Securities: Madoff trustee makes a multiplicity of actions

After issuing proceedings against UBS (see here ), there have been a rash of actions launched and, in the most recent activity, amended.

On 26 November, Picard issued 40 sets of proceedings. 22 of them were issued against members of the families of Madoff and his wife Ruth Alpern Madoff and various Madoff and Alpern relatives; 18 were filed against employees of Madoff's company (BLMIS) and their relatives and related entities. The actions are intended to trace and, insofar as possible recover, some USD69 million.Picard says he alleges that the moneys " are funds deposited by BLMIS customers, then diverted from BLMIS's investment advisory business and, ultimately, fraudulently transferred to Madoff family members and BLMIS employees."

Picard is going after the benefits that Madoff made available to his close family and friends and has already issued proceedings against some of them. He says " “When added to the previously filed actions against Madoff’s immediate family and other business associates, the aggregate recoveries sought from this group total almost 300 million dollars.”

The defendants named in the 40 complaints filed that day collectively held 66 different accounts with BLMIS, through which approximately USD30 million were allegedly diverted to Madoff and Alpern family accounts and related entities, and approximately USD39 million were diverted to the accounts held by employees, their families and related entities."

Among the 26th November actions are lawsuits against Sondra M. Wiener, Bernard Madoff’s sister, and her husband Marvin. The complaint against Sondra Wiener alleges that she enjoyed special privileges and profited for decades from the Ponzi scheme. The Trustee further alleges that from the late 1980s through the early 1990s, Ms. Weiner received a guaranteed annual return of at least 20 percent as well as a USD1 million loan from BLMIS which she never repaid.

On 5th December, Picard took action against HSBC. He alleges " HSBC enabled Madoff's Ponzi scheme through the creation, marketing and support of an international network of a dozen feeder funds based in Europe, the Caribbean, and Central America, which are also named in the complaint (collectively, the "Feeder Fund Defendants")."

Other Defendants named in the filing include the management companies and service providers of those feeder funds, as well as certain of their directors and managers, namely Sonja Kohn, Genevalor, Mario Benbassat and his sons, Albert and Stephane, as well as Bank Medici and Unicredit, who together with other defendants helped fuel and extend Madoff's Ponzi scheme across international borders. From these Defendants, the Trustee seeks to recover at least USD9,000 million based on theories of contribution to Madoff's scheme; aiding and abetting Madoff's fraud; unjust enrichment in the form of millions of dollars; and over USD2,300 million in fraudulent transfers.

Picard alleges that the Defendants were well aware of the indicia of fraud surrounding BLMIS. HSBC twice retained KPMG to identify concerns with BLMIS, and KPMG twice reported serious risks already known to HSBC.

"Had HSBC and the Defendants reacted appropriately to such warnings and other obvious badges of fraud outlined in the complaint, the Madoff Ponzi scheme would have collapsed years, thousands of millions of dollars, and countless victims sooner," says Picard. "The Defendants were wilfully and deliberately blind to the fraud, even after learning about numerous red flags surrounding Madoff." HSBC strenuously denies and wrongdoing.

For the Trustee and the victims, 6th December was a good day. He announced that he "has entered into a settlement agreement with Union Bancaire Privee, UBP S.A., a Swiss private bank ("UBP"), and a related entity, M-Invest Limited, a Cayman Islands corporation ("M-Invest"). The Trustee's settlement with UBP and M-Invest is for no less than USD470 million in cash and could reach USD500 million depending on the outcome of other related actions." Further: ""The UBP settlement agreement is the largest feeder fund bank cash settlement to date and the first major international bank settlement, two important milestones for the overall recovery initiative." That's provided that the court approves the agreement as is necessary in insolvency proceedings supervising, as it does, the Trustee.

The following day, 7th December, Picard was able to announce that it really was beginning to look like Christmas come early: another settlement, this time for USD550 million with the family of Carl Shapiro. "The agreement resolves the Trustee's potential claims against the Shapiro Family and its related entities," says Picard.The settlement application filed at Court states that "USD38 million of the USD550 million settlement payment represents the full amount that the Trustee demanded from Robert Jaffe in connection with his role with Cohmad Securities Corporation ("Cohmad"), as well as all amounts he withdrew from Madoff since the 1980s."

But there's a sting in the tail: it "permits swift recovery of an amount which exceeds the current net worth of Carl J. Shapiro, Ruth E. Shapiro, and Robert M. Jaffe, combined," according to David Sheehan, a partner in Picard's law firm who is acting in the litigation.

"The payment of USD38 million by Mr. Jaffe is particularly gratifying, as that amount exceeds the Trustee's demand for all fees paid to him as well as all of his withdrawals—including both fictitious profits and principal—from his own BLMIS accounts dating back to when those accounts opened," said another partner. "In satisfying the Trustee's demand in full, Mr. Jaffe has distinguished himself from the other officers and directors of Cohmad, who have yet to recognise any culpability for their involvement in recruiting victims for Madoff."

The Shapiro family is trying to make a clean break: the settlement application "also states that the Shapiro Family has separately agreed with the United States Department of Justice to settle civil forfeiture claims for an additional payment of USD75 million, bringing the total amount paid by the Shapiro Family to USD625 million, of which USD550 million will be paid to the Trustee for the BLMIS Customer Fund.

But agreements notwithstanding, the issue of proceedings continued apace. On 7th December, proceedings were commenced against Sterling Equities, its partners, their family members, and certain related trusts and entities. But we are not being told what is in the writ. ""In light of the ongoing negotiations between the Sterling Defendants and the Trustee, and consistent with Court orders, we have filed the complaint under seal," said the law firm acting.

The next day, another set of proceedings was filed under seal but this time we were given extensive background of the case against "investment funds, affiliates and executives associated with Tremont Group Holdings, Inc. ("Tremont Group"), the multi-milliard-dollar money-management company and operators of the second-largest Madoff "feeder fund" group."

They said "Also named as defendants in the suit are Oppenheimer Acquisition Corp. ("Oppenheimer"), which acquired Tremont Group in 2001, and Oppenheimer's parent corporations MassMutual Holding LLC ("MassMutual Holding") and Massachusetts Mutual Life Insurance Company ("Mass Mutual"). Together, the complaint states, these companies "dominated and controlled" Tremont following its acquisition. Also named are a number of individuals and executives with the various related funds and entities, including Tremont Group's founder and former CEO, Sandra L. Manzke, and its former president and CEO, Robert Schulman.

"In addition to recovering fictitious profits, preferential payments and fraudulent transfers, the Trustee seeks to recover additional payments to prevent any unjust enrichment on the part of Tremont, Oppenheimer, MassMutual Holding, Mass Mutual, Manzke, and Schulman, through fees and other payments they received. All recovered monies will be placed into the Customer Fund and distributed, pro rata, to BLMIS customers with valid claims."

The allegations against Tremont et al are devastating, if true. It is claimed:

- that "when Oppenheimer acquired Tremont to expand into the hedge fund business, they too were fully aware of the major role BLMIS played in the business they were buying."

- "Tremont, its related entities and feeder funds did not conduct any reasonable or meaningful analysis regarding Madoff's performance, nor did they acknowledge significant operational deficiencies in Madoff's organization, even though BLMIS's compensation and organisational structure deviated from well-established industry practices."

- "the Defendants were repeatedly warned and were on notice, through information in their own possession and publicly available, that the success of BLMIS could be the result of fraud."

- "All the warning signs were there – some were impossible to ignore – yet all were consciously ignored by the Tremont network."

- "Tremont did not comply with their own policies, made exceptions to accommodate Madoff for their own self interest, ignored best practices, and otherwise disregarded the due diligence and monitoring they touted."

If rumour and allegation were sufficient to warn others of Madoff's action, then the making of such comments in the Tremont case will surely bring attention from regulators, even if only to ascertain if there is a problem.

But it was in the early hours of this morning (GMT) when Picard dropped a substantial bombsell: he has added a further set of allegations to the action against UBS and increased the amount demanded from them to USD2,500 million (more than 25% increase).The additional action " includes an additional 26 counts of financial fraud and misconduct against UBS AG and related entities (collectively, the UBS Defendants), other management and advisory entities, feeder funds and individuals for collaboration in the Bernard Madoff Ponzi scheme."

They are, of course, not "counts" as that means charges in a criminal trial: the imprecise use of language for effect is a hallmark of US lawyers who really should know better.The action is brought in a civil action in the Bankruptcy Court (in the US all insolvency cases are classified as "bankruptcy" - this is a liquidation of a company, not a bankruptcy of an individual).

We are getting a "redacted version" of the claim the full version of which has been filed under seal. The lawyers say "The UBS Defendants ignored the lack of checks and balances on BLMIS, generating millions in "fees" while deliberately looking the other way.

Also named in today's filing is Defendant M&B Capital Advisers Sociedad de Valores, S.A. ("M&B"), which helped found LIF-USEP with the UBS Defendants and received millions of dollars for serving as the distributor of LIF-USEP. M&B eventually formed its own BLMIS feeder fund, Defendant Landmark Investment Fund Ireland ("Landmark"). While M&B and its related entities (collectively, the "M&B Defendants") purportedly acted as Landmark's investment manager and herded new investors into BLMIS as Landmark's distributor, the M&B Defendants obtained millions in fees for also ignoring red flags of fraud.

"Another distributor, as well as investment advisor, of LIF-USEP – Defendants Reliance Management (BVI) Limited, Reliance International Research, LLC, and Reliance Management (Gibraltar) Limited (collectively, the "Reliance Group Defendants") – followed the same path. As the complaint states, the Reliance Group Defendants were repeatedly willing to cut corners on due diligence and consciously disregarded warnings that Madoff was engaging in fraudulent activity.

"The Reliance Group Defendants furthered the Ponzi scheme in their quest for coveted access to Madoff and a direct avenue to millions more in fees and profits by creating another BLMIS feeder fund with M&B, Defender Limited ("Defender"), which has been sued in a separate action brought by the Trustee."

There is little doubt that there are more to come, including some large non-US banks and entities and that some will be hotly defended.