Final Madoff Defendant Sentenced To Prison

Nearly 8 years after Bernard Madoff confessed to an FBI agent in his Manhattan apartment that he was running a giant Ponzi scheme, a New York federal judge sentenced the 15th and last remaining defendant to be charged for their role in Madoff's scheme to six months in prison.  Irwin Lipkin, the first non-Madoff family member hired at Madoff's Bernard L. Madoff Investment Securities LLC ("BLMIS") in 1964, received a 6-month prison sentence - over the objection of his defense attorneys - for what prosecutors called conduct that was "central" to Madoff's fraud.  Lipkin had previously pleaded guilty in 2012 to conspiracy to commit securities fraud and falsify documents and the falsification of documents required by ERISA.

Lipkin was the third employee hired at BLMIS more than 50 years ago in 1964.  During his 34-year tenure at BLMIS, Lipkin served as Controller and was responsible for maintaining the internal books and records.  In this capacity, Lipkin assisted Madoff with performing internal audits of the securities positions that Madoff purportedly held on behalf of customers.  At the direction of Madoff, Lipkin was accused of creating false books and records that were designed to manipulate BLMIS's profit numbers.  Lipkin kept these changes in a journal he kept, and when he left BLMIS in 1998, he instructed his successor on how to accomplish these falsifications.  Additionally, Lipkin orchestrated sham trades in his person BLMIS trading account to create the appearance of capital losses that allowed Lipkin to retain significant capital gains.  Finally, Lipkin arranged for his wife to remain on BLMIS's payroll from 1978 to 2001 despite her failure to perform any services for BLMIS.

Mr. Lipkin is the last defendant to be sentenced in an extraordinary prosecutorial effort to bring to justice all who played a role in Madoff's fraud.  This ranged from Madoff's family members to Madoff's secretary to his accountant.  Notably, according to a graphic compiled by Reuters, 9 of the 15 defendants were sentenced to a prison term of 2.5 years or less - including six defendants who did not serve any prison time.  This extraordinary criminal prosecution has proceeded on a parallel track to an equally-extraordinary effort by the court-appointed trustee for BLMIS, Irving Picard, whose legal team has recovered over $10 billion to compensate a class of Madoff victims who collectively lost an estimated $17 billion.  This $10 billion amount does not include an additional $4 billion separately recovered and administered by the government.  

A copy of Irwin Lipkin's criminal charging document is below:

Lipkin, Irwin S9 Information

Judge Won't Dismiss Receiver's Suit Against Associated Bank

Months after an appeals court revived a lawsuit against Associated Bank for its alleged role in Trevor Cook's massive Ponzi scheme, a federal district denied the bank's subsequent attempt to dismiss the suit on in pari delicto and res judicata grounds.  On Tuesday, U.S. District Judge David S. Doty issued an order denying Associated Bank's (the "Bank") motion to dismiss the complaint brought by R.J. Zayed in his capacity as receiver over several entities used by Trevor Cook to perpetrate a $194 million Ponzi scheme.  The suit was originally filed in April 2013, dismissed by Judge Doty in September 2013 for failure to state a claim, and subsequently revived by the Eighth Circuit Court of Appeals in March 2015 on the basis that Zayed had, in fact, adequately stated claims against the Bank.  

The Scheme

Cook's scheme, the second-largest in Minnesota history to only Thomas Petters' $3.65 billion Ponzi scheme, promised investors above-average returns through trading in commodities and futures.  Partnering with two firms, Crown Forex SA and JDFX Technologies, Cook pitched risk-free returns to potential investors, attempting to allay any concerns by explaining that Crown Forex was operated by Jordanians that complied with Islamic sharia law and thus could not charge him interest on the loans he took out.  Additionally, investors were told that transactions closed daily and thus were not subject to risk from being held overnight.  In total, Cook and his associates raised nearly $200 million from over 700 investors.  Yet, only $104 million of that amount 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 Bank Lawsuit

The Receiver sued the Bank back in early 2013, asserting claims of aiding and abetting fraud, aiding and abetting breach of fiduciary duty, aiding and abetting conversion, and aiding and abetting false representations and omissions.  According to the Receiver, the Bank's substantial assistance allowed Cook's scheme to take in over $79 million.  The Complaint alleged, among other things, that Cook contacted Bank officials to discuss opening an account in the name of Crown Forex in order to receive investor funds. Following this, the Complaint described a pattern of "atypical banking activities" that, combined with other circumstantial evidence, represented actual knowledge by the Bank of Cook's scheme that was ignored in favor of the lucrative business brought in by Cook's scheme.  This included:

• Servicing of the Crown Forex account despite lacking the required Secretary of State documents;
• Transferring funds between the Crown Forex account and Cook's personal account, and in one instance allowing Cook to stuff $600,000 in cash in a box to allegedly go buy a yacht,
• Not a single penny being transferred from the Crown Forex account held in Switzerland, as originally promised, and instead only the repeated transfer of millions of dollars between Cook's personal account and other co-conspirator accounts; and
• Numerous suspicious transfers that should have triggered the Bank's obligations under anti-money laundering policies or the Bank Secrecy Act.

The Complaint also disclosed that the Bank recently entered into a Consent Order with the Comptroller of the Currency of the United States of America stemming from its failure to comply with Bank Secrecy Act requirements and anti-money laundering procedures.

While Judge Doty dismissed the suit on the basis that Zayed had failed to adequately plead both that the Bank had actual knowledge of Cook's fraud and that the Bank rendered substantial assistance to the scheme, the Eighth Circuit disagreed and remarked that "it is hard to envision how knowledge might be pleaded with any more particularity than [the receiver] has pleaded it."

The Motion to Dismiss

Following the Eighth Circuit's decision, Associated Bank again moved to dismiss the suit on the grounds that it was barred by the doctrine of both in pari delicto and res judicata.  Each is discussed below.

In pari delicto

The doctrine of in pari delicto is an equitable defense standing for the principle that a plaintiff who has participated in wrongdoing is prohibited from later attempting to recover damages for that wrongdoing.  While tracing its roots to judicial reluctance to become intertwined in disputes between wrongdoing parties, Judge Doty noted that judicial intervention might be warranted if a "paramount public interest supports the enforcement of a public policy which overrides considerations of a benefit inuring to the wrongdoer.” Associated Bank argued that, because the Receiver stands in the shoes of the receivership entities, both it and the receiver were at least equally culpable for any alleged losses and thus the suit was prohibited by the in pari delicto doctrine.  

In rejecting this argument, Judge Doty first observed that the appointment of an equity receiver over a corporation removes the wrongdoer and thus negates any in pari delicto argument.  Kelley v. College of St. Benedict, 901 F. Supp. 2d 1123, 1129 (D. Minn. 2012).  Further noting that the receiver was granted authority to bring all claims on behalf of the receivership entities pursuant to the order appointing receiver, Judge Doty held that it would

defeat one of the purposes for which the Receiver was appointed to bar this action based on in pari delicto.

While Associated Bank pointed to caselaw purportedly absolving similar participating entities from blame that had not benefited from the scheme, Judge Doty held that the preliminary stage of proceedings prevented the court from "determining the extent to which Associated Bank participated in and benefited from the Ponzi scheme."  

Res judicata

Next, Associated Bank argued that the doctrine of res judicata operated to bar the suit based on a Wisconsin court's 2010 dismissal of an action brought against the Bank by several Cook victims.  That doctrine prevents relitigation of claims and issues previously decided in a prior case.  The Bank argued that the investors' suit, brought in 2009 and alleging similar claims based on the Bank's alleged failure to detect Cook's scheme, precluded Zayed's suit.

Judge Doty switftly dealt with this argument, noting that the first requirement in a res judicata analysis that there exist "an identity between the parties or their privies in the prior and present suits."  While the Bank argued that the receiver and the investors were in privity, Judge Doty explained that the receiver and the investors had different interests: the investors were seeking recovery on their own behalf, while the receiver was pursuing the action on behalf of the receivership entities even though the ultimate result might benefit the investors.  This difference alone precluded a finding of privity.

Judge Doty's Order is below:

Associated Bank Order (1)

Texas Man Charged With $114 Million Ponzi Scheme

"The return on this investment is so tremendous, it is worth that amount many, many times over...and it is certainly worth paying a very generous interest rate in order to secure the funds."

- Investor offer letter

The Securities and Exchange Commission has filed civil fraud charges against a Houston businessman, alleging that he raised over $100 million from hundreds of investors over an 11-year period.  Frederick Alan Voight, 58, of Richmond, Texas, was the subject of an enforcement action filed by the Commission alleging multiple violations of federal securities laws.  Voight ironically recently served as the vice president of investments for a publicly-traded company, Intercore, Inc. ("Intercore"), which was developing a "Driver Alert Detection System" for drowsy drivers and whose affiliation Voight allegedly touted in pitching potential investors.   Voight consented to the imposition of asset freezes and permanent injunctions against himself and his company, DayStar Funding L.P. ("DayStar"), and also agreed to disgorge ill-gotten gains and pay civil penalties in an amount to later be determined.  The Commission also named several entities as Relief Defendants, including F.A. Voight & Associates, LP ("FAVA"); Rhine Partners, LP; Topside Partners, LP; Intercore; and a Canadian subsidiary of Intercore.

According to the Commission, Voight formed FAVA in 2004 and solicited investors for a series of 1-year promissory note offerings for the stated purpose of funding research and development activities with which Voight was associated, including Intercore.  Intercore, which Voight joined in June 2013, previously listed him as the Director and Vice President in a page which has since been removed from the internet (but a cached version is available here).  In a recent filing with the Commission, Intercore announced Mr. Voight's resignation of his position as Vice President of Investments and his seat on the company's Board of Directors.  

The Commission alleges that Voight raised at least $114.1 million from hundreds of investors who believed they were investing in lucrative promissory note offerings touted by Voight.  The Complaint focuses on several offerings occurring within the last year through DayStar that offered sky-high annual returns deriving from an acquisition to be made by Intercore.  Beginning in October 2014, potential investors were told of a "tremendous" and "time-sensitive" investment opportunity that could yield annual returns of up to 42% - based on how quickly an investment was made.  Investors were told that DayStar would loan their funds to Intercore to acquire another company and install its drowsy driving alert systems in "several million trucks and buses." Since October 2014, Voight and DayStar raised approximately $14 million based on these representations.

However, according to the Commission, no such lucrative and "time-sensitive" opportunity existed.  Nor was Intercore in a position to pay such returns based on its precarious financial position.  Indeed, of the approximately $14 million raised during the drowsy driving offerings, over $7 million was used to make Ponzi-style payments to investors in previous offerings through FAVA and DayStar.   Additionally, nearly $5 million of investor funds were funneled by Voight - then a 45% shareholder of Intercore - to his alter ego entities, Topside and Rhine, which in turn made favorable loans to Intercore.  None of these benefits accrued to the drowsy driving offering investors.  Those funds were apparently transferred to Intercore's Canadian subsidiary, Intercore Canada Research, Inc. ("IRC")

Intercore publicly announced in April 2015 that unauthorized individuals posing as IRC employees had stolen a substantial amount from IRC, including the nearly-$5 million transferred by Intercore.  Intercore announced in a filing with the Commission in early July that Voight had resigned his positions with the company.

At least $22 million of investor funds is believed to remain unaccounted for.  

The Commission's complaint is below:

comp-pr2015-158

Two Canadian Banks Pay $36 Million To End Ponzi Lawsuits

Two prominent Canadian banks agreed to pay $36 million to settle independent lawsuits alleging the banks aided massive Ponzi schemes that bilked victims out of a total of nearly $4 billion.  TD Bank, part of Canada's Toronto-Dominion Bank, and BMO Harris, also known as Bank of Montreal, disclosed the settlements last week that represented the culmination of years of contentious litigation.  TD Bank agreed to pay $20 million to resolve a class action suit brought by European victims of a $223 million Ponzi scheme peddling purported interests in life settlements, while BMO Harris will pay $16 million to two Florida funds that suffered losses in Thomas Petters' massive $3.65 billion Ponzi scheme.  The settlements, which require court approval, represent two of the largest settlements against financial institutions implicated in Ponzi schemes.

TD Bank

TD Bank provided banking services to participants in a massive Dutch-based Ponzi scheme that duped victims worldwide out of at least $223 million.  The scheme, operating as Quality Investments, promised investors lucrative returns from the sale of fractionalized interests in life insurance policies.  The company used some of the funds it raised from investors to purchase these life insurance policies, for which it orchestrated the creation of dozens of Florida entities to maintain and hold the policies.  Investors were instructed to wire funds to the account maintained by a "trustee" at TD Bank, where it was promised that the funds would stay until they were used to purchase life insurance policies. 

However, according to the class action plaintiffs, TD Bank failed to properly monitor the trust accounts purportedly holding investor monies, and ignored the transfer of tens of millions of dollars to recipients in high-risk countries such as Cyprus and Turkey known for money-laundering.  Under U.S. anti-money laundering laws, such as the Bank Secrecy Act, TD Bank was required to investigate such suspicious activities and to file reports known as suspicious activity reports ("SARs") with authorities upon the occurrence of such actions.  TD Bank denied liability for losses suffered by Quality Investments victims, and maintained that it provided routine banking services which did not result in the alleged losses. 

BMO Harris

BMO Harris is the successor by merger to M&I Marshall & Ilsley Bank ("M&I Bank").  The lawsuit against BMO Harris stemmed from the involvement of a now-bankrupt pair of Palm Beach "feeder funds" that collectively invested more than $1 billion in the massive $3.65 billion Ponzi scheme masterminded by Minnesota businessman Thomas Petters.  When the scheme collapsed in late 2009, Palm Beach Finance Partners LP and Palm Beach Finance II (collectively, "Palm Beach Funds") filed bankruptcy shortly thereafter and cited their Petters' exposure as the reason.  The Securities and Exchange Commission subsequently levied civil fraud charges against two investment management and advisory firms, along with their principals, that controlled the Palm Beach Funds, on accusations the firms and principals facilitated Petters' scheme and later took steps to conceal mounting losses.

According to Petters, the investment of the Palm Beach Funds and others would be used to finance consumer merchandise transactions from suppliers to big box retailers such as Costco and Sam's Club. Investors were instructed to wire funds directly to two purported suppliers, which would then upon receiving the funds send payment for the merchandise to one of several depository accounts maintained by Petters at M&I Bank.  According to Petters, these funds would be used first to repay investors and second to pay a commission to Petters.  For the assurance of certain investors, including the Palm Beach Funds and associated entities, Petters and M&I executed a Deposit Asset Management Agreement ("DAMA"), that assured third parties that deposits into one of Petters' M&I Bank accounts would be properly transferred to the appropriate parties - including the Palm Beach Funds.

However, Petters was not operating a legitimate business venture, as there were no purchase orders, sales, or contracted suppliers or retailers.  Instead, Petters was operating a classic Ponzi scheme by using new investor funds to make payments to existing investors.  Petters did so by transferring funds from the bank accounts purportedly maintained by the "suppliers" and remitting those funds to the accounts he maintained at M&I Bank.  There, funds were used to make payments to existing investors as well as to support Petters' lavish lifestyle.

A liquidating trustee appointed for the Palm Beach Funds, Barry Mukamal, sued BMO Harris, as successor to M&I Bank, in 2011 and asserted multiple claims including fraudulent transfer claims under Florida law and the U.S. Bankruptcy Code seeking recovery of transfers made to BMO Harris during the six-month period preceding the collapse of Petters' scheme.  A federal bankruptcy judge dismissed that complaint, and the trustee subsequently filed an amended complaint.  The court dismissed the tort claims in the amended complaint, but denied the motion to dismiss the fraudulent transfer claims.  After conducting discovery, the trustee filed an amended complaint in June 2014.

The Palm Beach Funds trustee also used some legal maneuvering to increase his claims against BMO Harris.  In November 2011, the Palm Beach Funds filed avoidance actions against the purported entities serving as Petters' suppliers, Nationwide International Resources, Inc. and Enchanted Family Buying Companies (the "Petters Suppliers").  In that suit, the trustee sought to recover all transfers made from the Palm Beach Funds to the Petters Suppliers from November 2005 to September 2008, which totaled over $1 billion.  The Petters Suppliers had been placed in receivership in 2008 shortly after the scheme's collapse, but the trustee was permitted to file the suits to preserve applicable statutes of limitation.  It was not until February 2014 that he was granted permission to prosecute the suits by the U.S. District Court for the District of Minnesota.   After he secured judgments against the Petters Suppliers in July 2014, the trustee filed another suit against BMO Harris asserting claims as a subsequent transferee pursuant to 11 U.S.C. 550.  That suit also sought the avoidance and recovery of all transfers from the Petters Suppliers to BMO Harris for the six-year period preceding the scheme's collapse pursuant to Minnesota state fraudulent transfer laws.  That suit sought more than $24 billion from BMO Harris.

After a two-day mediation and several months of continued negotiations, the trustee and BMO Harris agreed to settle for $16 million. 

Takeaways

These two settlements are notable not only for their high value, but also because of the rarity of such outcomes.  Recoveries against financial institutions by court-appointed receivers and trustees have historically been difficult in the current legal environment.  The TD Bank settlement is yet the latest in a series of high-profile cases tied to the bank's involvement in several Ponzi schemes, including the massive $1.2 billion Ponzi scheme carried out by Scott Rothstein that ultimately saw the bank pay hundreds of millions of dollars to resolve claims.  The BMO Harris outcome demonstrates the success of a legal strategy that sought not only to recover payments made to M&I Bank from Petters, but also payments made by the Petters Suppliers to M&I Bank, which ultimately significantly reduced the bank's settlement exposure.

The Motion to Approve Compromise filed in the Palm Beach Funds case is below:

2670 Motion to Compromise Controversy With BMO Harris Bank N.a., In Add...

Former Stockbroker Charged With $15.5 Million Ponzi Scheme

A Pennsylvania former stockbroker was hit with civil fraud charges by the Securities and Exchange Commission and accused of operating a Ponzi scheme that sold fake certificates of deposit ("CDs") and raised more than $15 million from victims.  Malcolm Segal, 69, was charged with multiple violations of federal securities laws in a complaint filed earlier this month by the Commission.  The Commission is seeking injunctive relief, disgorgement of ill-gotten gains plus pre-judgment interest, and civil monetary penalties.

According to the Commission, Segal began purchasing numerous CDs in 2009 on behalf of clients of an unnamed registered investment adviser (the "Adviser").  During this time period, Segal worked as a financial adviser at Cumberland Brokerage Corporation. In 2009 alone, Segal purchased at least 134 CDs with interest rates ranging from 1.14% to 2.75% for a total of nearly $11.7 million.  The CDs were not purchased in the names of the individual investors, but rather in the name of "Clients of [the Adviser]."  As such, Segal retained control over the redemption of the CDs, and subsequently redeemed at least 76 of those CDs for sales proceeds of over $5 million.  Instead of returning those proceeds to the relevant investors, Segal paid Ponzi-style proceeds to investors and also financed lavish lifestyle.

In April 2011, Segal moved from Cumberland to Aegis Capital Corp. ("Aegis")  At or around that time, Segal began soliciting investors to purchase CDs that in reality did not exist.  Investors were instructed to wire funds to a bank account in the name of J&M Financial, which Segal controlled, and were told that Segal would purchase the CDs and subsequently keep them in his vault for "safe keeping."  To assure potential investors of the safety of the program, Segal represented that Aegis sponsored and oversaw the CD program.  After wiring their funds to the bank account directed by Segal, investors would receive a "confirmation" from Segal that included, among other things, the issuer, settlement date, rate, and location of the CD purchased on that investor's behalf.  For some investors, the names of the banks provided by Segal that issued the purported CDs had actually been closed by federal and state banking authorities weeks before the transaction.  

As the scheme continued and Segal's obligations to existing investors ballooned, he increased the promised "interest rates" promised on the CDs.  To explain the increase, Segal claimed that Aegis was offering the lucrative rates through their "Bulk CD Program," and that the significantly large number of CDs offered by the bank allowed him to offer 12% annual rates.  

However, Segal ceased purchasing CDs on behalf of investors beginning in 2011.  Instead, Segal misappropriated investor funds for a variety of unauthorized purposes, including the payment of fictitious returns to earlier investors - a classic hallmark of a Ponzi scheme - as well as the payment of personal expenses and even the purchase of a south Florida residence.  In late 2013, faced with the prospect of dwindling available cash and mounting investor redemptions, Segal allegedly began misappropriating funds from customer accounts to meet his rising obligations.  His scheme ultimately collapsed when an investor reported missing funds from their account to Segal's employer.

The Commission's complaint is below:

comp-pr2015-135