Banks and Ponzi Schemes

I’ve said it so many times it’s almost becoming a mantra: It’s virtually impossible to carry out a major Ponzi scheme without the complicity of a large bank.  The receiver that was court-appointed to recover what’s left of Danny Pang’s billion-dollar investment fraud has provided the latest proof.

According to the receiver, HSBC Bank gave Pang the patina of legitimacy by allowing his firm to issue so-called net-asset-value reports on HSBC letterhead that were false.  Some of these statements were even signed by an HSBC official.  The receiver is seeking to recover from HSBC nearly $2 million in fees and unspecified damages.

Bank of America figures prominently in Ponzi schemes in Florida and Long Island and allegations have emerged that JP Morgan Chase may have abetted Bernard Madoff’s Ponzi scheme. Unfortunately, a 2007 Supreme Court decision known as Stoneridge makes it considerably more difficult to hold third-parties legally culpable for fraudulent schemes.

Senator Arlen Specter (D-PA) last July sought to pass legislation to remedy the Supreme Court decision, but the bill died a near instant death.  The Financial Reform Bill provides no legal avenue to offset the Stoneridge decision. Sadly, Specter last week lost the Democratic primary. Such is the fate of one of the few politicos willing to stand up to Wall Street.

Update on the Fiserv Class Action Case

The New York Times’ Diana Henriques wrote an excellent account of Fiserv’s potential liability for investor losses in several unrelated Ponzi schemes. As you may recall, Zamansky & Associates filed a class action lawsuit in federal court in Colorado on behalf of Madoff investors who were instructed to use Fiserv as their custodian for their IRA accounts.

The article clearly shows that Ponzi schemes almost always have large financial institutions supporting them in one way or another. In this case, Fiserv, one of the largest IRA service providers in the country, may be held accountable for $1 billion in investment losses.

I wrote a blog when I first filed the complaint in April which provides detailed information on the Madoff/Fiserv case. There is also a contact form on my website for investors who wish to provide my office with their contact information.

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.

Bank of America: “Bank of Opportunity” for Convicted Felons?

The New York Times last week published an investigative story questioning JPMorgan Chase’s connection to the Bernie Madoff scandal.  Similarly, I’m looking for answers about Bank of America’s connection to two other Ponzi schemes that were concocted by known felons. While these schemes pale in comparison to Madoff’s $50 billion fraud, the possibility that America’s biggest banks were potentially involved in allowing sizeable Ponzi schemes is most disturbing.

My office, on behalf of clients, is still in the early stages of investigating Agape World, Inc., a $380 million Ponzi scheme allegedly carried out by Nicholas Cosmo.   We have learned that Agape World on its contracts listed Bank of America as its “banking agent” and that all monies to the fund were wired to a BofA branch on Long Island.

We haven’t yet determined exactly what functions BofA provided Agape World. “Banking agent” functions often include performing back-office operations, which presumably would have given the branch a bird’s eye view of transfers to and from Agape World’s account.  Agape World required a minimum investment of $20,000, and given the reported size of Cosmo’s Ponzi scheme, the account likely generated considerable activity (and, no doubt, lucrative fees).

Under the Patriot Act, banks are required to be on the outlook for suspicious or fraudulent activity and report wire transactions of $10,000 or more.  Most banks typically are very diligent about complying with the law: The Fed’s uncovered Eliot Spitzer’s proclivity for prostitutes when the former New York governor’s bank reported the transfer of funds to the company that arranged his illicit liaisons.  Given that Cosmo had previously been convicted of securities fraud and ordered to undergo gambling therapy, BofA had plenty of reason to closely monitor his account.

Earlier this month, BoA was sued by a group of investors for being complicit in an Internet “ad package” Ponzi scheme.   According to the lawsuit, a small Bank of America branch in Florida was the conduit for the scheme operated by Andy Bowdoin, who also was previously convicted for securities fraud.    The lawsuit claims that at least one other financial institution closed accounts related to Bowdoin’s fraud, VISA would not process charges relating to his scheme and PayPal allegedly rejected efforts by Bowdoin and his perpetrators to use its popular payment system.

As evidenced by its hasty and misguided acquisition of Merrill Lynch, it’s already known that due diligence isn’t one of BofA’s core competencies.  And perhaps it’s merely a coincidence that two securities fraudsters chose to orchestrate their Ponzi schemes through BofA branches.   But this matter is worthy of close and aggressive examination. Given that JP Morgan Chase and BofA are now wards of the government, Congress and regulators should be fast demanding some answers.

Clearly at the top of the Obama administration’s agenda is securities industry reform.  Given the rash of Ponzi Schemes of late, they would be wise to consider the role of banks in monitoring such activity.