Friday, February 20, 2009

Did Madoff Have Help?

The story goes that Bernard Madoff acted alone, but now the trustee managing his former empire has hinted that others were in on it.

Bernard Madoff, who stands accused of a $50 billion Ponzi scheme, didn't trade for customer accounts for more than a decade and didn't separate the activities of his broker dealer from his investment advisory business, according to a court-appointed trustee.

The finding may support those who say Madoff, whose firm was once among the largest market makers on Wall Street, could not have acted alone in pulling off the alleged fraud.

Irving Picard, the trustee liquidating Bernard Madoff Investment Securities, said Friday that his investigation so far showed no divide between the market maker and the investment adviser. Madoff, who was arrested in December after allegedly confessing to his two sons, is said to have insisted he acted alone.

"We have found nothing to suggest there was any difference" between the broker-dealer and the adviser, Picard told a crowd of Madoff investors in U.S. bankruptcy court in Manhattan. "It was all one."

Given the length of the alleged fraud, which is said to have been carried out for at least 30 years, and the complexities of handling and distributing monthly statements for potentially thousands of investors, the idea that one person acted alone has been seen as dubious.

The investment adviser, where the fraud is alleged to have occurred, operated on a different floor in the office building where the Madoff firm was located, and was kept closely guarded. While more than 160 employees were registered brokers with the market-making operation upstairs, regulatory documents indicate that no more than five employees worked with the investment adviser. Of course, all documents filed by Madoff with regulators are now suspect.

The Madoff firm was filled with relatives and close associates of Madoff, including his two sons, his niece and his brother. Prosecutors and those associated with the liquidation of the firm are leaving no stone uncovered, investors were assured Friday, but the criminal investigation needs to proceed before many of the assets held personally by Madoff can be pursued.

Madoff remains on house arrest, with bail secured by his wife's properties, until the case is resolved.

"We are operating out of a crime scene," Picard said. In addition to the headquarters in Manhattan, Madoff's firm had a warehouse in Queens, where more than 7,000 boxes have been cataloged, and an undisclosed "back up" site. "We're getting a feel for how this operation worked."

Picard is trying to sort out what assets at the firm can be returned to the more than 8,000 investors who have lost money. So far, 2,350 claims are in, and he urged investors on Friday to make claims if they had not already done so. The trustee identified $946 million of assets that could be returned to investors, a pittance compared to the scope of the alleged fraud.

Bernard Madoff Investment Securities, the market-maker operation, is being put out for bid and could be sold to recover more money for investors, Picard said Friday. A deal could come within weeks.

Among other things, the trustee has tried to cut costs, eliminating dozens of jobs to save $300,000 a week in costs. About 45 employees have remained at the market-making operation to keep it running. Picard is also studying whether and how he could sell artwork owned by the firm, which was seized by the Federal Bureau of Investigation in December.

Subpoenas for documents, correspondence and other information about the activities of the Madoff firm have been sent out to various parties, including the Chicago Board of Trade and the CME Clearing House.

The progress in the case is no comfort to the thousands who lost money as a result of the Madoff affair, some of whom say they lost everything. The Securities Investors Protection Corp. caps claims at $500,000. Those who took profits out of their Madoff investments are subject to a claw back, Picard said. None of those reported returns were real over the course of the decades-long scheme.

The most investors may be able to hope for is a recovery of a small portion of their investments, the trustee warned Friday, because to get to a fair distribution of what assets can be found means "sharing the pain."

What is nationalization?

What does it mean to nationalize a bank, anyway?

That question has weighed on the minds of investors in the two weeks since the Obama administration's comprehensive financial industry stability plan fell flat.

And they came to a head Friday. Nationalization fears helped drag down shares of Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) as much as 36% at one point Friday. BofA recovered most of its losses to finish Friday down just 3.6%. But Cit's stock closed Friday with a 22% loss.

The term nationalization has been used to cover a range of very different outcomes. Most obviously, it refers to the outright takeover of troubled firms, such as when the Treasury Department put mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) into conservatorship.

But it has also been used by some people to cover sizable investments that give government officials considerable say in a firm's activities -- such as the loan guarantees extended in recent months to Citi and BofA.

The Obama administration has said it wants to keep the banking system in private hands, which seems to suggest it isn't aiming to run the likes of Citi and BofA.

"We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," Treasury Secretary Tim Geithner said two weeks ago.

But the White House hasn't completely ruled out taking over troubled firms, either - if with a very different intent.

Senate Banking Committee Chairman Chris Dodd, D-Conn., unsettled the market Friday morning when he told Bloomberg Television that he could see regulators briefly taking over Citi or BofA in the name of stabilizing the nation's two biggest banks.

"I don't welcome that at all, but I could see how it's possible it may happen," he said. "I'm concerned that we may end up having to do that, at least for a short time."

The White House moved later Friday to ease fears of a takeover, with spokesman Robert Gibbs telling reporters at an afternoon briefing that the administration wants to keep the nation's banks in private hands.

"The president believes that ... a privately held banking system regulated by the government is -- is what this country should have," Gibbs said.

But Gibbs' statement, while echoing the one Geithner made on Feb. 6, leaves open the question of whether the administration is considering what observers of the financial industry have termed an intervention -- a takeover of a troubled bank for the purpose of breaking it up, bringing in new capital and finding new owners and management.

Many economists say the Obama administration will have to take this tack before the financial crisis is resolved.

"We have no problem in this country shutting down small banks," Simon Johnson, a finance professor at MIT and a former chief economist at the International Monetary Fund, said last week on "Bill Moyers' Journal" on PBS. "In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks."

But with the big banks, which employ hundreds of thousands of people and make millions of dollars of campaign contributions, it may be a different story.

"Nobody has the political will to do it," Johnson said. "So you need to take an FDIC-type process. You scale it up. You say, 'You haven't raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone.'"

There are multiple advantages to this approach, proponents say. They say recapitalizing the banks is necessary, but it will be costly -- and the more current investors share in those costs, the less that burden must be borne by taxpayers.

And any form of nationalization would probably mean the removal of current executives. So it would not reward bad behavior and mismanagement.

That's exactly what many observers believe previous bailouts, namely the Bush administration's Troubled Asset Relief Program, have done.

But shareholders clearly believe they would be severely diluted in any government action, which explains, in part, why bank stocks have plunged in recent days.

What's more, the Obama administration's insistence that it won't nationalize a bank reminds some of how former Treasury Secretary Henry Paulson repeatedly pledged to stand behind Fannie and Freddie last summer - before he suddenly changed course Sept. 7 and took them over.

Regardless of how the government handles the problems at Citi, BofA and other too-big-to-fail banks, economists say the tab for the financial cleanup will come due -- it's only a matter of who gets stuck with it.

"There seems to be some sort of ideological bias against the government taking over banks," said Paola Sapienza, a finance professor at Northwestern University in Evanston, Ill. "But eventually we're going to pay for this, one way or another."

Stanford remains a free man despite fraud charges

For all the accusations of wrongdoing swirling around globe-trotting financier Allen Stanford, he faces no criminal charges and remains a free man.

The Texas billionaire and well-known sports patron has been charged with defrauding investors around the world in a civil lawsuit by U.S. financial regulators, who have no powers to seek a prison term when they bring a case.

But legal experts say that, based on the alleged wrongdoing portrayed in the U.S. Securities and Exchange Commission complaint, they think criminal charges carrying possible stiff prison terms would almost surely follow in this case.

"Given these types of allegations, it would be surprising if the Department of Justice was not actively investigating with the view toward seeking an indictment," said Robert McGahan, a partner at law firm Goodwin Procter LLP in Los Angeles and a former federal prosecutor.

McGahan, who is not involved in the Stanford case, said the size of the alleged fraud and the allegations of direct misrepresentations to investors laid out by the SEC were likely attracting attention from prosecutors if they had not already been investigating the matter on their own previously.

Stanford, some of his companies, and two top executives were charged by the SEC this week with falsely marketing $8 billon in high-yield CDs as safe investments, all the while secretly placing client funds in illiquid private equity and real estate holdings.

The Texas federal court complaint says Stanford's firm reported "improbable results" for its investment portfolio and that the defendants engaged in "unscrupulous and illegal activity."

Customers across the Americas and the Caribbean have been frantically trying to get their money back from Stanford's far-flung financial empire, which includes the Stanford International Bank Ltd in the small Caribbean country of Antigua and Barbuda and his Houston-based U.S. company.

The Justice Department has not commented on the matter. FBI agents served Stanford with a formal copy of the SEC fraud complaint after tracking him down in Virginia on Thursday, but they did not arrest him or charge him with any crime.

Two federal law enforcement officials, who declined to be identified because the investigation is ongoing, told Reuters criminal charges against Stanford are not imminent.

One official said such investigations tend to be complex and can take time, involving complicated financial transactions and interviews with numerous people.

"They do not happen overnight," this person said.

The SEC has a court order to freeze Stanford's assets and confiscate his passport, and the agency plans to seek civil penalties. The SEC said on Friday that Stanford had surrendered his passport.

There is a lower burden of proof for the government in civil cases, which requires proof of the charges based on a "preponderance" of evidence. In a criminal case, the standard is higher, with proof required beyond reasonable doubt.

Legal experts said it is unusual, although not unheard of, for securities regulators to bring charges in a case before prosecutors decide whether to bring parallel criminal charges.