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Samuel Goldberg has been a Massachusetts criminal defense attorney for 20 years. Prior to that, he was a New York state prosecutor. He has published various articles regarding the practice of criminal law and frequently provides legal analysis on radio and television, appearing on outlets such as the Fox News Channel, Court TV, MSNBC and The BBC Network.
To speak to Sam about a criminal matter call (617) 206-1942.

Posted On: December 16, 2008

Boston Is Hit, Along With The Rest Of The Country, By Financial Guru And His Use Of A Boston-Originated Method Of Fraud (The Madoff Nightmare Part One)

This holiday season, so many religions and traditions call for gift-giving. Sometimes, those gifts are a big surprise. One gentleman from out of state has been given a surprise gift from the government because of the gifts he has given throughout the country, including the Boston area, big time. The gift he received is the need of a criminal defense attorney. The wide-spread gift he gave? Well, that would be the gift of financial ruin.

You already know his name. It is Bernard Madoff (hereinafter, the “Defendant”). He is a 70-year-old former chairman of the Nasdaq Stock Market, who has now been awarded the country’s bracelets of shame. Last Thursday, he taken out of his house by United States marshals and charged with securities fraud by federal authorities.

Ironically, the Defendant’s gift of restraints and forced government housing was connected to charity and gift work throughout the nation. His actions have apparently brought about the destruction and near-destruction of various charities and philanthropies throughout the country. That’s right….that means fewer gifts for the under-privileged. It also means the same thing for victims of every financial level because they all have one thing in common now. They have been victims of white collar crime in a big way to the tune of approximately fifty billion dollars.

Such a loss is kind of hard to swallow, especially in such difficult economic times. Actually, it was the market's recent crash that finally brought the Defendant’s alleged $50 billion Ponzi scheme to light. The Defendant himself is said to have “come clean”. He has admitted that his money management operations were "all just one big lie" and "a giant Ponzi scheme." .

You may be unfamilier with the term “Ponzi scheme”. For those so uninitiated, it is a fraudulent investment operation that involves paying abnormally high profits to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi who apparently introduced the scheme to the United States in the early 1900’s from…of all places…Boston. Because the invested capital is not earning a sufficient return on its own, Ponzi schemes usually eventually collapse under their own weight.

So much for a “I never thought it could happen…” , or, perhaps more formally, “Whodathunkit” defense.

Now, in the waning days of 2008, the scheme rears its ugly head again. As economic times got tougher, the Defendant’s clients started doing nasty things such as needing to withdraw their money. The Defendant was not expecting that. According to the complaints filed against him, clients recently asked to withdraw $7 billion from the firm and he had to come up with the cash, according to complaints filed against him by the Securities and Exchange Commission and the US attorney's office in Manhattan. Last Wednesday, the Defendant told senior executives at his firm that he had been running a Ponzi scheme. The Defendant, who was arrested at his Manhattan apartment the next day, confessed his con to the FBI after his two sons turned him in. Apparently, the kids were into showing dear old dad that they had learned to follow the concept of loyalty he had provided.

The Defendant told investigators he had "paid investors with money that wasn't there." He said he expected to go to jail.

Good call.

A federal judge issued an order freezing the remaining assets in the Defendant’s firm and appointed a receiver who will try to recover client losses.

The Defendant’s attorney said his client would "fight to get through this unfortunate set of events."

The Defendant’s “unfortunately set of events” have apparently caused devastating waves, not ripples, across the ocean of American life. While it may not be a shocker that many wealthy people have been hit hard, these waves are splashing across all social and financial lines. Further, “events” have already begun shuttering various foundations and devastating nonprofits in medicine, education, and the arts.

The Defendant appears to have made inroads in philanthropic circles in Boston, Palm Beach, Florida and New York, particularly in the Jewish community. Some of the Boston clients maintained homes in Palm Beach and socialized with the Defendant there, especially at the country club.

The Defendant’s clients include philanthropists Carl and Ruth Shapiro, major donors to the Museum of Fine Arts, Brandeis University, and Beth Israel Deaconess Medical Center. The Shapiro family foundation lost almost half its money, or about $145 million, to the Defendant. Other clients include Avram and Carol Goldberg, former owners of the Stop & Shop supermarket chain, and Stephen A. Fine, president of Biltrite Corp. in Waltham.

The Shapiros have been generous to a number of Boston hospitals and universities. Construction is scheduled to start next week at Boston Medical Center on the Shapiro Ambulatory Care Center, a nine-floor, $135 million facility paid for in part with $15 million from the Shapiros. In March, the foundation pledged $27 million to DanaFarber/Brigham and Women's Cancer Center in Boston. At Brandeis, which received $22 million from the Shapiros to build the campus center building, spokesman Dennis Nealon said the school was monitoring the situation.
The Shapiro foundation has sought to assure the institutions it supports that it will follow through on any promised giving. "Over the long term, we fully anticipate that the foundation will continue to grow and be a strong supporter of the region's nonprofits," the foundation said in a statement.

In Salem, the Robert I. Lappin Charitable Foundation, a private family organization that financed trips for Jewish youth to Israel for many years, as well as also supporting various Jewish educational and cultural services on the Boston’s North Shore, said it was forced to shut down and lay off employees after losing all of its estimated $8 million to the Defendant. Lappin lost personal funds as well.

Other foundations and charities, not to mention the personal funds of its organizers and donors, have been hit hard by the discovery of the scheme. For example, 45 percent of the Shapiro Family Foundation’s monies were managed by the Defendant. To give matters a bit of a more personal sting, the Defendant’s chief recruiter of clients in Boston, Robert Jaffe, is married to one of the Shapiro’s' daughter's.

Jaffe, a former Boston branch manager for brokerage Cowen & Co., operated a company whose sole purpose was to market the Defendant’s investment products. Jaffe's firm is on the same floor of a New York building as the Defendant’s, according to securities filings. Jaffe is active with a number of charitable organizations in Boston where the Shapiros have directed their giving. He is an overseer of Beth Israel Deaconess Medical Center and a member of the President's Council at Brandeis, according to a biography on the website of the Dana-Farber Cancer Institute. His wife, Ellen, is a trustee at the Museum of Fine Arts.

People who know Robert Jaffe said that he, too, was fooled by the Defendant.
It would appear that the Defendant was quite good at what he did…namely fooling people. For example, one Boston businessman who invested in the Defendant’s fund said it was marketed as an exclusive investment opportunity, where only the wealthy and well connected could gain access. The businessman said it took a full year of lobbying to become a client of the Defendant, and only with the input of other large investors who helped persuade the Defendant to accept his money.

"You wouldn't imagine Ponzi artists would make it so hard to invest," the businessman said. Said businessman is now experiencing the lesson of “be careful what you wish for”.

These and many more investors are now trying to decide their recovery possibilities due to what is being described as the largest such scheme in history, including the forced selling of homes and changing of lifestyles for people who have used a great part of their fortune for the benefit for the, until now. , less financially fortunate, many of the intended targets of the philanthropy are also trying to figure out what to do.

The Defendant’s victims have also appeared on the non-charity side of the coin (no pun intended) and with some who one might expect would be “on the lookout” for such schemes and not so easy to fool.
Here’s a sampling of these:

• The Massachusetts state pension, whose officials invested in the Defendant’s company through a hedge fund vehicle and said yesterday that it has lost $12 million.

• The dean of the Massachusetts School of Law who invested money with the Defendant after being introduced by a friend to the prominent Wall Street money manager more than a decade ago.

• A hedge fund group of Massachusetts Mutual Life Insurance Co. of Springfield has lost all of its clients' money--more than $3 billion--to the Defendant. The group, Rye Investment Management, had retained the Defendant as the sole investor of its funds, which had $3.5 billion in assets in April. Rye is a division of MassMutual's Tremont Group Holdings Inc., in Rye, N.Y., which places wealthy clients and institutions, such as pension funds, into hedge funds and with exclusive investors such as the Defendant. Their relatinship had been 14 years long.

• In Connecticut, local officials scrambled to get a handle on damage to pension funds held for its police officers and firefighters. The town's employees board and police and fire board, which cover 971 workers, had $41.9 million invested with [the Defendant], said Paul Hiller, Fairfield's chief fiscal officer.

• Officials at the New York-based JEHT Foundation, a nonprofit focused on juvenile justice and fair elections, said it was freezing all its grants and would shut down at the end of January. The group gets all its funding from a couple, Jeanne and Kenneth Levy-Church, whose personal investments were managed by the Defendant. "The impact is really quite deep because we're talking about $25 to $30 million in funding to organizations that are no longer going to be getting that money," Robert Crane, the president of the foundation, said. "So it's a very significant ripple effect." Another New York nonprofit, the Philoctetes Center for the Multidisciplinary Study of the Imagination, may be forced to close, spokesman Adam Ludwig said.
• New Jersey Senator Frank Lautenberg, one of the wealthiest members of the Senate, entrusted his family's charitable foundation to the Defendant. Lautenberg's foundation handed out more than $765,000 to at least 100 recipients in 2006, according to the most recent listing on Guidestar, which tracks charitable organization filings. The foundation helps support a variety of religious, educational, civic and arts organizations in New Jersey and elsewhere, and its contributions range from a gift of than $300,000 to the United Jewish Communities of MetroWest New Jersey to a $2,000 donation to a children's program at the Hackensack Medical Center

.

Also included in this list are real estate magnate Mortimer Zuckerman and Irwin Kellner as well as a well-known economist for MarketWatch.com. They join a list of more powerful investors that have come forward, all worried about the extent of their losses. The roster of names include the Steven Spielberg charity, the Wunderkinder Foundation; New York's Yeshiva University, former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services, among others.

"There were a lot of very sophisticated people who were duped, and that happens a great deal when you've had somebody decide to be unscrupulous," said Harvey Pitt, a former chairman of the Securities and Exchange Commission, a regulator in charge of monitoring investment funds like the one the Defendant operated. "It isn't just the big investors," he said. "There's a lot of charitable and foundation money involved in this, which is the real tragedy."

Reports from Florida to Minnesota included profiles of ordinary investors who gave the Defendant their money. Some had been friends with him for decades, others were able to invest because they were a friend of a friend. They told stories of losing everything from $40,000 to an entire nest egg worth well over $1 million.

But effects of this scheme is not limited to the United States. Major banks as far afield as Zurich are included in the list of investors who say they were duped in one of Wall Street's biggest Ponzi schemes.

Around the world, investors who sunk cash into veteran the Defendant’s investment pool spent the weekend calculating how much exposure they might have. One thing was clear in the fallout from his arrest: The alleged victims span from the super rich, to pensioners and powerful financial institutions, to local charities. Some investors claim they've been wiped out, while others are still likely to come forward.

• Switzerland's Reichmuth & Co. said the private bank has $327 million at risk. It told investors that they "sincerely regret" being affected.

• French bank BNP Paribas estimated its exposure the Defendant's fund
could lead to 350 million Euros ($467 million) in losses. In a brief statement Sunday, Paribras said it has "no investment of its own" in the Defendant’s hedge funds but "does have risk exposure to these funds through its trading business and collateralized lending to funds of hedge funds."

• Spain’s Grupo Santander SA, Europe's second-largest banking consortium, said its clients had an exposure of 2.33 billion euros ($3.1 billion) to the Defendant’s investment funds, mostly through the Optimal Strategic US Equity fund, according to reports.

• Banco Santander, the largest bank in the euro zone by market capitalization, said its clients have $3.07 billion invested with the Defendant, mostly through a fund called Optimal Strategic US Equity.

• HSBC, Britain's largest bank, said a "small number" of its institutional clients had a total of about $1 billion in the Defendant’s funds.

Other overseas victims include international banking institutions HSBC Holdings PLC of Britain, Royal Bank of Scotland Group PLC and Man Group PLC, Spain's Grupo Santander SA, France's BNP Paribas and Japan's Nomura Holdings.
The extent of the potential damage prompted a leading fund manager in London to lash out at United States regulators for failing to detect the fraud earlier.
"I think now it is very difficult for people to invest in things that are meant to be regulated in America, because they haven't fallen down in the job," Nicola Horlick, the manager of Bramdean Alternatives, which has 9 percent of its funds invested in the Defendant’s scheme, told the British Broadcasting Corp.
"All through the credit crunch this has been apparent," Horlick added. "This is the biggest financial scandal, probably, in the history of the markets."

Samuel’s take:
It sure is easy to point the finger of blame, isn’t it? Some questions do beg to be asked, though, such as “how does a thing like this happen”, “how does a guy like the Defendant get created” and “what other lessons can we take from this in terms of Criminal Justice?”

Well, perhaps unlike the Defendant, I am a sympathetic soul. This is why I have broken this story into two parts. I am assuming you do not want to spend the rest of your day reading this one blog.

Please understand that, also unlike the Defendant, I am not a financial wizard. I cannot give you a dissertation here about how and why investors should have known better.

In criminal justice, we have a saying that I think was lifted ( I am sure legally) from somewhere else. It goes, “If it looks like a duck, walks like a duck and quacks like a duck…it is probably a duck.” Another way of putting it is, “If it seems too good to be true, it probably is”. These are often helpful, perhaps even clever, clichés.

But they do not help here…and that is part of the problem.

The Defendant’s scheme was not “on its face” too good to be true. Far from it. People had to try hard in order to qualify to be accepted into victimhood. It did not seem like a fraud or any other kind of related duck.

Such is today’s main lesson to both victim and potential defendant alike. Things are not always what they seem and, in the new millennium, it is too easy to manipulate reports and figures to be complacent. Not everyone was taken in by the Defendant in this case. In Part Two of this blog, which will be posted tomorrow, you will read about some who were suspicious of the Defendant.

The fact is, there are people out there who have no problem victimizing others to “get theirs”. Unfortunately, this is likely to become worse. We already had a problem-laden economy and it was already getting worse. We do not know yet the far-reaching effects this particular ponzi scheme is likely to bring. Given its effect world-wide and throughout all the levels of our society, from rich benefactors to the poorest recipients of charity (not to mention little things like hospitals and education institutions), we do know that there will be effects.

There will be desperation and there will be anger.

I am going to go out on a limb here and suggest that things may be about to get worse. When things get worse, people get more desperate. People who would never even think about victimizing others suddenly find their mind’s open to the subject.

As I mentioned, however, this is a warning to both sides of the equation.

Because things are getting worse and may well bring about the increase of scams, the authorities will be looking even harder for such scams. The result? The net of suspicion is about to widen.

I have already written many times in this daily blog about instances where investigations can exist, looking into innocent behavior which is misconstrued. After all, people often see what they want to see.

Therefore, it becomes even more imperative that, should you have any suspicion that something you are doing or have done could be misinterpreted (or actually correctly interpreted) and you see signs that an investigation may be underway, it is bordering on the insane to simply ignore it. You want to contact an experienced defense attorney at the earliest possible moment to advise, protect and, if necessary, defend you should the finger of accusation be leveled at you.

Let me give you an example. It does not seem like there is much doubt as to the Defendant’s ponzi scheme. The man seems to now have admitted it to anybody who is willing to talk to him. However, what if “Harvey Hapless”, a fictitious man who worked for the Defendant’s organization, was a trusted employee who followed all orders without question and helped the Defendant manage day to day business. Let’s say he knew nothing of the fraudulent aspects of it. With the wide-ranging reactions to the scheme’s discovery, do you really believe that law enforcement will not be carefully scrutinizing every move Harvey made over the last several years to determine if he was “in on it”? How about everyone else in the company? These people are in danger of facing indictment themselves.

Let’s make matters a bit worse, if more realistic. As I have often told you, the federal justice agencies base many of their cases on squeezing one target, or defendant, to testify against others. It would merely be following tradition to so squeeze, even indict, such employees with hopes of, at least, getting them to give information against the Defendant. Turn it around. What is to stop the Defendant from offering such information about colleagues, employees or competitors in order to strike a deal that does not lead to the rest of his life in prison?

And now the kicker-what if either these squeezed employees or ethically challenged Defendant do not limit themselves to the truth in giving information in order to save themselves?

Imagine…a master of criminal fraud being willing to lie in order to have a few years left on the outside of incarceration. Hard to believe? I think not.

The sad truth? I have been in the criminal justice system for a very long time. I have handled federal white collar cases. I can tell you…it happens. If you have an opinion that federal prosecutors or investigators would never take advantage of such a thing…I direct you to the plethora of cases in the media in the past 10 years involving discoveries of the underbelly of federal criminal prosecution.

Again, am I saying that federal prosecutors wake up in the morning and put their sense of justice into the drawer and leave it at home? No. Far from it. Look to this past Thursday’s Daily Criminal Blog about police officers. And then remember the great gift of rationalization, particularly if motivated by the perceived “greater good”.

And so, like it is difficult to completely be on guard for ruthless and crooked financial scam artists, it is also not so easy to be sure you are going to know when your path is crossed it its counter-part in the criminal justice arena. The most you can do is to be careful, be wary and be prepared.

The “blame game” is big in American society of 2008, and it is not likely to become less so in 2009. It will look very nice in the papers as law enforcement carts out many indictments for schemes (which may or may not actually exist) in the media, proclaiming how well they are protecting us.

Like many such “ducks”, however, the quack may not be as authentic as we might want to believe.

TOMORROW: Part Two of our coverage of the Madoff Nightmare.


Samuel Goldberg is the senior criminal defense attorney at the firm of Altman & Altman, LLP. A former prosecutor in New York, he has worked as a Boston defense attorney over 18 years. He has published various articles regarding the practice of criminal law and frequently provides legal analysis on radio and television, appearing on outlets such as the Fox News Channel, Court TV, MSNBC and The BBC Network. To speak to Sam about a criminal matter call 617-492 3000

The full articles of this story can be found at http://en.wikipedia.org/wiki/Ponzi_scheme, http://www.boston.com/business/articles/2008/12/13/boston_donors_bilked_out_of_millions/?page=full, http://www.businessweek.com/ap/financialnews/D952QOP00.htm, http://www.newsday.com/business/ny-bzscam1412270036dec14,0,5156462.story, http://www.boston.com/business/ticker/2008/12/massmutual_enti.html?p1=Well_MostPop_Emailed5, and http://www.iht.com/bin/printfriendly.php?id=18709174.