Milberg LLP Founder Seeks Dismissal of Madoff Trustee's Clawback Suit

The former co-founding partner of Milberg LLP is seeking to dismiss a clawback suit filed by the court-appointed trustee seeking assets for victims of Bernard Madoff's Ponzi scheme, alleging that the funds sought are beyond the time periods allowable under Bankruptcy and New York state law.  Irving Picard, the court-appointed trustee, filed suit in November 2010, seeking the return of over $20 million in false profits from Melvyn Weiss and David J. Bershad.  Both are former lawyers in Milberg, which was later disbanded after admitting to paying clients to file securities fraud lawsuits.

In the filing, Weiss argues that Picard is prevented from recovering any alleged false profits due to the length of time over which the profits were made, stating

“The trustee’s claims violate the statutory ‘look back’ periods limiting avoidance to six years prior to the filing date for state law,”

Both the Bankruptcy Code and New York state law govern the time period preceding the filing of a bankruptcy petition that a trustee may recover transfers from the debtor.  Under the Code and New York law, the maximum length of time preceding the petition filing date is six years.  According to Weiss, Picard is seeking the return of funds acquired over a fifteen-year period.  Picard has sought the return of funds from defendants in similar cases beyond the six-year limitation, but on the premise that those defendants knew or should have known of the fraudulent nature of the transfers.  Weiss attempts to distinguish those cases, arguing that Picard has not demonstrated that Weiss knew or should have known of Madoff's fraud.  

Weiss also asked United States Bankrtupcy Judge Burton L. Lifland to transfer the case to a district court, arguing that the case involved issues raising non-bankruptcy questions and would be more appropriately decided in a federal court.  

Arkansas Lawyer Surrenders Law License After Guilty Plea to Ponzi Scheme

An Arkansas man who authorities say perpetrated the largest financial fraud in Arkansas history has surrendered his license to practice law after pleading guilty to orchestrating the scheme.  Kevin Lewis, 43, tendered the surrender of his law license after pleading guilty last month to one count of bank fraud.  As previously covered by Ponzitracker, losses to investors are estimated to exceed $40 million.

Lewis's scheme entailed the issuance of paperwork for false rural improvement bonds to several Arkansas banks.  The bonds were then used by Lewis as collateral to receive financing from banks.  At least one bank involved in the fraud was forced 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. 

Lewis is one of several lawyers who in recent weeks have faced disciplinary proceedings including disbarment for their role in Ponzi schemes.  This includes Michael McNerney, the lead lawyer for Mutual Benefits Corp., later accused of being a Ponzi scheme, and Howard Kusnick, who pled guilty to his role in Scott Rothstein's $1.2 billion south Florida Ponzi scheme.

Judge Rejects HSBC Settlement With Madoff Feeder Fund

A federal judge refused to approve a proposed settlement between HSBC Holdings and Thema, an Irish fund that acted as a 'feeder fund' in funneling money to Bernard Madoff's Ponzi scheme.  HSBC acted in a custodial role for Thema International Fund, whose investors lost their entire investment valued at over $300 million to Madoff's scheme.  The two parties had announced in June that they had reached a settlement in which HSBC, while admitting no wrongdoing, would pay $62.5 million, or roughly 20% of Thema investor losses.  The balance in the fund at the time of Madoff's arrest was over $1 billion, but most of those profits were fictitious.

United States District Judge Richard Berman, while noting that he generally favored the settlement of suits - especially class actions - noted several "obvious deficiencies" in refusing to accept the proposed settlement, including the setting aside of a $10 million reserve for attorney's fees to pursue claims against non-settling defendants also named in the suit.  Judge Berman also took issue with what he perceived as the inadequate disclosure of legal costs.  Reflecting on the settlement, Judge Berman noted that while he would consider a revised accord, the current settlement was "not fair, reasonable or adequate -- even at this preliminary stage." 

Proposed settlements, while subject to a judicial stamp of approval, are routinely approved and viewed as essential to trimming judicial dockets of cases that should not be tried.  The rejection is notable in that HSBC had recently won the dismissal of common law claims filed by Irving Picard, the court-appointed trustee overseeing the liquidation of Madoff's failed brokerage.  There, United States District Judge Jed S. Rakoff had ruled that Picard lacked standing to bring those claims against HSBC, and that the proper party to bring those claims were the wronged investors.  Picard has appealed that decision to the Second Circuit Court of Appeals.

A Copy of Judge Berman's Order is here.

South Florida Man Pleads Not Guilty to Ponzi Scheme

A Miami man entered a plea of not guilty to charges he operated a Ponzi scheme that allegedly bilked family and friends out of $1.3 million.  As earlier covered by Ponzitracker, Scott Siegal, also known as Michael Scott Segal, was charged last week with twelve counts of mail and wire fraud.  He faces up to twenty years in prison on each charge if convicted, along with criminal monetary penalties and restitution to defrauded investors. 

Siegal operated Bright Jewel Holdings several months after being released from serving a seven-year prison sentence for attempted murder.  The company purported to purchase consumer goods from China at a discount which were then resold in the United States for a substantial profit.  Along with entering his not guilty plea, Segal's attorney that represented him in his attempted murder prosecution also successfully petitioned the court to serve as Siegal's court-appointed attorney.   Siegal also requested a trial by jury. 

Siegal remains in prison on $600,000 bail.

SEC Accuses Life Settlement Company of Operating $5 Million Ponzi Scheme

The United States Securities and Exchange Commission announced it had obtained an emergency injunction and asset freeze of a California-based company that was operating as a life settlement broker.  According to the SEC, Daniel C.S. Powell, 29, and his company Christian Stanley Inc. ("Christian Stanley"), purported to operate as a legitimate company in the life settlement industry.  In a filing with the United States District Court for the Central District of California, the SEC obtained a temporary restraining order and asset freeze against Powell and Christian Stanley Inc., and obtained the appointment of a receiver to marshal assets related to the fraud.

According to a complaint filed by the SEC, Powell and Christian Stanley raised nearly $5 million through the offer and sale of unregistered securities in the form of senior secured corporate debenture indentures (the "Securities").  The Securities were typically for a term of five years, and paid annual interest payments ranging from 10% to 15.5%.  Investors purchasing the Securities received assurances that proceeds from the sale would be used to acquire either (1) life settlements, (2) Kentucky coal leases worth $11.8 billion, or (3) interests in certain goal mining reserve claims in Nevada.  Yet, of the $4.5 million invested with Powell, less than $90,000 was used for corporate purposes, and according to the SEC, not a single life settlement was purchased.  Instead, the majority of investor funds were used to fund Powell's personal and business expenses, which included the purchase of luxury cars and expensive trips.  

Powell and Christian Stanley were charged with several violations of the 1933 and 1934 Securities Acts, including the unregistered sale of securities and fraud in connection with the sale of securities - more commonly known as 10(b)(5) violations.  The SEC is seeking disgorgement of ill-gotten gains, civil monetary penalties, and any other relief deemed appropriate.

A Copy of the SEC Complaint is here.