansas state history.  Kevin Lewis, 43, entered a guilty plea to a single charge of bank fraud in an Arkansas District Court.  While the charge carries a potential maximum prison sentence of thirty years, it is thought that Lewis will likely receive a sentence between ten and thirteen years.  Additionally, Lewis is also likely to be ordered to pay restitution to his victims.  

Lewis's scheme entailed the issuance of paperwork for false rural improvement bonds to several Arkansas banks.  The bonds were not registered in Arkansas, and were used by Lewis as collateral to receive financing from banks.  The scheme resulted in at least one bank, First Southern Bank, being placed into federal receivership after having purchased nearly $23 million of the fake bonds.  Lewis had obtained majority ownership of the bank through the use of fraudulent proceeds of a previous bond sale to another bank.    Instead of developing the property described in the bonds, Lewis used the financing for personal and business expenses.  Losses from Lewis's fraud are currently estimated at $40 million.

A sentencing date has not yet been scheduled.

Guilty Plea in St. Louis Ponzi Scheme

A Belleville, Missouri man pled guilty to running a 20-year Ponzi scheme that cost victims $2.4 million.  Edward Lynn Moskop, 63, entered guilty pleas to one charge of mail fraud and one charge of money laundering.  Each charge carries a a maximum prison sentence of twenty years, along with fines.  Federal sentencing guidelines call for a sentence between 70 and 85 months.  

Moskop originally operated Financial Services Moskop and Associates until 1990 when he was barred from selling securities.  From that point, he held himself out to prospective clients as a broker, promising returns from investments in various mutual funds of certificates of deposit.  Instead, prosecutors allege, Moskop deposited investor funds in his personal bank account and did not purchase any securities.  Over the course of the scheme, Moskop paid nearly $1 million to investors as purported interest payments.  Authorities estimate that seventeen investors lost $1.4 million when the scheme collapsed.

Moskop is due to be sentenced November 18, 2011.