Could JP Morgan Face Criminal Charges For Role in Madoff Ponzi Scheme?

credit: New York TimesIn an unprecedented move, federal authorities are reportedly weighing the filing of criminal charges against financial behemoth JP Morgan for its role in Bernard Madoff's massive Ponzi scheme.  According to the New York Times, both the Federal Bureau of Investigation and the U.S. Attorney's Office have opened an investigation into whether JP Morgan failed to sound the alarm on Madoff's Ponzi scheme even as red flags emerged amidst the bank's relationship with Madoff.  The FBI and USAO are the latest agencies to take a closer look at the bank's two-decade relationship with Madoff, and the bank has also reportedly been notified by the Office of the Comptroller of the Currency ("OCC") that it is likely to face fines for inadequate controls.

Ignoring Warning Signs as Madoff's 'Primary Banker' 

Madoff shifted the majority of his banking to JP Morgan back in 1986, which involved the frequent transfers of billions of dollars through Madoff's accounts.  Despite these significant transfers, virtually none of the funds were used to purchase securities.  However, as Madoff's success continued, JP Morgan began to sell structured products based on Madoff feeder funds, and even became an investor.  

Even while JP Morgan became more and more intertwined with Madoff's business, which reaped it an estimated $500 million in fees and commissions, bank employees increasingly voiced their skepticism as to Madoff's ability to generate such consistent returns. This included concerns by JP Morgan's internal due diligence team, as well as employees.  Some of these concerns, made by email internally, included:

“The Private Bank chose not to invest with any BLMIS feeder funds because it had never been able to reverse engineer how they made money”; and 

"For whatever it[']s worth, I am sitting at lunch with [JPMC Employee 1] 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." 

While these concerns were voiced internally, no steps were taken by the bank to alert auditors until October 2008 when it submitted a "filing of suspicious activity" with the U.K. Serious Organized Crime Agency indicating it knew Madoff was "too good to be true."  At about the same time, the bank redeemed its $276 million investment in a Madoff feeder fund, and Madoff's fraud was exposed just weeks later.

While the Bank's talks with authorities are in preliminary stages and could ultimately lead nowhere, the New York Times cites unnamed sources that suggest the most likely resolution would be the payment of a fine.  The possibility of entering into a deferred prosecution agreement ("DPA") was also mentioned, which would avoid the bank pleading guilty to any changes in lieu of payment of a fine and other corrective measures.  However, a DPA in such a situation would be extremely rare, as they are typically used for severe infractions such as Foreign Corrupt Practices Act prosecutions.  

It is unknown whether any fine paid by J.P. Morgan would be eligible for distribution to Madoff's victims. 

Bank Still Being Pursued By Madoff Trustee

The news comes just weeks after the court-appointed trustee tasked with recovering funds for Madoff's victims, Irving Picard, asked the Supreme Court to review a federal appeals court decision ruling that prevented Picard from pursuing significant claims against JP Morgan.  

A copy of Picard's original civil complaint against JP Morgan is below:

020311madoffjpm.pdf

In Last-Ditch Effort, Petters Seeks Sentence Reduction For $3.65 Billion Ponzi Scheme

"Your honor, I was scared, scared to death.  It's not a great excuse. But I kept thinking about my kids and being gone from them for life. I'm sorry I lied in the courtroom, on the stand. I didn't want to go to trial. It's a horrible excuse. But I lied. I'm begging for your forgiveness."

-Tom Petters

Admitting his guilt for the first time, a Minnesota businessman convicted and sentenced for the third-largest Ponzi scheme in history begged for leniency from a federal judge today, claiming that his 50-year sentence should be reduced to a 30-year sentence.  Tom Petters, currently serving time for masterminding a $3.65 billion Ponzi scheme, took the stand today in his quest to show that his former attorneys provided "ineffective assistance of counsel" by failing to allegedly communicate a lesser 30-year plea bargain offer.  Petters was ultimately convicted of twenty fraud counts and sentenced to a 50-year prison term.  

After his arrest in October 2008, Petters' former attorney, Jon Hopeman, met with an assistant U.S. attorney who purportedly indicated that the government would agree not to seek more than a 30-year sentence if Petters would plead guilty.  After an indictment was issued shortly thereafter charging Petters with twenty fraud counts, Petters alleges that he met with Hopeman and was told that no plea offer had been made.  Following this, Petters also alleged that Hopeman had a subsequent meeting with the prosecuting attorney and indicated that "as a matter of personal pride," his "professional integrity would not allow" him to advise Petters to accept the offer.  Petters has offered his sworn testimony in favor of these claims.  After proceeding to trial, Petters was convicted of all counts on December 2, 2009, and later sentenced to serve 50 years in prison.

At the evidentiary hearing today, Petters took the stand to face intense questioning from prosecutors, who insinuated that Petters would "say anything" in order to win a sentence reduction.  For the first time, Petters admitted his role in the massive scheme, explaining that "we were robbing Peter to pay Paul."  However, Petters maintained that he was not the mastermind, and that the scheme was simply "a culmination of ideas that got messed up."  

Petters' former attorney, Hopeman, also took the stand to address claims that he had not communicated the 30-year plea bargain offer to Petters.  Hopeman adamantly denied the allegations, contending that he had informed Petters of the offer, and that Petters thought the offer was "ridiculous" at the time.  Additionally, Hopeman indicated that Petters had instructed him not to settle for less than 15 years, and was trying to "piss off" the prosecutors.  In a slight reversal of the position taken in Petters' filing, Petters' attorney sought to paint the picture that, instead of never presenting the offer to Petters, Hopeman told Petters he "couldn't recommend" the sentence.  

Motions are now due November 5th from each side, and a ruling will likely follow shortly thereafter.  

SEC Stops $20 Million Pyramid Scheme Touting Youth Education Courses

The Securities and Exchange Commission announced it had obtained an asset freeze and filed civil fraud charges against the operators and promoters of a worldwide pyramid scheme that targeted Asian-Americans through the allure of risk-free returns based on the sale of internet-based youth educational courses.  According to the Commission, a consortium of entities based in Hong Kong, Canada, and the British Virgin Islands that operated under the trade names "CKB" and "CKB168" (collectively, "CKB") raised more than $20 million from U.S. investors alone, and millions more from investors around the world.  The Complaint named three CKB executives, Rayla Melchor Santos, Hung Wai Shern, and Rui Ling Leung, as well as eight CKB promoters located in the U.S.: Daliang Guo, Yao Lin, Chih Hsuan Lin, Wen Chen Hwang, Toni Tong Chen, Cheongwha Chang, Joan Congyi Ma, and Heidi Mao Liu. The Commission was granted a temporary restraining order, and is seeking injunctive relief, disgorgement of ill-gotten gains, and civil monetary penalties.

According to the Commission, CKB began in mid-2011 and was portrayed as a profitable multi-level marketing company engaged in the business of distributing web-based children's educational courses.  Potential investors were told that, by investing in CKB, they would earn exponential and risk-free returns in the form of Profit Reward Points ("Profit Points").  Investors received these Profit Points in the form of dividends and 2-for-1 splits, and were told that an online exchange was also available as an easy way to buy and sell Profit Points.  CKB also told investors that the Profit Points would be convertible into shares of CKB stock when the company went public on the Hong Kong Stock Exchange sometime in 2014.  Investors were solicited through promotional materials, seminars, and videos posted to the internet.  Over $20 million was raised from approximately 400 U.S. investors, with millions more raised from other investors worldwide.

However, contrary to these representations, CKB had little to no retail consumer sales needed in order to support the returns promised to investors.  Instead, CKB operated as a classic pyramid scheme by using incoming funds from new investors to pay purported interest and principal redemptions to existing investors.  The Commission cited CKB bank records that purportedly showed that the majority of funds were used to pay commissions, and that the bulk of these commissions were paid to the named defendants.  According to the Commission, the CKB investments constituted securities, and did not comply with registration and antifraud provisions of the federal securities laws.  

The Commission also issued investor alerts highlighting the telltale signs of pyramid schemes.  

The Commission's complaint is below:

SEC Complaint - CKB

Florida Lawyer Gets 3-Year Sentence For Helping Ponzi Schemer's Wife Hide $1 Million in Jewelry

A similar 12.02 carat ring (credit: Sun-sentinel.com)A Florida lawyer will spend the next three years in federal prison for assisting the wife of convicted Ponzi schemer Scott Rothstein hide more than $1 million in jewelry - including a 12.08 carat yellow diamond ring valued at nearly $500,000. Scott Saidel, 46, received the sentence from U.S. District Judge Robin Rosenbaum after previously pleading guilty to a single count of conspiracy to commit money laundering back in January.  Judge Rosenbaum noted Saidel's role as an attorney in fashioning the sentence, observing that Saidel's efforts were designed to prevent the approximately $1 million in assets from being used to compensate Rothstein's victims.  Saidel was previously disbarred from the practice of law.

Days after authorities learned that Scott Rothstein had been operating a massive Ponzi scheme, federal agents went to Rothstein's house to collect all cash and assets that were believed to have been purchased with scheme proceeds.  Kim Rothstein assisted agents in retrieving the assets, which included jewelry and numerous luxury watches - nearly all of which were later auctioned off by the U.S. Treasury.   However, Kim Rothstein and several others, including Saidel, concealed the existence of numerous pieces of jewelry from federal authorities, including a 12.08 carat yellow diamond that Rothstein had recently purchased for approximately $400,000.  Additionally, Kim Rothstein also failed to turn over:

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

After the items were withheld from authorities, Rothstein and two others attempted to sell several of the pieces to local jewelers.  Saidel agreed to hold some of the proceeds from the sale in his attorney trust account to prevent their disclosure to investigators.  Even Scott Rothstein was pressured to lie to investigators about the whereabouts of the missing jewelry (and was rumored to have refused to do so). 

However, court-appointed bankruptcy trustee Herbert Stettin and his team soon began to discover several missing pieces of jewelry during their investigation, and authorities later charged Kim Rothstein, Saidel, and several others, including two local jewelers they alleged were complicit in the scheme.  Both Rothstein and Saidel entered into plea agreements with prosecutors - with Saidel agreeing to forfeit over $500,000 to authorities that included (1) $65,000 in legal fees paid by Kim Rothstein; (2) four expensive pens; and (3) a pair of mother of pearl, diamond, and sapphire cuff links. 

Kim Rothstein has remained free on bail while her sentencing has been repeatedly delayed, and is currently scheduled to be sentenced November 12, 2013.  The most recent delay came before her scheduled sentencing on October 7, 2013, with her lawyers seeking the delay so she could testify against the two jewelers accused of helping her sell the jewelry.  After granting that delay, Judge Rosenbaum warned Rothstein's lawyers that no more delays will be granted.  

Disgruntled Victims Apprehend Fugitive Ponzi Schemer, Hand Over To Authorities

An Indian man suspected of masterminding a massive Ponzi scheme is no longer a fugitive after he was captured - by a group of disgruntled investors, no less - and turned over to authorities.  Badarul Islam, the former managing director of a company known as "Finix," had been a fugitive from authorities for more than one year after the company shut its doors to investors.  However, his time on the run came to an end as Islam was apparently apprehended by a group of aggrieved investors that had been searching for him.  After his capture, Islam was subsequently turned over to police.  

While details remain scarce, Islam is alleged to have acted as managing director for "Finix," which solicited investors with the promise of outsized returns.  After collecting a "considerable" sum of money from investors, which is estimated to be in the hundreds of thousands, if not millions, of dollars, Islam's branch closed down and all employees fled town.  

Islam had been on the run for over a year before being spotted by investors.  Police have confirmed that an investigation remains ongoing.