Posts filed under “Legal”

Hedge Fund Partners vs Managed Account Investors

Today’s NYT (and Monday’s WSJ) each have articles which compare Madoff investors with those of recent $400 million dollar hedge fund fraud Bayou Group.

I believe this misunderstands the applicable law of partnership, fraud, and investing.

Hedge fund investors are limited partners, and as such, they have a fiduciary duty to their other partners. Regardless of the additional due dilly, the gut instinct, or any other basis one investor had when they pulled their capital, the Bayou case grants the other LPs the opportunity to clawback that money.

That was the Bayou decision — one I disagree with, but its the law (for now).

Managed account investors have no such legal obligation. Indeed, some people have argued that the doctrine of fraudulent conveyance might apply. But that requires that the investor who pulled money out of Madoff knew it was an illegal Ponzi scheme, and that their transfer of property was illegal and done with the intent to commit fraud.

Merely pulling money out of what you legitimately believe is your own brokerage account hardly qualifies as the appropriate mental state for fraud . . .

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UPDATE: December 20, 2008 6:32am

Let me clarify one thing — I assumed that some of the investors were actually investors, and that the Ponzi scheme didn’t start until much more recently (5-10 years).

If its the case that the entire operation has been a scam from day one, well then, all bets are off. That is a different story. Whatever proceeds and withdrawals there were may simply be the proceeds of illegal activity.  Then you may not get to keep anything, and there is a pro-rata redistribution of all assets.

But I strongly suspect that much of the early years were legitimate investing. My best guess is he went Ponzi to hide a bad quarter, and it snowballed from there.

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Sources:
Even Winners May Lose Out With Madoff
Investors May Have to Surrender Gains
JANE J. KIM, JENNY STRASBURG and AARON LUCCHETTI
WSJ, DECEMBER 15, 2008

http://online.wsj.com/article/SB122930184908605505.html

Even Winners May Lose With Madoff
ALEX BERENSON
NYT, December 18, 2008

http://www.nytimes.com/2008/12/19/business/19ponzi.html

Category: Hedge Funds, Legal, Regulation

Vast Under-Investment in Due Diligence

With everyone tsk-tsking the Madoff scandal — the amount lost, the after-the-fact obviousness, the SEC incompetence — I thought now was as  good a time as any to look at the actual research, due diligence and manpower thrown at investigating managers and funds. Not surprisingly, it is tiny — at least, when compared with the…Read More

Category: Bailouts, Hedge Funds, Investing, Legal, Regulation

SEC Under Fire; $50 Billion Fraud

Atkins was republican SEC commissioner from 2002 to 2008; Cox says SEC failed to act on allegations against Madoff; Investors lost up to $50 billion in Madoff’s alleged scheme; Analysis by Paul Atkins, Former SEC Commissioner

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The Madoff Scandal – Interview with Former SEC Chairman Arthur Levitt

Category: Legal, Regulation, Video

S.E.C. Chairmen, 2001-08

Here’s an excerpt from Bailout Nation, about a subject under much discussion today: The incompetence of the S.E.C.

Part IV: Market Failure
Chapter 14. Casting Blame

Over the course of two terms, Bush appointed three SEC Chairmen, each ill-suited for the position. It was a veritable parade of poor choices for the role of regulating stock markets. His first appointment, Harvey Pitt, was a securities industry defense attorney and was wholly unsuited to the position. Instead of representing the interests of investors, Pitt was an industry lapdog. Pitt pledged a “kinder and gentler” SEC just when the opposite was needed in the midst of a huge run of corporate misfeasance.

In an era of corporate accounting scandals, Pitt had close ties to the accounting industry. And for inexplicable reasons, Pitt met with the heads of companies under active SEC investigation. As a Wall Street lawyer, Pitt had “recommended that clients destroy sensitive documents before they could be used against them – advice that seemed to find echoes in the SEC’s investigations into Enron and its shredder-happy auditor, Arthur Andersen.” Pitt had to recuse himself from many of the SEC’s votes — they were frequently about the clients he had represented as a defense attorney. By July of 2002, Senator (and future GOP presidential candidate) John McCain was calling for Pitt’s resignation.

Pitt, not surprisingly, demoralized the agency. To investor advocacy groups, having Pitt as SEC chief was like putting Osama bin Laden in charge of Homeland Security.

The next SEC Chairman Bush appointed was William Donaldson. He is the one who allowed the net-cap rule to be exempted for the five biggest banks in 2004. Instead of 12 to 1 leverage, banks levered up 30 and even 40 to 1 after the waiver. It isn’t glib to say the financial meltdown was three times as bad as it might have been for Donaldson’s SEC agreeing to this waiver. It would be charitable to call his chairmanship undistinguished.

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Category: Legal, Regulation

Why Do Fund of Funds Exist

Here’s a question for you: What is the actual purpose of FoF ? In theory, they are supposed to do the due diligence, the forensic accounting, the deep background checks that ordinary investors cannot. Then once they identify a group of funds they want to allocate capital too, they are supposed to run the asset…Read More

Category: Bailouts, Hedge Funds, Investing, Legal

Inside Look: Ponzi Scheme

Hedge Fund Regulation – More Perspective on Madoff’s Alleged $50 Billion Ponzi Scheme

Category: Legal, Video

Culprits of the Financial Crisis

Great graphic ! I won’t link to the very strange article it comes from (it violates my  “No linking to shite policy”)but I liked the graphic above.

Category: Bailouts, Digital Media, Humor, Legal

Bernie Madoff on the Modern Stock Market

Implicated in a $50 billion Ponzi scheme, at a 2007 roundtable discussion with Justin Fox, Ailsa Roell, Robert A. Schwartz, Muriel Seibert, and Josh Stampfli.

These are some excerpts featuring Madoff, recently implicated in a $50 billion Ponzi scheme.

The full video is here

Category: Legal, Regulation, Video

Madoffs Victims

A partial list of Bernard Madoff’s alleged ponzi scam victims Madoff Investor Investor Type Possible Losses Source Fairfield Greenwich Group alternatives firm $7.5 billion firm statement Banco Santander bank $3.5 billion El Pais Kingate Management alternatives firm $2.8 billion Bloomerg News Ascot Partners hedge fund $1.8 billion Wall Street Journal Benbassat & Cie bank $935…Read More

Category: Digital Media, Legal

Madoff Story Smells Funny

I have no special insight into the Madoff story.

However, my spidey sense is tingling.

Consider this: Running a billion dollar Ponzi scheme has to be very time consuming. Running a $50 billion Ponzi scheme by yourself, at age 70?

I don’t think it can be done.

Just generating the phony transaction receipts is a full time job.  How did this son-of-a-bitch do it all by himself? Madoff HAD TO HAVE HELP.

I simply cannot believe he did it himself, all alone. His entire scheme was predicated upon finding another 1% of assets every month to payout to the prior investors. Between raising moeny and running operations, it was more than a 1 man job.

And when the market hit the skids and topped out so fast — it fell much quicker in 2008 than in 2000 — he ran out of manuevering room. Madoff had to know he was going down, and everyone who was working with him — everyone who knew of the scheme — they were going down, too.

So he confessed — TO HIS SONS. AND THEY TURNED HIM IN.

And Bloomberg reports they are already represented by Martin Flumenbaum, a lawyer.

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Maybe I’ve read one too many detective novels, but consider this strictly hypothetical, based on-no-facts whatsoever, wildly imaginative hypothesis: If I were running a $50 billion Ponzi scheme, I would have to bring in someone close to help me with it.

Who is closer than my family?

When it became clear there was no where else to turn, instead of bringing down the entire dynasty, I would have them turn me in, to protect the family and what left of the legacy.

I would take the fall so they wouldn’t have to.

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As I noted, I have no special facts, no insight into this what-so-ever.  Other than the story we have been fed so far doesn’t make any sense.

Who was Madoff’s accomplices? I have no idea, but there has to be some! If I were the SEC, I would be looking over close friends and family closely. Very, very closely.

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Category: Credit, Legal, Markets, Regulation