It's a Scandal that Fraudsters Bernie Madoff and Robert Allen Stanford Were Not Shut Down by the SEC

Believe it or not Bernie Madoff’s phony monthly trading reports listed trades on days the market was closed, or at prices that were far off the market or in volumes that simply never existed. Yet, Madoff’s scam continued for 36 years, from 1972 until 2008, as the SEC was incapable of discovering the truth, and Madoff’s clients never read their phoney monthly statements, since through bull and bear markets Madoff always turned in profits that were not real. And shocking as it may seem, the SEC knew that Stanford was a fraud early on in 1998, but chose not to prosecute as the securities he sold were short term notes of a foreign bank supposedly yielding 12% and were not shares of stock. Imagine the stupidity of that pusillanimous decision. What a bunch of wimps!

 Such were the most shocking revelations at a Boston College Conference on the Madoff and Stanford Cases ” The Legacy of Mr. Ponzi,” that the American College of Bankruptcy organized last Friday, at which I was a speaker on the Madoff crimes. I emphasized the lackadaisical performance by the Securities and Exchange Commission as the key absurdity of allowing these crimes to damage so many naive investors who wanted to believe against all past investment history that Madoff’s year-in,year-out returns of 9%-10% and Stanford’s offer of a 12% coupon on his bank’s notes could somehow be a rational expectation by small investors entrusting these two con men with most of their valuable savings. By comparison, Mr. Ponzi was put out of business in a very short time long before there was even an SEC existing. So much for the securities regulatory process where scams are concerned. It is a travesty of justice.

 Clearly, the SEC should have had the smarts and the will to put Madoff and Stanford out of business before they were able to do so much harm. The fact that the SEC was inadequate to the challenge should give legislators the motivation to order a review of the agency’s leadership, manpower, and its statutory powers. It appears that the political connections of Madoff and the political contributions by Stanford may well have dulled or dented the investigations into their chicanery and kept the cops off the beat. Especially, as in the case of Madoff, the recent conviction of 5 employees together with the conviction of Madoff’s brother and other high-level employees reveals clearly the conspiracy pretty well included between 15 and 20 people. Stanford’s behavior involved an offshore bank in the Caribbean and so must not have been seen as so crucial to the SEC. It’s ability to make securities criminal cases is far overshadowed by the Justice Department.

 After 6 years of progress, Irving H. Picard, the Trustee for the Liquidation of Bernard L. Madoff Investments Securities, has been able to pay the innocent Madoff investors back 56% of the money they lost. With any luck in another 155 claims for $6 billion more payments, Picard is hopeful of returning 100% to those legitimate Madoff losers. “ My goal is 100%”, he said before a crowd of over 100 students and bankruptcy experts at Boston College Law School in Newton, Mass. on Friday. He has spent $980 million in legal and administrative fees to collect $9.8 billion so far. By comparison the Stanford fundraising is only about $240 million, while the costs have been $120 million or 50% of receipts. Picard revealed for the first time that fabricated backdated trades for Madoff’s sons(one committed suicide) in Apple common shares that threw off paper profits of $6.5 million suggests that they “should have known” the enterprise was a scam.

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SLUSA - What the courts have to decide

For years federal law enforcers ignored warnings about R. Allen Stanford's $7 billion fraud, but don't expect government officials to suffer any penalty. Instead, plaintiffs lawyers are seeking to use Stanford's crimes as a pretext to launch class-action lawsuits against other people and businesses.

 Now the Supreme Court will decide whether to let them. The question at oral argument this week in Chadbourne & Parke LLP v. Troice was whether state class-action lawsuits filed against various vendors to Stanford's operation should be allowed to proceed.

 Last year Stanford was convicted and sentenced to 110 years in prison for defrauding thousands of investors around the world. Because the enforcement division of the Securities and Exchange Commission spent more than a decade ignoring recommendations to investigate from both inside and outside the SEC, victims will likely recover very little of the billions they sent to Stanford.

 So plaintiffs lawyers want to take it out on others who did business with Stanford, even if they didn't have anything to do with his bogus offering of certificates of deposit from his bank in Antigua. Stanford told investors that the money backing their CDs was invested in safe, liquid securities that trade in U.S. public markets, when in fact investors were funding a Ponzi scheme.

 The trial lawyers want to sue under state law because previous Supreme Court decisions—especially Central Bank of Denver v. First Interstate Bank of Denver and Stoneridge v. Scientific Atlanta—make it difficult under federal law to sue companies that merely did business with fraudsters, unless these vendors directly participated in misleading investors.

 Moreover, a 1998 reform prevents securities class-action cases from being brought under state law. The Securities Litigation Uniform Standards Act says that such cases must be filed under federal law if "the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security."

 Covered securities include stocks and bonds issued by firms that trade on U.S. exchanges. At Monday's oral argument, Justice Antonin Scalia noted that Stanford didn't fulfill his promise to put investors' money in these securities, and therefore such a case "can't be in connection with a purchase or sale that has never occurred."

 As usual, Justice Scalia is doing a public service by focusing on the text of the law the court is asked to interpret. But a fraudulent claim of buying securities sure sounds to us like a "deceptive device" that's "in connection with" a purchase of securities. Otherwise, could Bernie Madoff argue that he didn't commit securities fraud because he pocketed the cash from victims instead of investing it?

 The Justices also wrestled with the significance of Stanford's various deceptions. The U.S. Court of Appeals for the Fifth Circuit had overturned a district court and ruled in favor of the plaintiffs in part because Stanford made other significant misrepresentations unrelated to securities.

 But on Monday Paul Clement, attorney for the defendants, rightly noted that without the promise of these liquid assets, "nobody's going to give their money to a bank in Antigua. The reason you give your money to a bank in Antigua is because you think it's backed by something more than a piece of paper, and the something more was purchases of covered securities on the market."

 Even if the Supreme Court rules against them, Stanford's victims can still pursue justice via federal class-action suits, or via individual suits in both state and federal court. But overriding federal law to allow suits against defendants who may have done nothing wrong is anything but just.


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Government Opposes Stanford Bid to Delay Trial

Scott Cohn (CNBC)
Federal prosecutors say a bid by accused Ponzi mastermind Allen Stanford to delay his criminal trial until late April ignores the interests of thousands of investors in the alleged $7 billion scam.

Attorneys for Stanford, who last week was ruled competent to stand trial following eight months in drug treatment, asked for the delay to give their client more time to prepare. He faces 14 counts in the scheme centered on allegedly bogus certificates of deposit. The trial is currently set for January 23.

"The public's interest in a speedy trial is particularly acute in this case in which thousands of individuals who purchased CDs from Stanford have lost billions of dollars," writes Assistant U.S. Attorney Gregg Costa in a court filing today. "This trial will decide not just whether Stanford is guilty of the criminal charges but also whether hundreds of millions of dollars of investor funds currently frozen in foreign countries will be forfeited and returned to the victims."

Prosecutors say the alleged Stanford fraud is the second largest in U.S. history, surpassed only by Bernard Madoff's Ponzi scheme.

U.S. District Judge David Hittner has promised a ruling this week on Stanford's motion for a three-month continuance.

While Costa said the government does not oppose a shorter delay of four to six weeks, he says a longer delay ignores the interests of the public and the alleged victims.

Those investors--some 28,000 of them--have often found themselves lost in the shuffle of a case that has been marked by bizarre twists and unusual delays.

Stanford was indicted in June, 2009 and detained as a flight risk, but he was severely beaten by another inmate and then became addicted to prescription drugs while in custody. On Thursday, Hittner ruled Stanford has sufficiently recovered from his injuries and his addiction, and is fit for trial.

Meanwhile, the investors are locked in a dispute with the Securities Investor Protection Corporation (SIPC), which insures U.S. brokerage accounts, over whether their losses should be covered.

With the insurance coverage and Stanford's trial still undecided, the investors have recovered just pennies on the dollar, nearly three years after the alleged scam was first exposed.

Stanford Court Receiver Seeks $55 Million from Libya, All in US Banks

Published: Friday, 17 Jun 2011 | 2:19 PM By: Scott Cohn

Senior Correspondent, CNBC

The court-appointed receiver who is recovering assets for investors in Allen Stanford's alleged Ponzi scheme is demanding that Libya's sovereign wealth funds return millions of dollars they somehow managed to withdraw just before the firm blew up in 2009, CNBC has learned.

And all of the money is on deposit in a U.S. bank.

In a complaint still under seal in U.S. District Court in Dallas, attorney Ralph Janvey demands the return of nearly $55 million in alleged "fraudulent transfers" to the Libyans. The money includes $12 million in funds Libya managed to withdraw just after Allen Stanford made a personal trip to meet with members of the Qaddafi regime in early 2009.

Three weeks later, the Securities and Exchange Commission filed suit against Stanford and his companies, shutting down the alleged scam. A spokesman for Janvey tells CNBC all of the money is in a U.S. bank, but he could not disclose which bank because the order is still under seal.

All of the funds have been frozen by the court, pending a hearing in December.