Saturday, January 31, 2009

Losses in Cornerstone Ministries

Cornerstone Ministries Investments, Inc. was in the business of lending money to fund churches and faith-based organizations through churches by raising money through the issuance of Cornerstone stocks and bonds. Church-going consumers interested in making investments in the development of churches were targeted as investors in Cornerstone stocks and bonds.

Cornerstone departed from its core mission and branched out into secular, speculative real estate ventures at the expense of its investors. Now, the values of those stocks and bonds have plummeted, leaving the investors with substantial losses.

Wednesday, January 28, 2009

Oppenheimer Champion Income Fund -- Wrong-Way Bets

Oppenheimer’s Champion Income Fund sank 78.5 percent last year from wrong-way bets tied to commercial mortgages, making it the worst performing taxable high-yield bond fund. Angelo Manioudakis, a portfolio manager who oversaw $16 billion in fixed-income assets, resigned on Dec. 12. Two investors filed complaints yesterday with the Financial Industry Regulatory Authority claiming the company misrepresented the fund’s risk. OppenheimerFunds spokeswoman Pisarra declined to comment.

Fielding, who made headlines in 2003 when he donated $10 million to St. John’s College in Annapolis, Maryland, said his compensation will drop about 75 percent after last year’s performance. Oppenheimer, a private company, doesn’t disclose employee compensation, Pisarra said.

He founded a money-management firm in Rochester in 1980. OppenheimerFunds bought that business in 1996, and consolidated the company’s municipal bond fund group under Fielding in 2002. The unit currently manages $22 billion, down from a peak of $35 billion in September, 2007.

Fielding went to worst from first by sticking to his wagers. He bought airport bonds secured with airline company revenue after the Sept. 11 terror attacks and municipal bonds backed by a 1998 settlement with tobacco companies after several lawsuits undermined demand for the debt in 2003.

Tuesday, January 27, 2009

Missing Fund Manager Arrested

Florida fund manager Arthur Nadel, whose family reported him missing in early January, was arrested on Tuesday on criminal charges of securities fraud, U.S. officials said.

New York FBI spokeswoman Monica McLean said Nadel -- head of Scoop Management, overseeing six hedge funds he had valued at more than $300 million -- would make an initial appearance in a federal court in Florida.

"Arthur Nadel surrendered in the company of two lawyers to FBI agents in Tampa," McLean said.

In a criminal complaint filed in U.S. District Court in Manhattan, Nadel was charged with securities fraud and wire fraud related to his funds from around 2004 until at least January 14 this year.

The court document contains excerpts of a handwritten letter from Nadel, 76, to his wife. It says the letter was found by Scoop employees in an office shredding machine.

"The avenues to money for you will likely be blocked soon," the letter quoted in an affidavit by FBI agent Kevin Riordan said. "You must use the trust (yours) to your benefit as much and as soon as possible."

Monday, January 26, 2009

Schapiro Aims to Broaden SEC's Responsibilities, Boost Funding

Mary Schapiro, who is poised to be sworn in today as the chairman of the Securities and Exchange Commission, will push to broaden the agency's responsibilities as well as to boost its funding levels, she told a top Democratic lawmaker last week.

Responding to written questions from Michigan Sen. Carl Levin, Schapiro said it is "safe to say" that the SEC "has not been funded at a level commensurate with its responsibilities" but that "additional oversight capability is essential and [I] look forward to working with Congress to ensure that the agency has the resources it needs."

Her comments were publicly released following the Senate's unanimous vote Thursday night confirming her as chairman of the SEC. She replaces Christopher Cox, who left the beleaguered agency quietly on Tuesday.

Schapiro, formerly the chief executive officer of the Financial Industry Regulatory Authority, pledged at a confirmation hearing before the Senate Banking Committee earlier this month to "reinvigorate" the SEC's enforcement division and ensure the commission adopts a "laser-like focus" on uncovering fraud and protecting investors.

Sunday, January 25, 2009

Thain Resigns After BofA Learns That Merrill Paid Bonuses Early

His Wall Street pedigree seems impeccable. A top job at Goldman Sachs. The chief of the New York Stock Exchange. Finally, the reins of the stock market’s “thundering herd,” Merrill Lynch.

But in less than 15 minutes on Thursday, the charmed career of John A. Thain was derailed.

Three weeks after his foundering brokerage firm was sold to Bank of America for $50 billion in stock, Mr. Thain was pushed out by the bank’s chief executive, Kenneth D. Lewis, who is struggling to contain the damage from his bank’s daring gamble on Merrill Lynch.

Gaping losses at the brokerage firm forced Bank of America to seek a second financial lifeline from Washington last week, leaving Mr. Lewis’s bank, the nation’s largest, facing an uncertain future.

Saturday, January 24, 2009

Auction Rate Securities Still Failing to provide Liquidity Solution for Large Investors

2008 marked many memorable controversies in the financial world. From Bernie Madoffs $50 billion ponzi scheme to the crash of the financial markets, and let’s not forget the collapse of the auction-rate securities (ARS) market. As a result, individual and institutional investors of ARS have now found themselves entangled in a financial nightmare.

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, 2008 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.

Suffering from the same terrible fate is another company named Tufts Health Plan, who lost a huge chunk of its money that was tied up in illiquid auction-rate securities The Massachusetts-based health care provider has nearly half of its total cash holdings - approximately $30 million - in auctionrate securities at Citigroup. So far, Citigroup hasn’t announced any plans to help Tufts get its money back.

Marc Drier Likely To Remain In Jail

Marc Dreier, the New York lawyer jailed since his arrest for allegedly cheating hedge funds, won’t be able to post the $20 million bond that would free him, his lawyer told a federal judge.

U.S. Magistrate Judge Douglas Eaton in New York yesterday modified an earlier ruling that ordered Dreier held without bail until trial. Eaton required Dreier to have four co-signers and submit to home detention and electronic monitoring. Dreier’s lawyer, Gerald Shargel, said he will probably appeal.

“Effectively, that will keep my client in jail,” Shargel told Eaton, the same judge who set $10 million bail for accused swindler Bernard Madoff, who is charged with running an unrelated $50 billion Ponzi scheme.

Dreier, 58, was arrested Dec. 7 on charges that he persuaded two unidentified hedge funds to give him more than $100 million by falsely claiming he was selling at a discount notes issued by Sheldon Solow, a New York developer. Prosecutors later said “very sophisticated investors” lost $380 million. In a letter to the judge Jan. 21, they said that the loss topped $400 million.

Friday, January 23, 2009

Hedge Fund Is A Ponzi Scheme According To SEC

A former Texas bail bondsman who told investors he ran a $45 million hedge fund and installed a swimming pool at his office was sued by U.S. regulators for allegedly operating a Ponzi scheme.

Rod Cameron Stringer of Lamesa misappropriated millions of dollars from investors since 2001 while touting a trading strategy he said had annual profits of as much as 61 percent, the Securities and Exchange Commission said in a suit at federal court in Lubbock, Texas. A Federal Bureau of Investigation probe shows he raised at least $8.5 million since 2007 and had losses while investing less than a fifth of the cash, the SEC said.

Thursday, January 22, 2009

Madoff Trustee May Take Five Years To Pay Investors

Irving Picard, the lawyer seeking to recover money invested with alleged swindler Bernard Madoff, may take more than five years to pay all customers of the man accused of a $50 billion Ponzi scheme.

The 67-year-old Picard is tackling the most complex fraud in the four-decade history of the Securities Investor Protection Corp., the government-backed corporation that hired him, SIPC President Stephen Harbeck said.

Picard was named trustee of Bernard L. Madoff Investment Securities LLC on Dec. 15, four days after prosecutors said Madoff confessed to the crime. Picard was told to liquidate the brokerage, find assets and distribute them to Madoff’s customers.

Picard and lawyers from his firm, Baker Hostetler LLP, are reviewing records with the help of ex-employees at Madoff’s offices in Manhattan, a person familiar with the case said. Judges gave Picard power to seize assets and records, demand documents, summon witnesses and enter Madoff’s residences, including the apartment where he’s under house arrest.

So far, Picard and attorneys from Baker Hostetler, the Cleveland-based firm he joined the week he accepted the trustee job, have found $830 million in assets and sent letters to 8,000 potential claimants.

Tuesday, January 20, 2009

Raymond James ARS Investors at a Total Loss?

Investors with Raymond James Financial, who thus far have only received a four-page letter dated January 2, 2009 from Thomas James, chairman and chief executive officer, in which he says the company cannot repurchase the securities it sold because it doesn’t have enough capital on hand, are still holding out for answers from the St. Petersburg-based financial services firm regarding their illiquid auction rate securities.

The message is of little comfort to clients of Raymond James Financial who currently own about $1 billion in outstanding auction-rate bonds and auction-rate preferred securities. It’s the same scenario they’ve faced since February 2008, when the $330 billion auction-rate securities market collapsed and left hundreds of thousands of investors unable to sell securities that had been touted as cash equivalents.

Facing pressure from state and federal regulators, a number of financial firms such as UBS, Wachovia, Merrill Lynch, Morgan Stanley and others announced plans to repurchase the illiquid securities from their clients. Many already have completed their buyback programs. Clients of Raymond James Financial, however, have been left in a holding pattern.

As it turns out, they may be in for a long wait. Any potential relief is likely tied to Raymond James Financial’s ability to secure a bank loan and buy back the securities after it becomes a bank-holding company. But that process will not be completed until next summer.

Meanwhile, Raymond James Financial remains under investigation by the Securities and Exchange Commission (SEC), the New York Attorney General and the Florida Office of Financial Regulation for its handling of auction-rate securities.

As of December 31, 2008, shares of Raymond James Financial had fallen more than 40% meaning the company’s stock has taken a beating from the firm’s inability to make good on its customers’ auction-rate securities.

Oppenheimer Champion Fund Arbitration

Oppenheimer Champion Income Fund (OCHBX, OPCHX and OCHCX) and the Oppenheimer Core Bond Fund (OPIGX) Fund have been the recent subject of investor arbitraitons.

The recomendation of the Oppenheimer Champion funds was typically pitched to investors either as a conservative high income fund (Champion) or conservative intermediate fund (Core) or at least a high income or intermediate funds that were not significantly riskier than it's peers.

The Champion Fund dropped a stunning 55% in November of 2008 alone. For calendar year 2008, Champion Income has lost 79.1%, a record eclipsed only by a high income fund of southern based Regions.

The representations made by financial advisors, the marketing material and even the prospectus portrayed the Oppenheimer Champion Income Fund as conservative. This was very misleading. For example, even the revised prospectus that was published in 2008, after the meltdown began, portrays the Champion fund as appropriate for clients who were retired and makes no disclosures about the Champion fund being dramatically riskier than its peer group.

Rather than making meaningful, detailed disclosures about the risks of the Oppenheimer Champion Income Fund, instead, generic, boilerplate disclosures were made. The disclosures were the same sorts of disclosures virtually every mutual fund made. The disclosures did not provide the degree of clarity needed by investors to determine the true riskiness of these funds.

The Champion fund took a massive bet in high risk derivatives in the form of mortgage backed securities and credit default swaps. The full risks of the Fund’s illiquid, speculative derivatives were not meaningfully disclosed to investors. The Champion Income Fund was portrayed as a garden variety high income fund. Unfortunately, starting in late 2006, Angelo Manioudakis, the 42 year old head of the firm's Core Plus team responsible for managing the Fund, concentrated the Fund in total-return swaps.

These are highly illiquid, speculative and complex agreements between parties to exchange cash flows in the future based on how a set of securities performs. Specifically, the Fund was betting that top-rated commercial mortgage-backed securities would rally in 2008. The Fund gambled, and lost, with money for investors that was not supposed to be gambled with.

Additionally, the Fund was also concentrated in credit-default swaps (CDSs). The CDSs declined $238 million through September alone. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.

Saturday, January 17, 2009

$8.3 Billion Loss Likely to Spilt Citigroup

Double of what analysts had predicted, Citigroup posted a whopping $8.9 billion fourth-quarter loss. The New York-based bank has been forced to resort to the drastic measure of splitting into two separate entities: Citicorp and Citi Holdings, as a means to try and raise some capital.

Citicorp will focus on traditional banking, with Citi Holdings to include the bank’s asset management and consumer finance units, as well as some $300 billion of Citigroup’s most risky assets. Citi Holdings also will oversee Citigroup’s 49% stake in the recently announced venture with Morgan Stanley.

By splitting in two, CEO Vikram Pandit believes Citigroup will be able to free up its capital, while at the same time unload the more troubled assets that have continued to plague the bank for the past year.

Citigroup’s fourth-quarter loss also included $7.78 billion in write-downs on subprime mortgages, collateralized debt obligations and structured investment vehicles. In total, Citigroup’s losses have surpassed the $90 billion mark over the past 15 months.

During the Jan. 16 2009 conference call with analysts, Pandit also noted the likelihood of future layoffs. The bank, which already reduced its workforce by 52,000 in 2008, is expected to let go another 23,000 employees by the end of December 2009.

In addition Citigoup’s woes are reflected in their plummeting share prices, which plunged nearly 90% in 2008. In October of 2008, the bank was the recipient of $45 billion from the U.S. Treasury in an attempt by the government to conduct an emergency rescue of the bank. Meanwhile, news of Pandit’s restructuring plans did little to improve investor confidence. Citigroup stock has been trading at below $3.50 which is a sign of trouble ahead, especially when you compare their January 16, 2007 stock price which was trading at $54.39 some three years ago.

Thursday, January 15, 2009

NYAG Investigates Hedge Funds That Dealt with Madoff

New York's attorney general is investigating whether a hedge fund operator who lost more than $1 billion in the Bernard Madoff scandal misled schools and charities about how he was investing their money.

A person familiar with the probe says Andrew Cuomo's office has sent subpoenas to three funds run by investment adviser J. Ezra Merkin. The individual spoke on condition of anonymity because of the sensitivity of the investigation.

Merkin's investors say he never told them he was turning over their money to Madoff, who has confessed to losing up to $50 billion in a giant Ponzi scheme.

Tuesday, January 13, 2009

Morgan Stanley Smith Barney

Citigroup Inc. and Morgan Stanley agreed Tuesday to combine their brokerages in a deal that shows how much Citigroup wants to slim down and build up cash.

Morgan Stanley is paying Citigroup $2.7 billion for a 51 percent stake in the joint venture. Citigroup will have a 49 percent stake.

Citigroup's retail brokerage, Smith Barney, was once the crown jewel in its wealth management business.

The new unit, to be called Morgan Stanley Smith Barney, will have more than 20,000 advisors, $1.7 trillion in client assets; and serve 6.8 million households around the world, the companies said.

NYAG Probes Charities Defrauded by Madoff

New York state prosecutors are investigating frauds on charities caught up in the scandal of accused swindler Bernard Madoff, New York Attorney General Andrew Cuomo said on Tuesday.

Cuomo, whose office has not previously publicly declared a probe of the purported worldwide $50 billion Madoff fraud, said the scandal had given his office great cause of concern.

On Monday a U.S. magistrate judge rejected a government request to revoke's Madoff's bail and send him to jail while the investigation of his alleged fraud proceeds.

The 70-year-old investment adviser remains under house arrest in his $7 million Manhattan apartment.

Monday, January 12, 2009

Judge Permits Madoff to Remain Free on Bail

A judge allowed disgraced money manager Bernard Madoff to remain free on bail Monday, rejecting an attempt by prosecutors to send him to jail for mailing more than $1 million in jewelry to family and friends over the holidays.

The decision is sure to outrage investors who have been clamoring for Madoff to be sent to jail for allegedly carrying out the largest financial fraud in history.

Prosecutors said the gifts were grounds to have his bail revoked because what's left of Madoff's assets will have to be returned to burned investors.

But the judge not swayed by their arguments that Madoff represents an economic danger to the community because of the size of the fraud and his actions in sending the gifts. Judges in bail decisions normally consider two main factors: whether the defendant is a flight risk or a danger to the community.

"The government fails to provide sufficient evidence that any potential future dissemination of Madoff's assets would rise to the level of an economic harm," Magistrate Judge Ronald L. Ellis wrote.

The anxiously awaited decision does put more restrictions on Madoff, including forcing him to come up with a list of items at his apartment and allowing a security firm to check on the items. The security company will also be allowed to search all outgoing mail from Madoff to ensure that no property has been transferred.

Defense lawyer Ira Sorkin says the "the opinion speaks for itself and we intend to comply with the judge's order." Sorkin has said the gifts were an innocent mistake and said he is neither a danger to the community nor a threat to flee.

Saturday, January 10, 2009

Morgan Stanley and Citigroup Plan to Merge Brokerage Departments

Still suffering in the aftermath of financial crisis, job lay-offs and a lack of investor confidence, mega bank Citigroup is reportedly gearing itself up to sell its Smith Barney brokerage unit to Morgan Stanley.

According to reports in the Wall Street Journal and the New York Times, the deal would be structured as a joint venture and entail payment from Morgan Stanley for an undisclosed sum that would give Morgan a larger stake in the transaction.

News of a potential deal appeared shortly after Citigroup announced that Robert Rubin, former U.S. Treasury secretary under Bill Clinton, had resigned from his post as senior adviser and director of the bank. Rubin’s resignation came after ongoing criticism for his role in encouraging the bank to increase its trading of high-risk mortgage-related securities - a move that many say led to Citigroup’s current financial troubles.

In the past six months, Citigroup has been rocked with staggering financial losses. Despite a second, $20 billion injection of capital from the government’s $700 billion bailout, along with federal guarantees to cover more than $300 billion of the bank’s exposure to toxic mortgage-backed securities, Citigroup continued to experience problems. With losses totaling more than $20 billion, its stock value responded by plunging nearly 80% in 2008.

Faced with eroding investor confidence and a stock price that continued to slide downward, CEO Vikram Pandit reportedly initiated private talks in November with his top executive team regarding the sale of all or parts of the financial services company.

The possibility of this merge would reunite Pandit with former employer Morgan Stanely. Pandit , who left Morgan Stanley in 2005 after being passed over for a promotion and providing them with 22 years of service went on to begin his own hedge fund firm, Old Lane. Old Lane was later sold for $800 million to Citigroup. Pandit had been on the job with Citigroup for only five months before taking the reins of the company as CEO. His predecessor had been Charles Prince, who resigned following shockingly large losses connected to investments in subprime mortgages.

Friday, January 9, 2009

Oppenheimer Rochester Fund Manager, Ron Fielding, Under Fire as Losses Mount

Mutual fund manager, Ronald Fielding, and Oppenheimer Rochester National Municipals fund are coming under increasing fire after losing nearly 50% of its value. According to Morningstar, Inc., Oppenheimer Rochester National Municipals fund ended up as the worst performer in the open-end municipal bond fund category in 2008.

Problems for the Rochester National Municipals fund add to a slew of setbacks for New York-based OppenheimerFunds. In recent months, the company has encountered a lengthy losing streak with several of its bond funds, including the Champion Income fund. After making bad bets on risky mortgage-backed securities, the Champion fund plummeted nearly 80% last year, making it the worst-performing taxable high-yield bond fund of 2008. On Dec. 12, the fund’s manager, Angelo Manioudakis, abruptly resigned from his position with OppenheimerFunds.

Meanwhile, several investors who unexpectedly lost huge amounts of their money in the Champion Income fund have filed complaints with the Financial Industry Regulatory Authority (FINRA), charging that Manioudakis and Oppenheimer failed to disclose the fund’s risks to them.

As for Oppenheimer’s Rochester National Municipals fund, its financial woes began in 2007, following the onset of the subprime mortgage debacle. As of Dec. 31, 2008, the fund had $3.6 billion in assets; three months earlier it was valued at $6.7 billion, according to a Jan. 8 article by Bloomberg.

The losses are yet another black mark against OppenheimerFunds, which owns the hedge fund firm Tremont Group Holdings. In late December, Tremont revealed it had gambled and lost more than $3 billion in the Bernie Madoff Ponzi scheme.

Now it’s Ron Fielding who’s in the hot seat for his questionable management decisions with the Rochester funds. For years, Fielding made his mark in the municipal bond world by buying up the riskiest and least desirable portions of the bond market, including sectors like tobacco and airlines. His gambles failed to pay off, however, when he bought airport bonds secured with airline company revenue following the terrorist attacks of Sept. 11. Another bad bet included the purchase of municipal bonds backed by a 1998 settlement with tobacco companies. A combination of anti-smoking efforts and lawsuits against cigarette manufacturers later proved to drastically reduce demand for the debt.

As a result, Fielding’s funds took on a lot more credit risk. Oppenheimer’s Rochester family offers 18 different bond funds - many of which have 25% of their assets invested in tobacco bonds. In the case of the Rochester National Municipals fund, its most notable holdings are tobacco and airline bonds. One key danger for the fund is the possibility of heavy redemptions in the future.

If that happens, the fund would be forced to sell some of its holdings. And in the current market environment, that means selling at well below par value. In what may be a sign such action is looming, the fund substantially increased its credit line with Citibank last month from $1 billion to $3 billion.

Fielding in all his wisdom took on risk which resulted in a failure. His adverse style in the municipal bond arena may have worked at one time, but market conditions are no longer what they used to be. Now, investors are paying the ultimate price for Fielding’s risk-taking behavior.

Madoff Exposure Spreads to Labor Union Pension Funds

The financial carnage coming out of the Bernard Madoff investment scandal is now spreading from charities and wealthy individuals to labor union pension funds. In recent days, several have fessed up to their members their significant exposure to Madoff's investment scheme, which will result in massive losses to their members.

CNBC has learned that one union, the Carpenters local in Syracuse, N.Y., has lost the majority of the $100 million to $150 million it had in pension money because of its dealings with Madoff, people close to the matter said. The union's money manager, J.P. Jeanneret Associates of Syracuse, didn't return a telephone call for comment.

The Syracuse carpenters local isn't alone. Pat Morin, business manager of Empire State Carpenters Union, is sifting through the wreckage in his own portfolio, which at the end of June had around $800 million in assets under management. Morin says his fund has exposure to Madoff as well, largely the result of consolidation in union pension funds where locals like Syracuse had transferred money to his oversight.

Syracuse consolidated in June, but that doesn't mean that the Syracuse fund will now be covered by money in the larger pool. Morin says pension assets remain segregated at least for a period of time, meaning that Syracuse may have to shoulder the entire Madoff hit on its own, which one person close to the matter said was nearly all the money it had under management. Morin declined to comment on the Syracuse exposure.

The labor union exposure to the Madoff Ponzi scheme adds another twist in the scandal, which may be the largest in recent financial history.

Thursday, January 8, 2009

Madoff on Verge of Disbursing $173 Million Prior to Arrest

Prosecutors said Thursday that investigators found 100 signed checks worth $173 million in Bernard Madoff's office desk that he was ready to send out to his closest family and friends at the time of his arrest last month.

The detail was provided in a court filing Thursday as prosecutors argued that Madoff should have his bail revoked and be sent to jail. They said the checks were further evidence that he wants to keep his assets away from burned investors.

In the filing, Assistant U.S. Attorney Marc Litt said Madoff cannot be trusted because he had long engaged in a "scheme that required the defendant to lie routinely to thousands of people and a scheme which has caused extraordinary damage to individuals, families, and institutions all over the world."

The judge will now decide whether Madoff should be sent to jail or remain free on bail in his luxury Upper East Side penthouse.

Defense lawyers say bail should not be revoked because he is not a risk to flee or a danger to community.

Investigators previously have said that Madoff had planned on distributing more than $200 million to his closest friends and family after he realized his scheme had unraveled. He also was accused of sending more than $1 million worth of jewelry to friends and family over the holidays, prompting prosecutors to ask a judge to revoke his bail.

Prosecutors say he presents "grave" economic harm to the community because of the wide range of his alleged fraud, and they cited the attempt to distribute some of his wealth in the past month as proof of the damage he can do.

"The only thing that prevented the defendant from executing his plan to dissipate those assets was his arrest by the FBI on Dec. 11," prosecutors argued.

The letter was a response to a letter Madoff's lawyers had submitted to U.S. Magistrate Judge Ronald L. Ellis on Wednesday.

The defense lawyers had noted that Madoff and his wife had offered to give up their assets, including four properties in Manhattan, Montauk, N.Y., Palm Beach, Fla. and Antibes, France, along with four boats and three cars. The U.S. properties alone were estimated to be worth more than $19 million.

"Mr. Madoff's conduct ... is not the conduct of a man who is unwilling to face justice in this matter," the lawyers wrote, noting that Madoff encouraged his sons at the outset to tell the authorities of the exact nature of his fraud and that he planned to turn himself in.

Litt, the prosecutor, wrote that Madoff's "effort to paint his pre-arrest actions in heroic terms should be viewed with great skepticism."

SEC Approves FINRA Rule to Drastically Limit Motions to Dismiss in Arbitration

Abusive Motions to Dismiss Cases Will Face Stringent Sanctions

The Financial Industry Regulatory Authority (FINRA) today announced that the Securities and Exchange Commission (SEC) has approved an important change FINRA requested to its dispute resolution rules that will significantly reduce the frequency of motions to dismiss arbitration cases before investors have a chance to present their case.

The new rule responds to investor concerns regarding abusive and duplicative filing of motions to dismiss, also called dispositive motions. FINRA received complaints that parties - most often respondent firms - were filing dispositive motions routinely and repetitively, causing increased costs for claimants, who are typically retail investors.

"In recent years, there has been an increase in motions to dismiss by respondents, even before individual claimants presented their cases," said Linda Fienberg, President of FINRA Dispute Resolution. "Although arbitrators rarely grant such motions, it is costly and time consuming for parties to defend motions to dismiss. This new rule sharply limits the bases for making motions to dismiss and penalizes those who abuse the dismissal process."

By narrowing significantly the grounds for granting dispositive motions before investors present their case, the new rule will ensure that claimants in arbitration have a full opportunity to argue their case. Under the new rule, a motion to dismiss before a claimant's case is presented can only be granted on three specific grounds, and there are stringent new sanctions against parties for engaging in abusive case-dismissal practices.

If a party in an arbitration case files a dispositive motion before a claimant finishes presenting its case, the arbitration panel can only grant the motion for three reasons: the parties have settled their dispute in writing; there is a "factual impossibility," meaning the party could not have been associated with the conduct at issue; or, the motion could be granted under the eligibility rule that requires parties to bring arbitration claims within six years of the events at issue.

The new rule also requires that the arbitrators conduct a hearing on motions to dismiss, and that a decision to grant the dispositive motion be unanimous. The panel also is required to issue a written explanation of a decision to grant dismissal.

Additionally, a party is prohibited from re-filing a denied motion to dismiss unless specifically permitted by an order of the panel. If the panel determines that a party filed a motion in bad faith, the panel may, under existing rules, issue sanctions that can include fines, initiation of a disciplinary referral, or dismissal of a defense.

As for costs and penalties, the party seeking a dismissal will be assessed all the related fees if the motion is denied. The arbitrators must also award costs and attorneys' fees in favor of the party opposing a motion that is deemed to be frivolous by the panel. When a respondent files a motion to dismiss after the conclusion of the claimant's case, the provisions above would not apply. However, the rule would not prevent the arbitrators from issuing an explanation or awarding costs or fees.

Wednesday, January 7, 2009

Madoff Remains Free on Bail

Bernard Madoff, awaiting trial for securities fraud, remained free on bail while a federal judge considered a request by prosecutors to send him to prison for mailing $1 million of valuables in violation of an asset freeze.

Madoff disposed of five items including “very valuable jewelry,” Assistant U.S. Attorney Marc Litt said yesterday in Manhattan federal court. The government has three of the items, Litt told U.S. Magistrate Judge Ronald Ellis. Defense lawyer Ira Sorkin said the objects, including watches and cuff links, were heirlooms innocently sent to Madoff’s relatives. Sorkin said he told his client to retrieve them and alerted the government.

Madoff, 70, was charged last month for allegedly directing a $50 billion Ponzi scheme out of his New York investment firm. He is free on $10 million bail while under house arrest and electronic surveillance. Litt said the transfer of valuables is a “changed circumstance” allowing the revocation of bail.

Ellis declined to immediately rule on the government request, asking for legal briefs from both sides by Jan. 7. As Madoff fought yesterday to stay out of jail, his alleged victims continued to detail their losses with him and regulators sought to identify assets they could use to repay customers.

Picard has identified $830 million in liquid assets in Madoff’s defunct brokerage firm, Bernard L. Madoff Investment Securities LLC, according to the Securities Investor Protection Corp. The assets may be subject to recovery by Madoff’s customers, SIPC Chief Executive Officer Stephen Harbeck told a congressional committee yesterday in prepared testimony.

At yesterday’s bail hearing, Litt argued that the mailing of the valuables by Madoff and his wife Ruth, which Sorkin said began Dec. 24, violated an agreement to freeze Madoff’s assets as part of a Securities and Exchange Commission lawsuit.

Saturday, January 3, 2009

FINRA Dispute Resolution 2008 Statistics


Summary Arbitration Statistics November 2008

New Case Filings through November:

2006 4,358
2007 2,986
2008 4,414

2008 vs. 2007 represents an increase of 48%.

Friday, January 2, 2009

Information For Madoff Customers

The U.S. District Court for the Southern District of New York has granted the application of the Securities Investor Protection Corporation (SIPC) for the liquidation of Bernard L. Madoff Investment Securities LLC (BMIS). The court appointed Irving H. Picard as trustee for the liquidation of BMIS.

For more information, investors should contact the SIPC trustee at 888-727-8695.

Additional Information for Madoff Customers

Scandals and Setbacks: a Financial Summary of 2008

2008 will forever be the year that subprime mortgages and corporate scandals altered the face of Wall Street. With $800 billion in writedowns and losses the market found itself buried under the weight of the subprime crisis. Stock markets worldwide crashed by more than $30 trillion taking mega investment houses like Bear Stearns down with them. At the core of the problem were investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs), which all lead to State, municipal and corporate pension funds suffering huge losses.

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February 2008 and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra- Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value.

Investors, meanwhile, are suing the funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested December 11, 2008 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

Confidence in Wall Street was ultimately lost, with the enormity of the Madoff scandal, and the failure of government officials to step in before it was too late. Subsequently, investors and Wall Street will forever be scarred from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions.

Thursday, January 1, 2009

SEC Halts Ponzi and Affinity Fraud Scheme

The Securities and Exchange Commission has obtained an emergency court order to halt an alleged Ponzi scheme and affinity fraud that collected more than $23 million from thousands of investors in the Haitian-American community nationwide through a network of purported investment clubs.

The SEC alleges that Creative Capital Consortium LLC and A Creative Capital Concept$, LLC (collectively, Creative Capital) and its principal, George L. Theodule, began conducting the scheme as early as November 2007 by urging investors to form investment clubs to funnel funds to Theodule and Creative Capital. Theodule solicited investors by guaranteeing a 100 percent return on their investment within 90 days based on his claimed successful trading of stocks and options. According to the SEC's complaint, investors also were promised that Creative Capital's trading profits were being used to fund new business ventures, including some to benefit the Haitian community in the U.S., Haiti, and Sierra Leone. The SEC alleges that Theodule has lost at least $18 million trading stocks and options just over the last year, and Creative Capital merely repaid earlier investors with monies collected from new investors in typical Ponzi scheme fashion. The SEC also alleges that Theodule has commingled investor funds with his personal funds and misappropriated at least $3.8 million for himself and his family.

"This alleged Ponzi scheme preyed upon unsuspecting members of a close-knit community, attempting to take advantage of the trust they had in each other," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "As always, investors need to be wary of investment opportunities that guarantee results and tout extraordinary returns."

David Nelson, Director of the SEC's Miami Regional Office, added, "This case demonstrates that individuals will often rely on a shared affinity to gain investors' trust. In this case, Theodule allegedly abused that trust to con thousands of investors in the Haitian-American community."

Judge Donald M. Middlebrooks, U.S. District Judge for the Southern District of Florida, issued the order on December 29 placing Creative Capital under the control of a receiver to safeguard assets, as well as other emergency orders, including temporary restraining orders and asset freezes.