Category: Fraud

New Frontier: Best Practices in Fraud Investigations and EmergingTrends in SEC and DOJ Enforcement

securitiesdocket

Securities Docket sponsored a webinar addressing critical questions about recent changes in the economic and political climates, emerging trends in SEC and DOJ enforcement, and the potential impact on lawyers, accountants, investigators, and other consultants who perform fraud investigations. It also outlined best practices when conducting investigations for the DOJ and SEC.

Panelists:

  • Gary Kleinrichert, Senior Managing Director in FTI Consulting’s Forensic and Litigation Consulting Practice
  • Pravin Rao, formerly an Assistant U.S. Attorney in the Northern District of Illinois and currently a partner in the Litigation group of Perkins Coie
  • Jose A. Lopez, formerly a Senior Attorney at the United States Securities and Exchange Commission’s Division of Enforcement and currently a partner at Schopf & Weiss LLP

The webcast is available for replay. But if you want to browse, these are my notes:

Gary started the presentation by noting there is a change in regulatory focus and likely to be a new regulatory framework. He also pointed out that the SEC has become aggressive in bringing securities cases.

He noted that the hedge funds and other pooled investments will be regulated although the scope is still uncertain.

After a lengthy run through some other potential and recent regulatory changes, Gary pointed out a few things that you can do right now:

  • Be preventative
  • Review Sarbanes-Oxley, financial reporting, and securities compliance
  • Whistleblowers – Speak with lawyers to ensure internal policies are effective

Jose took over and highlighted President Obama’s impact on the SEC. Again, they are getting more aggressive. How can you survive in this hostile environment:

  • Master the SEC’s Enforcement Manual (.pdf)
  • Conduct an Effective Investigation
  • If Charges Are Filed, Aggressively Seek Information and Documents

Jose advocated requesting a Termination Notice from the SEC. The SEC’s Enforcement Manual (.pdf) provides that the Division should notify individuals and entities at the earliest opportunity when the staff has determined not to recommend an enforcement action against them to the Commission.

There was discussion about witness assurance letters, providing civil immunity for witnesses. In limited circumstances and with specific authorization of the Commission, SEC staff may provide a witness with a letter assuring him or her that the SEC does not intend to bring an enforcement action. There seems to have been little use of this procedure. In practice its use has not materialized.

Pravin focused on the Department of Justice enforcement activities. The DOJ had a focus on terrorism. He has seen a shift back to financial crimes. There is also more white collar crime legislation coming out of Washington.

he offered up two guiding principles for internal investigations:

  • “One size does not fit all“
  • “What you don’t know can hurt you”

You want to conduct an internal investigation:

  • Identify and limit harm to the company
  • Obligations under laws, regulations to self-disclose
  • Assist in criminal defense of company
  • Puts company in better light with government regulators
  • Puts company in better light with shareholders, public

He stressed the need for an developing a game plan for the investigation. You need to define the scope and decided who should be interviewed.

The materials are available on the Securities Docket website: Today’s Webcast (June 15): Materials Available Here for “A New Frontier: Best Practices in Fraud Investigations and Emerging Trends in SEC and DOJ Enforcement”

You’re a Victim of a Ponzi Scheme, But What About Your State Taxes?

IRS_Logo

You missed the warning signs and got suckered into a Ponzi scheme. The IRS offered some tax relief for long-term Ponzi scheme investors (like some of the Madoff victims) who have paid taxes on gains from the investment. The IRS clarified the federal tax law governing the treatment of losses in Ponzi schemes. They also set out a safe harbor method for computing and reporting the losses.

The revenue ruling (2009-9) addresses the difficulty in determining the amount and timing of losses from Ponzi schemes and the prospect of recovering the lost money. The revenue procedure (2009-20) simplifies compliance for taxpayers by providing a safe-harbor for determining the year in which the loss is deemed to occur and a simplified means of calculating the amount of the loss.

But what about state taxes?

California: On March 25, 2009, the California Franchise Tax Board announced that the federal guidance (Revenue Ruling 2009-9 and Revenue Procedure 2009-20) regarding the treatment of Madoff-related or other Ponzi scheme losses would be generally applicable for California purposes.

Connecticut: On April 9, 2009, the Connecticut Department of Revenue Services released Connecticut Announcement No. 2009(7), which describes the effect for Connecticut income tax purposes of the reporting of Madoff-related or other Ponzi scheme losses under the Revenue Procedure 2009-20 safe harbor and under Revenue Ruling 2009-9. In general, Connecticut does not allow federal itemized deductions for Connecticut income tax purposes. Thus, any theft loss deduction claimed by a taxpayer under the Revenue Procedure 2009-20 safe harbor will not affect a taxpayer’s 2008 Connecticut income tax liability. However, if the amount of a taxpayer’s theft loss deduction allowed under Revenue Ruling 2009-9 or Revenue Procedure 2009-20 creates an NOL, then the taxpayer must file amended Connecticut income tax return(s) for the year(s) to which such NOL may be carried back for federal income tax purposes.

Massachusetts: On March 20, 2009, Massachusetts issued: “Notice—Individual Investors; Investments in Criminally Fraudulent Ponzi-type Schemes and Reporting of Fictitious Investment Income.” Massachusetts did not adopt the Revenue Procedure 2009-20 safe harbor in the case of individual investors since Massachusetts tax law does not recognize the theft loss deduction provided under federal tax law.

New Jersey: On April 2, 2009, the New Jersey Division of Taxation had issued guidance on the treatment of Madoff-related
or other Ponzi scheme losses for New Jersey gross income tax purposes. Under this guidance, taxpayers are allowed a theft
loss deduction for New Jersey gross income tax purposes in an amount equal to the original investment plus the income
reported in prior years minus distributions received in prior years. New Jersey does not allow NOL carrybacks or carry
forwards.

New York: On May 29, 2009, the New York State Department of Taxation and Finance issued guidance TSB-M-09(7)I (.pdf) on the
reporting of Madoff-related or other Ponzi scheme losses. In general, New York State will recognize the Revenue Procedure
2009-20 safe harbor.

For more information, Seyfarth Shaw put together some information: Some States Have “Weighed In” on Tax Treatment of Madoff-Related and Other Ponzi Scheme Losses (.pdf)

Watch Frontline’s “The Madoff Affair” Online

For those of you who missed last night’s airing of “The Madoff Affair” it’s now available online.

The program has a startling interview of Michael Bienes, one of the first people to set up a feeder fund for Madoff. Bienes describes those early years as “easy, easy-peasy, like a money machine.” When asked if he had ever questioned Madoff about his approach, Bienes says: “Never. Why would I ask him? I wouldn’t understand it if he explained it.” Bienes didn’t know how Madoff was doing it. “How do I know? How do you split an atom? I know that you can split them; I don’t know how you do it. How does an airplane fly? I don’t ask.”

My previous assumption was that Madoff started off legitimate and went bad somewhere along the way. Based on the Bienes interview I am rethinking that assumption. It sounds like Madoff went bad very early on, maybe even from the beginning.

You can watch the video below:

There is additional material on the Frontline website for The Madoff Affair:

“Hello, Madoff” What the Secretary Saw

vanity-fair-june-2009

The June issue of Vanity Fair continues its coverage of Bernie Madoff. This issue centers around Eleanor Squillari, who spent two decades as Madoff’ private secretary.

The article, entitled “Hello, Madoff!,” is accompanied by more than a dozen intimate photos of Madoff and his family from as far back as the 1970s.

According to Eleanor Squillari, Bernie Madoff was a sexist, egomaniacal, short-tempered control freak—yet everybody loved him.

At first, I was not interested in the story. It looked a little sordid for me. Then I saw this quote:

Squillari recalls an unusually prescient conversation she had with Madoff years earlier, after a client’s secretary had been arrested for embezzlement. “You know, [he] has to take some responsibility for this,” Madoff told Squillari. “He should have been keeping an eye on his personal finances. That’s why I’ve always had Ruth watching the books. Nothing gets by Ruth.” Squillari says she was surprised when he added: “Well, you know what happens is, it starts out with you taking a little bit, maybe a few hundred, a few thousand. You get comfortable with that, and before you know it, it snowballs into something big.”

Perhaps the story will give us some insight into what makes a person go bad.

For a preview, there is a video of Vanity Fair’s Mark Seal interviewing Eleanor Squillari: Bernie Madoff’s Secretary Spills His Secrets.

Part I of Vanity Fair’s coverage of Madoff was in the April issue: Madoff’s World.

Arthur Nadel Indicted

nadel

Florida fund manager Arthur Nadel was indicted Tuesday on criminal charges for allegedly soliciting hundreds of millions of dollars in investor money under false pretenses and misappropriating client funds. Mr. Nadel, 76 years old, was charged in a 15-count indictment with mail fraud, securities fraud and wire fraud.

“It’s a much more complex story than the indictment may suggest,” said Mark Gombiner, Mr. Nadel’s lawyer. “We’re going to be evaluating what our defenses are.” Mr. Gombiner said his client will plead not guilty.

Previously, the SEC had filed a complaint against Mr. Nadel related to the same frauds perpetrated on his investors. “Nadel solicited prospective clients to invest in the funds by making various misrepresentations about the performance and value of the funds, including that the net asset value of each of the funds was tens of millions of dollars,” the U.S. Attorney’s Office in New York said in a statement. “Nadel also claimed to investors that his purchases and sales of securities in the Funds had generated cumulatively more than $271 million in gains. In truth, Nadel’s trading resulted in an overall net loss in the funds.”

Back in January, Nadel went on the run and spent two week in hiding. He had ditched his car in an airport parking lot. One of his investors had demanded an independent audit after the fallout form the Madoff scandal.

See:

Coming Attractions – Frontline Reports on Madoff

madoff

Next month, Frontline is running a report about Bernard Madoff on a PBS station near you. The episode premiers the week of May 12.

“Bernard Madoff’s success as a broker made the competition wonder how the man could produce such steady returns in good times and bad. The SEC investigated several times over the last two decades, but Madoff remained untouched until last December when he admitted it was all “one big lie.” Frontline producers Martin Smith and Marcela Gaviria unravel the story behind the world’s first truly global Ponzi scheme – a deception that lasted longer, reached wider and cut deeper than any other business scandal in history.”

The Impersonator – How Attorney Marc Dreier Bilked Investors Out of Millions

dreier

We live in an age of white-collar villains. But of all the financial bad guys out there, Marc Dreier is arguably the single greatest character of them all. Bernie Madoff may have stolen more money. Dick Fuld may have caused more systemic damage. But it’s Dreier alone whose story reads like the stuff of Hollywood. Dreier isn’t just accused of swindling more than $400 million from thirteen hedge funds. Prosecutors say he carried out the deception by inventing $700 million in financial assets out of whole cloth, staging fictional conference calls, and impersonating executives, sometimes personally, sometimes with the help of an associate, all while snapping up Warhols and waterfront homes, partying with pop stars and football players, and chasing an endless parade of much-younger women. He also allegedly stole some $40 million from his clients’ escrow accounts, a brazen legal sin. Unlike Madoff, who worked from behind the scenes in the Lipstick Building, Dreier took a starring role in his own financial drama. Where Madoff was outwardly quiet and self-effacing, Dreier was openly egotistical, even smug. He seemed to think he could lie to his victims’ faces and get away with it, to thrill, even, in the art of deceiving people. It’s been suggested that Bernie Madoff was a pathological liar. With Marc Dreier, there appears to be little doubt.

This paragraph comes from a great article in New York Magazine by Robert Kolker: The Impersonator. Like Bernie Madoff, Marc Dreier bilked unsuspecting investors out of many millions of dollars. But Dreier did it with flair.

The photo of Dreier with Michael Strahan is from the free content collection of Newscom.

Ponzimonium, Ponzipalooza, Ponzimania

Charles Ponzi
Charles Ponzi

There is “rampant Ponzimonium.” Or is there a “virtual Ponzipalooza”?

Bart Chilton, a commissioner at the Commodities Futures Trading Commission coined these terms in his speech on March 20 before American Bar Association’s Committee on Derivatives and Futures Law Students.

Personally, I prefer Ponzimania.

The CFTC has filed charges against 15 alleged Ponzi schemes so far this year, compared with 13 during the whole of 2008. (If you do the math that would mean more than 60 cases for 2009, assuming the rate continues. )  In a search of the SEC litigation website I had 57 hits for Ponzi in 2009, compared to 92 for all of 2008.   (I admit that it is less scientific than the CFTC research.) Clearly there are more enforcement actions against Ponzi schemes. We are hearing more about Ponzi schemes in the news.

Is this increase because there are more Ponzi schemes out there?

Or are we just uncovering a greater percentage of Ponzi schemes?

I think the investment tide has gone out, uncovering more Ponzi schemes and fraud in the market. The newscycle has switched from celebrating big gains to wallowing in the muck from the financial implosion.

It is easier to run a fraud when values are increasing. Even a terrible investor can make some money when most of the possible investment choices are rising in value. Plummeting markets decrease the value of the poor investment choices and increase the amount of redemptions by the investors/victims. It was the redemption activity that finally did in Madoff. He could not raise new money fast enough to pay out the redemptions.

Jim Cramer has gone from being a rock star of the investing world to being the punching bag of Jon Stewart. The media is now turning on investment industry looking for targets to aim the public’s ire over the financial implosion. Fraudsters make good news and good targets.

I don’t think there are any more fraudulent schemes currently out there than average. The downturn in the markets is bringing fraud schemes crashing down. The media is feasting on carnage.

I expect that we will be experiencing Ponzimonium, Ponzipalooza, and Ponzimania for awhile.

See:

SEC Settlements in Ponzi Scheme Cases: Putting Madoff and Stanford in Context

Charles Ponzi
Charles Ponzi

In the last six and half years the Securities and Exchange Commission has reached settlements with over 300 defendants in cases related to alleged Ponzi schemes. NERA Consulting has been tracking these SEC settlements since the Sarbanes-Oxley Act was enacted in July 2002.

In that time frame there have been 12 Ponzi scheme settlements that involved alleged fraud in excess of $50 million. Jan Larsen and Paul Hinton of NERA Consulting put together an overview of those 12 cases and their SEC Settlements: SEC Settlements in Ponzi Scheme Cases: Putting Madoff and Stanford in Context (.pdf).

Based on the settlement amounts shown in this report, things don’t look good for the Madoff investors. The settlement amounts are small, averaging less than 10% of the fraud size. Most of the total settlement amount is tied to the Private Capital Management, Inc. case where $112 million of the $145 was recovered.

nera_table

Thanks to Bruce Carton of Securities Docket for pointing out this report (via Twitter).

More on Madoff’s Auditor

friehling

Yesterday, Madoff’s auditor was arrested for falsely stating that the firm had audited the financial statements. No surprise that such a small firm could be auditing a supposedly large investment company like Madoff Investments.

Just in time, the AICPA (that’s the American Institute of Certified Public Accountants) has expelled Friehling from its membership following an ethics investigation.

“Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff’s business,” said acting U.S. Attorney Lev Dassin.

Like his client, Mr. Madoff, Mr. Friehling was released on bail. He apparently post a $2.5 million bail bond and walked free, for now.

See: