Madoff gets 150 years

Bernard Madoff has been sentanced to 150 year for perpetuating a Ponzi Scheme which may have cost contributors a total of $65 Billion.  In his sentencing, Judge Denny Chin noted that no other fraud scheme in history had cost so much, and that there was  an important “symbolism” in the 150-year sentence. From Bloomberg:

Over three decades, he built a reputation as a brilliant stock picker who delivered steady returns through both bull and bear markets. He attracted an international client roster that included celebrities including filmmaker Steven Spielberg, fund managers such as J. Ezra Merkin, charities, universities, friends and even European royalty.

Big Lie

His facade shattered on Dec. 11, as Madoff confessed to authorities that his firm, Bernard L. Madoff Investment Securities LLC, was “one big lie.” Under immense pressure from a rush of investor redemptions, he admitted he used money from new investors to pay old ones. Regulators later said that his investment advisory business hadn’t made a trade in at least 13 years….

Madoff received the maximum sentence on the 11 fraud charges to which he pleaded guilty. Before his sentencing, he consulted with Herbert Hoelter of the National Center on Institutions and Alternatives, a prisoner advocacy group, according to court records.

Madoff gets what he deserves.  There is no other way to describe his crime other than, grand-grand-grand-grand-grand-grand larceny.  What will be interesting to watch is the progression of the civil case against Madoff.   Civil litigation arising out of this Ponzi scheme will last at least a decade as all of the assets of Bernard L. Maddoff Securities Investments LLC are already in a constructive trust with Securities Investment Protection Corporation (SIPC) as trustee.   It is very likely that many of Madoff’s personal assets will also be placed in trust.  For more information on the SIPC, see this article.

The case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).

Sweepting Changes for the SEC and CFTC

The White House today released a “white paper” outlining their plans for reform for the regulation of financial markets.  Two major changes will greatly affect the world of Securities Markets.  The first deals with Hedge Fund filings with the SEC.  From the Wall Street Journal.

Hedge funds and other private pools of capital would have to register with the Securities and Exchange Commission. Thousands of financial institutions would be required to hold more capital in reserve to protect against unexpected losses, and companies would also have to retain a portion of the credit risk for loans they have packaged into securities.

It seems that the main target of this regulation is not the hedge funds themselves, but Ponzi schemes.  The registration and reserve requirements will have the affect of allowing the SEC to monitor investments closely.  Ponzi schemes by their nature lack reserves because they are structured based on continuing investment and payouts to where their capitol is always less than what was invested.  This will raise large red flags for the SEC which has been criticized for their inability to spot Ponzi schemes.

The second major change involves an increase of police powers by both the SEC and the CFTC.  Wall Street Journal:

The Securities and Exchange Commission and Commodity Futures Trading Commission should get “clear, unimpeded authority to police and prevent fraud” in the derivatives markets, according to a new Obama administration proposal….

“All OTC derivatives markets, including CDS (credit default swaps) markets, should be subject to comprehensive regulation that addresses relevant public policy objectives,” according to a near-final draft of the regulator plan….

The plan calls for amending commodities and securities laws “to authorize the CFTC and the SEC, consistent with their respective missions, to impose recordkeeping and reporting requirements (including an audit trail) on all OTC derivatives.”

In their conception, the SEC and the SFTC were not designed as policing bodies, but as regulatory institutions.  It will be interesting to see how they make the shift.   It would involve a major shift in the role played by both bodies.  There may even be some constitutional questions regarding federal policing powers.  Congress, and more importantly, the public ought to take a hard look at the Obama plan and scrutinize the proposed changes.

The white paper has been made available by the Wall Street Journal.  You can access it here.

Chicago White Sox and a Ponzi Scheme

The Securities and Exchange Commission today obtained a court order ending a $11 millions ponzi scheme operated by David Hernandez, a local felon turned Chicago sports internet entrepreneur.   Looks like his entrepreneurial efforts were focused on something other than Chicago sports.  From the SEC:

The SEC alleges that David J. Hernandez, who was convicted in 1998 for wire fraud arising from his previous employment at a bank, sold “guaranteed investment contracts” through his company that, unbeknownst to investors, was actually out of business. Hernandez promised returns of 10 percent to 16 percent per month and made false and misleading statements about his background, the use of investor proceeds, and the safety of the investment. Among Hernandez’s illicit uses of investor funds was to start up a Chicago sports-talk Web site called “Chicago Sports Webio” featuring Chicago-area sports figures and reporters.

Now look how Hernandez grossly misrepresents his credentials:

The SEC alleges that Hernandez, who lives in Downers Grove, Ill., misrepresented that Next Step Financial was a successful company that invested in payday advance stores when, in fact, it was out of business. He trumpeted a strong educational and banking background, claiming to hold a J.D. and M.B.A. and have more than 20 years of experience in banking. According to the SEC’s complaint, Hernandez never received the claimed degrees, and his banking career ended with the conviction for wire fraud. He never invested in payday advance stores as he claimed, nor did he purchase the insurance policies that purportedly covered investor funds.

“Chicago Sports Webio” is a venture between Hernandez and Chicago sports radio personality, Mike North, who was recently fired from sports radio The Score 670. For those northsiders who know that the good guys wear blue pinstripes and hats, not black, should not be surprised that the site is sponsored by none other than the “Chicago White Sox“.  The site features a rather attractive model/”sports personality”, April Rose.   I am assuming that she is nothing more than a pretty face, who looks good in a White Sox jersey, and really does not care at all about sports.

On a side note, if you would like read a blog by a stunningly attractive woman, it had better be someone who knows sports inside and out and is passionate about the subject.  I am talking about none other than Sarah Spain, who posts on mouthpiecesports.com. Best of all, she is a Cubs fan!

If you want to read the complaint, it is available in pdf. form from the SEC’s website.

Yet Another Ponzi Scheme

This time two it involves California men allegedly involved in a $80million Ponzi scheme.  The SEC is now suing them for fraud.  From Bloomberg:

An important thing to note about Ponzi schemes, especially in trying to avoid them, is that they largely target specific ethnic groups, and are committed by members of that ethnic group.  The imfamous Madoff Ponzi scheme targeted wealthy Jews and their families.  No, Kevin Bacon isn’t Jewish, but his wife Kira Sedgwick is Jewish.  This ponzi scheme was instigated by two Korean-Americans, and targeted the local Korean community.

Madoff Victims and the Securities Investor Protection Corporation

The New York Times online has an article on how Madoff Victims may be compensated.  Included is a brief discussion of the Securities Investor Protection Corporation or SIPC.   The SIPC may be the only source of relief for some of the victims, and unfortunately, many of the elderly victims may not be eligible for SIPC relief.  From the New York Times Article:

The approach they seek would produce a significantly higher tally of cash losses than the formula being used by the court-appointed trustee overseeing the claims process for the Securities Investor Protection Corporation, a government-chartered agency financed by the brokerage industry….

Customers who qualify are eligible for up to $500,000 in immediate compensation from SIPC. Those whose eligible losses exceed that amount would divide up the assets recovered by the trustee.

Thousands of long-term investors, including elderly people who lived for decades on withdrawals from their Madoff accounts, do not qualify for SIPC payments because they withdrew considerably more over time than they originally entrusted to Mr. Madoff, Barry Lax, a lawyer for the plaintiffs, said.

The SIPC is like the FDIC for securities investors.  It is a government mandated, non-profit insurance company set up to protect the accounts of securities investors.  However, unlike the FDIC, it is not a federal agency, but a self-funded corporation.  Although it is not administered by the government, government officials play a role in that some of its governors are appointed by the President of the United States, under the bill that orginally created the corporation.  Generally, investors are insured for up to $500,000 per account.   Most of the securities traded on Wall Street are covered, however, failure to execute  trades transacted under naked short selling are not.

SEC worst favored Government Agency

People are frustrated with the government.   Bailout money, increased national debt, tax hikes, wire-tapping, torture, all give people a reason to be upset at the government.  Of all the government agencies, which should be the worst rated, FBI? CIA, IRS?  No, among all the agencies in the alphabet soup of government agencies, the letters  SEC draw the most ire.  An interesting article on Investment News‘s website:

Among six large government agencies, the Securities and Exchange Commission ranked dead last on the likeability scale with the public, with even the Internal Revenue Service coming in ahead….

Fifty-five percent of the respondents in the telephone survey had an unfavorable view of the SEC, compared to 43% for the IRS, according to the survey, which was conducted in April for Persuasion Strategies, a service of Denver law firm Holland & Hart LLP.

Why the SEC?  Well they are damned if they do, and they are damned if they don’t.  Lack of government oversight has been largely blamed for the nation’s current economic crisis.  This is no more true than in the regulation of financial markets.  On the other hand, others are lead to believe that government interference in markets only have the affect of prolonging economic problems.   To top it all off, the SEC has received a lot of bad press lately, summed up in one word, Madoff.  Of course Madoff is not the only source of SEC problems.  The silver lining in the status of the SEC is that, as the article points out, at least the people under investigation by the SEC are less popular than the SEC itself.

Lawmakers eyes “Naked” Short Selling

No, naked short selling has nothing to do with the flashy jackets traders wear on trading room floors.  Short selling is basically selling shares that you do not own, for the purpose of buying them back at a lower price.  The difference between the selling price and the buy back price is the trader’s gain.  Short selling comes in two flavors, regular and “naked”.   In a normal short sale, the seller borrows the shares from the owner.  In a “Naked” short sale, the seller doesn’t even borrow the share.  The main problem with short selling is that it artificially drives down the price of shares by increasing the supply of available shares.  Under normal suppy-demand economics, this drives down the price.  With the naked variety, there is the problem with “failure to deliver”, which occures when the stock isn’t delivered to the owner, particularly because the seller never owned it in the first place.  Aggressive short selling was largely blamed for the failure of Lehman Brothers and Bears Sterns.

Over the summer,  the SEC created rules requiring pre-borrowing before a trader can sell shares from certain financial firms.  The Wall Street Journal has an article on recommendations for further regulation.

One idea is to require that traders borrow shares before they try to sell a stock short, known as a preborrow. Last summer, the SEC issued an emergency rule requiring preborrowing for certain financial firms’ shares, but the industry said it was too expensive, and the requirement was abandoned….

The statement came after the Government Accountability Office found that SEC regulations issued earlier this decade only temporarily slowed cases of “failure to deliver,” which occurs when the seller of a security doesn’t deliver the security to the buyer during a required period. These cases can occur for a variety of reasons, including naked short selling.

An SEC spokesman said the SEC appreciates the GAO’s recommendations and is focused on short selling, including examining a preborrow requirement.

Great Post on Basic Securities Law

The FindLaw Blotter , a criminal law blog hosted on findlaw.com as a wonderful post on the basics of securities laws, and the crimes with in.  The post uses the recent conviction of Charles Conaway, the former CEO of Kmart, as its background.  Conaway was convicted of misleading Kmart’s investors prior to its 2002 bankruptcy.   Here is the Securities and Exchange Commissions release on Conaway’s Conviction.

Read the post on Findlaw Blotter.

New Position at the SEC, Chief Operating Officer

So, as part of the reforms of the Securities and Exchange Commisssion, a new position has been created, Cheif Operating Officer. It appears that the federal securities oversight commission is starting to take on the appearance of a corporation. They are also planning to add an additional 1,100 new hires to their 3,500 employees, according to Reuters. Surrounding all of this are rumors of stripping the SEC of certain powers, creating other agencies to oversee credit cards, even merging the SEC with the CFTC. Beware of interesting times.

SEC and CFTC Merger?

The New York Times published an article this morning which had a large part devoted to a possible merger of two agencies charged with monitoring securities, the Securities Exchange Commission, and the Commodity Futures Trade Commission.  Both bodies have faced accusations of weak oversite over their prospective areas.   Many reform minded people feel that this would be a good way of changing business in Washington, by consolidating two government agencies which do similar jobs.  The article does touch on amajor roadblock, turf.  One source of this is in congress itself. With oversight commities looking over both agencies, members of congress would be hard pressed to give up their territory.  Another turf battle would be largely territorial.  With most of the Securities Trading occuring in New York, and the Commodities Trading taking place in Chicago, some would fear that the smaller commodities trading institutions will be swallowed by the larger securities institutions (I am a bit partial to this concern as a native Chicagoan).  With that there is a fear that regarding oversite, the commodities division would be largely ignored.  Here is the article from the New York Times:

A merger of two other federal agencies — the S.E.C. and the Commodity Futures Trading Commission — would face fierce political resistance. In recent years, both agencies have been accused of weak oversight. But the industries regulated by the agencies have traditionally opposed a merger, and the Congressional committees with jurisdiction over each agency historically have been reluctant to cede any authority….

A central goal of the plan is to more tightly control companies that are now largely unregulated but could pose risks to the financial system if they failed, such as hedge funds. Under the proposal, hedge funds would be required to register with the S.E.C. and provide access to their books. Many hedge funds already do so….

As part of its overhaul, the Obama administration announced three weeks ago that it would seek new authority over the complex financial instruments known as derivatives, which were a major cause of the financial crisis and have gone largely unregulated for decades. While some in Congress are pushing for tougher oversight, the financial industry is lobbying hard against it, arguing that too much regulation would thwart financial innovation. On Thursday, Gary Gensler, the new chairman of the C.F.T.C., is expected to provide more details about that proposal at a Senate Agriculture Committee hearing.

For years, the debate over how to regulate such instruments has been mired in disagreement between the C.F.T.C. and the S.E.C., reflecting the rivalries between markets in Chicago and New York. But officials said this week that Mr. Gensler and Mary L. Schapiro, his counterpart at the S.E.C., had reached an informal understanding that would enable their respective agencies to share authority over the derivatives market.

The understanding, which the regulators hope Congress will ultimately ratify, would essentially give the S.E.C. authority over derivatives that are related to publicly traded securities and other instruments under the S.E.C.’s jurisdiction, such as credit-default swaps, while the C.F.T.C. would oversee commodities-based derivatives, the officials said.