Ponzi Scheme According to FBI — Billions of dollars in Fraud — and they want your house too?

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Madoff Charged With Securities Fraud

[Bernard Madoff] Madoff.com

Bernard Madoff

Bernard L. Madoff, the founder of Bernard L. Madoff Investment Securities and a fixture of the Wall Street trading world for decades, was arrested Thursday morning by Federal Bureau of Investigation agents and charged with criminal securities fraud by federal prosecutors in Manhattan.

The criminal complaint filed against Mr. Madoff alleges that he told senior employees Wednesday that his business was “a giant Ponzi scheme,” according to a person familiar with the matter. The alleged scheme involved tens of billions of dollars, but the extent of investor losses wasn’t immediately clear.

The disclosure came after Mr. Madoff tried to distribute early bonuses to employees of his firm, prompting questions by senior employees, a person familiar with the situation said.

Mr. Madoff, 70 years old, allegedly told employees he had a couple of hundred million dollars left and wanted to distribute it before turning himself in to authorities, this person said.

The Securities and Exchange Commission is expected to file parallel civil charges against Mr. Madoff.

The alleged scheme apparently involved an asset-management unit of Madoff Securities. The New York firm is primarily known for its business of market-making in stocks. The asset-management group at Madoff oversaw money for high net-worth individuals, hedge funds and other institutions, according to another person familiar with the matter.

An attorney believed to be representing Mr. Madoff in the matter couldn’t be immediately reached for comment.

Write to Amir Efrati at amir.efrati@wsj.com, Tom Lauricella at tom.lauricella@wsj.com and Dionne Searcey at dionne.searcey@wsj.com

6 Responses

  1. Salon The Web Site
    Sunday, Jan 4,

    The economy crumbled
    It was the worst of times for ordinary Americans. And even worse times for deregulators and supply-siders. The bright side? Their party is over.

    By Andrew Leonard

    Read more: Technology & Business, Andrew Leonard, Economy, 2008

    Former Chairman of the Federal Reserve Alan Greenspan testifies before the House Oversight and Government Reform Committee in Washington Oct. 23, 2008.

    Jan. 2, 2009 | Of all the economic earthquakes that racked the global economy in 2008, one temblor ranks supreme. Alan Greenspan’s declaration to Congress on Oct. 23: “I made a mistake.”

    In those four words can be heard the crumbling of at least three decades of ideological dominance. Technically speaking, Greenspan was acknowledging that he had misjudged the private sector’s ability to manage risk in a largely deregulated environment. After all the carnage on Wall Street in 2008, the conclusion, even to Greenspan, was inescapable: High finance’s best and brightest had proved incapable of understanding their own business.

    How did we get here?

    We will be mulling over the extraordinary economic events of 2008 for years to come. We could have plenty of morbid fun, right now, reliving the nightmare in horrific detail: the collapse of the subprime-mortgage-backed securities market; the demise of Bear Stearns and Merrill Lynch; the bankruptcy of Lehman Brothers; the “rescue” of AIG; the great drama of the fight to authorize the Troubled Assets Relief Program, complete with John McCain’s ludicrous, and revelatory, campaign “suspension,” and the sight of Hank Paulson on bended knee before Nancy Pelosi. We would be remiss not to note the wild swings in all kinds of commodity prices, not least the surge of gas and oil prices to record highs, followed by an even more amazing tumble. A historically unprecedented implosion of the U.S. residential housing market achieved the previously unthinkable: The American consumer juggernaut halted dead in its tracks.

    Oh, and the economy played a critical role in the outcome of an epochal presidential election. No little thing, that. And finally, as the year came to a close, we can try to enjoy our holidays while wondering whether the really bad stuff is only just getting started. 2009 could be much worse than 2008.

    That’s quite a year, and what’s most astonishing is how much has happened just since September, and how dramatically the stakes have grown. In April, I wrote a story for Salon asking the intentionally provocative question: “Is this recession another Great Depression?” But even I was skeptical of the thesis — at the time I wasn’t totally sure we were in a recession. I certainly did not anticipate that before the end of the year the treasury secretary and Federal Reserve chairman would be begging Congress for $700 billion to rescue failing financial institutions, or that General Motors would be facing a real likelihood of bankruptcy, or that the president-elect would be promising a half-trillion-dollar economic recovery plan as his first order of business. Heck, back then I even dared suggest the possibility that the economic stimulus checks due to arrive in taxpayer mailboxes in May might avert a serious downturn.

    Ho ho ho.

    But all those events are just chaff strewn by the wind in the face of the true economic significance of 2008: the narrative of how Americans view politics and the economy has changed. Even according to Alan Greenspan.

    2008 was a very bad year for ordinary Americans in real, cash-on-the-barrelhead terms. But it was also an awful year for market fundamentalists, deregulators, supply-siders and acolytes of Milton Friedman and Ayn Rand. Their three-decade-long party is over.

    This is not to say people aren’t still arguing, heatedly and with great sophistication, about such topics as the role that credit default swaps played in precipitating the financial crisis, or the question of how much blame can be attributed to the repeal in 1998 of Glass-Steagall’s separation of commercial and investment banking (or even whether Franklin Roosevelt rescued the U.S. from the Great Depression or just made it worse). But there is no ignoring the sacred cow that lies gutted, innards steaming, on the altar. In 2008, we witnessed a market failure of epic proportions. Whatever moral authority the deregulators thought they might have had — that sense of superiority that came from the calm confidence that their interpretation of how the world works is the correct one — is gone. Politics will not be the same for a generation.

    That’s a big deal, if not necessarily a promise of a new deal.

    The story of how a particular kind of mortgage loan proved to be the undoing of Wall Street and the catalyst for the end of a period of sustained global economic growth is at once insanely complex and, by now, almost too familiar. We now know that dereliction of duty ran rampant at every step of the chain. Mortgage borrowers lied about their income. Mortgage lenders failed to check the credit-worthiness of borrowers. Banks restructured loans into derivative instruments that obscured the underlying liabilities. Credit rating agencies — dependent on fees from the very institutions whose products they were supposed to be judging — gave the newfangled securities gold-plated ratings. Government regulators looked the other way. We now know that the incentives built into the system encouraged every individual actor to act in defiance of economic rationality.

    We now know, in other words, that left to themselves, economic actors do not pursue rational, sustainable courses of action. Greed and self-interest will steer you into the ditch every time.

    There were warnings along the way. Cassandras who feared that exotic financial innovation, specifically unregulated at the behest of both Democratic and Republican politicians, was setting the stage for a major systemic shock. But their voices were drowned out by a chorus of status quo defenders who told us, again and again, that financial innovation was making the world a safer, less risky place.

    By slicing and dicing risk and redistributing it across the world, we were told, the chance that any one shock could destabilize the entire system had diminished. Even better, ran the argument, policymakers had learned the lessons of the Great Depression so well that there was no chance there could be another depression. One of Ben Bernanke’s claims to fame was as the proselytizer of the idea that we live in the age of the Great Moderation, an era in which recessions would be mild, growth stable and financial panics a thing of antiquity.

    They were wrong. If there is one lesson to take from 2008 it is that the majority of analysts, economists and Wall Street financiers were flat-out wrong. Instead of redistributing risk to make us safer, they tied the whole world up into such a tightly wound ball of interconnections that when one piece of the system broke, the repercussions spread everywhere, immediately.

    As a consequence, the self-satisfaction bequeathed to Americans by their victory in the Cold War and their unchallenged status as superpower has been irretrievably punctured and replaced by fear. The world seems far more fragile than it did a year ago. It baffles comprehension that so much could go so wrong so fast.

    Where things go from here is anyone’s guess. Will a President Obama succeed in pushing a vast new spending program through Congress? How will new regulatory structures work? How bad will the economy get? We don’t know the answers to any of these questions, and we can anticipate massive political battles as a new order is hammered out.

    But I think we can be pretty sure about one thing: For the foreseeable future it’s going to be very difficult for a politician to argue that markets work best when the government stays off the playing field. The phrase “well-regulated markets” suddenly rings with a new vigor. And Wall Street’s masters of the universe will be the butt of unkind jokes for decades to come.

    Alan Greenspan made a mistake. And a new world is born.

    Read all letters (147)
    About the writer
    Andrew Leonard is a staff writer at Salon.

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    Copyright ©2009 Salon Media Group, Inc. Reproduction of material from any Salon pages without written permission is strictly prohibited. SALON® is registered in the U.S. Patent and Trademark Office as a trademark of Salon Media Group Inc.

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Allan
    BeMoved@AOL.com

  2. By MICHAEL LEWIS and DAVID EINHORN
    Published: January 3, 2009

    AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

    Op-Ed Contributors: How to Repair a Broken Financial World (January 4, 2009) This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

    Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

    To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

    In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

    In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

    Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

    What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

    The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

    A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

    Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

    OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

    The credit-rating agencies, for instance.

    Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

    Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

    The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

    These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

    This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

    By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

    Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

    At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

    The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

    But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

    Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

    The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

    IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

    The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

    At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

    At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

    How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

    And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

    SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

    When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

    Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

    But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

    In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

    It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

    Continued at “How to Repair a Broken Financial World.”

    Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

    More Articles in Opinion » A version of this article appeared in print on January 4, 2009, on page WK9 of the New York edition. Past Coverage
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    To a more prosperous 2009!

    Allan
    BeMoved@AOL.com

  3. Added insult to Madoff investors
    Some people who got out of Bernard Madoff Investment Securities before it imploded may have to give back gains.

    By Nicholas Varchaver

    Last Updated: December 19, 2008: 1:44 PM ET

    (Fortune) — Should you be penalized if you were smart enough to pull your money out of Bernard Madoff Investment Securities before it imploded in what appears to have been a multibillion-dollar Ponzi scheme? That’s only one of the depressing issues facing investors who put their trust in Madoff.

    For starters, simply trying to fathom the assets and liabilities of Madoff’s firm will be a Herculean challenge. “I don’t think the extent of the losses is going to be known for months,” says Stephen Harbeck, CEO of the Securities Investor Protection Corporation. “This is a completely different order of magnitude than anything that has gone before it, certainly in terms of brokerage firm failures or any other kind of financial institution fraud. This is a monster.”

    Any way you look at it, the only certainties will be time, litigation — and pain. “It’s hard to have a rule of thumb on this,” says Robb Evans of Robb Evans & Associates. Evans was the receiver — the person appointed by authorities to oversee the company while it’s in government control — for the Bank of Credit and Commerce International after it collapsed in a multibillion-dollar fraud and has also served as receiver in dozens of Ponzi schemes. “But the longer the Ponzi scheme has run, the less money is going to be available. Because the only way a long-running Ponzi scheme can keep going is by paying off early investors.”

    As Evans puts it, “The sad part of it is that it usually works out that your primary source of recovery is innocent people who put in their money early and got their money out — and are asked to return it.”

    This is the legal notion known as “fraudulent conveyance,” and it’s a concept whose interpretation has recently gotten much more onerous for investors.

    The basic notion is ancient, says Philip Bentley of New York-based law firm Kramer, Levin, Naftalis & Frankel. “It’s an old concept going all the way back to back to Elizabethan times,” he says. “The first case involved a man who transferred all his sheep to his wife to keep them out of the hands of people who were suing him. Nowadays, the classic case of a fraudulent transfer is a man who is being sued who transfers his house or his investment assets to his wife.”

    According to Bentley, it is long-settled law that some investors might have to give back some or all of their investment gains. But what has changed as a result of a federal court ruling in 2007 — stemming from the faked results and misappropriation by the now-convicted managers of the $450 million Bayou hedge funds — is that some investors might have to return some of their principal, too.

    In the abstract, there’s some logic here. Here’s how Bentley, who represented 70 clients who had invested in, and then exited, the Bayou fund before its collapse, explains it: “The court ruled that because there was clearly a fraud going on at Bayou, and because arguably the redemption payment to investors furthered the fraud by fostering the illusion of profitability, the investors who took out their money were liable if they knew of the fraud or if they should’ve known of the fraud.”

    As Bentley puts it, “the first part — having to give money back if they knew of the fraud — is uncontroversial. Because if they were in on the fraud or had inside information, not many people would quarrel with the view that they should give money back. But what’s problematic about the Bayou decision is holding them liable if they should’ve known; in other words, if they saw enough red flags that they should’ve investigated further.”

    In practice, that has meant different Bayou investors (again, among the ones who escaped profitably) have had to return differing portions of their money. Brad Alford of Alpha Capital Management advised an investor who had bought into the fund (when he had a different investment advisor, Alford is quick to note). “He got out with a nice 40% gain,” Alford says, “and then the inevitable FedEx package arrived.” It was a lawsuit filed by the Bayou receiver. In the end, says Alford, his client settled and gave back all the profits and half the principal because he was afraid he’d be deemed to have been on notice of Bayou’s troubles (though he was not alleged to be privy to inside information).

    Others have had to give back more or less depending on, first, their level of knowledge and second, when they pulled their money out of the fund. In the Madoff case, the statute of limitations will be six years, which means that any money withdrawn more than six years ago would not be subject to recapture by the bankruptcy court.

    The notion of punishing people who “should’ve known” about a fraud is a process in which a guilty conspirator can be confused with an honorable and intelligent person who protects his interests.

    “There’s going to be a very big policy issue at stake,” Bentley argues. “You’re penalizing the investors who were savvy enough to see the warning signs that others overlooked… And the question is, especially in today’s world, when you’ve got a financial crisis caused by people being blind to risk, do you really want to put in place a legal rule that penalizes investors who were savvy about risk and did something about it?”

    First Published: December 19, 2008: 9:59 AM ET

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    When the tide goes out, my, what wrecks emerge, and what stench rises from the exposed rot.

    The Madoff tragedy so impugns the free market model, and showcases the unfortunate consequences of toothless regulation.

    Where in the Garfield Continuum foreclosure defense might we be able to attack securitization as a FRAUDULENT CONVEYANCE? Anybody?

    Allan
    BeMoved@AOL.com

  4. AMERICA’S MONEY CRISIS

    How to spend $350 billion in 77 days

    Economy rescue: Adding up the dollars

    The government is engaged in an unprecedented – and expensive – effort to rescue the economy. Here are all the elements of the bailouts.

    NEW YORK (CNNMoney.com) — President Bush has grudgingly allowed General Motors and Chrysler to drive away with the last few billion bucks in Treasury’s TARP till, which boasted $350 billion a mere 77 days ago.

    How did it all slip away so fast?

    The money pot — intended to save the teetering financial system — was formally proposed in a three-page missive that Treasury sent to Congress on the morning of Saturday, Sept. 20.

    Over the course of two weeks, lawmakers debated the potential moral, ethical and financial hazards of handing over unprecedented power and unprecedented sums of taxpayer money to the Treasury. Their responses ranged from gobsmacked to apoplectic.

    By Friday, Oct. 3, Congress had passed a 451-page bill that President Bush signed into law within hours. The law granted Treasury up to $700 billion, half of which was made available right away.

    Since then, Treasury has:

    sent checks totaling $168 billion in varying amounts to 116 banks;
    committed another $82 billion to capitalize more banks;
    bought $40 billion in preferred shares of American International Group (AIG, Fortune 500) so the troubled insurer could pay off an earlier loan from the Federal Reserve;
    committed $20 billion to back any losses that the Federal Reserve Bank of New York might incur in a new program to lend money to owners of securities backed by credit card debt, student loans, auto loans and small business loans;
    committed to invest $20 billion in Citigroup on top of $25 billion the bank had already received;
    committed $5 billion as a loan loss backstop to Citigroup;
    agreed to loan $13.4 billion to GM and Chrysler to get them through the next few months.
    That next $350B? Maybe not yet, Hank
    Now, it’s likely that Treasury will ask for the second tranche of $350 billion.

    “It’s clear Congress will need to release the remainder of the TARP to support financial market stability,” Treasury Secretary Henry Paulson said Friday. “I will discuss that process with the congressional leadership and the president-elect’s transition team in the near future.”

    It’s not clear, however, whether Paulson will formally ask Congress for the second tranche of TARP money before turning over the keys of the Treasury to his likely successor, Tim Geithner.

    Even if Paulson wants to, however, he’s likely to face an uphill battle getting it.

    “It seems very unlikely that Congress will give the final TARP installment to the Bush administration,” said Jaret Seiberg, a financial services analyst at policy research firm Stanford Group.

    That’s because the apoplexy among those who originally opposed the TARP or who voted for it reluctantly has grown and spread for several reasons.

    One cause of Capitol Hill’s bailout rage: the Treasury has not used TARP money to help prevent foreclosures. Democratic lawmakers, who crafted the legislation and purposefully included language about foreclosure prevention, beg to differ. They have said repeatedly they will not release any more TARP money until the Treasury commits to use some of it to help troubled homeowners.

    Second, lawmakers are not happy Treasury has given so much capital to banks without requiring them to lend more and do more to oversee how the banks are using the money. Paulson has said Treasury told TARP recipients that it expects them to lend. “But it’s not practical or prudent for the government to say ‘make this loan, don’t make that loan,'” he said Thursday, speaking at an event in New York.

    And third, Republicans in particular resent what they see as TARP mission creep. House Minority Leader John Boehner, R-Ohio, was one of many who opposed the auto bailout, and the fact that TARP was the source of the bridge loans in particular.

    “The use of TARP funds is also regrettable, the latest in a growing list of TARP money uses that were not discussed with or envisioned by Congress when the program was authorized,” Boehner said Friday.

    House Speaker Nancy Pelosi, D-Calif., has said she is working on a bill to add more guarantees that future TARP funds be used to prevent foreclosures and protect taxpayers. But it’s not clear yet how much Democratic support that will get. And there is near total Republican opposition in the House to approve any more TARP funding.

    If that remains the case, the Obama team will have to add yet another entry to its ever-growing to-do list when they take power on Jan. 20.

    – CNN congressional producer Deirdre Walsh contributed to this report.

    First Published: December 19, 2008: 4:13 PM ET

    Bailout: Detroit saved … for now

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

    Get the feeling that us about-to-be-foreclosed-upon-homeowners are alone to fend for ourselves, and won’t see a sou of this TARP windfall?

    Allan
    BeMoved@AOL.com

  5. Yeah
    Prison may be lovely this time of year…..but he will still recieve three hots and a cot………..perhaps the quiet time to rehabilate himself using prison libraries and the internet and while his new accomendations aren’t the Ritz, he will have the time to exercise and diet and guess what?????The very people he crushed will pick up his tab…………….Send him to the front line in Iraq.

  6. I hear prison is lovely this time of year.

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