Madoff Trustee to Dismiss Common Law Claims Against Maxam Capital Management

Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities ("BLMIS"), has agreed to dismiss several of the common law claims originally asserted against several feeder funds of Madoff's massive Ponzi scheme.  These entities, collectively referred to as the "Maxam Funds", were formed by Sandra Manzke, who originally founded Tremont Capital, another large Madoff feeder fund that earlier reached a $1 billion settlement with Picard for its role in the scheme.  Picard had filed suit against the Maxam Funds in June, seeking not only the avoidance of transfers under the Bankruptcy Code, but also damages under common law theories of unjust enrichment and constructive trust.  

In light of United States District Judge Jed S. Rakoff's recent rulings dismissing Picard's attempt to assert common law claims against HSBC and Bank Austria, many entities facing similar suits sought the same relief.  This included a motion to dismiss filed by the Maxam Funds.  In a court filing this week, Picard ceded to the Maxam Funds and agreed to drop the common law claims, stating that "the parties wish to avoid the expense and time of additional resources in connection with defendants’ motion to dismiss the common law claims."  However, in conjunction with his appeal of the decision to dismiss the common law claims against HSBC filed last week, Picard indicated he would renew the claims should he receive a favorable ruling.

A copy of the original Maxam Complaint is here. 

Two Florida Lawyers Disciplined for Involvement in Ponzi Schemes

The Florida Bar announced that it had handed down disciplinary sanctions against two Florida lawyers implicated in recent Ponzi schemes.  Howard Kusnick, implicated for his role in Howard Rothstein's $1.2 billion Ponzi scheme, and Michael McNerney, who was the lead attorney for Mutual Benefits Corp., each received the Florida Bar's official decision on their future ability to practice law.  Kusnick was disbarred for his role, while McNerney received an indefinite suspension from the practice of law.

Kusnick is currently awaiting sentencing after entering a guilty plea to conspiracy to commit wire fraud in connection with Rothstein's Ponzi scheme.  McNerney, earlier sentenced to five years in prison for his role as counsel for the failed Mutual Benefits Corp., received an indefinite suspension from the Florida Bar.  

A copy of Kusnick's Disbarment Consent is here.

A copy of McNerney's Guilty Plea is here.

Banco Bilbao Seeks Dismissal of Madoff Trustee's Clawback Suit Citing Extraterritoriality Concerns

A Spanish banking institution sought the dismissal of a "clawback" lawsuit filed by the trustee for Bernard Madoff's failed Ponzi scheme, claiming that United States bankruptcy law is silent as to its extraterritorial reach and thus ineffective in Picard's quest to recover funds for the benefit of Madoff's defrauded investors.  Banco Bilbao Vizcaya Argentaria ("BBVA"), a multinational Spanish banking group, was sued by Irving Picard, the court-appointed trustee, in December in which Picard sought the return of approximately $45 million withdrawn through BBVA's investment with Madoff "feeder fund" Fairfield Sentry Limited.  In addition to the claim that the Bankruptcy Code was silent on its extraterritoriality, BBVA also claimed that Picard's Complaint should be dismissed because (1) the Complaint failed to state a claim upon which relief could be granted, and (2) Picard's failure to avoid the initial transfer between Madoff and Fairfield Sentry precluded any avoidance between Madoff and BBVA as a subsequent transferee.

Contrary to Picard's assertion that BBVA should return the $45 million it received from Madoff through "public information, as well as considerable non-public information, which raised red flags of possible fraudulent activities at BLMIS," BBVA claimed that it had in fact been another of Madoff's victims.  In fact, claimed BBVA, it had "invested $311 million in Fairfield Sentry, and, as of December 2008, still had more than $774 million invested in all feeder funds." This entire amount was lost due to the deception of the "feeder funds," claimed BBVA, which maintained it remained without knowledge as to any indication of Madoff's fraud.  

BBVA raises several interesting novel issues that have largely remained unaddressed in Picard's bevy of ongoing litigation.  The first is the contention that, without the avoidance of the initial transfer between Madoff and Fairfield Sentry, the avoidance of any subsequent transfer is precluded by both the statutory language of section 550 of the Bankruptcy Code and legislative history.  According to BBVA, Section 550(a) permits the Trustee to recover property or its value from a subsequent transferee only “to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title.”  BBVA recognizes that Picard will likely raise the issue of his previous settlement with Fairfield Sentry "and argue that the initial transfers are as good as avoided."  Yet, in weighing the language of Picard's settlement and accompanying declarations, BBVA posits that the transfers from Madoff to Fairfield not only remained unavoided, but were never avoidable. 

Next, BBVA claims that the presumption against extraterritorial application of United States laws bars the Trustee's claim to recover transfers made to BBVA.  Elaborating, BBVA claims that

[g]iven the foreign based nature of both the initial investment and the redemption, the Trustee cannot state a cause of action against BBVA unless he can make an affirmative showing that Section 550(a) has extraterritorial effect. He cannot do so. The language of Section 550(a) gives no clear indication of an extraterritorial application, and, therefore, the statute has none.    

In support of this, BBVA invokes the recent Supreme Court decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010).  In Morrison, the Court rejected years of caselaw concerning the extraterritorial application of US securities fraud legislation, stating that "[w]hen a statute gives no clear indication of an extraterritorial  application, it has none."  While Morrison dealt with the Securities and Exchange Act of 1934, the Court made it clear that a presumption against extraterritoriality applies in all cases.  BBVA analyzed Section 550 of the Bankruptcy Code under this analysis, concluding that Congress, except for very limited circumstances, did not intend for Section 550 to apply extraterritorially.

Under Federal Rules of Civil Procedure, Picard now has twenty-one days to respond to the motion.

A Copy of the Complaint filed by the Trustee is here.

A Copy of BBVA's Motion to Dismiss is here. 

Alleged Ponzi Schemer's Garage Sales Draw Attention of Receiver

A financial advisor accused of running a multi-million dollar Ponzi scheme has recently come under scrutiny for several suspicious yard sales that have prompted the court-appointed Receiver to take action to ensure that assets were not being depleted to the detriment of defrauded investors.  Stan Kowalewski recently held several weekend "estate" sales in which bargain hunters were invited to shop among two garages full of furniture. However, the court-appointed receiver, S. Gregory Hays, became involved when it was learned that Kowalewski had cancelled his home insurance, and neighbors reported that items other than furniture, such as fixtures and doors, were also being sold in an effort to avoid an asset freeze on the house previously obtained by the SEC.  A private investigator hired by Hays determined that at least one outside fixture had been removed, resulting in exposed wiring and a hole in the ceiling.  Hays has demanded a complete accounting from Kowalewski's attorney.  

Kowalewski was accused by the SEC in January 2011 of operating a Ponzi scheme through his investment advisory business, SJK Investment Management LLC, that bilked investors out of at least $16.5 million.  According to the SEC, Kowalewski operated the SJK Absolure Return Fund and the SJK Special Opportunities Fund, which ultimately solicited $65 million from investors that included school endowments, pension funds,  hospitals, and non-profit foundations.  During his tenure at SJK, Kowalewski represented to investors that he would entrust their funds with other investment entities, promising that each fund picked by Kowalewski would not exceed 15% of the total amount of investor funds.  Investors were provided with fictitious account statements showing artificially inflated valuations of underlying assets.  

Kowalewski settled the SEC lawsuit in late June without admitting or denying wrongdoing.  The SEC is asking a federal judge to impose disgorgement of at least $8.6 million along with civil monetary penalties that could range from several hundred thousand dollars to $67 million.  

A Copy of the SEC's Complaint is here.

SEC Charges Two Florida Men in $22 Million Ponzi Scheme

The Securities and Exchange Commission filed charges against two Florida men accused of operating a Ponzi scheme that raised over $20 million from investors mainly consisting of Florida teachers and retirees.  In a complaint filed today, James Davis Risher, of Sanibel, and Daniel Joseph Sebastian, of Lakeland, were charged with various securities law violations and the SEC indicated it is seeking permanent injunctions, disgorgement of profits, and financial penalties against the two.  Authorities also announced that Risher pled guilty to criminal charges stemming from the scheme in an indictment handed down in June.

From early 2007 until July 2010, Risher and Sebastian solicited funds from individuals for investment in a private equity fund known by several names, including Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund.  According to the SEC Complaint, the two advertised their endeavor as “an investment vehicle that would allow investors to capitalize from both bull and bear markets.”  Potential investors were provided with offering materials that contained numerous misrepresentations, including a successful history of annual returns for the fund ranging from 14% to more than 124% since 2000.   During the time period in question, investors were sent account statements showing purported quarterly returns ranging from 2.28% to 5.64%.   While investors were sold shares representing interests in the fund, no registration statement was filed or in effect with the SEC as required under federal securities law.  The two also sent out regular newsletters and hosted several golf tournaments and promotion events for investors.  At one golf tournament, Sebastian told investors that

“[Y]ou invest in this fund and all of a sudden you start making more money than you’ve ever made in your life with your investors. And then all of a sudden you start making enough money where you don’t have to go to work…[a]t Safe Harbor, you could retire today, like right now.  And I’m telling you, you get rid of the struggle.”

Risher and his wife controlled several entities that were used to funnel funds to the operation, including Jade Asset Group, Capital Trading Partners, LLC, Managed Capital, LLC, and Isle FX Trading, LLC.   Risher and Sebastian also solicited investments in a REIT Offering in January 2010 in which nearly $1 million was raised.  The Safe Harbor Real Estate Investment Trust was purportedly established to fund the purchase and re-sale of distressed real estate.  In total, Risher and Sebastian raised more than $22 million from over 100 investors.  But according to the SEC, only $2.5 million of that $22 million was invested in securities, and brokerage records showed that nearly $1 million of that $2.5 million was lost in trading.  The majority of the remaining $20 million was instead used to pay management and performance fees, interest payments and redemption requests to investors, and to fund Risher’s lavish lifestyle.

The Complaint also alleged that Risher had concealed his criminal background, including over ten years spent in prison for convictions based on violations of Georgia and federal securities laws.  Additionally, contrary to his representations, Risher was never licensed to sell securities nor was he associated with any registered broker-dealer.

Along with the SEC charges, it was also disclosed that Risher entered guilty pleas to a June indictment charging him with money laundering and conspiracy to commit mail and wire fraud.  Risher pled guilty to single counts of mail fraud, money laundering, and engaging in an illegal monetary transaction.  Those charges carry a maximum combined sentence of fifty years in federal prison, although federal sentencing guidelines will likely yield a lower recommended range.  Along with the to-be determined sentence, Risher also agreed to pay restitution to defrauded investors under the Mandatory Victim Restitution Act, and to the forfeiture of millions of dollars in cash and assets.  A sentencing hearing has not yet been scheduled. 

A Copy of the Criminal Complaint against Risher is here.

A Copy of Risher's Plea Agreement is here.

A Copy of the SEC Complaint is here.