Investor Lawyers Blog

District Court Denies Federal Government’s Request to Detain Investment Adviser Bernard Madoff After He Transferred $1 Million in Valuables

Published on: January 26, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Earlier this month, the U.S. District Court for the Southern District of New York rejected a motion by the federal government to put investment adviser Bernard Madoff in jail. Madoff is charged with securities fraud over his involvement in a $50 million Ponzi scheme.

Federal prosecutors had claimed that the investment adviser violated the conditions of his bail when he removed nearly $1 million in valuables from his New York home in December and sent them to friends and relatives. Items that were mailed reportedly included more than 13 watches, an emerald ring, a diamond necklace, two cufflink sets, four diamond broaches, and other expensive jewelry.

Prosecutors say that Madoff’s actions were in violation of a preliminary injunction that prevented him from breaking up his assets so that his investor fraud victims could obtain restitution. Madoff’s attorneys, however, claim that their client did not think he was doing anything wrong and did everything he could to get the items back after he was told that he shouldn’t have sent them.

According to Magistrate Judge Ronald L. Ellis, however, the prosecutors’ argument wasn’t enough to mandate incarceration and the government made too huge a “leap” when it claimed that the community became endangered because Madoff transferred his assets. The district court did impose more bail conditions so Madoff cannot move additional items. The court also noted that these supplemental restrictions would provide additional protections.

Meantime, the Financial Industry Regulatory Authority says it has received at least 19 complaints about Madoff’s broker-dealer enterprise. However, FINRA noted that the complaints pertained to trading execution issues and not retail investment advisory issues or allegations of a Ponzi scam or fraud.

Related Web Resources:
U.S. loses another bid to jail Madoff, CNN Money, January 14, 2009
Madoff Is a ‘Danger,’ Argue Prosecutors, WSJ Online, January 8, 2009 Continue Reading ›

Madoff Investors May Have a Better Chance of Recovering their Investment Losses Through Tax Strategies Rather than Lawsuits

Published on: January 22, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Investors who lost money in Bernard Madoff’s $50 billion Ponzi scam may have a better chance of recouping their losses through tax strategies rather than filing lawsuits. Under US tax law, Madoff clients are allowed to take income deductions for losses that occur due to theft. The claim can be filed for the year the loss was discovered, and there is reasonable expectation of recovery.

Madoff has been charged with securities fraud. The 70-year-old investment adviser allegedly confessed to swindling thousands of investors. If convicted, he could face up to 20 years in prison, have his assets forfeited, and be ordered to pay a $5 million fine.

Investors who were direct customers of Madoff can file their loss claims with the Securities Investor Protection Corporation. If they have determined that they are not likely to recover from an SIPC claim, they can file for a theft-loss deduction. Per this provision, Madoff’s victims who are eligible to file an SIPC claim but don’t would get their deduction reduced by the $500,000 cap on SIPC coverage for securities losses. According to the Internal Revenue Service, the loss from 1 occurrence has to be above $100, with the total loss needing to be over 10% of someone’s adjusted gross income for the year when the deduction is claimed.

SEC Rapped for Allegedly Failing to Fully Investigate Alleged Wrongdoings in the Municipal Securities Market

Published on: January 21, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Congressman Spencer Bachus (R – Ala) says the Securities and Exchange Commission should have done more to probe alleged wrongdoings in the municipal securities market. Bachus issued a statement noting that the SEC knew as far back as 1997 of a potential “pay to play” scam involving water and sewer bonds in Jefferson County, Alabama, which is now facing the largest municipal bankruptcy in sewer bonds at $4 billion.

Bachus says that back then, Jefferson County Commissioner Bettye Fine Collins had sent the SEC a letter telling them about the municipal bond sales, but no follow up letter was sent to her. The congressman noted that it doesn’t appear to be an uncommon practice for the SEC to fail to use the tools to which it has access to investigation credible allegations.

Bachus said he resubmitted the original packet, along with information from 2007 to the SEC but nothing has been done to address his concerns. He also says that he provided SEC Chairman Christopher Cox with material about Jefferson County’s municipal bond indebtedness. The Commission responded by presenting a White Paper about municipal securities reform. Bacchus also noted new information has come to light indicating an “anti-trust collusion” involving investment advisers who inflated the fees that were “already outrageous.”

Jefferson County got into financial trouble when it changed from fixed rates to adjustable rates and refinanced its sewer bonds before becoming involved in complex interest rate swap agreements to hedge against higher rates. When the rates increased, Jefferson County found that it couldn’t refinance a return to fixed rates.

Last April, the SEC filed a lawsuit against Birmingham, Alabama Mayor Larry Langford, who formerly served as Jefferson County Commission president, for alleged improper payments involving the county’s bond business. While serving in the role of county president, Langford allegedly accepted over $156,000 in undisclosed benefits and cash from Blount Parris & Co. securities chairman William Blount. In exchange, Langford allegedly allowed Blount’s company to take part in all of Jefferson County’s security-based swap agreement transactions and municipal bond offerings and the firm earned over $6.7 million in fees.

Related Web Resources:
Jefferson County, Alabama

US Securities and Exchange Commission
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Wachovia Corp Sued by Carolinas Health Care System for More than $19 Million in “Bad” Investments

Published on: January 19, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Carolinas Healthcare System (CHS) is suing Wachovia Corp for alleged bad investments that resulted in losses valued at over $19 million. CHS is also accusing the bank of “directly misleading” it, misrepresenting the risks associated with the investments, and failing to follow the hospital system’s orders that it be withdrawn from the securities-lending program. Wachovia spokesperson Mary Eshet says that the company disagrees about the allegations, was always in compliance, and only made appropriate investments for CHS.

In 2003, according to the investment fraud lawsuit, Wachovia recommended that CHS take part in a securities-lending program. As a participant, a third party would borrow securities from CHS’s portfolio in return for collateral that would be invested by Wachovia until the securities were returned. This would also hopefully result in additional returns.

Per the agreement, Wachovia was only supposed to invest in safe, liquid, quality securities. Any time CHS opted to withdraw from the program, the hospital system was supposed to get all of its investments back within five business days. Also, Wachovia would be allowed to keep 40% of the profits on one account and 35% on the other account.

Last summer, CHS determined that the securities-lending program was proving too risky, especially with the markets collapsing. In September, CHS notified Wachovia to return all borrowed securities right away.

Wachovia couldn’t return all of the securities immediately. Wachovia had invested for CHS $14.9 million in Sigma Finance Corp-issued floating rate notes (now worth $750,000) and $5 million in Pricoa Global Funding floating-rate notes (now worth $4.95 million).

The lawsuit contends that Wachovia never notified Carolinas HealthCare System that the investments were not appropriate until CHS decided to end its participation in the securities-leading program. 5 days after Sigma went into receivership last October, Wachovia told the hospital system for the first time that its investment was, at that time, worth just $1.8 million. CHS says there is now no market for the Pricoa-related securities.

CHS contends that Wachovia gained 40% of the profits but did not suffer any of the losses. The hospital system is solely responsible for returning the lost collateral to its borrowers.

CHS files suit vs. Wachovia over losses on investments, Charlotte Business Journal, January 9, 2009

Related Web Resources:
Carolinas HealthCare System

Wachovia Corp
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$865 billion in state pension fund losses are resulting in reduced benefits for new hires

Published on: January 14, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Because state governments have accrued about $865.1 billion in state pension fund losses, new hires are ending up with reduced benefits. The losses not only exceed the $700 billion Troubled Asset Relief Program that Congress approved last year, but they are accompanied by $42 billion in state budget deficits. In a letter to US Treasury Secretary Henry Paulson, the mayors of Atlanta, Philadelphia, and Phoenix asked for help for their financially beleaguered cities and noted growing pension costs and investment deficits.

According to the Center for Retirement Research at Boston College, 109 state funds’ assets dropped 37% to $1.46 billion between October 2007 and December 2008. A 41% decline during this time period also occurred on the Standard & Poor’s 500 index of stocks.

For the 109 funds to be restored to their 2007 actuarial funding levels by 2010, the Boston College Center says the funds would require yearly returns of 52% on assets. These estimated projections could occur if there was a 5.7% increase in yearly liabilities and a $50 billion growth in assets from contributions beyond yearly payouts. While state funds do have enough money to pay for benefits for the foreseeable future, taxpayers will still have to make up this one-time loss-a proposition that is a hard sell.

A number of states are creating two-tiered systems that offer less benefits to new employees in order to reduce pension costs. For example, As of June 30, 2008, the largest fund in Kentucky for state workers had just 52% of the assets required to pay 117,000 members their present and future benefits. Now, Kentucky officials have established age 57 as the state’s minimum retirement age for workers hired after September 1. In order to receive full benefits, 30 years of service (rather than 27) are required. In New York, Governor David Patterson wants to increase the retirement age from 55 to 62 and decrease new workers’ benefits.

The stock market decline has also resulted in pension funds’ asset losses. Marsh & McLennan pension consulting unit Mercer LLC says that defined benefit funds dropped from $1.3 trillion in September 2008 to $1.1 trillion the following month. There are also state retirement systems that have experienced derivatives losses. Public data put together by Bloomberg in 2007 shows that public pension funds purchased over $500 million in so-called equity trenches of collateralized debt obligations.

Related Web Resources:
State Pensions’ $865 Billion Loss Affects New Workers, Bloomberg.com, January 13, 2009
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Although $200 Billion Auction Rate Securities Are Unfrozen, Many Investors Still Hoping to Recover $135 Billion in Frozen ARS

Published on: January 11, 2009 | by Shepherd Smith Edwards & Kantas, LLP

There is some good new to report. Nearly one year since the auction-rate securities market collapsed and some $330 billion in what was supposed to be liquid, cash-like investments in government bonds became frozen, some $200 billion auction-rate securities are now unfrozen thanks to the efforts of Massachusetts and New York securities regulators. However, there is still a lot more work to be done.

About $135 billion in ARS remain frozen. For many individual investors, the possibility that they will recover these funds is limited. A number of non-profit groups and companies are also unable to access their frozen funds.

For example, Vicor’s $30 million in ARS are tied up until 2010, while Five Star Quality Care has $75 million in frozen ARS. Issuers and regulators have to find a way to retrieve these frozen ARS for investors so they can get their funds back.

The ARS debacle is much bigger than Bernie Madoff’s $50 billion Ponzi scam, which has been dominating the headlines. On BloggingStocks.com, Peter Cohen said that he believes the reason the Madoff scheme has gotten more media attention than the ARS collapse is because Madoff’s victims are high profile celebrities, such as Steven Spielberg and Kevin Bacon.

ARS Market Collapse
UBS, Bank of America, Merrill Lynch, Wachovia, and other large investment firms were accused of knowingly misleading investors into believing that auction-rate securities were “safe,” liquid like cash investments. When the ARS market dropped, these same investors became victims of the market collapse and could longer access these funds.

Related Web Resources:
$135b still frozen by an early ’08 debacle, Boston.com, December 31, 2008
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Former Regions Morgan Keegan Investment Funds Revise Their Names to Include Helios Brand

Published on: January 7, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Seven former Regions Morgan Keegan Investment Funds have changed their names. Each fund’s name now begins with “Helios,” to reflect the shift in management to Hyperion Brookfield Asset Management from Regions Financial.

Helios is Hyperion’s brand name. Hyperion took over Morgan Keegan’s beleaguered investment arm last year after a number of funds suffered serious value drops following the subprime mortgage collapse. Three open-end funds and four closed-end funds are affected by the name change:

New Names of Former Regions-Morgan Keegan Select Funds:
Helios Select High Income Fund: HIFAX (Previously MKHIX)
Helios Select Intermediate Income Fund: HSIBX  (Previously MKIBX)
Helios Select Short Term Bond Fund: Remains as MSBIX
New Names of Former RMK Funds:
Helios Advantage Income Fund: HAV (Previously RMA)
Helios High Income Fund: HIH (Previously RMH)
Helios Multi-Sector High Income Fund: HMH (Previously RHY)
HMH Helios Strategic Income Fund: HSA (Previously RSF)

Hyperion spokesperson Marion Hayes says it was important that the new names reflect the funds’ new management. Hyperion Brookfield President and Chief Executive Officer John Feeney also noted that the rebranding of the acquired funds is part of the company’s efforts to integrate them with its existing fund platform.

Shepherd Smith Edwards & Kantas LTD LLP Founder and Stockbroker Fraud Attorney William Shepherd, however, cautions, “It is not uncommon for mutual fund managers to change the name of funds in an attempt to escape negative publicity. Yet, if the goal is to hide widespread allegations of fraud from investors, this might be considered yet another fraudulent act!”

Related Web Resources:
Hyperion Brookfield Announces Changes to the Names and Ticker Symbols for its Closed-End Funds, MarketWatch, December 18, 2008
Continue Reading ›

Former Broker Charged with Conspiracy to Commit Wire Fraud Following Allegations He Helped Law Firm Founder Mark Dreier Defraud Hedge Funds Through Ponzi Scam

Published on: January 6, 2009 | by Shepherd Smith Edwards & Kantas, LLP

Former broker Kosta Kovachev has been charged with conspiracy to commit wire fraud for his alleged role in assisting New York law firm founder Marc Dreier with an alleged $380 million Ponzi scheme. Dreier is the founder of Dreier LLP. He was arrested last month on charges he convinced two hedge funds to give him over $100 million after he made false claims that he was selling discounted notes issued by Sheldon Solow, a New York developer.

According to prosecutors, Kovachev posed as the controller of Solow Realty for Dreier-even though he never worked for the company-after a hedge fund employee asked to meet with a Solow representative after the promissory notes were not paid back on time. Authorities are also accusing Kovachev of helping Dreier sell fake notes, totaling $113.5 million, to two other hedge funds last October, as well as posing as Solow’s CEO during a conference call to talk about financial statements. If convicted, Kovachev could spend up to five years in prison and have to pay $250,000 or twice the gross loss or gain as a result of his offense-whichever is greater.

At Kovachev’s bail hearing, Assistant US Attorney Jonathan Streeter says Dreier paid people that took part in “impersonations” for him up to $100,000 a phone call. Drier LLP filed for bankruptcy last December.

In 2006, the Securities and Exchange Commission filed a civil suit against Kovachev accusing him and several others of engaging in a different Ponzi scam and defrauding over 600 investors of over $28 million. Kovachev, who was accused of selling unregistered securities that were structured as hotel timeshare rental interests, was ordered to pay $350,000.

Dreier Case Leads to Charges Against Broker Kovachev, Bloomberg.com, January 5, 2008
Ex-Broker Charged With Helping New York Lawyer in Elaborate Fraud Scheme, New York Times, December 23, 2008

Related Web Resources:

SEC Charges N.Y. Attorney Marc S. Dreier With Multi-Million Dollar Fraud, SEC, December 8, 2008
“Ponzi” Schemes, SEC.gov Continue Reading ›

Investor Fraud Lawsuits Stemming $50 Billion Ponzi Scheme May Name Madoff’s Family Members as Additional Defendants

Published on: January 5, 2009 | by Shepherd Smith Edwards & Kantas, LLP

The civil lawsuits that will be brought by the victims of Bernard Madoff’s $50 billion fraud scam are expected to be numerous and massive. Not only will they likely target Madoff and his firm, Bernard L. Madoff Investment Securities LLC., but a number of his family members who work for the firm could also be named as defendants.

The company’s chief compliance officer and senior managing director is Madoff’s brother Peter. Madoff’s sons, Mark and Andrew, also are employed by the firm, as is Shana Madoff, Peter’s daughter. While Madoff has maintained that no family members were involved in the Ponzi scheme and that he acted alone, actual knowledge doesn’t have to be involved when there is a fiduciary relationship or if recklessness or negligence is a factor for someone to be held liable.

According to Securities and Exchange Commission staff attorney Peter J. Henning, two main types of litigation are expected from the Madoff scheme. One type of securities fraud litigation will target Madoff, his company, and his family members. Another kind of investor fraud lawsuit will target third parties, such as investment advisers, feeder funds connected to Madoff’s company, and other parties that sent investors Madoff’s way.

Complications are expected. Determining the liability of people who acted in an agent role but did not receive compensation when they referred investors to Madoff, differentiating between claimants that invested in feeder funds and those who directly invested with Madoff, and determining whether money can be gotten back from investors who redeemed their funds earlier, are just some of the difficulties that are likely to arise.

Already, a number of investors have filed class action and group lawsuits against the 70-year-old financial adviser, who remains under house arrest. In October, Bernard L. Madoff Investment Securities LLC., was the 23rd biggest market maker on Nasdaq.

Related Web Resources:
Suits From Madoff Fraud Will Be Massive, Will Involve Family Members, Attorneys Say, BNA, December 22, 2008
Bernie Madoff Victim List, Huffington Post, December 15, 2008
Bernard L. Madoff Investment Securities LLC
Continue Reading ›

Number of Federal Securities Fraud Cases Prosecuted Drop Significantly

Published on: January 2, 2009 | by Shepherd Smith Edwards & Kantas, LLP

A recent New York Times article reports that according to new data, federal officials are prosecuting far fewer cases involving fraudulent stock scams than they did in 2000 before the Bush Administration came into office. According to financial and legal experts, less strict enforcement polices, Securities and Exchange Commission staff cutbacks, and a greater focus on fighting terrorism have led to the federal government’s laxer policing efforts when it comes to pursuing securities fraud cases.

The new information, based on Justice Department information and put together by a Syracuse University research group, says that there haven’t been so few securities fraud prosecutions in a year since 1991. Also:

• During the first 11 months of the 2008 fiscal year, there were 133 securities fraud prosecutions-compare this to 2002 when there were 513 prosecutions, spurred by the WorldCom and Enron scandals, and 2000 when there were 437 prosecutions for this same time period.