Standard Chartered and Bernie Madoff

A class action lawsuit was filed yesterday in Miami on behalf of investors in Standard Chartered Bank International and Standard Chartered Private Bank. The suit seeks to recover millions of dollars in customer fees improperly charged by Standard Chartered.

According to the case filings, Standard Chartered purchased shares in a Fairfield Sentry Hedge Fund, one of the infamous Madoff feeder funds, on behalf of certain clients.  Standard Chartered customers were charged fees based on the net asset value of their accounts with the Sentry Fund.

Since the Sentry Fund was essentially worthless after Bernie Madoff was exposed, fees paid by Standard Chartered customers, through investments in the Sentry Fund, were based on fraudulent asset valuations. According to the suit, the Plaintiffs are seeking to recover more than $5 million from Standard Chartered, which has since conceded that it was not entitled to charge these so-called “phantom fees”.

Recovering these “phantom fees” is clearly an important first step.  But presumably in exchange for those fees, Standard Charter was in an advisory role, and responsible for due-diligence.

Zamansky & Associates is investigating potential wrongdoing related to internal controls, due diligence breakdowns and negligence which may have occurred.

If you are interested in discussing potential losses or have additional information regarding this investigation contact Zamansky & Associates.

SIPC and the Madoff Victims

Joe Nocera’s column in last Saturday’s New York Times about the victims of the Madoff fraud has been weighing on my mind.  Nocera passionately defends Irving Picard, the trustee of the Madoff bankruptcy, for refusing to accept the Madoff statements at face value and seeking to claw back any monies that were in excess of what investors put in.  The Securities Investor Protection Corp. will only reimburse Madoff investors for up to $500,000, regardless if the money they invested is well in excess of what they took out.

Nocera posits that Picard “almost certainly is not” misreading the law, but in focusing on the legal issue, he can’t see the forest from the trees.  Nocera would serve his readers considerably better by asking this question: “Why is SIPC coverage a mere $500,000?”

As I’ve noted before, the SIPC $100,000 maximum limit for stolen cash and $500,000 for stolen securities was set in the 1970s, when investor balances were considerably lower than today.  The agency is funded by Wall Street, so it’s hardly a surprise that the powerful brokerage house lobby has been successful in keeping the archaic limits in place.  Despite the slew of Ponzi schemes that have surfaced in the past year, there has been nary a peep on Capital Hill to raise SIPC’s insurance maximums to realistic levels.

An investor who has a good reason to believe that his investment returns are bona fide should be made whole if it turns out he or she was a victim of a scam. Ponzi schemes cannot be facilitated without the support or complicity of established banks and brokerage firms.  These firms must be held accountable for their duplicitous activities and there is no better way to do that than requiring them to make investors who have been scammed completely whole.   If SIPC had to cover all real and fictitious investment losses, Wall Street would be more aggressive policing itself and ferreting out fraudsters like Bernie Madoff.

Indeed, the time has come to require that any manager or firm who accepts investments, including hedge funds, contribute to an insurance fund that would make investors whole in the event of wrongdoing.  If such a rule were in place, people who invested with Bernie Madoff through so-called feeder funds would also be eligible for SIPC reimbursement.  Sadly, the only potential source of recourse for these investors is to sue the feeder funds, a long and costly process.

Wall Street firms had no shame taking taxpayer money to avert their near financial implosion, which was induced by their own recklessness and wrongdoing.  Innocent investors without question are entitled to an industry-funded bailout.

Madoff Securities Alleged Ponzi Scheme Exposed: What’s an investor left to do?

In a bull market, investors are happy and tend not ask many questions. But when times get tough, they start wanting answers and Ponzi schemes are inevitably discovered.

The latest, of course, involves Bernard Madoff, a fixture on Wall Street for decades and one of the creators of the NASDAQ exchange. Mr. Madoff is the founder of Bernard L. Madoff Investment Securities. He was arrested by Federal Bureau of Investigation agents and charged with criminal securities fraud by federal prosecutors in Manhattan. The SEC has shown up late to the party once again and filed a civil suit, years after they were alerted of suspicious activity at Madoff Securities’ investment arm. All told, the alleged Ponzi scheme totaled $50 billion, possibly half of which was investor funds.

Naturally, Bernard Madoff’s clients are wondering if there’s anything left, and if so, how they can get their money back. Some investors will have an up-hill road to travel but for others there are legal options they can immediately pursue.

Firstly, to the extent that there are any funds left, claims can be filed against Madoff Securities directly. But it’s unlikely that there will be any money left. “It’s all a lie,” Mr. Madoff told investigators who were there to arrest him.

And it is doubtful there will be any recourse through the Securities Investor Protection Corporation (SIPC) because the money management function at Madoff Securities was held outside of the brokerage unit.

But investors that were placed into the Madoff Funds through other “fund-of-funds” or by another hedge fund manager could have more maneuverability. Indeed, managers of fund-of-funds could have liability for failing to perform a reasonable amount of due diligence on Bernard Madoff’s dealings. They had an obligation to research Mr. Madoff, his firm, and his returns. Managers of fund-of-funds were compensated to do this and likely marketed their due diligence capabilities to their clients.

The red flags were very clear in this case. Perhaps the most compelling was the fact that Mr. Madoff was generating such high returns using a strategy tied to the S&P 500. And this was all happening while the overall market sank in 2008!

The magnitude of Mr. Madoff’s deception is astounding. And the destruction of wealth that has apparently occurred here is shockingly awful. But if there is a silver lining to this at all, it’s that during this economic crisis the unnecessary middle men, fraudsters, hucksters and Wall Street’s ugly underbelly are being exposed and eliminated.

While that is likely of no consolation to Madoff Securities clients and investors, rest assured, they will also have their day in court.