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) 492 3000.

A Man And A Scam Have Brought Boston’s Philanthropic Community, Among Others, To Its Knees And So We Seek Additional Targets For Blame And Sources Of Money. Break Out The Defense Attorneys! (The Madoff Nightmare, Part Two)

Let the games begin! As local as Boston and as distant as the globe will reach! The adventure of pointing fingers and looking for bodies to blame, as expected, has begun. Defense Attorneys for everybody! Everybody pays!

Bernard Madoff (hereinafter, the “Defendant”), talking in 2001 about what fed the Internet bubble said “You had a lot of novice investors who got into the market looking for easy money, without any regard to the fundamentals. These stocks were running on fumes.”

You would almost think that the Defendant did not have a lot of faith in investors, regulatory agencies such as the Security Exchange Commission and the market in general, wouldn’t you?

Well, I guess now we know why. He, himself, was apparently engaged in a huge fraud and getting away with it.

Unless you have been living under a rock for the past couple of weeks, you have heard that the Defendant is accused of devestated the international economic world, when it was already reeling, through what is alleged to be a fifty billion dollar scam, the largest such fraud in history. For more background information, you may want to check out Tuesday’s blog, entitled, 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.

The question of what to do next appears to be a nasty little thing for which there is no clear answer. Therefore, filling that vacuum, we move to other, and perhaps more lucrative, questions. The questions include such topics as how any scam of this size could remain a secret for so long, who was involved, who else is out there doing similar things and, of course, who got off easy.

In short, the questions are “Who else can we blame?” and perhaps more importantly, “Who else can help finance the cleanup?”

Hey, it’s what we do.

Let’s first turn to the “I told you so” crowd. There have been suspicions about the Defendant’s consistent record of success for some time. Putting aside the question of potential co-conspirators, sophisticated investors and the Securities and Exchange Commission are being called guilty of naivety and neglect of duty.

In fact, on Tuesday, the SEC said it is launching its own internal investigation into how the Defendant’s scheme was able to continue unchecked for at least 10 years.

Not everyone had been convinced by the Defendant’s previous claims to be using accepted and legal economic means throughout the years. For example, in the late 1990’s, Chris Jones, chief investment officer of Key Asset Management, part of Swedish bank SEB, said he visited the Defendant and found him and his company reluctant to explain how it made its money. “I found it impossible to understand how they were making money and so I did not invest”, he said.

A few years ago, Millicent Holmes was working for a fund of funds – a sort of giant hedge fund that invests in lots of smaller funds – and she was looking for places to invest her clients’ money.

“[I] contacted the firm, spoke with Madoff, who described the strategy in a very matter-of-fact way. When I called the firm back to discuss getting complete transparency on [the] trades, the information given at that point was very concerning,” says Holmes. After the Defendant explained what his strategy allegedly was, she says, the numbers didn’t add up. She says trades as large as the Defendant was claiming didn’t seem to show up in the options markets. So she steered clear of him. And so did a lot of others.

“There were many, many people in the hedge fund industry that shared these reservations,” she says.

Today, Holmes works for Crowe Wealth Management, and she is surprised by how long it took regulators to go after The Defendant. In 2001, Barron’s ran an article questioning his returns.

“And many people in the hedge fund industry thought after that article the authorities would take a very close look at Madoff,” she says. “Sadly, I don’t think that happened.”

Why that didn’t happen is a question a lot of people are asking right now. The Defendant was able to operate for years with little apparent oversight from the Securities and Exchange Commission, although it’s not clear regulators would have caught on to his crimes had his sons not turned him in.

But critics note that the SEC had received at least one complaint about the Defendant’s investment practices as far back as 1999. A securities industry executive warned that his returns were too good to be true and urged it to investigate him. Yet he was able to keep operating and even register as an investment adviser in 2006.

SEC officials say they can’t discuss what they knew or didn’t know about the Defendant because the case against him is still open. What is clear, however, is that U.S. officials appear to have done little to stop him, even though a lot of other people in the financial markets were raising questions about him.

The $50 billion fraud allegedly committed by the Defendant is a major embarrassment for the agency and adds to questions already being asked about the regulator’s competence.

The SEC’s inability to uncover the scandal until the Defendant’s sons went to authorities last week with the banner of “Come And Get Daddy” comes at a particularly bad time for the SEC and its Chairman, Christopher Cox. They have already been accused by some lawmakers and market experts of being asleep at the wheel while the credit crisis exploded on Wall Street.

The agency’s future existence as a separate agency is already under threat as Washington looks at overhauling the regulation of the financial services industry.
“This will be profoundly embarrassing for the SEC,” said Columbia University law school professor John Coffee, who has been critical of the agency for failing to properly regulate the failed investments banks. “Congress will predictably give them little mercy.”

“Well, gee”, you might say. “That’s not very fair. I mean, hindsight is 20-20, right?

Yes, that is true. The only problem is that accusers are suggesting that the agency should be looking out of their other end. Besides, there had already been a number of red flags about the way the Defendant operated his investment business going back many years, including an article in the financial newspaper Barron’s in 2001 that questioned how the Defendant made stunning double-digit returns year after year.

The Wall Street Journal also reported on Friday that Harry Markopolos, who years ago worked for a rival firm, researched The Defendant’s stock-options strategy and was convinced the results likely were not real. Markopolos pursued his accusations over the past nine years, dealing with both the New York and Boston offices of the SEC, according to documents he sent to the SEC, the newspaper said.

If the Defendant was able to fool sophisticated hedge funds, institutions and individuals, mightn’t he have been able work around regulators too?

Maybe, but one might also imagine that the thing to do now is see if the Defendant was the only one engaging in such a scam. To do that, we need another level of finger pointing and accusations. Don’t worry, after we are done with accusing the accusers for being so late in accusing, we will get to that as discussed in the https://www.bostoncriminallawyerblog.com/2008/12/boston_is_hit_along_with_the_r.html
In the meantime, though, suffice it to say that House Financial Services Committee Chairman Barney Frank is likely to examine how the SEC handled the matter, which also involves a criminal investigation.

Frank and Christopher Dodd, chairman of the Senate Banking Committee are likely to head the reform efforts in Congress.

Dodd is concerned about the people caught up in the scheme who may have been misled and also how such a massive fraud could have gone undetected, his spokeswoman, Kate Szostak, said.

You don’t suppose that a 70 year old former chairman of the Nasdaq Stock Market and an investment adviser to thousands of upper-crust clients might have friends and followers in high places, do you?

There goes that overly-suspicious tendency of mine again…!

Ira Sorkin, one of the Defendant’s attorneys, declined to comment on the case, other than to say a hearing was scheduled for Friday in the SEC case against his client in a federal court in New York.

Sometimes the legal system even impresses even me with its speed in developing legal theories. Here we are, week two into the the Defendant’s revelations and already the fish-eye of suspicion has worked its way beyond the non-victims to look askance at apparent near-victims.

How about those lucky souls who either smelled a problem or simply needed the money back before the scam folded like a rotted-out tent because of legitimate need such as to buy a house or to pay for a daughter’s education? They may have even sighed with relief because they ended ties with the Defendant long before the fraud scandal erupted late last week.

They must be feeling pretty lucky right about now, right?

Well, not so much.

After all…”why should they be so lucky?” “Hey…do you think they actually knew something…?” “I know that timing is all part of the investment game, but…why should they win while some many lose?”

Well, now it appears that they might not escape so unscathed, regardless of what they did or did not know. Because of a legal concept known as “fraudulent conveyance,” they could be forced to return their profits and even some of their initial investments to help offset losses incurred by others entangled in the long-running Ponzi scheme.
A Ponzi scheme, as discussed in yesterday’s daily blog, is an illegal investment vehicle that pays off old investors with money from new ones, and relies on a constant stream of new investment. Such schemes eventually collapse under their own weight.

The theory to reach into the pocket of the former investers is that, in actuality, there were no profits. It was just other people’s money. One attorney opined that he expected the court-appointed trustee now in control of the Defendant’s U.S. operations to look hard at who withdrew money in time. “The trustee is going to look very closely at redemptions and seriously consider bringing suits just because the trustee’s job is to bring in assets any way he can,” he said. “Potentially the numbers are enormous.”

Of course, it would be for a judge to determine how far back such an action might go. However, there could be a bit of a shock in store for investors who innocently entrusted their money with the Defendant, a 70-year-old Wall Street legend, long before he was accused of defrauding banks, charities and rich individuals whose assets he managed at Bernard L. Madoff Investment Securities LLC, which he launched in 1960.

And so, while we are getting ready to grab and point at subsequent targets of fraud, negligence and “just too damned lucky” accusations, let’s pause now to consider the man behind it all.

The latest shining example of the infamous…the Defendant himself.

Like his predecessor before him, Bostonian Charles Ponzi, He was a likeable man. That worked for Ponzi in 1920 and it has worked for the Defendant…until now. 2008. Over eighty years later.

Do you think we learn much from history?

The Defendant did. He learned about the renowned Ponzi scheme and made history with it.

Let’s look at some more modern history, though. The Defendant began 2008 with a reputation for savvy investing and $17 billion under management from 23 clients. He ends the year with his reputation in ruins amid allegations that he defrauded investors out of as much as $50 billion over two decades. His results are being felt across the globe.

More than ever before, he is, indeed, a man of influence.

According to the criminal complaint filed against, the Defendant’s scheme began to unravel in the first week of December, when investors asked to redeem $7 billion in funds. At that point, he began confiding in his two sons, Andrew and Mark (hereinafter, “Potential Suspects”), who are, at present, being reported as having had no insight into how the black box of the Defendant’s advisory business worked.

According to said reports, the Defendant told one of Potential Suspects that he wanted to pay bonuses to his employees in December, two months ahead of the usual date. On Wednesday, the two sons visited their father in his office to discuss the matter further, and noticed that that he appeared to be under a great deal of stress. When they challenged him about the rationale behind early payment of bonuses, daddy said he had recently made some profits and wanted to pay out the money now. When Potential Suspects expressed skepticism, the Defendant asked to continue the discussion at his Manhattan apartment because he was not sure he would be able to “hold it together” at the office.

There, at his apartment, the Defendant described his advisory fund as “a giant Ponzi scheme”. According to Potential Suspects, he also said he was “finished” and added, “it’s all just one big lie”. Continuing his confession, he said his fund had been insolvent for years, and that the total losses could exceed $50 billion. The admission carried extra shock value for one of Potential Suspects, who had several million dollars invested in his father’s fund.

The Defendant concluded this discussion by saying that he planned to turn himself in to the authorities sometime next week, but wanted to pay out $200 million to $300 million to valued employees, family and friends before doing so. One would imagine that that included his sons.

According to the story, however, Future Suspects went straight to the authorities with the information and, the next day, an FBI agent showed up at daddy’s apartment. After explaining why he was there, special agent Theodore Cacioppi asked if there was any innocent explanation for the Defendant’s financial troubles. The response was allegedly that “there is no innocent explanation” and the Defendant then proceeded to voluntarily admit that he had traded and lost the money invested with him. He added that he was “broke” and that he expected to go to jail for his actions.

Following his subsequent arrest on that very day, the Defendant was released on $10 million bond and confined to his apartment. He has been charged with securities fraud and a hearing has been scheduled for January 12th.

Dan Horowitz, one of The Defendant’s lawyers, told The Associated Press that his client was “a long-standing leader in the financial services industry with an unblemished record” and would “fight to get through this unfortunate event.”

And they say that lawyers don’t have testicular fortitude these days…!

Samuel’s take:

When talking about large swings in the market in 2007, the Defendant is quoted as saying, “Take my word for it, for the most part you can ignore those moves.”

Do you think he might have been trying to tell us something…such as he felt it was the fraudulent “slight of hand” that you really have to worry about when it comes to the market? It is kind of hard to tell, though, because, beyond a certain point, the poor man was limited in terms of what he could reveal about his investing. After all, as he told Barron’s Magazine , in 2001, It’s a proprietary strategy. I can’t go into it in great detail.”

Still, the man apparently did have confidence in the system which allowed him to operate behind a cloak of secrecy. As he told a panel called “The Future of the Stock Market” at the Philoctetes Center for the Multidisciplinary Study of the Imagination in New York in 2007, “In today’s regulatory environment, it’s virtually impossible to violate rules … but it’s impossible for a violation to go undetected, certainly not for a considerable period of time.”

When the man is right, the man is right…unless you count the estimated 20 odd years as “a considerable period of time”.

And so, you ask, “Sam, I don’t know why you keep telling us to beware of all these unknown investigations out there they we only suspect may be going on. They don’t even seem to be investigating schemes that now appear obvious.”

By that, I am sure you suggest that you, who have either done nothing really wrong or are simply just traveling under the proverbial radar when agencies like the SEC do not even seek to pierce the curtain of mystery surrounding people, like the Defendant, who say things like, when discussing the dynamics between investors and Wall Street firms, “The nature of any human being, certainly anyone on Wall Street, is ‘the better deal you give the customer, the worse deal it is for you.'”

Not a bad point. But, first of all, as discussed in Part One of the Madoff Nightmare, that is all likely to change now, especially given the fact that the investigators themselves now appear to be on the “hot seat” for not investigating the Defendant earlier.

Further, do not be deceived. The fact that the Defendant was able to skate by attention for so long does not mean that the prisons were devoid of white collar criminal defendants. I can tell you that this was not the case.

Sometimes, people “get away with it” for awhile, sometimes they do not. The fact that some guilty parties (allegedly) escape the system for so long does not mean that no innocent such parties are not incarcerated because they were suspected and convicted of crimes they did not commit.

And so, yes, the advice is the same…only more so since the dire need to save face is now resting upon regulators and law enforcement in general.

Get a lawyer!

Don’t make the same mistake the Defendant made…well, one of them. As he said 1999, again of the dangers of the “Internet bubble” fiasco, “I don’t like to see this type of activity. Eventually, if this bubble bursts, I think that people will be left holding the bag. I don’t want to be around when that happens.”

Too late. Different “bubble”, same “bag”.

NOTE TO READERS: No, you did not blink and miss it. There was no daily criminal law blog posted by me yesterday. I send my regrets. The court schedule and length of material made it impossible to post yesterday. Rest assured, however, that this is still a daily blog. Rest further assured, that, as this story will continue and blossom into, I believe, a much bigger entanglement of criminal justice issues, I will be following this story closely and bringing you along with me! Thanks for reading, Sam G.

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

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