Archive for the “Ponzi Scheme” Category

It was in the 1990s that the Shelby County, Tennessee, government first entered into a contractual agreement with Memphis-based Consulting Services Group (CSG) for advice on how to allocate its pension fund assets and on which money managers to hire. One of those money managers eventually included Morgan Asset Management, a subsidiary of Morgan Keegan & Co. Today, both companies - CSG and Morgan Keegan - are the subject of ongoing investigations and possible enforcement actions by the Securities and Exchange Commission (SEC) for misleading investors.

CSG has been identified as channeling clients’ money into Ponzi schemes, including the notorious one run by Bernie Madoff. It’s also being questioned by the SEC and New York Attorney General Andrew Cuomo for its role in the so-called “pay-to-play” pension fund consulting scandal in New York.

Meanwhile, Morgan Keegan, Morgan Asset Management and three unidentified employees were put on notice by the SEC earlier this month to expect legal action in the relating to various types of securities and financial products that Morgan Asset Management managed and which the SEC believes Morgan Keegan misrepresented to investors.

The products in question include several Morgan Keegan mutual funds whose values plummeted in 2007 and 2008 because of the underlying investments they contained. Those investments, which Morgan Keegan allegedly marketed to investors as stable investments, included high concentrations of risky and untested securities. 

In addition, the SEC filed a federal complaint against Morgan Keegan in early July over its sales of auction-rate securities. Again, the agency claims Morgan Keegan misrepresented the nature of risks associated with the instruments to investors.

As for Shelby County, the account that Morgan Asset Management oversees is comprised of intermediate bond funds; securities in that account are currently valued at $3.6 million. The account was opened nine years ago with $20 million, according to a July 24 article in the Memphis Daily News. At the pension board’s request, Morgan Asset Management recently began disposing of securities in the fund; the $3.6 million in securities is what remains. The fund should be completely liquidated within the next three to six months, according to the article. Once that happens, Shelby County will no longer have a relationship with Morgan Asset Management.

CSG’s future role in managing Shelby County’s finances is still unclear, though given the fact it has a long history of regulatory black eyes against it - the most recent being the New York state pension fund scandal - county officials may finally start to scrutinize the company’s practices in earnest. Some food for thought might include a recent article in the June 8 issue of Forbes magazine. The story provided a cautionary tale on the pension fund consulting industry, citing CSG as one of the biggest players. Among the highlights: 

• In the 1990s, CSG began steering clients into hedge funds, including its own and others that paid finder’s fees. One CSG client was municipally owned Memphis Light, Gas & Water. In 1997, Memphis Light discovered CSG was collecting $800,000 annually in commissions from a Florida money manager. The utility’s pension replaced CSG later that year as its consultant.

• In 1998, CSG signed up Shelby County and its $670 million pension fund as a new client. CSG put Shelby County into five funds of funds, which invested in 120 hedge funds. That “strategy” subjected Shelby County to three layers of fees that together cost between 2.5% and 3.25% annually, plus 20% of any profits. Last year, the pension lost 25% of the assets it had invested in CSG’s hedge fund program, net of fees.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

It’s become a familiar scene across the country: Public pension funds gambled billions of dollars of their employees’ retirement money in the high stakes world of hedge funds. Now, as pension fund managers discover that their hedge funds investments have delivered far less than what they expected, many people are left to wonder if their golden years will instead be spent logging more time in the workforce.

Long before Bernard Madoff made front page news for his $50 billion hedge fund Ponzi fraud, hedge funds were garnering the attention of state and federal regulators for their lack of transparency and opaque oversight standards.

Despite this veil of secrecy, public pension funds nonetheless gravitated to hedge funds in droves, putting their money into everything from real estate to private equity funds. In 2005, 13% of all public pension funds invested in hedge funds, according to an April 15 article in the New York Times. Three years later, the percentage had climbed to 40%.

The apparent infatuation of public pensions and hedge funds may be changing, however. Faced with the grim reality of massive losses on their hedge fund investments, more pension funds are scaling back or, at the very least, trying to change the terms of their hedge fund investments.

The California Public Employees’ Retirement System (Calpers) is a prime example. As reported in the New York Times article, the nation’s largest public pension fund is trying to reduce hedge fund fees and alter the terms of its investments to hedge funds. The decision comes after Calpers saw its investments in hedge funds fall from $7.6 billion to $5.9 billion.

Moreover, the annual returns Calpers has achieved since it began investing in hedge funds in 2002 have been modest at best: only a 3.5% annual rate of return. The percentage is far, far less than what it initially had been promised by Caplers’ hedge fund managers, according to the New York Times story.

As for hedge funds, many are in no position to question the demands of investors like Calpers. In the past year, hedge fund assets have collectively fallen by nearly 40% to $1.2 trillion due to record losses and redemption requests. Adding to the industry’s blight are state and federal investigations into whether certain hedge funds made illegal payments to intermediaries in order to gain access to state public pension funds.

Among the hedge firms under investigation by the Securities and Exchange Commission (SEC) and New York Attorney Andrew Cuomo as having paid fees to garner business from the New York State Common Retirement Fund are the Carlyle Group, Odyssey Investment Partners, and HFV Asset Management LP. On April 15, Barrett Wissman, an executive at HFV, pleaded guilty to securities fraud and agreed to a $12 million settlement as part of the investigation.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Religious ties, nepotism, and the tenacity of Robert Allen Stanford himself appear to be the common theme that produced what the Securities and Exchange Commission (SEC) calls a $9 billion massive Ponzi fraud. Stanford, chairman of the Stanford Financial Group, and employees James Allen and Laura Pendergest-Holt were sued last month by the SEC for allegedly conducting the second biggest securities fraud to emerge in just three months, following the Bernard “Bernie” Madoff case. 

On Feb. 26, Pendergest-Holt was arrested and charged with obstructing a federal investigation. All three individuals, Stanford, Allen and Pendergest-Holt are accused of taking part in issuing fraudulent certificates of deposit through Stanford International Bank in Antigua, as well as a further scheme relating to $1.2 billion in sales. As in Madoff’s Ponzi scheme, Stanford’s CDs carried improbable high interest rates of return, as much as 15.7%. That is four times what banks in the United States offer on similar accounts.

As reported March 9 by Bloomberg, Stanford knew Davis, the company chief financial officer, in college. Davis then later brought in Pendergest-Holt as chief investment officer. Davis had met Pendergest-Holt at the Baptist Church in Baldwyn, Mississippi.

Employees of Stanford’s company apparently relied heavily on church and community to attract clients. Religion also was a big part of the corporate culture at Stanford’s companies. According to the Bloomberg article, employees say it was common for Davis, based in Memphis, Tennessee, to “clasp the shoulders of employees, look them in the eyes and pray for them.”

Now the prayers should be for investors. So far, only $90 million of the missing $8 billion has been found. Stanford’s assets, as well as those of his companies, have been frozen and placed into receivership by a U.S. federal judge.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

In what appears to be a page right out of the Bernie Madoff book on hedge fund fraud, money managers Paul Greenwood and Stephen Walsh are charged with bilking $550 million out of investors, state and city pension funds and higher education institutions in order to fund elaborate personal purchases that included multimillion-dollar mansions, rare books and 1,350 Steiff teddy bears.

Like Madoff, Greenwood and Walsh had been revered on Wall Street - their supposed investment prowess legendary among clients and colleagues across the country. For years, the two men succeeded in living up to the hype with claims of outperforming the Standard & Poor’s 500 Index. Their bragging came to an abrupt halt on Feb. 25, however, when FBI agents arrested them on conspiracy, securities and wire fraud charges.

The Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission brought separate civil charges against Greenwood and Walsh. In its 22-page complaint, the CFTC charged the two men of fraudulently soliciting some $1.3 billion from investors over the past decade.

Greenwood, 61, and Walsh, 64, are principals of the Greenwich, Conn.-based hedge fund WG Trading Co. LP and Westridge Capital Management in Santa Barbara, Calif. According to SEC documents, the duo conned investors with an elaborate hedge fund investing strategy that involved buying and selling equity futures and enhanced equity index arbitrage trading. 

As part of the scam, investors were told that their money was going toward “conservative” investments. Instead, court documents say the funds were used as a personal piggy bank by Greenwood and Walsh. Included in their buys: $160 million for personal expenses, $80,000 for a Steiff teddy bear (Greenwood is said to own the world’s largest collection), a $10 million property in North Salem, a $4 million home on Long Island’s Gold Coast and a 54-acre riding school and horse farm once belonging to the now-deceased actor Paul Newman.

A number of pension funds and universities are included among those who lost money to Greenwood and Walsh. The Sacramento County Employees’ Retirement System in California reportedly invested nearly $90 million with Westridge Capital Management. The Iowa Public Employee’s Retirement System invested nearly $340 million, and the University of Pittsburgh and Carnegie Mellon University collectively invested $114 million.

According to court documents, there may be as many as 16 universities or public-employee pension funds that used Westridge Capital Management as their investment advisor.

Federal authorities believe the swindle by Greenwood and Walsh could date as far back as 1996. The two men were caught only this month during a routine audit investigation by the National Futures Association. The association found $812 million in assets on the balance sheets of the pair’s hedge fund, with $794 million in promissory notes due from Greenwood and Walsh.

If convicted, Greenwood and Walsh could spend up to 20 years in prison on each of the fraud counts and five years for conspiracy. They currently remain out of jail on a $7 million bond.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Times are tough for hedge funds, and they’re likely to get even tougher. Taking their lead from Capitol Hill, Connecticut lawmakers have proposed three new bills designed to dramatically shake up hedge fund business in that state with stiffer rules governing hedge fund transparency and oversight.

For years, Connecticut - which is home to hundreds of hedge funds - has taken a hands-off approach to hedge fund regulation. Until now that is. As reported Feb. 23 in the Hartford Business Journal, Connecticut’s proposed legislation would require hedge funds to obtain a state license, provide annual financial audits and disclose fees and any changes in management or investing strategy.

The plan also would bar individuals with less than $2.5 million and institutions with less than $5 million in assets from investing in a hedge fund. Stricter rules to promote transparency for hedge funds that hold investments from pension funds are an integral part of the Connecticut legislation, as well.

Connecticut’s hedge fund legislation comes on the heels of similar recommendations currently being touted in Washington. The Hedge Fund Transparency Act of 2009, which was introduced in the Senate on Jan. 29, would impose stricter regulatory oversight of hedge funds.

For years, hedge funds have operated in what many call a regulatory black hole. Despite the fact that more than 9,000 hedge funds exist today, the industry remains largely unregulated. There are no mandatory requirements for hedge fund managers to register with the Securities and Exchange Commission (SEC) or to provide detailed financial disclosures about their investing strategies.

This laxness may in part be responsible for the record number of hedge funds that shuttered in 2008. According to Hedge Fund Research, 920 funds closed down this past year. Of the survivors, the majority posted dismal performances. On average, hedge funds lost more than 18% in 2008.

Hedge funds also have been in the hot seat for their role in short selling and credit-default-swaps, both of which are at the core of the nation’s credit meltdown.

The arrest of hedge fund manager Bernie Madoff added further tarnish to the reputation of hedge funds, with many people citing the industry’s lack of transparency as the reason Madoff, who is accused of running a $50 billion global Ponzi scheme, went undetected from federal authorities for so long.

The bottom line: Heightened vigilance of hedge funds isn’t just a good idea, it’s critical if we want to protect investors and mitigate further risk to the nation’s already troubled financial system. For too long, this once-secret-but-powerful financial sector has operated under a veil of secrecy. It’s time to lift that veil.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Once again, the Securities and Exchange Commission (SEC) is in the hot seat. This time, Harry Markopolos, the former investment manager who tried for years to warn U.S. regulators about disgraced money manager Bernard Madoff, is behind the grilling. On Feb. 4, Markopolos testified before lawmakers that the SEC did nothing to stop Madoff’s alleged $50 billion Ponzi scheme, despite the many red flags that literally were presented at the agency’s doorsteps.

Markopolos is the whistleblower who first lifted the veil surrounding Madoff and his so-called investing business back in 1996. At the time - as well as in later years - Markopolos presented strong evidence of Madoff’s illegal activities to the SEC, but no actions ever were taken. 

House lawmakers are now leveling harsh criticism on the SEC for its failure to stop Madoff and prevent investors from losing some $50 billion. During the course of Wednesday’s testimony, some lawmakers threatened to issue subpoenas to SEC officials who would not answer questions regarding Madoff because of what they said is the agency’s ongoing investigation.

Meanwhile, Markopolos, who is now a fraud investigator, says it is unlikely Madoff acted alone in his crime.

Markopolos also told lawmakers on Wednesday about other Ponzi-type schemes that he has uncovered.

As for Madoff, he remains free on bail, living in his luxury, $7 million Manhattan penthouse. On Feb. 4, the trustee in charge of liquidating Madoff’s businesses said that nearly $1 billion in cash and securities has been recovered to date. Investors have until July 2 to file their claims.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The Bernie Madoff scandal is a classic tale of modern-day dysfunction - and a life lesson for codependents everywhere. For years, investors were quick to sing the praises of the now-disgraced 70-year-old hedge fund manager who is charged with running a $50 billion Ponzi scheme. It wasn’t just individual investors who revered Madoff; global financial institutions from as far away as Switzerland and Colombia, pension funds, banks, hedge funds and charities and foundations were caught up in the adulation, as well, with many holding Madoff in almost God-like status.

Closer inspection of Madoff’s fraud is focusing new attention on the role of certain investment firms - the so-called feeder funds - that funneled clients’ money to Madoff. In spite of constant red flags, including indecipherable accounting statements and double-digit returns that miraculously appeared even in a down market, the people in charge of these feeder funds apparently never thought to ask any questions of Madoff. They simply paid their fees for his investing acumen, and reaped the benefits. 

After all, Madoff was the former chairman of NASDAQ. In investing circles, colleagues referred to him as the King of Wall Street. As it turns out, the King was indeed fallible. 

When asked in interviews how he achieved such remarkable returns month after month and year after year, Madoff would remain coy. He said it was a “proprietary trading strategy.” Now we know that Madoff never did any actual trading at all.

Many people thought Madoff participated in what’s known as “front running,” or using knowledge of trades you are about to do for clients to make a profit. As reported Jan. 26 by Bloomberg, allegations of front running apparently have followed Madoff for years. In fact, many of the feeder funds that did business with Madoff had long suspected he was involved in the illegal activity.

Despite those suspicions, the feeder funds took an ‘ask no questions of Bernie stance.’ The cost of that enabling would be dear, however, with clients of those funds ultimately losing billions and billions of dollars.

Granted, no evidence has been uncovered - yet - to prove that any of the feeder funds connected to the Madoff scandal actually participated in front-running themselves.  Instead, they just ignored the obvious. Faced with returns that were too-good-to-be true, they chose to look the other way.  In other words, they enabled Madoff to conduct his scam. They were just like the parents of the 30-year-old child who is now an adult yet still lives at home, without a job and sponges off Mom and Dad. By obliging the child/adult, they are shrieking their responsibilities as parents because the child will never learn how the real world works.

According to the Bloomberg article, Madoff never could have pulled off his historic crime without the participation of this constant stream of feeder funds-turned-enablers. The premise of a Ponzi scam relies on the reputation of its participants. And Madoff had plenty of participants eager to profit. The feeder funds that funneled money to Madoff included the likes of respected firms like Access International Advisors LLC of New York and Geneva-based Banque Marcuard Cook & Co.

The job of a feeder fund is to thoroughly examine hedge funds for the wealthy clients it represents. Instead of practicing due diligence, however, the feeder funds tied to Madoff turned a blind eye when it came time to protect their clients’ money. In return for that codependency, they charged clients hundreds of millions of dollars in service fees.  

Federal regulators played the enabler card, as well. As far back as the 1970s, the Securities and Exchange Commission (SEC) received complaints about Madoff and his investment-advising business. Among the accusations: Madoff was running a large-scale Ponzi scheme. Despite the seriousness of the claims, regulators never charged Madoff with a crime.

The actions - and inactions - of the many enablers surrounding Madoff came to an abrupt end on Dec. 11, when federal agents formally arrested the hedge fund manager at his luxury $7 million Manhattan penthouse. Later, Madoff confessed to authorities that his business had “all been just one big lie.”  

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The year of 2008 may go down in history as a year of scandals gone wild. From Bernie Madoff’s $50 billion Ponzi scheme to the collapse of the auction-rate securities market, individual and institutional investors alike have found themselves entangled in a financial nightmare that seems to go from bad to worse.

For investors who’ve been stuck holding illiquid auction-rate securities since February 2008, the likelihood that regulators will find a solution to their dilemma anytime soon is remote. Even though some of Wall Street’s biggest firms have bought back more than $60 billion of their clients’ securities, another $135 billion of the bonds still remain frozen.

As reported Dec. 31 by the Boston.com, the illiquidity status of auction-rate securities is hitting small businesses especially hard. Vicor Corp., which makes power systems for electronics, is one of those businesses. The company invested nearly $40 million in auction-rate securities before the market’s collapse in February. At the time, the company’s management thought the bonds were safe and liquid investments. Now, the earliest that Vicor can expect to see some of its auction-rate money is 2010.

UBS is one of the firms that sold Vicor the auction bonds, and it has pledged to buy back about $18 million worth of the securities beginning in June 2010. However, Vicor also bought another $20 million of auction securities from Bank of America, which has yet to offer any kind of buy-back program to Vicor and other large institutional and corporate holders of auction-rate securities.

Another company with a huge chunk of its money tied up in illiquid auction-rate securities is Tufts Health Plan. The Massachusetts-based health care provider has nearly half of its total cash holdings - approximately $30 million - in auction-rate securities at Citigroup. So far, Citigroup hasn’t announced any plans to help Tufts get its money back.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The Securities and Exchange Commission has charged Philadelphia investment manager Joseph S. Forte and his firm, Joseph Forte LP, of swindling investors out of $50 million in a giant Ponzi scheme. According to the complaint filed Jan. 5, Forte is accused of running the scam from 1995 to 2008.

It is the second multimillion-dollar Ponzi scheme to be uncovered by authorities in the past month. On Dec. 11, New York hedge fund manager Bernie Madoff was arrested on charges of duping investors out of $50 billion. Thousands of retirees, Hollywood celebrities, charities, foundations, global banks and big hedge funds lost everything in Madoff’s subterfuge. Even Madoff’s own sister, Sondra Wiener, was a target of her brother’s scheme. Wiener, 74, lost an estimated $3 million in the Madoff scam, and is now trying to sell her Florida home.

In the case of Forte, the Broomall, Pennsylvania, money manager told FBI agents he had solicited approximately $50 million from dozens of individuals and entities to participate in a commodity futures pool to trade, among other things, S&P 500 stock index futures, foreign currency futures, and metal futures. To conceal his fraud, Forte did not register with the U.S. Commodity Futures Trading Commission and provided quarterly account statements to pool participants that showed profitable returns.

In reality, however, Forte was neither successfully trading nor making an effort to do so.

According to the SEC complaint, Forte consistently lost money in the limited trading that he did, withdrew millions of dollars in so-called fees for his personal use based on the falsely inflated value of Forte LP, and used investor funds to repay other investors.

In addition to misrepresenting the profitability of his trading business, Forte and Forte LP are accused of lying to investors about the use of their funds. Although Forte claimed he raised approximately $50 million from investors for the purpose of participating in the trading program, Forte deposited only $25.8 million in the trading account between January 1998 and October 2008. During that same time period, he withdrew $23.1 million. Forte claims he took at least $10 million to $12 million in fees for his personal use based on the falsely inflated value of Forte LP. However, Forte LP statements to investors reflect fees charged of $28.7 million between March 1995 and September 2008.

Forte also told authorities he used up to $20 million of investor funds to repay other investors, which is the hallmark of a Ponzi scheme.

The SEC’s complaint alleges that Forte and Forte LP also lied to investors about the value of the partnership portfolio. For example, in September 2008, investors were told that the Forte LP portfolio had a value of more than $150 million. In fact, Forte LP’s trading account at the time had a balance of only $146,814.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.