Articles of Interest 078

Catching Mice

The Bernie Madoff self-declared Ponzi scheme and other massive investment frauds are wreaking havoc on investment firms and individuals across the globe.  While a case against him is being constructed in the United States, other countries – including the United Kingdom – will examine all possible avenues in order to prosecute the man (and his accomplices, once their identities are known) who squandered the life savings of so many investors.

One possible avenue available to authorities is the use of anti-money laundering legislation (see attached article).  Once defrauded funds are transferred to the account of the fraudster it can be proven that money laundering has occurred.  Within capital markets, the paper trail of such a transformation of the proceeds of crime is usually well documented.  

“It doesn’t matter if a cat is black or white, as long as it catches mice.”

Deng Xiao Ping
Paramount Leader of the Peoples Republic of China
1904-1997

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http://www.dailymail.co.uk/money/article-1159612/UK-hit-Madoff-money-laundering.html?printingPage=true

Articles of Interest 077

High Levels of Capital

When the supply of capital is low and the demand high, financial institutions will often perform desperate acts in order to stave off insolvency.  Anecdotal evidence suggests that banks are cutting their AML and CFT regimes in order to save cost – is the article below symptomatic of other motivations?  

If so, what happens when the pendulum swings the other way?

“A lot of people mistake a short memory for a clear conscience.”

Doug Larson

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http://www.iht.com/articles/reuters/2009/01/25/europe/OUKWD-UK-FINANCIAL-UN-DRUGS.php


U.N. crime chief says drug money flowed into banks

Reuters
Sunday, January 25, 2009

VIENNA: The United Nations' crime and drug watchdog has indications that money made in illicit drug trade has been used to keep banks afloat in the global financial crisis, its head was quoted as saying on Sunday.

Vienna-based UNODC Executive Director Antonio Maria Costa said in an interview released by Austrian weekly Profil that drug money often became the only available capital when the crisis spiralled out of control last year.

"In many instances, drug money is currently the only liquid investment capital," Costa was quoted as saying by Profil. "In the second half of 2008, liquidity was the banking system's main problem and hence liquid capital became an important factor."

The United Nations Office on Drugs and Crime had found evidence that "interbank loans were funded by money that originated from drug trade and other illegal activities," Costa was quoted as saying. There were "signs that some banks were rescued in that way."

Profil said Costa declined to identify countries or banks which may have received drug money and gave no indication how much cash might be involved. He only said Austria was not on top of his list, Profil said.

(Reporting by Boris Groendahl; Editing by Charles Dick)

Copyright © 2009 The International Herald Tribune | www.iht.com

Articles of Interest 076

Yawn...  A boring fraudster

Arthur G. Nadel was not what one would call “exciting”.  His alleged USD50m (+?) fraud was not a spectacular amount, nor was his high volume, pricing deviation trading strategy.  The distraught note left at the airport does not display a hint of originality, as unlike his predecessors, he is unlikely to jump from the aircraft and then zoom off on a motorcycle.

In fact, it would appear that Mr. Nadel’s greatest achievement was his poker face – the ability to display calm despite the fact that all about him is falling to pieces.  Investment firms would do well to keep an eye not just on the flamboyant but the quiet ones as well...

“Some men are born mediocre, some men achieve mediocrity, and some men have mediocrity thrust upon them.”

Joseph Heller, “Catch-22”

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http://dealbook.blogs.nytimes.com/2009/01/20/hunt-for-missin-hedge-fubd-manger-continues/?pagemode=print


JANUARY 20, 2009, 7:20 AM

Hunt for Missing Hedge Fund Manager Continues

Around the same time he mysteriously vanished, hedge fund manager Arthur G. Nadel owed a $50 million payout to some of the investors who had entrusted their life savings to him, an accountant told The Associated Press.

Instead, they learned their money was gone — and now they’re left asking if it was all a bad investment, or if they were scammed.

The search for Mr. Nadel entered its sixth day Monday as more investors contacted authorities with concerns their savings, and Mr. Nadel, were gone forever. Mr. Nadel’s green Subaru was found in a Sarasota airport parking lot on Jan. 15, and he left his family a note in which he appeared to be ”very distraught,” Lt. Chuck Lesaltato of the Sarasota County Sheriff’s office told The Associated Press.

Mr. Nadel, 75, was expected to deliver a $50 million redemption that day to investors in the six hedge funds he managed, Michael Zucker, an internal accountant for Scoop Management Inc., where Mr. Nadel traded, told The Associated Press. Nothing in documents indicated the funds weren’t turning a profit, he said.

”Mind you, this was a lot, but it was still, we thought, very easily done,” Mr. Zucker told the news service.

The payment was set to be made after the funds, which had about 600 investors from across the country, suffered losses in October, Mr. Zucker said. But if Mr. Nadel was nervous, he didn’t show it: He often was seen around the office smiling and seemed on top of things.

”He felt that he was turning the whole thing around,” Mr. Zucker said.

Investors and police said that Mr. Nadel or Neil Moody, who was a general partner in some of Scoop’s funds, would often meet potential clients in person, and would promise big returns. Karin Gustafson, the YMCA Foundation of Sarasota head, told The Associated Press that Mr. Moody promised them a 10 percent return each year — and vowed to make up the difference himself if the fund didn’t deliver. It always did, until now.

”All we know is someone has said that the money is gone,” said Ms. Gufstason.

Ms. Gustafson said the YMCA had invested a $1.1 million endowment given to them by Mr. Moody.

Mr. Nadel had what some have characterized as a mathematical formula to his investments, which even investors failed to fully comprehend. According to Mr. Zucker, Mr. Nadel traded through Goldman Sachs and primarily in the Nasdaq 100.

”Sometimes he’d be trading while we were talking,” said Gordon Garrett, president of Sarasota’s Jazz Club, which received donations from Mr. Nadel to put on nine jazz events in the community this year. ”He had a formula that he followed, when a stock got too high would short, and when too low, would go in and buy. He was always looking for very small margins and traded very frequently.”

Dave Couvertier, a special agent with the F.B.I. in Tampa, confirmed that investigators are reviewing the case, but told The Associated Press that the investigation is still in its preliminary stages. The Securities and Exchange Commission declined comment, and Mr. Nadel has not been charged with any wrongdoing.

”What we’re really trying to do is get to know a little bit about the victims and their scenario,” Sarasota County Police Department Capt. William Spitler told the news service. ”None of us have any idea what the magnitude is.”

The investigation comes on the heels of two other high-profile financial fraud cases. Investigators say Wall Street’s Bernard L. Madoff devastated investors of some $50 billion late last year in what may be the largest Ponzi scheme in history. And last week, Indiana money manager Marcus Schrenker was apprehended in Florida after allegedly trying to stage his death in a plane crash as investigators probed his businesses.

But those who know Mr. Nadel say he was nothing like the accounts of those sensational cases. He was known around Sarasota as a trusted philanthropist who lived a low-key life. He didn’t drive fancy cars, lived in a middle-class, white, ranch-style home, and gave generously to Habitat for Humanity and the Jazz Club of Sarasota, among other causes. Though he went to black-tie events, he preferred a sports jacket and shirt over a tuxedo or a tie.

”It’s a huge shock for most of us in our community,” Zeb Portanova, board chair of Habitat for Humanity in Sarasota, told The Associated Press. ”I don’t think anybody really saw this coming.”

Go to Article from The Associated Press »

Copyright 2009 The New York Times CompanyPrivacy PolicyNYTimes.com 620 Eighth Avenue New York, NY 10018

Articles of Interest 075

World Champion

In 2006, Ao Man-long, former public works minister in the Macau Special Administrative Region (SAR) of the Peoples Republic of China, was arrested by the Macau Commission Against Corruption for amassing a fortune 57 times his family’s income over a relatively short period of time.

A warrant for the arrest of the brother-in-law of the Macau SAR Chief Executive’s Officer’s brother for money laundering has been announced by INTERPOL in the same corruption case.

Macau has recently surpassed Las Vegas as the world’s biggest gambling hot spot.  Does this illustrious position come at a price?

“Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power.”

P.J. O'Rourke

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Relative of Macau leader on Interpol wanted list in graft scandal

HONG KONG (AFP) — A relative of Macau chief executive Edmund Ho is wanted by Interpol, AFP learnt 

Sunday, in the latest twist in the city's biggest graft scandal. 

The international police organisation has issued a "red notice" for Chan Lin-ian, brother-in-law of Ho's 

brother, and his wife Lam Man-i over suspected money laundering. Arrest warrants for the pair had also 

been issued by Macau authorities, according to the Interpol website. 

A red notice means that the persons concerned are wanted by national jurisdictions, and that Interpol will 

assist the national police forces in identifying or locating them with a view to their arrest and extradition. 

Chan, 53, had been implicated in the corruption case of Macau's former public works minister Ao Man-long, 

who was jailed last year for 27 years on 57 counts of bribe-taking, money laundering, abuse of power and 

other charges, the Sunday Morning Post said. 

Chan's company, Shun Heng Construction, came under investigation last year after it allegedly provided 

kickbacks to Ao over three public works projects it undertook between 2003 and 2006, the newspaper said. 

Interpol has so far issued a total of six red notices for people allegedly involved with Ao's case, including his 

wife, Chan Meng-ieng, the report said. 

Ao, who was arrested in December 2006 by the Macau Commission Against Corruption, amassed a 

personal fortune of more than 100 million US dollars in his seven years in office -- 57 times his family's 

income during that time. 

The high-profile scandal has put the spotlight on the casino city, which overtook the Las Vegas Strip as the 

world's largest gaming hub in gaming revenues in 2007.

Articles of Interest 074

Tabloid Crime Photos for the 21st Century

During the 1920s, newspaper tabloids splashed sensational photographs on their covers, often detailing the sordid details of celebrities, politicians and the glitterati.  Bernard L. Madoff (or “Made-Off (with the money) as he is now known to defrauded investors) has given the New York Post cause to revive the tradition (see attached photo, hyperlink below).

The sensationalism of the Madoff case is of critical importance to compliance officers and risk managers at financial institutions, as intelligent financial crime risk management and proper due diligence (the missing ingredient for many investors in the Madoff case) must overcome the cries for blood from both politicians and unsophisticated investors.  

Enron produced the crushing paperwork of Sarbanes-Oxley, a knee-jerk reaction that did little to reduce the possibility of fraudulent activity within corporate boardrooms.  With what legislation will Mr. Madoff’s name be associated?

"In Vietnam, the bullshit piled up so fast you needed wings to stay above it."

Captain Willard, “Apocalypse Now”, Directed by Francis Ford Coppola, 1979

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http://www.nypost.com/seven/12162008/photos/bus0b.jpg

Articles of Interest 073

A billion here, a billion there...

The article yesterday described the fraud allegedly perpetrated by Mr. Marc Dreier, icon of the New York legal community.  Not to be outdone, Mr. Bernard L. Madoff – founder of Bernard L. Madoff Investment Securities LLC in New York– is now being charged by the United States Securities and Exchange Commission for allegedly pulling off a Ponzi-scheme fraud 131 times larger that the $380m fraud alleged against Mr. Dreier.

A billion here, a billion there, pretty soon it adds up to real money.

Senator Everett Dirksen
US politician (1896 - 1969)

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http://www.sec.gov/news/press/2008/2008-293.htm


SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme

FOR IMMEDIATE RELEASE
2008-293

Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."

Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The SEC's investigation is continuing.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York.

# # #

For more information, contact:

Andrew M. Calamari
Associate Director, Enforcement
SEC's New York Regional Office
(212) 336-0042

Alexander Vasilescu
Chief, Trial Unit
SEC's New York Regional Office
(21 2) 336-0178

 
http://www.sec.gov/news/press/2008/2008-293.htm

Articles of Interest 072

Riches to Rags

The article below outlines the latest fascinating developments surrounding Mr. Marc Dreier, power lawyer to the glitterati, jet setter and now lonely prisoner in the maximum security wing of a Manhattan prison.  A first glance, it would appear that desperate people will do desperate things in a declining market in order to save their own skin.

Given the enormous volatility and disruption within global capital markets, the financial crime perpetrated by those who cannot wave a fond  farewell to their 120-foot yachts will only grow in magnitude and complexity.    

Annual income twenty pounds, annual expenditure nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.

- Charles Dickens, David Copperfield, 1849

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http://www.forbes.com/2008/12/11/legal-fraud-dreier-biz-wall-cx_lm_1211dreier_print.html


Feds Now Say Dreier Bilked Investors Of $380 Million

Liz Moyer, 12.11.08, 2:25 PM ET

Prosecutors have expanded their investigation of prominent New York attorney Marc Dreier, uncovering hundreds of millions more of missing funds in what they characterize as an "extraordinary" fraud played out over two years.

A federal magistrate judge ordered Dreier to remain behind bars Thursday, denying bail because of the "enormous risk of flight." Dreier was arrested in New York Sunday evening and has been charged with fraud in an alleged brazen scheme to bilk sophisticated hedge funds.

Assistant U.S. Attorney Jonathan Streeter said in court Thursday the loss from the alleged fraud is $380 million, well more than the $113 million cited in criminal charges filed Monday because of new information pouring into the prosecutor's office.

The alleged fraud has been carried out since at least January 2006, Streeter said, and targeted some of the most sophisticated institutional investors. Dreier, a Harvard and Yale-educated litigator with a roster of celebrity clients at the 238-attorney firm he founded in 1996, is a "Houdini of impersonation and false pretenses," Streeter said at Thursday's bail hearing.

Dreier's lawyer, Gerald Shargel, had asked that Dreier be released on a $10 million bond signed by Dreier's 19-year-old son and 85-year-old mother and allowed to live under house arrest at his beach home in Quogue, N.Y., or at his Manhattan apartment.

Shargel also told Judge Douglas Eaton that Dreier was prepared to meet with the court-appointed receiver of the Dreier LLP law firm Thursday evening to help identify and locate assets and would provide a complete financial statement. None of Dreier's money is overseas, he said.

But Streeter successfully argued the government's case that Dreier could have squirreled away substantial assets overseas. Much of the $380 million is unaccounted for, he said. With his firm in tatters and his U.S. property to be seized--and with overwhelming evidence against him--Dreier had nothing to lose by skipping out of the country, he said.

Prosecutors initially accused Dreier of selling $113 million of fake notes to two hedge funds in October in an elaborate scheme that involved forgery and ruse. Canadian law enforcement arrested Dreier last week alleging he impersonated the senior counsel of a major Canadian pension fund to effect a similar scheme.

The evidence now shows the activity may have targeted many more hedge funds over a far longer period of time, Streeter says.

On top of that, employees and partners of the Dreier law firm learned last week that tens of millions were missing from client escrow accounts and other firm accounts.

Dreier even managed to transfer $10 million by telephone from escrow accounts to his personal account last Thursday while sitting in a Canadian jail awaiting a bail hearing, the documents say.

Dreier, the only equity partner, is the only person authorized to make transfers from the escrow accounts, according to court documents. A statement by a Dreier law partner says $37.5 million of $38 million attributed to a single client had been transferred from the firm's escrow accounts into an account controlled by Dreier, but the statement didn't give a time frame for that transfer.

The tip-off about the missing funds was a request by a Dreier partner, Norman Kinel, to Dreier to disburse $38 million in client escrow funds for unsecured creditors of 360 Networks, a Seattle telecommunications company that emerged from bankruptcy in 2002. The Dreier firm represents the unsecured creditors.

Kinel first requested the funds on Dec. 1. On Dec. 2, when he realized the transfer hadn't been made, he twice requested the funds again. He learned of Dreier's arrest on Dec. 3 and, through a lawyer, contacted the Federal Bureau of Investigation and the U.S. attorney.

John Provenzano, the law firm's controller, said in the court documents that at the time of Kinel's request, the escrow accounts had only $19 million in them.

Dreier was in contact with partners at the firm last week, according to the court documents. Asked about the missing escrow funds for 360 Networks, Dreier is reported to have said he could have sold some of the art collection to return the money if he had been allowed to return to New York.

"I understood from his conversation that Mr. Dreier was implicitly admitting he had improperly used client escrow funds," says the court declaration by Joel Chernov, one of the partners at Dreier who was on that phone call.

Dreier's world started collapsing in October, his lawyer said, when an accounting firm employee told him he would go to the police after finding out Dreier allegedly falsified accounting materials using the firm's name as part of his scheme.

Even then, his lawyer argued, Dreier left the U.S. a few times and came back, compelling evidence that he was not a flight risk. He traveled to Dubai on business in October and to St. Bart's in the Caribbean right before Thanksgiving, "knowing full well his life was unraveling," Shargel said. He had a private plane available to him in Canada last week but decided to fly commercial back to the U.S., where authorities were waiting at LaGuardia Airport to arrest him.

Dreier led an opulent, jet-setting life by most reports, with several homes and a 120-foot yacht. Now he sits in a maximum security wing of the federal prison in Manhattan, where he has no books, no television and no visitors. His lawyer asked the judge Thursday to at least have him moved to a more suitable part of the prison. "You could lose your mind in there," Shargel argued.