L. Dennis Kozlowski and Mark H. Swartz have been in jail since 2005, but were not officially prevented from engaging in their business after committing accounting fraud. The SEC final judgments against Kozlowski (former CEO of Tyco) and Swartz (former CFO). The judgements bar the men from serving as directors of public companies.

Sarah N. Lynch reports:

“The judgments bar the men for life from serving as a director of a public company and enjoin them from violating securities laws. The SEC had accused them in its civil case of failing to disclose hundreds of millions in executive indebtedness and executive compensation.

They were convicted for their roles in the criminal case and sentenced to serve terms [of various lengths]. They also paid $134 million in restitution to Tyco and criminal fines of $70 million and $35 million, respectively.

The final settlements are still subject to approval by a federal New York judge.”

SEC is just jumping right into these things, huh?  Part of the problem is that soo many of these scams/failures can be detected long before they blow up.  The SEC needs to get more aggressive in their approach.

For more on the story click here.

On July 1st, the SEC voted on several new measures that were aimed primarily to increase investor confidence by providing investors with tools to increase corporate accountability. First, the commission approved a measure that requires a shareholder vote on executive pay in proxy solicitations involving companies that receive money from the Troubled Asset Relief Program (TARP).  The Commission also voted to propose a measure requiring public companies  better disclosure of executive pay in their proxy statements. A New York Stock Exchange rule was changed as well, as the SEC now prohibits brokers from voting proxies in corporate elections without customer input.

These types of programs are all well and good but a fundamental issue remains and that is the SEC actually taking action against the fraudsters in the industry.  Until the SEC starts using the tools it has to catch the fraudsters, even the very obvious ones (for example: Madoff), investor confidence will remain lower than it could and should be.

For more information on this story ,click here.

His own lawyer calls him a “deeply flawed individual” and I nominate that for the understatement of the recession.

Madoff’s fraud is an almost unbelievable scam, spanning a reported $170 billion dollars through his company, decades of time, abuse of untold friendships, and destruction of tens, hundreds, maybe thousands of peoples’ lives.  This is not a scam limited to the primary vicitims, no, this scam has destroyed many families for generations to come because soo many invested everything they had.

But Madoff says he’s “sorry.”  Due to the type of damages these cases do to families, retirees, and anyone touched by the scam, I am not sure “sorry” does it.  I think spending the rest of his life confined in a spartan cell with plenty of time to think about all the horror he inflicted and to feel all the anguish and loss of his victims, but maybe that gives him too much credit because I don’t think he has any ability to respond as a human.  How coudl he?  He launched this scam decades ago and instead of unwinding it if not giving himself up, he only pushed harder to scam greater and greater amounts of money from more and more people.

Did he have no thoughts for what he was doing and no understanding that it would all wind up a massive train wreck?

Did he even try to invest the money?  It sounds like the answer to that is “no.”  Instead used the loot, because that’s what it was, to benefit himself and his family.  He didn’t even try to invest the money – everything was a scam from his published returns (shame on the SEC, too)  to his monthly account statements where he did not even take the time to make sure that his statements were even remotely accurate.

Madoff is less than human most would agree.  But is it only that he is perfectly human?

Can a human be soo epically flawed and still function in society as he did for decades?  I suppose so.

Maybe money is the root of all evil after all.

A New York broker-dealer and four other individuals were charged with securities fraud by the SEC. It was alleged that they collectively raised billions of dollars illegally from investors to feed Bernie Madoff’s Ponzi scheme.

The legal complaint filed in a Southern District of New York U.S District Court lists the Cohmad Securities Corporation of being at fault. Chairman Maurice J. Cohn, COO Marcia B. Cohn, and representative Robert M. Jaffe were charged of marketing investment with Madoff without regarding the illegality of his Ponzi scheme. The same court filed a complaint against Stanley Chais, an investment adviser who handled three funds valued nearly at 1 billion dollars that were totally invested with Madoff.

Robert Khuzami, Director of the SEC’s Division of Enforcement, noted that:

“Madoff cultivated an air of exclusivity by pretending that he was too successful to trouble himself with marketing to new investors..In fact, he needed a constant in-flow of funds to sustain his fraud, and used his secret control of Cohmad to obtain them.”

The Cohmad defendants were indicted for fraud due to their peculiar apathy towards Madoff’s suspicious activities. For example the Cohns filed Forms BD and FOCUS reports that were falsified to hide Cohmad’s business of attracting investors to Bernard L. Madoff Investment Securities LLC  (BMIS). The referral business was 90 percent of Cohmad’s revenue bringing in over 800 accounts and billions of dollars for BMIS. BMIS paid 100 million for Cohmad’s referral services. The compensation arraignment between the two entities created fraudulent conduct as well, with clients unable to withdraw money from accounts with false account statements.

Jaffe, the registered representative at Cohmad, brought in more than 1 billion into BMIS. Jaffe though he was getting overcompensated by Madoff when really BMIS employees were taking money out of Jaffe’s BMIS account.

Chais’s charges centered around his false role in managing the funds and for distributing false account statements. Chais built himself up as a qualified investor managing hundreds of millions of dollars worth of money with three partnerships. But Chais only sent them money out of one of his partnerships to BMIS and then proceeded to charge that partnership for his “service.”  Chais apparently also ignored blatant inconsistencies with Madoff’s reported returns, and even encouraged them.

The article is linked here.

More key, specific advantages of Mediation from FINRA:

• Control—Mediation belongs to the parties. The disputing parties control the process, scheduling, costs, and outcome of the dispute.
• Less Adversarial—The mediation process is informal. It is less confrontational than arbitration or litigation.
• Preserves Options—Parties can enter into mediation without jeopardizing their option to arbitrate or litigate.
• Swift Settlement—Most mediations are successfully concluded in a single day. Since mediation can be scheduled soon after a dispute arises, parties reach settlement much earlier than in arbitration or litigation. Many mediations conclude before a formal arbitration claim is filed.
• Lower Cost —Mediation usually entails lower legal and preparatory costs, there is minimal interruption of business or personal life, lost productivity is kept to a minimum, and the fees and expenses of mediation are modest.”
• Preservation of Business Relationships—By reaching an early resolution with minimal financial or other strain on either party, the chances for preserving business relationships are greatly enhanced.
• Protects Privacy—Mediation offers greater confidentiality than arbitration.
• Creative Solutions—Mediators help the parties craft creative solutions.
• Low Risk—Settlement potential is high. The case proceeds quickly. The cost is modest and there are benefits even if a settlement is not reached.

Meditation is the choice of many parties when choosing to settle a business dispute. One particular reason why mediation has been so popular is that the parties have full control of the variables (process, costs, outcome). Even if there is not a full settlement made, the progress made in mediation proves to be invaluable because it leaves less difficulties to be resolved through any other forms of dispute resolution (arbitration/litigation). Mediation seems to resolve the key, collateral issues  the best, which saves a considerable amount of resources for both parties that are involved. Mediation thus streamlines the situation for the next step of alternative dispute resolution (depending on the complexity of the issue) or it resolves the issue altogether. On the local level, with situations arising between investors and individual clients, mediation is often the best option.

For more information on Mediation, click here.

R. Allen Stanford was taken into custody on his Ponzi scheme allegations related to his international banking empire.  Because the judge agreed that Stanford poses a flight risk the judge ordered him to remain in custody.

The government’s indictment charged Stanford and other executives at his firm with scamming 30,000 investors invested $1.2 billion in assets and in about 7 years grew it to about $8.5 billion.

Investigators say that even as Stanford claimed healthy returns for those investors, he was secretly diverting more than $1.6 billion in personal loans to himself.

The Financial Industry Regulatory Authority (FINRA) provides a helpful overview of the main attributes of each of these dispute resolution processes.  Keep in mind that these non-legal processes are described in the context of securities disputes whether between a client and a broker-dealer or between a broker-dealer and one of its ex-brokers.  Ideally, there should be a good relationship between brokers and investors, but inevitably there are disagreements.  Arbitration and Mediation are examples of alternative dispute resolution processes that bypass the inconveniences an expense associated with a lawsuit filed in civil court.

Mediation and Arbitration are non-judicial processes for resolving disputes between parties.  In mediation, an impartial third party, known as the mediator, tries to help the parties to the dispute reach a resolution by focusing both parties on the critical issues.  Mediation is a voluntary process where the parties agree to ‘give it a try’ but the mediator cannot make any decisions or force any party to do anything.  In contrast, once the parties have agreed to submit their dispute to arbitration, the (hopefully) impartial arbitrator makes a decision that is binding on both sides.  The arbitrator listens to each party’s concerns and makes a decision based on each party’s presentation of their story.

The Financial Industry Regulatory Authority (FINRA) states that:

Meditation…

• “Is voluntary. The parties also decide who the mediator will be, when the mediation will take place, and how the dispute will be settled.”
• “Is informal. In mediation, an impartial person—the mediator—promotes negotiations between the disputing parties.”
• “Is inexpensive. The mediation process is less expensive than arbitration or litigation.”
• “Is non-binding. Unlike other forms of dispute resolution, such as arbitration and litigation, the mediator does not impose a solution or decide your case. Instead, the mediator guides or helps the parties to reach or create their own solution. Parties may still arbitrate their dispute if they are unable to agree on a settlement.”
• “Is a “win-win” solution. The mediator’s role is to help the parties find a mutually acceptable solution to their controversy. Since the inception of the program in 1995, more than 6,000 cases have been filed in mediation. Parties who mediate at this forum resolve four out of every five disputes, an 80% settlement rate!!”

Arbitration…

• “Is impartial. Based on the size of your claim, your dispute will be heard by one or more impartial arbitrators. Arbitrators are selected by the parties through an automated system that produces arbitrator lists. Parties may remove any listed arbitrator for any reason. They are encouraged to rank the remaining arbitrators, according to preference.”
• “Is fair. During the hearing, parties make brief opening statements explaining what they intend to prove and what relief (e.g., money damages) is sought. Parties have the opportunity to present documents and witnesses in support of their positions, to object to documents and to question witnesses presented by other parties, and to make closing remarks to summarize their positions.”
• “Is final and binding. Arbitrators evaluate the evidence and arguments presented and reach a final and binding decision (the “award”). Awards are only subject to court review on very limited grounds.”
• “Is expedient. Arbitrators endeavor to render the award within 30 business days after the close of the proceeding.”

For more on these articles by FINRA, click here and here.

I will be writing a series of posts this week dedicated to the advantages of using mediation (as well as providing background information on arbitration). In today’s market, when fraudulent behavior in business matters is quite prevalent, it is necessary to know what options are available.  This week, there will be detailed posts on each of these topics:

1) The Differences Between Mediation and Arbitration

2) Mediation as the Most Viable Option

3) Breaking Misconceptions about Mediation

Of course, I will continue to post my views on the top news stories as well.

Many of Madoff’s victims sent impassioned letters asking the judge to give Madoff as much time in prison as possible.  Some of them have even asked for a chance to speak at the June 29 sentencing hearing.

The letters are wrenching because many of Madoff’s victims are elderly and retired who have lost everything to Madoff’s greed.

For more, including a link to these moving letters, click here.

Earlier this week,  Wells Fargo (along with the Bank of America, regarding Auction Rate Securities) reached agreements to settle securities fraud charges with state and federal regulators. Wells Fargo’s settlement involves its Boston-based mutual fund Evergreen Investment Management.  Wells Fargo will pay $40 million dollars in the agreement with the Securities and Exchange Commission and the Massachusetts Securities Division.  According to the regulators, Evergreen lied to investors about the value of securities it sold and disclosed this information to a select group of people.  Although the behavior occurred while Evergreen was owned by the Wachovia Group, Wells Fargo has to bear the cost.

The value of the Evergreen Ultra Short Opportunities Fund, a group of mortgage-related securities that Evergreen controlled, was inflated 17% between February 2007 and June 2008, the SEC reports.  The SEC states that its valuation committee learned of this when portfolio managers knew about problems regarding mortgage-backed securities but knowingly failed to disclose the mortgage-backed issues.  Mutual funds must treat its clients equally, and hence, when Evergreen repriced the holdings in the fund, they informed only a few investors who were able to significantly reduced their losses.

This is a classic example of preferential treatment that is ever present in our market today.  As the financial crisis looms, it is hard to see when such offenses will become less frequent, to say the least.

For more information, click here.