JP Morgan Given January 11th Deadline to Disclose Madoff-Related Documents; Investigation Related To Money Laundering Policies?

Bringing to light a previously-undisclosed investigation, the Office of the Comptroller of the Currency ("OCC") has accused financial behemoth JP Morgan Chase ("JP Morgan") of withholding requested documentation pertaining to an investigation of the bank's relationship with infamous Ponzi schemer Bernard Madoff.  According to a letter from Treasury Inspector General Eric Thorson to JP Morgan's general counsel, the dispute seems to center on documents that JP Morgan has taken the position are protected by the attorney-client privilege.  Thorson, in dismissing the bank's claims, cautioned that further inaction would be viewed as "continuing purposeful impediment" to the OCC that would merit "further action by our office."

Inquiry May Have Been Spawned By Madoff Trustee's Investigation

The OCC's investigation, while not publicly known, is not surprising in light of previous claims made in a lawsuit brought by Irving Picard, the bankruptcy trustee tasked with recovering assets for Madoff's victims.  In a 148-page lawsuit filed in June 2011, Picard accused JP Morgan of turning "a blind eye" to Madoff's fraud "as the drive for fees and profits became a substitute for common sense, ethics, and legal obligations."  (A federal judge later dismissed a majority of the claims, which Picard has since appealed.)  

The lawsuit is rich with numerous examples purportedly demonstrating that JP Morgan was aware of Madoff's fraud for over a decade, including an internal email in June 2007 from JP Morgan's chief investment officer observing that

For whatever it[']s worth, I am sitting at lunch with Matt Zames who just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a [P]onzi scheme.

This knowledge, coming from JP Morgan's role as Madoff's primary banker for decades, allegedly allowed the bank to quietly withdraw nearly $300 million from Madoff's scheme just before it unraveled in December 2008.  JP Morgan later claimed the withdrawals stemmed from a routine re-balancing of the bank's hedge-fund exposure. 

In addition to avoiding those losses, JP Morgan also benefitted from use of the billions of dollars in Madoff accounts.  Indeed, according to a study conducted by a respected finance professor, JP Morgan realized an after-tax profit of at least $483 million.  Linus Wilson, assistant professor of finance at University of Louisiana at Lafayette, arrived at this figure using several factors, including JP Morgan's reported net interest margin levels.  Wilson's treatise is available for purchase here.

Possible Hints Into Subject Of Inquiry

While the OCC has not specified the focus of its investigation, recent comments made by a JP Morgan spokeswoman suggest that the documents sought concerned communications seeking guidance from the bank's lawyers.  Additionally, the presence of the OCC as the lead investigative agency suggests that the inquiry could be related to JP Morgan's obligation under the Bank Secrecy Act of 1970 ("BSA") to file suspicious activity reports ("SAR's") regarding the detection of "certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA." SAR's are typically shrouded in secrecy - indeed, the unauthorized disclosure of an SAR is by itself a criminal offense.  

Authorities have bolstered efforts to crack down on financial institutions skirting their duty to file SAR's, with the OCC recently leading an investigation that culminated with banking giant Wachovia agreeing to pay a then-record $160 million fine stemming from a "woefully inadequate" anti-money laundering program.  

A copy of the Trustee's lawsuit against JP Morgan is here.

Former Colorado Sheriff Accused of Duping Co-Workers in $1.2 Million Ponzi Scheme

A former Colorado sheriff's deputy is accused of deceiving co-workers and other law enforcement officials in a Ponzi scheme that promised annual returns of over 100%.  David Hawkins, a former El Paso County Sheriff deputy who then operated an indoor-football league, entered an initial plea of not guilty to charges of wire fraud and spending of unlawfully-obtained funds.  Wire fraud carries a maximum prison term of twenty years and a $250,000 fine, while the charge of spending money illegally carries a ten-year maximum sentence and a $250,000 fine.  

Hawkins was hired by the El Paso Sheriff's Office in 2001, where he was sworn in as a sheriff's deputy in 2002.  He remained in that position until his resignation in December 2011.  However, beginning in late 2009, Hawkins began soliciting investments in his PD Hawk Investments Fund - apparently without receiving written approval for outside employment as required by his employer.  Hawkins touted himself as a currency trader, and boasted that he had three years of experience in obtaining consistent and steady profits as high as 62%.  Hawkins' investors included fellow sheriff's deputies and law enforcement officers, who were promised monthly returns of 10% with the understanding that Hawkins would keep any amount over that threshold.  In total, Hawkins is said to have raised over $1 million.

Hawkins also was heavily involved in an indoor football league, announcing his plans at a July 2011 news conference that his Danville Dragons would start a 14-game season beginning in March 2012.  However, when these plans were abruptly cancelled several months later, authorities began an investigation that revealed Hawkins was apparently not the astute currency trader he held himself out to be.  Instead, according to authorities, Hawkins never earned any profits from his trading.  Instead, he used investor funds to run the classic Ponzi scheme - making fictitious interest payments and for a variety of personal expenses, including spending more than $18,000 at an Oregon automobile dealership.  

The Colorado-Springs Gazette reports that Hawkins has retained a high-powered defense attorney and is currently negotiating a plea agreement.  

Minnesota Man Who Offered $19 Million For 1-Year Sentence Instead Receives 30 Years For Role In $194 Million Ponzi Scheme

A Minnesota businessman convicted for his role in a $194 million Ponzi scheme who tried a variety of tactics to obtain a light sentence - including offering a $19 million check and begging the sentencing judge for mercy - was ultimately unsuccessful as a Minnesota federal judge sentenced him to a thirty-year term.  Jason "Bo" Beckman, one of the major players in Trevor Cook's massive Ponzi scheme that defrauded nearly 1,000 people, received the sentence after a federal jury convicted him of 18 counts that included mail fraud, wire fraud, and conspiracy to commit money laundering.  Two of Beckman's co-conspirators, Gerald Durand and Christopher Pettengill, also were sentenced, while a third, Patrick Kiley, was scheduled to be sentenced before accusing his attorney of misconduct.

Along with Cook, the men operated Crown Forex SA and JDFX Technologies, which they represented could achieve risk-free and tax-free returns through currency trading.  Potential investors were told that the above-average returns were possible due to the fact that the source of his loans complied with Islamia sharia law and thus could not charge interest.  Cook used the men to pitch the scheme to potential investors, as both Kiley and Durand hosted successful radio talk shows. Indeed, Kiley alone brought in nearly two-thirds of the total investors.  Beckman used his money-management firm, Oxford Private Client Group, to solicit affluent clients.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million was used to trade currency, of which $68 million was lost.  The remaining amounts were used to pay investor returns and fund the personal and business expenses of the schemers.  

The morning of the sentencing was spent reviewing defense attorneys' motion for a new trial after prosecutors alleged that Durand and Pettengill had previously discussed murdering Beckman in order to collect on a life insurance policy.  United States District Judge Michael Davis denied that request.  The court then heard from numerous victims of the scheme, many urging the maximum sentence for the defendants.  

Beckman was sentenced first, but not before he spoke for nearly an hour, often choking up and continuing to deny any knowledge of the scheme.  He lambasted the lack of evidence used to convict him, and intimated that he would gladly join those wrongfully convicted of crimes.  His wife also testified, imploring Judge Davis to tread lightly in delivering his sentence and instead allowing Beckman to continue his search for the missing cash.  Judge Davis had little patience for the acts, remarking that Beckman's grandstanding proved that

"some people should not have access to the English dictionary.  You have used the English language to do violence to so many.  It is not a gun.  It is worse than a gun."

Assistant U.S. Attorney David MacLaughlin also weighed in, observing that "Mr. Beckman is the worst white-collar defendant in the history in the District of Minnesota."  Beckman was then sentenced to serve a thirty-year prison term.  One co-defendant, Gerald Durand, received a twenty-year sentence. Another, Christopher Pettengill, who has been cooperating with the prosecution since pleading guilty several years ago, was sentenced a 7.5-year term.  Judge Davis indicated that, if not for Pettengill's cooperation, he too would have received a 20-year sentence.  Beckman's attorney indicated he would appeal the sentence.

Kiley was also scheduled to be sentenced, with his attorney seeking a lenient sentence due to Kiley's age and medical maladies.  However, when Kiley took the stand, he claimed that he had never been shown his pre-sentencing report - a document prepared by the U.S. Probation Office that detailed the crimes and calculated a recommended sentencing range.  Additionally, Kiley accused his attorney of attempting to gain from his representation through various internet postings describing his representation of Kiley.  Following this, Judge Davis indicated he would replace Kiley's attorney with a public defender and continue sentencing until a later date.  

Ironically, the admitted mastermind of the scheme, Trevor Cook, received a 25-year sentence in August 2010 after pleading guilty and will serve less time than Beckman.  With credit for good behavior, Beckman could be released in 2037.  

A copy of Pettengill's plea agreement is here.

A copy of Durand, Kiley, and Beckman's indictment is here.

Rothstein's Wife To Plead Guilty, Could Face 5-Year Prison Sentence

Kim Rothstein, whose husband Scott is serving a 50-year sentence for masterminding Florida's largest Ponzi scheme, could face prison time of her own when she pleads guilty February 1 to a federal conspiracy charge. Mrs. Rothstein, along with four others, was charged back in September with conspiring to conceal over $1 million in jewelry from federal authorities, including a $450,000 diamond ring tipping the scales at 12.08 carats. While the conspiracy charge carries a maximum five-year prison term, Mrs. Rothstein is likely to face a much lower sentence under federal sentencing guidelines.

After Rothstein's scheme unraveled in October 2009, federal authorities were dispatched to his residence in early November to secure his collection of jewelry and luxury items that included hundreds of thousands of dollars in watches. Kim Rothstein assisted authorities in gathering the jewelry, and represented that she was not aware of any other jewelry subject to potential forfeiture.

However, the bankruptcy trustee appointed to investigate Rothstein's fraud and recover assets for investors soon learned that some jewelry remained unaccounted for, including the 12.08 carat diamond ring purchased by Rothstein from a local jeweler. This jewelry included:

• An engagement ring and wedding band with 18 emerald cut diamonds;


• 10 watches, including a Rolex with leopard design, a woman's Piaget and a platinum/diamond Pierre Kunz;


• 5 sets of earrings, several necklaces, and a variety of gold coins;


• Pearl, diamond, and sapphire cufflinks, and 50 1-ounce gold bars

The trustee then deposed Rothstein and several of her acquaintances, learning under oath that the missing jewelry had been concealed by Rothstein, with one of Rothstein's friends selling the 12-carat ring to a local jeweler. Rothstein's former attorney, Scott Saidel, even agreed to hold some of the proceeds from the sale in his attorney trust account to stymie investigators.

Rothstein, her friend, and Rothstein's former attorney were each charged with a single count of conspiracy to commit money laundering. The jeweler and a businessman that assisted in the sale were accused of lying under oath, and currently face obstruction of justice and perjury charges.

Rothstein's decision to plead guilty came as trial could have commenced as early as next week. The nature of the charging documents had suggested that plea deals were likely, but Rothstein had initially entered a "not guilty" plea. Rothstein's acquaintance is also expected to plead guilty on February 1st, while Saidel is scheduled to appear January 25. Saidel's situation is unclear, since as an attorney, Saidel could face scrutiny from the Florida Bar with a felony conviction.

Questions Mount As Tax Preparer Accused of $10 Million Ponzi Scheme Refuses to Cooperate

A Tennessee tax preparer suspected of masterminding a $10 million Ponzi scheme is now being accused of failing to cooperate with a court-appointed bankruptcy trustee tasked with recovering millions of dollars in missing investor funds.  Jack Brown, owner of Soddy-Daisy-based Brown's Tax Service and frequent preacher/Sunday school teacher at the Sale Creek Church of God, saw the business forced into involuntary bankruptcy in early November as scores of clients began asking questions about their investments.  According to the court-appointed trustee, Brown has "refused to answer questions which would not be protected under the Fifth Amendment" while also claiming that his health has deteriorated to the point where he is movable only by ambulance.  

While details thus far are sparse, it appears that Brown began his scheme as early as 2005 by telling potential investors that he could promise annual returns of 15% through his daytrading talents.  Soliciting not only existing tax preparation clients, Brown also used his position as a regular Sunday School teacher at a local Baptist church to attract investors.  While investors were not provided with any regular account statements, Brown offered them the opportunity to stop by his office at any time to check the status of their investment on his computer.  In total, Brown managed to raise approximately $10 million from over 40 investors.

However, many investors were horrified to learn in early November that Brown's operation was insolvent. Soon after this revelation, a local attorney filed a petition to have Brown's Tax Service placed in bankruptcy, alleging that Brown had been operating a Ponzi scheme that had just collapsed.  Rather than using investor funds to daytrade as promised, Brown was accused of misappropriating millions of dollars to purchase lakefront property that was lavishly outfitted with an indoor gymnasium, a golf simulator, a full bar, various games, several vintage automobiles, and the authentic floor from the Boston Garden sports arena.  In bankruptcy filings, Brown claimed only $1.4 million in assets while representing a yearly income of less than $30,000.  

According to the court-appointed bankruptcy trustee, Brown and his wife have resisted efforts to cooperate, instead cancelling scheduled meetings due to Brown's allegedly failing health.  A scheduled meeting with creditors, known as a 341 Meeting in bankruptcy parlance, is scheduled for January 8, 2013.