When the Madoff scandal news first broke, I thought it would be like so many other fraud controversies, dominating the headlines briefly and then fading into the background – as seemingly has happened with the Marc Dreier debacle. But perhaps as a result of the scale and breadth of the harm caused, the Madoff scandal story just seems to keep escalating.
Today’s headline revelation is the widely reported news (refer here), that Ruth Madoff, Bernard Madoff’s wife, allegedly withdrew a total of $15.5 million from a brokerage account just prior to Mr. Madoff’s now-famous confession to his sons and subsequent arrest.
This allegation first arose in a footnote of a complaint filed on February 11, 2009 by Massachusetts Secretary of State William F. Galvin to revoke the broker-dealer registration of Cohmad Securities Corporation. The complaint and related exhibits can be found here.
The Enforcement Section of the Massachusetts Securities Division of the Officer of the Secretary of the Commonwealth had "sought to determine whether the businesses of Cohmad and Madoff Investments were so intertwined that they could be viewed as a common enterprise, and not as separate entities, for purposes of imputing liability and obtaining investor relief." The complaint alleges that Madoff was one of Cohmad’s co-founders and directors.
As detailed in the complaint, Galvan contends that Cohmad "categorically refuses to discuss its actions with regulators" and therefore "has no right to continue to engage in the securities business in the The Commonwealth of Massachusetts."
As part of the complaint’s contention that Cohmad and Madoff’s securities firm are "so intertwined that they could be viewed as a common enterprise," Galvin cites, among other things (in footnote 4, on page 25 of the complaint) wire transfer records showing the "flow of funds" between the two enterprises, referring specifically to documents showing that "Ruth Madoff withdrew [from Madoff-related accounts at Cohmad] $5,500,000 on November 25, 2008 and withdrew $10,000,0000 on December 10,2008." Madoff was arrested on December 11, 2008.
The documents reflecting these two wire transfers can be found on the last two pages of Exhibit 16 (refer to pages 51 and 52, here).
A news wire story (here) quotes a spokesman from Galvin’s office as saying "We’re not accusing her of anything wrong." The spokesman added "Now, what someone in New York or the feds may think of it may be entirely different."
A Painful Situation: And under the general heading of marital complications related to the Madoff scandal, I reference the difficulties facing Steven Simkin, formerly married to Laura Blank. On February 3, 2008, Simkin filed a complaint in New York State (New York County) Supreme Court (here) against his former wife in connection with the Madoff-related investment the couple had maintained prior to their divorce.
According to the complaint, the couple entered a June 27, 2006 agreement providing for the division of their marital assets. The couple "mistakenly believed" that their largest asset was their account with Madoff Investment Securities, which they believed to be valued at $5.4 million. As part of the agreement, Simkin agreed to pay Blank half of the assumed account value in cash. (Ouch.)
The account is now "worthless, literally not worth the paper on which the parties’ valuation rested." Simkin’s complaint alleges that
As a result of the parties’ clear mistake of fact, Steven paid Laura millions of dollars believing, as did Laura, that it represented her share in the "Account" (as the parties understood it to be) and retained the "Account" as a portion of his equitable share of the couple’s assets. As a result, Laura obtained a windfall and Steven did not receive an equitable share of the couple’s joint assets. Accordingly, by this action, Steven seeks to reform the Agreement, which is grounded upon a material and mutual mistake respecting the couple’s assets at the time …and recover from Laura so as to accomplish the goal the parties intended by executing the Agreement.
Mr. Simkin, you have my sympathy.
Special thanks to the several readers who send me links to the Massachusetts Secretary of State’s complaint and to Jon Jacobson for help in finding the Simkin complaint. I have added the two complaints to my register of Madoff-related litigation, which can be accessed here.
A Clawshank Redemption?: And under the general heading of trying to recover previously paid out amounts, one issue that has gained a great deal of attention is whether the trustee in the Madoff liquidation proceeding can recover ("clawback") amounts paid out to fund investors who cashed out before the scandal was revealed. The Securities Docket has a post on the topic (here), discussing efforts that some of the investors who redeemed their shares to change the claims bar date in the Madoff liquidation proceeding out of concern for anticipated clawback efforts. .
In a February 2009 memorandum entitled "How Long and Strong is Trustee Piccard’s Claw?" (here), the Seyfarth Shaw law firm takes a detailed look at the trustees’ powers, and reviews the similar clawback efforts undertake in the Bayou funds scandal.
The memo concludes that the trustee’s ability to clawback redemption payments is "not unbridled" and that there are "powerful defenses that can and will be advanced, including the good faith defense that protected many redeeming investors in the Bayou case." The memo also notes that "additional defenses also are likely to be developed as the facts surrounding what Madoff did come into sharper focus."
Meanwhile, in Europe: According to press reports (here), European investor rights group Deminor has initiated a legal proceeding in a Luxembourg court in order to compel two Luxembourg units of UBS to provide informatoin and materials relating to the entities’ role in steering clients to Madoff-related investmens.
The action, which Deminor initiated on February 11, 2009, is filed against UBS S.A. and UBS Fund Services, as well as against the Luxalpha SICAV Fund, Luxembourg Third Party Management Company SA and Access Management Luxembourg SA.
According to the news reports, the action seeks information regarding contracts between the UBS units, Madoff, and Luxalpha, an investment fund that UBS allegedly promoted. Regulators closed Luxalpha last week for not complying with regulatory requirements. The action also seeks to obtain audit reports of the fund, prepared by Ernst & Young.
Deminor claims that it represents individual and institutional investors that had lost over $1.3 billion as a result of the Madoff scheme.
I would be very grateful to any reader who might be able to provide me with a copy of the new Luxembourg complaint.
Gender Issues: A February 11, 2009 Washington Post article entitled "In Banking Crisis, Guys Get the Blame" (here) raises the question whether the current global economic crisis is a result of the fact that the financial industry and its regulators are "overwhelmingly male-dominated."
The article quotes one commentator as saying that "you can argue that the men have made a right mess of it, and now the ladies should have a go." Another commentator observes that "maybe if we had some more women in the boardrooms, we may not have seen as much risk-taking behavior."
Finally, one commentator with an odd notion of human anatomy, commenting on London’s top financial sector officials, observed that "there are quite a lot of alpha males with testosterone steaming out their ears."
At least when it comes to relying on women to clean things up, Iceland "is leading the way," having appointed a female prime minister as well as two women to lead two of its major banks. The prime minister’s spokesperson is quoted as saying "Men, especially young men, made a mess of things. There is a strong discussion that women would have taken a more cautious approach in the financial sector."
And Finally: I have added a Twitter button in the right hand column. Readers interested in receiving Twitter updates (or "tweets" as they are known) between blog posts will want to click on the Twitter button and register to become a "follower" of my Twitter site. I also add "tweets" when I have added new blog posts. I have come to appreciate that there are many web denizens who prefer to receive their information as "tweets", so that is why this blog now has a Twitter button.
The New York Times has a nice February 11, 2009 article (here) with a good overview of what Twitter is all about.