Suits expected against Madoff scheme

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Suits expected against Madoff scheme
Regulator: $17 billion missing from firm

By Ronald D. Orol, MarketWatch
Last update: 4:20 p.m. EST Dec. 12, 2008Comments: 659
WASHINGTON (MarketWatch) -- High-net-worth and pension-fund investors are expected to launch a rash of investor lawsuits on the federal and state levels against Bernard L. Madoff Investment Securities LLC, whose founder was arrested and charged with securities fraud in what federal prosecutors are calling a Ponzi scheme that could involve losses of more than $50 billion.
"This is the largest Ponzi scheme I have ever seen," said Craig Carpenito, an attorney at Alston & Bird LLP in New York and a former assistant U.S. attorney and enforcement staffer at the SEC.
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The suits are expected to come after the Department of Justice late Thursday charged Bernard Madoff, 70, of New York with one count of securities fraud, according to a statement from the acting U.S. attorney for the Southern District of New York and the Federal Bureau of Investigation.
In a parallel case, the SEC filed a civil complaint in federal court in Manhattan seeking to freeze the accounts and appoint Lee Richards, a partner at Richards, Kibbe & Orbe LLP in New York, as a receiver.
Richards -- chosen by U.S. District Judge Louis Stanton, who is overseeing the SEC's case -- is responsible for finding any investors in the fund. He will be responsible for investigating whether there is any remaining capital in the fund to return to investors. He is expected to bring in accountants and experts to assist in his examination of the Madoff funds.
According to regulatory filings, the fund had more than $17 billion in assets under management as of the beginning of 2008. Nevertheless, an SEC statement said it appears that virtually all assets of the advisory business are missing.
Carpenito said that, in addition to the parallel proceedings brought by the Department of Justice and the SEC, Madoff can expect "legions" of investor suits brought under both federal and state claims. He expects the criminal case to take between three and five years before a resolution, he said.
The private suits are expected to be based on the theory that investors didn't have all the information they were entitled to regarding the health of the firm when they made capital allocations, Carpenito said.

Marvin Pickholz, partner at Duane Morris LLP in New York, said he has been receiving phone calls from high-net-worth investors in Madoff's fund looking for counsel. Pickholz said he believes the largest chunk of Madoff's fund is made up of high-net-worth investors, though pension-fund institutions have allocated capital with the firm as well.
He argued that the revelations about Madoff would have a psychological effect on the hedge-fund industry. "Madoff and his firm had a spectacular reputation," Pickholz said. "I think most people in the industry were shocked by the charges."
Pickholz, who was assistant director of the SEC's enforcement division between 1975 and 1980, added that the extent of the impact of the Madoff charges remained unclear. "Does Madoff have open positions where it owes other professional firms money?" he asked. "Are they showing their investment in the Madoff fund as a good asset, and will they have to change that to a receivable?"
Managed Funds Association President Richard Baker said he was disappointed by the revelations about Madoff. "Fraudulent activities and breach of trust cannot be tolerated in the financial-services industry," said Baker, a former lawmaker from Louisiana. "MFA is a longtime advocate of high standards of excellence in professional conduct and responsibilities to investors."
At a hearing Friday, a judge is considering the SEC's request to grant powers to the receiver over the entire firm and a complete asset freeze.
'This is the largest Ponzi scheme I have ever seen.'

— Craig Carpenito, Alston & Bird LLP
Madoff did not enter a plea or make any comment during a court hearing Thursday evening. He was expected to be released after agreeing to post a $10 million bond secured by his Manhattan apartment.
A preliminary hearing was scheduled for Jan. 12.
Madoff's firm is known as a securities broker-dealer, but he also runs a separate investment advisory business, which had more than $17 billion in assets under management, federal authorities said, citing two unidentified employees and a Securities and Exchange Commission filing.
Madoff counted several large hedge-fund firms as clients, along with some European banks, so if his firm has lost more than $50 billion, the impact could be widespread.
On Wednesday, Madoff told two senior employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme," according to the SEC's complaint.
According to the SEC's complaint, the agency is seeking to have Madoff pay penalties based on the agency's antifraud provisions.
According to the complaint, Madoff told one of his senior employees that clients were seeking about $7 billion in redemptions and that "he was struggling to obtain the liquidity necessary to meet those obligations."
Earlier this week, Madoff also allegedly told an employee that he wanted to pay bonuses to employees this month -- earlier than usual. Later, two employees who met with Madoff at his apartment were told that the business was a giant Ponzi scheme, which they took to mean that Madoff "for years been paying returns to investors out of principal received from other, different investors." Madoff allegedly told those employees that the firm was insolvent, according to the complaint.
According to an SEC filing from January 2008, Madoff has been registered as an investment adviser with the SEC, granting the agency access to his books and records. Despite that access, Peter Schiff, president of Euro Pacific Capital in New York, also raised concerns about the SEC's auditing of the firm.
"Of course, the fact that the SEC routinely audited Madoff's investment company and found nothing wrong is further proof that government regulation of the securities industry is ineffective and has done more harm than good," he said. "Rather than protecting investors, it merely lulls them into a falls sense of confidence. If government stayed out, private-sector due diligence would do a much better job of ferreting out such massive and poorly conceived scams."
Ronald D. Orol is a MarketWatch reporter, based in Washington.