Bigger Than Enron - Madoff Pyramid Scheme

[David Guyatt]

This death does have that curious smell to it doesn't it Peter.

The suicided gentleman represented European clients of Rothschilds Investment bank and UBS. Oddly enough, Rothschilds AG Zurich were deeply mired in the death of another financier who "lost" a great deal of his clients money many years ago -- Roberto Calvi.

http://www.modernghana.com/news/196288/1...icide.html

Madoff scam victim commits suicide
By New York Times
International | 5 hours ago



Around 4 a.m. on Monday, a prominent hedge fund manager who apparently had lost $1.4 billion with Bernard L. Madoff, telephoned a longtime client in Paris, sounding upset.

Journalists gathered on Tuesday at the Madison Avenue office where the body of Thierry Magon de la Villehuchet was found.

“I have to fight for my clients and myself,” the money manager, R. Thierry Magon de la Villehuchet, told the client, who spoke on the condition of anonymity because of investigations into the $50 billion Ponzi scheme Mr. Madoff is suspected of orchestrating. “It's a complete nightmare.”

A little more than 24 hours later, Mr. de la Villehuchet was found dead in his office on Madison Avenue. The evidence pointed to suicide, the police said on Tuesday.

Security officers discovered the body of Mr. de la Villehuchet, a co-founder of Access International Advisors, in a chair, with one of his legs propped on his desk. His wrists and his left biceps were slashed, said Paul J. Browne, a New York police spokesman. A wastebasket had been placed under his bleeding biceps, Mr. Browne said.

No suicide note was found, but sleeping pills and a box cutter were discovered under his desk.

Mr. de la Villehuchet, 65, was in his office at 7 p.m. on Monday and had asked the cleaning staff to clean up early because he would be working late.

Later that evening, one of the firm's partners asked a security guard to see if Mr. de la Villehuchet was still in his office, but the door was locked, and the guard had no key, the police said.

During the last week, as the scale of the scheme came to light, Mr. de la Villehuchet had tried unsuccessfully to recover his clients' money, the client said. Mr. de la Villehuchet told the client in Paris on Monday morning that he felt that he had betrayed clients and friends.

“He said he felt robbed,” the client said.
A native of the Brittany region of France, Mr. de la Villehuchet was described by friends as a man who was devoted to his firm. He founded Access International Advisors in 1994 with Patrick Littaye after his tenure as chairman and chief executive of the United States investment banking arm of the French bank Crédit Lyonnais.

Mr. de la Villehuchet, an avid sailor and a member of the New York Yacht Club, lived in Westchester County with his wife. The couple also owned a home in Brittany. No one responded to a telephone call to Mr. de la Villehuchet's home or to messages left at Access International's offices.

Early Tuesday afternoon, several reporters and photographers gathered in front of the narrow entrance to Access International's office on Madison Avenue, a few blocks from Rockefeller Center.

Access International is one of several so-called feeder funds that funneled money from investors across the globe into Mr. Madoff's collapsed firm. The news of Mr. de la Villehuchet's death came as investors in other feeder funds with exposure to Mr. Madoff, including Fairfield Greenwich Group and Tremont Group Holdings, began suing those funds alleging negligence and breach of fiduciary duty.

Access International managed $3 billion, but its Luxalpha American Selection fund invested all of its assets with Mr. Madoff. In a letter to fund investors last week, the New York-based firm called Mr. Madoff's arrest “a shocking development” and said it was assessing the situation.

Investors in the Luxalpha fund were mostly wealthy European clients of Rothschild investment bank and UBS, which was the custodian and administrator of the Luxalpha fund until this year, when Access International took over.

UBS has said that wealthy European clients, attracted by Mr. Madoff's stellar returns, had asked the bank to set up a fund to invest with him.

Source: New York Times

[Mark Stapleton]

I'm not sure I buy into that false guilty plea angle.

You could be right David, although the false guilty plea sounds plausible at first glance.

It all comes down to this US financial fraud compensation law which the writer alluded to. Rather than take his word for it, I'm trying to find out more about it, but I'm not having much luck just now.

I don't expect a large fund has been provisioned, or whether there would be anything left in it but if it provides for unlimited tax offsets then it's big money for aggrieved investors.

[Mark Stapleton]

This death does have that curious smell to it doesn't it Peter.

The suicided gentleman represented European clients of Rothschilds Investment bank and UBS. Source: New York Times

Thanks for that, David.

Hate to say it, but I think it's suicide.

[Mark Stapleton]

The comments by journalists, judges and commentators alike seem to be unanimous. The whole Madoff affair was a terrible, terrible fraud. A horrible, awful, rancid, malodorous, disgusting fraud. Really bad and terrible too. Oh, how investors must have suffered. The loss of faith and trust (and money). The suffering, the humanity.

When these poor souls finally dry their tears, here's how they can claim compensation:


http://www.reuters.com/article/wtMostRea...ZT20081224


Investors can also make claims for money lost with Madoff through the Securities Investor Protection Corp (SIPC), which is overseeing the liquidation of Bernard L. Madoff Investment Securities LLC via a court-appointed trustee.

A U.S. bankruptcy court judge on Tuesday authorized the nonprofit group, created by Congress in 1970, to mail claim forms to customers in the first week of January. Customers have six months to return the forms.

"They will return those claim forms to the trustee with data indicating what they believe they were owed, how much they put in, how much they withdrew," said Stephen Harbeck, SIPC president and chief executive. "Since the records in this case are unreliable, the more information people can get us the faster we will be able to satisfy the claim."


I love that last sentence. Now was it four billion I had in the fund. No, maybe it was six or seven. Better check with Bernie's trustee, oops I forgot, the records are 'unreliable'. Maybe that's not so bad.

I agree with one blogger who said Bernie's done a Jack Ruby.


p.s. it was a terrible terrible fraud.

[David Guyatt]

Naked short selling speciality law firm found gulity of racketeering, graft, mail fraud now involved in Madoff case.

That smell you can smell is very likely the cloaked involvement of a major New York mafia crime family (Genovese) in this whole affair.

http://www.milberg.com/newsevents/public...&pubid=975

MILBERG LLP AND SEEGER WEISS LLP EXPAND INVESTOR REPRESENTATION GLOBALLY IN MADOFF FRAUD CASE

12/16/08

New York, NY, – As banks, hedge funds, institutional and individual investors throughout the world examine their portfolios for investments made through Madoff Investment Securities, Milberg LLP and Seeger Weiss LLP are helping hundreds explore their legal options. The firms, with offices in New York, Tampa, Los Angeles, Detroit, Newark, Tulsa and Philadelphia, are now representing clients from locations including Hong Kong, Spain and throughout the United States.

“The global impact of the alleged fraud perpetrated by Bernard Madoff and his firm is just beginning to become clear,” said Brad Friedman, a partner at Milberg LLP. “Given that our firm has a great deal of experience managing class action lawsuits that affect individual and institutional investors both domestically and abroad, we are able to make recommendations appropriate to each situation.”

“In Spain alone the number of investors seeking recoveries is growing dramatically each day,” added Stephen Weiss, a partner at Seeger Weiss LLP. “As a result, we’re counseling several Spanish law firms representing hundreds of millions of dollars in lost investments on the legal options available to them.”

About Milberg

Milberg LLP has been representing individual and institutional investors for nearly 40 years and serves as lead counsel in federal and state courts throughout the United States. Please visit the Milberg website (http://www.milberg.com) for more information about the firm.

About Seeger Weiss LLP

Seeger Weiss LLP is recognized as one of the nation's preeminent law firms handling complex individual, mass, and class action litigation on behalf of consumers, investors, and injured persons nationwide. Please visit the Seeger Weiss website (http://www.seegerweiss.com) for more information about the firm.

Investor contact:

Matthew Gluck
mgluck@milberg.com
Brad N. Friedman
bfriedman@milberg.com
Sanford P. Dumain
sdumain@milberg.com
Milberg LLP
One Pennsylvania Plaza, 49th Fl.
New York, NY 10119-0165
Phone number: (212) 594-5300 or (877) 692-1965

Stephen A. Weiss
sweiss@seegerweiss.com
Seeger Weiss LLP
One William Street
New York, NY 10004
Phone number: (212) 584-0700 or (877) 539-4125
Media Contact: Dan Fleshler (646-552-1213) or Barbara Shrager (212-935-0210, ext. 224)

***

Note the RICO charge:

http://en.wikipedia.org/wiki/Milberg_Weiss

Milberg

From Wikipedia, the free encyclopedia

Founded in 1965 by attorneys Larry Milberg and Melvyn I. Weiss, Milberg LLP (formerly known Milberg Weiss LLP and Milberg Weiss Bershad & Schulman LLP) is a U.S. plaintiffs' law firm. Based in New York City, it is widely known for representing investors in securities class actions. Before its split in May 2004 with the firm now known as Coughlin Stoia Geller Rudman & Robbins LLP, it was the largest plaintiff law firm in the United States, with over 200 attorneys and a leader in its field, responsible, at least in part, for over 50 percent of all securities class action cases settled in 2002.[1]

On May 18, 2006,[2][3] the firm and two of its named partners, David J. Bershad and Steven G. Schulman (Schulman resigned in December 2006), were indicted by United States Attorney Debra Wong Yang of the United States District Court for the Central District of California on various counts, including racketeering, mail fraud, and bribery. The charges include claims that Milberg Weiss paid portions of its legal fees to plaintiffs in order to induce them to sue.[4][5] By January 2007, more than half of the firm's partners had left the firm. As of June 2008, the firm's website lists only 53 full-time attorneys (29 partners and 24 associates).

Four longtime Milberg Weiss partners have pled guilty to federal charges, including Steven Schulman, David Bershad, William Lerach, and Melvyn Weiss. On March 20, 2008, Melvyn Weiss announced through his attorney that he would plead guilty in exchange for an 18 to 33 month prison sentence and fines and restitution of $10 million. [6] On Monday February 11, 2008, Lerach was sentenced to two years in federal prison, two years' probation, fined $250,000 and ordered to complete 1,000 hours of community service. Bershad will pay $250,000 in fines and forfeit $7.75 million. Bershad was sentenced to six months of incarceration in October 2008.[7] On June 16, 2008, U.S. prosecutors in Los Angeles agreed to dismiss the indictment against the firm, under a non-prosecution agreement that requires Milberg to pay $75 million to settle the charges.

Mel Weiss was sentenced to 30 months of incarceration on Monday June 2, 2008, and is currently incarcerated at the federal minimum security institution known as FCI Morgantown in West Virginia, with a projected release date of November 1, 2010.[8]

***

http://www.nytimes.com/2007/10/18/us/pol....html?_r=1

Accused Law Firm Continues Giving to Democrats

By MIKE McINTIRE
Published: October 18, 2007

Over the years, as it became Exhibit A for critics of shareholders’ class action lawsuits, the law firm of Milberg Weiss often enjoyed the support of Democrats who called the suits an invaluable weapon in the universal conflict between big business and the little guy.

The Democrats, in turn, enjoyed the support of Milberg Weiss and its partners, who together have contributed more than $7 million to the party’s candidates since the 1980s.

Last year, the firm was indicted on federal charges of fraud and bribery. But the political partnership has not been entirely severed. Since the indictment, 26 Democrats around the country, including four presidential candidates, have accepted $150,000 in campaign contributions from people connected to Milberg Weiss, according to state and federal campaign finance records. And some Democrats have taken public actions that potentially helped the firm or its former partners.

The recent contributors include current and former Milberg partners who had either been indicted or were widely reported to be facing potential criminal problems when they wrote their checks. One, William S. Lerach, was a fund-raiser for John Edwards’s presidential campaign until his guilty plea last month. Melvyn I. Weiss, a founder of the firm, gave the maximum $4,600 to Senator Hillary Rodham Clinton of New York in June. Other firm members contributed to the presidential campaigns of Senators Barack Obama of Illinois and Joseph R. Biden Jr. of Delaware.

Milberg Weiss reaped billions of dollars in legal fees over four decades as the acknowledged king of class action lawsuits, which accused executives of misleading investors with erroneous financial statements or some other fraud. According to the indictment, the New York-based firm ran a “racketeering enterprise” that collected a quarter billion dollars in 250 cases in which people were paid secret kickbacks for serving as plaintiffs.

The law firm has denied the charges.

The reluctance of Democrats to shut off the cash spigot, even in the face of scandal, underscores how the pressure to raise money creates marriages of political interests that can be difficult to break up. Fred Wertheimer, a longtime advocate of campaign finance reform, called it the “natural outcome of a system where huge amounts of private contributions are raised and spent, and the political parties turn to groups with interests in government to feed the spending machine.”

In the current campaign, the race for cash has led to several embarrassments for the Democrats, including the indictment of a trial lawyer, Geoffrey Fieger, who was accused of using straw donors to make illegal contributions to Mr. Edwards’s 2004 presidential campaign, and the arrest of Norman Hsu, a businessman accused of fraud who raised hundreds of thousands of dollars for Mrs. Clinton.

In addition to the kickback charges in the Milberg Weiss case, federal agents have investigated accusations that the firm funneled campaign contributions through plaintiffs and expert witnesses in the 1990s, said two lawyers familiar with the inquiry. The guilty plea entered by Mr. Lerach hinted at that, but it also specified that prosecutors would not pursue campaign finance violations, in exchange for Mr. Lerach’s admission that he had conspired to obstruct justice by concealing the kickbacks.

Beyond campaign contributions, Milberg Weiss became deeply ingrained in the financial firmament of the Democratic Party in other ways. Members of the firm gave $500,000 toward construction of a new Democratic National Committee headquarters, and some became partners in a private investment venture with several prominent Democrats. They included former Senator Robert G. Torricelli of New Jersey, who is a fund-raiser for Mrs. Clinton, and Leonard Barrack, a Philadelphia trial lawyer who was once the national fund-raising chairman for the Democratic Party.

Along the way, as Milberg Weiss’s brass-knuckles legal strategy made it a target for Republicans advocating limits on class action suits, it usually could count on Democrats in Washington to protect its interests. After federal prosecutors indicted the firm in May 2006, four Democratic congressmen issued a joint statement, posted on Milberg Weiss’s Web site, accusing the Bush administration of persecuting lawyers who take on big businesses.

The statement, signed by Representatives Gary L. Ackerman, Carolyn McCarthy and Charles B. Rangel, all of New York, and Robert Wexler of Florida, contained several passages that appear to be lifted directly from a “class action press kit” distributed by a national trial lawyers group. All but Mr. Wexler have received campaign contributions from Milberg Weiss partners.

More recently, Mr. Edwards, a trial lawyer who became wealthy pursing personal injury cases, joined labor unions and consumer groups last May in pressing securities regulators to intervene in a lawsuit against banks brought by Mr. Lerach on behalf of Enron investors. His campaign said Mr. Edwards’s actions had nothing to do with Mr. Lerach, and were consistent with the candidate’s longstanding defense of working people.

***

http://www.nytimes.com/2008/06/07/busine...ocera.html

Serving Time, but Lacking Remorse

By JOE NOCERA
Published: June 7, 2008

Some guys just don’t know when to shut up. William S. Lerach is one of those guys.



William S. Lerach was sentenced to two years after pleading guilty to playing a role in a kickback scheme at his law firm.

Once the most feared plaintiffs’ lawyer in the land, Mr. Lerach went to prison last month for his involvement in a long-running kickback scheme. His former firm, Milberg Weiss Bershad & Schulman, you see, allegedly made secret payments to a small group of people who acted, in effect, as Potemkin plaintiffs, allowing the firm to trot them out as clients whenever it wanted to sue a company whose stock had fallen. Which, by the way, was often; in its glory years, Milberg Weiss’s annual “market share” in securities litigation exceeded 50 percent.

Wait. Did I say “allegedly?” I take that back; at this point there is nothing alleged about it: Mr. Lerach and his partners absolutely, positively committed these crimes. David J. Bershad, Steven G. Schulman and Melvyn I. Weiss — three of the firm’s name partners — have all pleaded guilty to the same essential charges as Mr. Lerach. None of the cases came close to going to trial.

Mr. Bershad, who appears to have been the firm’s bagman as well as one of its top partners, used to keep safe full of cash in his office credenza; that was the firm’s slush fund for its crooked clients. According to the government, Milberg Weiss disbursed $11.3 million illegally over a 25-year period. In other words, this wasn’t some rogue operation — the kickbacks were at the heart of the firm’s business model.

Although neither Mr. Bershad nor Mr. Schulman has been sentenced, the denouement of the case came this week, when Mr. Weiss, one of the co-founders of Milberg Weiss — and long considered one of the giants of the securities bar — was sentenced to 30 months in prison. This came less than a month after Mr. Lerach began serving his two-year sentence. When I began asking around about why Mr. Lerach — Milberg’s other leading light until he broke away in 2004 — had gotten the lesser sentence, I was told that Mr. Lerach had pleaded guilty a year earlier than Mr. Weiss and that he had not tried to prevent the government from obtaining a crucial piece of evidence, as Mr. Weiss had.

Fair enough. But there is something about their disparate sentences — even though there is only a six-month difference — that sticks in my craw. In the aftermath of his guilty plea, Mr. Weiss has struck notes of genuine remorse. “Looking up from the deep pit into which I have descended has been painful,” he wrote in a letter to the judge before his sentencing. “I have spent day after day, and sleepless nights, reflecting on how I could have permitted myself to stray so far off course from the hopes and desires I established for my life’s work.”

Meanwhile, Mr. Lerach was publishing his reflections on the case in a first-person article that appeared this week on the Web site of Portfolio, the Condé Nast business magazine. In the article, Mr. Lerach expresses zero remorse, positions his crimes as having hurt no one while serving a greater good and makes the absurd claim that he was railroaded by his political opponents.

It is a brazen, shameful piece of work — and it must infuriate the prosecutors who made the plea agreement with him, and the judge who accepted it, especially since Mr. Lerach wrote his own remorseful letter to the judge ahead of his sentencing. It also ought to infuriate anyone who cares about the law. Plenty of criminals head to prison still believing they’re above the law, but Mr. Lerach takes the cake.

As regular readers know, I’m no fan of Mr. Lerach. I’ve long thought he ran a kind of extortion racket, filing class-actions suits against companies whose stock had dropped — without a shred of evidence that any wrongdoing had taken place — and then torturing them with motions, discovery and depositions until they settled. He used their own rational judgment — that it made more economic sense to settle than fight — against them. When a case settled, Mr. Lerach, in effect, took money from shareholders, sliced off a large percentage for his firm and gave whatever was left back to shareholders. The best description of Mr. Lerach’s methods I ever heard came from the venture capitalist John Doerr: a “cunning economic terrorist,” he called him.

None of this is illegal, alas. Lawyers like Mr. Lerach have the right to file bogus suits — and extract what they can from them. What is illegal is secretly paying off what Michael A. Perino, a St. John’s University law professor, calls “professional plaintiffs”— people who hold stock in dozens of companies just so a lawyer can use them as “aggrieved shareholders” whenever they want to file a lawsuit. Lawyers like Mr. Lerach needed such “on-call” clients because it was important to be first to the courtroom to file a suit; up until 1995, when the law changed, that was the crucial criteria in determining which lawyers would be lead counsel, and thus take the largest share of attorney’s fees.

In his Portfolio article, Mr. Lerach claims that before 1995, it was legal to pay plaintiffs the way Milberg Weiss did — and that everyone did it. It wasn’t, and they didn’t. “The practice of secretly paying plaintiffs was always illegal,” said Robert J. Giuffra Jr., a lawyer with Sullivan & Cromwell, who helped write the 1995 law when he was working for Congress. But the new law made its illegality even more explicit, while ending the “race to the courthouse,” as Mr. Giuffra calls it, by changing the criteria for lead counsel. (The lawyer whose client had the most shares now has the best shot at become lead counsel.) One of the shocking things about the Milberg Weiss case is that the firm continued to pay plaintiffs well after the passage of the 1995 law.

Still, Mr. Edwards’s willingness to be seen doing anything that could benefit Mr. Lerach, and allowing him to raise money, provided fodder for critics. At the time the Edwards campaign took on Mr. Lerach as a fund-raiser, it was already widely reported that Mr. Lerach, who left Milberg Weiss in 2004, was one of the unnamed co-conspirators cited in court documents related to the firm’s indictment.

In all, Mr. Edwards collected about $16,000 from people connected to Milberg Weiss, including Mr. Lerach and two other former Milberg Weiss lawyers who had joined him at his new firm, Patrick J. Coughlin and Keith F. Park. Federal authorities agreed not to prosecute them as part of the plea deal with Mr. Lerach. (Mr. Lerach also raised $64,000 for Mr. Edwards from members of his new firm who were not named in the Milberg case.)

“With Edwards, he has associated himself with people in his campaign that don’t represent the face that even the trial lawyers want to put forward to the country,” said Walter K. Olson, a fellow at the Manhattan Institute, a conservative research group, who has written extensively on the American legal system.

Eric Schultz, a spokesman for the Edwards campaign, said that it had given Mr. Lerach’s $4,600 personal contribution to charity and that “should anyone else be found guilty of wrongdoing, we will donate their contributions to charity as well.”

“The bottom line is, the system is far from perfect,” Mr. Schultz said. “The influence of money in politics has gotten out of control. That’s why John Edwards has decided to play by the rules that were designed to ensure fairness in the election process by capping his campaign spending and seeking public financing.”

John W. Keker, a lawyer for Mr. Lerach, declined to comment on his client’s guilty plea.

A spokesman for Mrs. Clinton said her presidential campaign did not intend to return the contribution from Mr. Weiss. A spokesman for the Obama campaign, whose Milberg Weiss contributions came from lawyers not directly involved in the kickback scandal, declined to comment.

In a statement denying the charges in the indictment, Milberg Weiss, which continues to operate, said: “The indictment is unprecedented and unfair, and the firm intends to vigorously defend itself against the charges. We are confident that we will be fully vindicated.”

The indictment of Milberg Weiss was a stunning turnabout for the firm, which has recovered $45 billion for clients since it was founded in 1965.

Its approach was controversial. The moment a publicly traded company’s stock dropped, Milberg Weiss would enlist a shareholder as a plaintiff and rush to court with a lawsuit. Usually, the sued company would end up settling rather than risk going to trial.

Milberg Weiss’s supporters gave it credit for enforcing accountability in the boardroom. Critics, however, accused the firm of economic terrorism, and with the Republican takeover of Congress in 1994 a business-backed movement took hold to change securities laws to make it harder to bring shareholder lawsuits.

The firm found a friend in President Bill Clinton, who, a few days after being seen chatting and shaking hands with Mr. Lerach at a White House dinner in 1995, vetoed legislation that clamped down on class action suits. Congress overrode the veto, but the image remained of a close relationship between the president and Mr. Lerach, a Lincoln Bedroom guest during the Clinton presidency who donated more than $100,000 to Mr. Clinton’s presidential library.

Beginning in 2000, federal investigators began looking into Milberg Weiss’s litigation practices, particularly its uncanny ability to beat other firms in the race to be named lead counsel in large class action suits, thereby ensuring itself a larger percentage of fees. By last year, two people had pleaded guilty to accepting kickbacks from Milberg Weiss in return for being on call to serve as plaintiffs in more than 100 lawsuits; an expert witness used by the firm was implicated in the fraud; and two partners, Steven G. Schulman and David J. Bershad, had been indicted.

Both Mr. Schulman and Mr. Bershad have since pleaded guilty. Late last month, Mr. Lerach also pleaded guilty, leaving Mr. Weiss as the only named partner facing criminal charges.

The case has taken a toll not only on the lawyers involved, but also on the firm’s name plate. After Mr. Lerach left to form his own practice in San Diego, his old firm dropped his name, becoming Milberg Weiss Bershad & Schulman. Two resignations and guilty pleas later, it is now simply Milberg Weiss.

Mr. Lerach’s statement has infuriated other plaintiffs’ lawyers. “It would just be unthinkable” to give kickbacks to lead plaintiffs, said Max Berger, of the firm Bernstein, Litowitz, Berger & Grossman. Added Sean Coffey, another Bernstein, Litowitz partner: “It is bad enough that this confessed criminal cheated for years to get an unfair advantage over his rival firms. But for this guy, on his way to prison, to say that everyone does it is just beyond the pale.”

Mr. Lerach’s “everybody-does-it” claim — which he has made in numerous pre-prison interviews, as well as the Portfolio article — is also giving the Congressional enemies of the plaintiffs’ bar a new weapon with which to club it. For instance, Senator John Cornyn, Republican of Texas, has introduced legislation that would both force new disclosures on the plaintiff’s bar and reduce their fees; the senator told me point-blank that Mr. Lerach’s pronouncements helped spur him to file the legislation. So as he heads to jail, Mr. Lerach has succeeded in making life more difficult everyone who sues companies for a living. Nice going.

Let’s take another of Mr. Lerach’s claims: “The government contends that the people on whose behalf we sued were damaged by the fees paid to plaintiffs,” he wrote in the Portfolio article. “This is false.” According to Mr. Lerach, the kickback came out the lawyer’s fees. In other words, he was the one sacrificing when he kicked money back to one of his on-call plaintiffs!

To which the only appropriate response is: What a crock. Think about it: Why is it illegal for a lead plaintiff to take money under the table from his lawyer in a class-action suit? Because in doing so, the client has a conflict with the rest of the class, for whom he is supposed to be fighting. If he knows he is going to get a kickback that comes out of the attorney’s fees, he will care more about the fees than the amount of the settlement — or the amount he might reap from a trial. Indeed, Mr. Perino recently published a study that showed that the fees awarded in Milberg Weiss cases that were included in the indictment were considerably higher than the fees in other Milberg Weiss cases — but that “the recoveries are statistically indistinguishable.” Which is to say, the lead plaintiffs didn’t spend a lot of time worrying about extracting the maximum settlement.

There is a second reason why having Potemkin plaintiffs constitutes wrongdoing. The plaintiffs are the ones who are supposed to bring the cases — not the lawyers. They hire lawyers because they have suffered harm and want redress — and they are the ones who should be making the final decisions about fighting, settling or dropping the case. The Milberg Weiss method really meant that the client was a nonentity in the process. As Mr. Lerach once famously put it to Forbes — in another great example of his lack of discretion — “I have the greatest practice of law in the world. I have no clients.”

Ultimately, what Mr. Lerach wants us to believe is that it was his zealotry in bringing evil corporations to heel that caused him to cross the line. There is no question that corporations do things they shouldn’t, and given the system we have, plaintiffs lawyers, at their best, can offer a kind of rough justice. Even Mr. Lerach has had his bright, shining moment, when he extracted billions from the banks that aided Enron.

But Enron is not really representative of Mr. Lerach’s career, much as he’d like you to believe it. He’s a crook who got caught, and if putting him in prison for his little kickback scheme — rather than his far more venal form of economic extortion — is a little like putting Al Capone in jail for tax evasion, well, so be it.

That’s a form of rough justice, too.

[Peter Lemkin]

Hmmmm....now taking an interesting and predictable turn.....nothing ever changes, sadly. The problem seems to be the popular mythology that the elites of society and the criminals in it are two diametrically opposite groups. I find they overlap greatly!

[Peter Lemkin]

Decmber 23, 2008

Last week the Good Lord evidently realized that not enough people had been reading Hyman Minsky’s explanation of how financial cycles end in Ponzi schemes – the stage in which banks keep the boom going by lending their customers the money to pay interest and thus avoid default. So He sent Bernie Madoff to dominate the news for a week and give the mass media an opportunity to familiarize newspaper readers and TV watchers with just how Ponzi Schemes work. What Mr. Madoff did was, in a nutshell, what the economy as a whole has been doing under the moniker “wealth creation.”

If the media were able to wait until as late in the financial collapse as last week to provide helpful diagrams about how Ponzi schemes need to keep on growing exponentially, it is simply because bad foreign financial news is not deemed newsworthy in North America. But Europe has been having its own run-throughs, headed by Spain – which by no coincidence is now experiencing the biggest real estate bust outside of the post-Soviet economies.

The best case study occurred two years ago. On May 9, 2006, Spanish police raided 21 homes and offices of Afinsa Fienes Tangibles SA, the world’s largest postage-stamp dealer, and rival firm, Forum Filatélico. They charged eleven men with running a $6.4 billion pyramid scheme that took in some 343,000 investors – 1 percent of Spain’s entire population, making the fraud one of the largest in Spanish history.[1]

An economy either is in trouble or has lost its sense of balance when investors shy away from tangible capital formation in favor of buying postage stamps and similar collectibles. Unlike machinery and technology, stamps do not produce real goods and services. They have long since been printed and sold by the government, and will never be used actually to mail letters. However, stamps have shown themselves to be a great vehicle to attract savers who think that buying them can produce an exponential earnings growth – or more technically, “capital” gains, if we can stretch economic terminology far enough to call a stamp collection “capital.”

If value resulted merely from scarcity, then postage stamps, coins and master paintings all would seem to increase almost automatically over time, just like most land does. But these trophies of wealth do not promote rising production, consumption or living standards. As stamps do not earn money by employing labor to produce goods and services, their price gains are neither profit nor capital gains as classically understood. They are what economists call a windfall.

The Spanish postage-stamp scheme seems to have taken off in 2003, the year in which Spain’s free-market conservative government deregulated public insurance and oversight for non-financial investment funds. Afinsa Group bought two-thirds control of the New Jersey stamp and coin auction house Greg Manning and merged it with the Spanish auctioneer Auctentia to create Escala as the world’s third largest auction house (after Sotheby’s and Christie’s). Escala moved its operations to New York City and listed its stock on the Nasdaq over-the-counter market. Despite the stock market’s lethargic trend, the company’s earnings showed such rapid growth that in just three years its share price soared from under $5 to $35, tripling in 2005 alone.

Afinsa’s purchases accounted for 70 percent of Escala’s profits, thanks largely to the fact that as its Spanish parent’s sole supplier, Escala marked up its stamps by a reported 1,150 percent, out of all proportion to the usual 25 percent. Afinsa thus was carrying stamps for which it paid 58 million euros on its books at €723 million, over ten times their catalog values – which are fictitiously high in any case, being published mainly for the benefit of stamp dealers to give their customers the idea that they are getting a good buy. But as Forum Filatélico’s chairman, Francisco Briones, explained to a reporter from London’s Financial Times: “It was ‘normal’ to charge clients such inflated prices because of the services provided . . . including the custody and conservation of stamps.”

Afinsa paid its stamp investors an annual rate of 6 to 10 percent interest, beating most competing yields as the global financial bubble was pushing interest rates steadily downward. (Spanish government bonds paid only 3.5 percent.) To build up trust, Afinsa gave its clients post-dated checks for the gains that were promised. It also promised to buy back the stamps it sold, at the original price. This gave an appearance of liquidity to the normally illiquid market in stamps, fine arts and other collectibles, where 25 percent commissions to auction houses are normal. These ploys convinced the majority to simply re-invest the money to buy yet more stamps, which the company held in its offices ostensibly for safekeeping and preservation.

Money poured in, giving stock-market investors in Escala much higher returns than the stamp-buying customers nominally were receiving. As one news report remarked, why buy stamps and coins when you can invest in companies dealing in them?[2] But within a week of the arrests, Escala’s stock plunged below $4 a share.

The denouement came shortly after Lloyd’s of London withdrew from a €1.2 billion policy to insure Afinsa’s stamps. One of its experts noticed that if $6 billion really had been invested, it would have bought up all the investment-grade stamps in the world many times over. The fact that stamp prices did not reflect any such extraordinary buying implied that few bona fide stamp transactions occurred at all, and there had been a massive over-billing.

As matters turned out, most of Afinsa’s stamps had no investment value. This explained why there were no receipts for transactions with Escala. The police found €10 million in €500 banknotes (worth about $650 each at the exchange rate of $1.30 per euro) by breaking open a newly plastered wall at the Madrid home of Afinsa’s main stamp supplier, Francisco Guijarro. What they could not find were any receipts for the stamps that he allegedly bought. And despite the remarkably high markups charged for curating the stamp collection, it was rife with phonies, as Lloyd’s had suspected. Concluding that the bills Senor Guijarro had sent to Afinsa were just a cover for a money laundering operation, the prosecutors charged the family members and officers who controlled Afinsa with embezzlement, money laundering, tax evasion, fraudulent bankruptcy, breach of trust and forgery.

The arrests recalled memories of a more famous U.S. fraud involving postage stamps some 86 years earlier, in 1920, by Charles Ponzi – the man who bequeathed his name to history in the form of Ponzi pyramid scheme. He is reported to have arrived in Boston in 1903 with only $2.50. Not speaking much English, he took menial jobs. Fired as a waiter for shortchanging customers, he moved up to Montreal and became an assistant teller in an Italian immigrant bank. It grew rapidly by paying double the normal 3 percent rate of interest on savings accounts, but failed when its real estate loans began to go bad. The bank’s attempt to give the impression of solvency seems to have given Ponzi the idea of paying interest out of new deposit inflows rather than actual earnings.[3] As long as clients felt they were receiving interest regularly, they tended to be calm about the principal balance.

Ponzi was sent to a Canadian prison for forgery, and then was jailed in Atlanta for trying to smuggle Italian immigrants into the United States. After his release he moved back to Boston and got a job selling business catalogs. A Spanish customer sent him a postal reply coupon, which allowed its holder to buy stamps in foreign countries for return mail rather than using domestic currency to buy a stamp.

Prices for these coupons were long out of date, having been set in 1907 by the International Postal Union. World War I drastically shifted exchange rates, enabling buyers to pay a small amount in Britain – or even less in Germany with its depreciated currency – and obtain a return stamp order that was good in the United States.

The markup on these tiny postal orders was large. An American penny could buy foreign stamp orders that could be converted into six cents in U.S. stamps, for a 500 percent profit. The problem was that it would take a truckload of such postal orders to make serious money. A million-dollar investment would involve a hundred million penny coupons – which then would have to be converted into stamps and sold in competition with the U.S. Post Office, presumably at a discount, mainly in immigrant neighborhoods.

Focusing on the principle of arbitrage rather than such laborious implementation, Ponzi explained that he could make a 400 percent gain after expenses. He promised that investors could double their money in 90 days, pretending to take due account of the costs and shipping time from Europe to America. When his Securities Exchange Company paid early investors the high returns he had described, they spread the word to others. Ponzi’s inflow of funds rose from $5,000 in February 1920 to $30,000 in March, and $420,000 by May. By July an estimated $250,000 a day was flowing into his firm, mainly from small investors who let their book credits build up rather than taking out their money. Some people put their life savings into the plan, and even borrowed against their homes.

Ponzi spent most of the money on himself, buying a mansion and bringing his mother over from Italy. The financial reporter Clarence Barron (publisher of Barron’s) noted that if he really had invested the money as he told his investors he had done, Ponzi would have had to purchase 160 million postal reply coupons. Yet the post office reported that few were being bought at home or abroad, and only 27,000 were circulating in the United States.

Federal agents raided Ponzi’s offices in August, but did not find any postal reply coupons, just as Spanish police did not find investment-grade postage stamps in the scheme’s 2006 replay. Ponzi was sentenced to prison yet again, but jumped bail and tried to make some quick money selling Florida real estate. He soon was recaptured, and was deported back to Italy upon his release in 1934.

What Ponzi sold was hope, pandering to peoples’ unrealistic desire to believe that a new way to make easy gains had been discovered, with no visible upper limit as to how long gains can persist in excess of the economy’s own rate of growth. It is a measure of how much harder it is to make returns in today’s world – and hence, how little hope needs to be excited – that whereas Ponzi promised to double his investors’ money every three months, the Spanish stamp scheme paid only a 6 to 10 percent annual return. Neither fraud actually made any trading gains or profits, but simply paid investors out of new money coming in from fresh players. New inflows were treated as earnings. That’s how pyramid schemes work.

It was almost as if the Spanish operators had read one of the biographies of Ponzi that began to appear as observers noticed the common denominators between the global financial bubble of the 1990s and earlier bubbles. These bubbles provide a classic contrast between the real wealth of nations and what the business press these days calls “wealth creation” that simply takes the form of rising asset prices – “capital gains,” most of which are land-price gains.

No doubt stamp collectors would have viewed the bidding up of stamp prices as wealth creation if it actually had occurred. But all it would have achieved was to inflate the price of old stamps, much as the world’s growing ranks of billionaires were bidding up prices for master paintings and modern art, designer furniture and beachfront homes. If all the economy’s savings went into Rembrandts and Picassos, their price obviously would soar, just as putting $6 billion into postage stamps would have established higher plateau levels for stamp prices.

The flow of funds into any category of assets bid up their prices. This is true most of all for land, one of the most universal economic needs and conspicuous-consumption status measures. But does this really “create wealth”? Do market prices reflect use values, living standards and the progress of civilization?

The requisite characteristic for such price gains is indeed scarcity, but not so much that there is not enough for large numbers of buyers to make a market. If psychological utility is the key, “scarcity” has value only as a compulsive acquisitive character – wealth addiction. It means having what other people lack, with connotations of denial. Most money in search of mere scarcity is not going into trophies of the nouveau riches, but into the world’s most abundant yet also most universal scarce resource: land. Nature is not making any more of it, and global warming in fact threatens to take away thousands of miles of prime seashore sites. Yet everyone needs land to live on, making it the object of personal and business saving par excellence. Even in today’s postindustrial economies, land and its subsoil wealth represent the largest components of national balance sheets.

But inasmuch as land cannot be manufactured, savings cannot increase its supply by active investment. This poses a traumatizing problem for economists. National income statistics count any money spent that is not consumed as saving. Following John Maynard Keynes, they define saving as equal to investment. This sows the seeds of confusion with regard to the character and preconditions of economic growth. Can we really call it “wealth creation” when society directs its savings merely into speculation rather than into building up productive powers or living standards?

Classical economists vacillated over treating land as a factor of production or as a legal property right to extract a tollbooth around a given site and levy an access charge much like a user-tax. A factor of production contributes to production and income as more income is invested in it. A rent-yielding property reduces the economy’s flow of income. In the latter case land is part of the institutional property system, not the technologically based production sector of the economy.

What is beyond dispute is that real estate is highly political at the local level. Urban development tends to be shaped by insider dealing and public infrastructure spending to increase local property prices and lobbying to obtain low tax appraisals. It is axiomatic that the more economically powerful a source of wealth becomes, the greater its political power to lobby for special tax advantages. At the national level, real estate uses part of its revenue to back politicians who give it a widening wedge of special income-tax favoritism.

In the financial sphere, every bubble has been led by governments. Bubbles need to be orchestrated by opinion makers, topped by public officials giving a patina of confidence. The “madness of crowds” is a euphemism designed to divert blame away from governments onto the public. In the United States, Alan Greenspan played the role of public bubblemeister similar to that which Walpole had played in England’s South Sea bubble and John Law in France’s Mississippi bubble nearly three centuries ago, in the 1710s.

Today’s balance sheets confuse bubble wealth with real capital formation. “Investment” has become whatever accountants say they are. So have asset and debt values, given today’s leeway for financial fiction. The practice of “marking to market” permits accountants to project hypothetical gains at astronomical rates of interest, or trivializing by discounting, applying purely mathematical functions that have lost all connection to realistic rates of growth. The result is that the financial sector itself has become decoupled from the “real” economy.

The tragedy of our time is that saving today is being diverted in ways that are decoupled from real capital formation, but merely add to the economy’s debt and property overhead. To distinguish wealth from overhead, this book starts with real estate, and then reviews the stock market, advance saving for pensions and health care via a flow of funds into the stock market to create capital gains. My aim is to show how different the actual economy is from what economic textbooks teach. Economic statistics have been hijacked to the cause of special-interest pleading. All but lost from sight is the common weal.

Suppose that Ponzi actually had bought International Postal Orders, and that the Spanish stamp companies actually had invested $6 billion in rare philatelic items and coins, driving up their price to create paper gains for the investors. To whom would they sell, in order to take their gains? (This is the proverbial “greater fool” problem.) More to the point, how positive would have been the broad economic effect of such asset-price inflation?

The recent stock market and real estate bubbles are much like pyramid schemes in the sense that what is bidding up stock and property prices is an exponential inflow of new money from pension plans and mutual funds (for shares) and bank credit (for real estate). Venture capitalists are “cashing out” while corporate managers exercise their stock options.

Suppose that mortgage-packaging companies are honest in their appraisals of current price trends. The real estate bubble is nonetheless speculative and postindustrial. The analogy is found when financial managers endorse government policies that encourage the inflation of price for stocks and bonds, stamps and coins, Rembrandts and modern art by claiming that this creates wealth and hence, by definition, pulls living standards and culture onward and upward.

What is wrong with this picture? For starters, it fails to define value as distinct from price, windfall and capital gains as distinct from earned income. It also neglects the fact that market prices rise and fall, but the debts remain in place. And when debts cannot be paid, savings are wiped out.

On May 9, 2006, the price of Escala shares fell by half as news of the police raids spread. By Friday its stock was down almost 90 percent. On Monday it jumped by 50 percent, from $4.34 at Thursday’s close to $9.45 a share. Hedge funds were making and losing money hand over fist, dwarfing the gains and losses made from stamp trading. A veritable market in crime, punishment and beating the rap was in play.

What does this have to do with true capital formation? Individuals are getting rich while the economy is polarizing between creditors and debtors, property owners and rent-payers. Unproductive investment occurs when it takes the form of windfall “capital” gains, and when it involves going into debt for real estate, stocks or bonds, or “collectibles.” Unproductive credit occurs when commercial banks make loans that merely finance the purchase of property, companies or financial securities already in place.

Two centuries ago, French followers of Count Henry St. Simon outlined an industrial system that was to be based mainly on equity financing (stocks) rather than debt (bonds and bank loans). Their idea was to make industrial banking a kind of mutual fund, so that claims for payment (and hence, the value of savings) would rise and fall to reflect the economy’s earning power. The industrial banking that developed largely in Germany and central Europe differed from the short-term Anglo-American collateral-based trade credit and mortgage lending. But since World War I, global financial practices have been more extractive than productive.

The consequence has been that debts on the economy-wide level have grown more rapidly than the ability to pay. Instead of reducing this debt overhead by earning their way out of debt, economies have sought to inflate their way out of debt. However, the mode of inflation is not the familiar rise in consumer prices, much less wage inflation. Rather, it is asset-price inflation, emanating largely from the United States. Since the gold-exchange standard gave way to the paper dollar standard in 1971, the U.S. economy has become unique in being able to create credit – and foreign debt – without constraint. The result has been an unparalleled growth in debt relative to income, production and wages. This “debt pollution” has been likened to environmental pollution. It is the financial equivalent of global warming.

We have entered an era in which financial markets resemble the stamp-buying funds. Governments have replaced industrial growth with purely financial wealth creation in the form of a real estate and stock market bubble. This has turned the economic universe upside-down relative to what the classical writers expected to result from the technological progress unleashed by the Industrial Revolution and its parallel agricultural, commercial and financial revolutions. Property and credit have become costs instead of a benefit, institutional forms of rent- and interest-extracting overhead rather than helpful inputs.

Notes

[1] “Spanish dealers raided in stamp probe,” “Fears grow for lifetime savings” and “World of collecting comes into focus,” Financial Times, May 10, 2006, and “Stamp groups ‘ran Spain's biggest scam,’” ibid., May 12, 2006. See also “Stamp-Selling Firms Charged With Fraud By Spain Authorities,” The Wall Street Journal, May 12, 2006.

[2] Escala Trades Up, MSNBC.com, May 16, 2006: Rich Duprey, “Investors buy into the auction house’s claim that it avoided criminal charges”; THE MOTLEY FOOL, MSNBC, May 10, 2006: Rich Duprey, “Escala Is Stamped Out: The company’s stock falls more than 50% after a raid by Spanish authorities,” and “Afinsa denies ‘insolvency’ claim,” BBC, May 11, 2006.

[3] See Wikipedia, “Charles Ponzi,” based mainly on Mitchell Zuckoff, Ponzi's Scheme: The True Story of a Financial Legend (Random House: New York, 2005).

[Peter Lemkin]

Madoff Jailed After Guilty Plea

The billionaire financier Bernie Madoff has pleaded guilty to all eleven counts against him for his role at the helm of one of the biggest frauds in Wall Street history. Madoff entered the plea Thursday at a federal courthouse here in New York. In a ten-minute statement, Madoff said he is “deeply sorry and ashamed” for his actions. Madoff is accused of running a $65 billion Ponzi scheme. He has been jailed pending a June sentencing hearing, where he faces up to 150 years in prison. Several former Madoff clients who lost their life’s savings were among the hundreds in attendance. Applause broke out in the courtroom when the judge announced Madoff would await his sentencing in jail.

Madoff victim Burt Ross: “Oh, sure. Tremendous satisfaction when they put the cuffs on him. That’s justice. We don’t live by mob rule. I was concerned that people would be yelling and shouting. There was none of that. It was a dignified courtroom.”

An attorney for a group of former Madoff clients, Rob Intelisano, said unanswered questions remain.

Rob Intelisano: “I think they’re satisfied that he’s going to jail immediately. I think they would have been happy to hear a little bit more about, you know, what happened, how long the fraud took place, who else was involved, whether the family members were involved. I mean, you could tell that Madoff was clearly trying to protect the family and his own employees in his elocution.”

[Jan Klimkowski]

I'm surprized that Madoff is still alive.

My own view is that it's highly likely his "fund" will eventually be shown to be of the species Nugan Hand.

There is absolutely no way that an investment fund could carry on booking trades that it was not making year after year, whilst the regulators & auditors - gee - just didn't notice.

That is so much MSM Bullshit.

The regulators were clearly warned off - most probably in a deep black and spooky fashion.

If Madoff had been found murdered with William Colby's business card in his lapel pocket - or the contemporary equivalent of Colby - I wouldn't have batted an eyelid....

[David Guyatt]

More Madoff. If only the cdrooked banks were being targeted too.

Bernard Madoff's former accountant arrested over $65bn Ponzi schemePaul Konigsberg is the 15th person to be charged over Bernard Madoff's fraud revealed nearly five years ago
Reuters
The Guardian, Thursday 26 September 2013 20.30 BST
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Bernard Madoff received the maximum 150-year prison sentence. Photograph: Timothy A. Clary/AFP
A former accountant for Bernard Madoff was arrested on Thursday, nearly five years after the fraudster's huge Ponzi scheme was uncovered, an FBI spokesman said.
Paul Konigsberg, an accountant and former senior tax partner at Konigsberg Wolf & Co in New York, is the 15th person to be charged over the fraud.
Madoff, 75, was arrested on 12 December 2008 and is serving a 150-year sentence. The trustee liquidating Madoff's New York investment firm has said customers lost about $17.3bn (£10.7bn).
Konigsberg's arrest comes less than two weeks before the expected trial of five former Madoff employees accused of aiding the fraud.
According to court papers, Konigsberg was a close associate of Madoff's and helped him open a London-based operation, Madoff Securities International Ltd, in which he owned non-voting shares.
It was not immediately clear what charges Konigsberg faces.
In March 2009, prosecutors in the US accused Madoff of using the London operation to launder money.
They said he would wire money from his New York investment advisory business to London, and then from London back to New York to support his trading business and to personally benefit himself, family and associates.
Reed Brodsky, a lawyer for Konigsberg, did not immediately respond to requests for comment.
Brodsky told the New York Times, which earlier reported the arrest, that his 77-year-old client was an "innocent victim" of Madoff's fraud and looked forward to clearing his name at trial.
A spokeswoman for US attorney Preet Bharara in New York declined to comment.
Thursday's arrest comes less than three months before a five-year statute of limitations runs out for prosecutors to bring charges tied to the fraud.
Nine people have pleaded guilty. They include Madoff, his brother Peter Madoff, former top lieutenant Frank DiPascali who has been closely cooperating with the investigation, and another former accountant, David Friehling.
The five former employees, who pleaded not guilty and face a trial in the federal court in New York on 7 October, are Annette Bongiorno, Daniel Bonventre, Joann Crupi, Jerome O'Hara and George Perez.