Monday, June 29, 2009

Madoff Gets Max 150 Years

Monday June 29, 2009

New York-

Convicted Wall Street financier Bernard Madoff was sentenced to 150 years in prison Monday for orchestrating a fraud so extensive that the judge said he needed to send a message to all potential imitators and to the victims who demanded harsh punishment.

Bernard Madoff rose to prominence in the 1960's when he founded Bernard L. Madoff Investment Securities LLC. His firm was an early user of the National Quotation Bureau's Pink Sheet and would eventually grow to become one of the largest market makers in the NASDAQ. Madoff would come to serve as Chairman of the board of Directors of the NASDAQ and on the NASD's Board of Governors.

U.S. District Judge Denny Chin announced the sentence with Madoff standing at the defense table wearing a dark suit that seemed to hang over his thinned frail frame, white shirt and a tie. He appeared to have lost many pounds while awaiting sentencing. Weighing possibly 10-12 pounds less than he did at his last court appearance in March. Head barely raised, he gave no noticeable reaction when the sentence was announced.

This sentence dwarfs other prison terms handed out for other high-profile white-collar fraud in recent years, such as former Worldcom Inc. Chief Executive Bernard J. Ebbers, 67, and Adelphia Communications founder John Rigas. Ebbers is serving 25 years in prison, while Rigas, 84, is serving 12 years in prison.

After the victims spoke, Mr. Madoff himself stood up from the defense table to acknowledge the damage he had inflicted and express regret.

“I’m responsible for a great deal of suffering and pain, I understand that,” the 71-year-old convicted swindler told the court. “I live in a tormented state now, knowing all of the pain and suffering that I’ve created. I’ve left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren.”

A short time later, Ruth Madoff, who was not in court to witness her husband's humiliation, broke the silence she has maintained since her husband's arrest. "I am embarrassed and ashamed," she wrote in a statement. "Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years."

Several victims applauded in the court room upon hearing Judge Chin's sentence. Many were more than happy to comment. Including especially moving remarks by Burt Ross, a Madoff victim and a former mayor of Fort Lee, N.J. Ross made it clear he was satisfied with the sentence and that Madoff deserves to go to his grave "an unmourned man."

Thursday, June 18, 2009

The Little Bill That Couldn't - Hedge Fund Regulation, Again???

On August 7, 2006, SEC Chairman Christopher Cox announced that the SEC would not appeal the recent decision of the U.S. Court of Appeals in Phillip Goldstein, et al. v. SEC. This Goldstein decision effectively overturned the SEC’s 2004 rule requiring most advisers to hedge funds to count investors in the funds for purposes of determining if registration as an
investment adviser is required. Cox confirmed that the SEC would neither seek en banc review of the Goldstein decision, nor would it petition the U.S. Supreme Court for a writ of certiorari. Accordingly, the Court of Appeals decision became effective upon its issuance of a final mandate.

Now, Senator Jack Reed (D-R.I.) has introduced a bill which covers hedge fund, private equity, venture capital and other investment pool managers and requires them to register with the SEC. Under his proposal, only firms managing more than $30 million would have to register on the federal level; smaller funds would be regulated on the state level. This is not the first time a Senator or Congressman has introduced such a bill since 2006. In fact, they seem to be a all the rage these days.

Since 2006 many Senators have introduced or threatened to introduce their own bills calling for regulation of the hedge fund industry including Senator Grassley (R-I.A.), who seems particularly focused introducing a bill bearing his name. The Grassley initiative was a direct response to the 2006 D.C. Circuit Court of Appeals overturning the regulation imposed by the Securities and Exchange Commission requiring hedge funds to register. The federal courts said the Securities and Exchange Commission was going beyond its statutory authority. The initiative was never passed.

Another bill was introduced in Congress by Rep. Barney Frank (D., Mass.); Rep. Michael Capuano (D., Mass.); and Rep. Paul Kanjorski (D., Pa.) They hoped to not only amend the Investment Advisors Act of 1940, but more importantly, they wished to re-establish the authority of the SEC to regulate hedge funds, a power the commission gave itself in a controversial rule enacted in 2004, Goldstein. It too, was not passed.

The focus on Phillip Goldstein et al. v. SEC is understandable, as is the ruling overturning it. Hedge funds are a private business. The government, Federal or State, clearly over steps its authority when they attempt to regulate private industry. In fact, it was only after billions and billions of tax payer dollars were used to bailout some of our countries largest companies, that the board members, officers and shareholders of these public corporations finally ceded much decision making and control to federal officials. Again, these are public companies, forced to relinquish much control due to poor management which led to forced bailouts utilizing TARP loans.

There is no bailout for hedge funds. There are no TARP loans. After all, it would make absolutely no sense for the taxpayer to bailout private industry. That being said, the same holds true of government regulation in private industry- it makes absolutely no sense. In fact, many managers went through the onerous process of registration in 2004. Imagine lots of lawyers, accountants, paperwork and then a process of question and answer that can take weeks or months. Once one is registered, often, the SEC will come to your offices for a formal review. This too is costly, the taxpayer pays for the SEC employees and the rest is paid for by the investor via management fee. The process takes time, the most precious commodity in the fund business. A manager now spends time on reviewing paperwork, filling out forms and SEC responses, instead of focusing their undivided attention on performing for the investor.

Ironically, in the long run with the overturning of Goldstein we realize the SEC had indeed overstepped its authority. The managers precious time and investors funds as well as taxpayer money, was wasted fulfilling the reckless, lobbyist infused needs of politicians. These are the same individuals who were responsible for overseeing the markets. These men sat on the banking committees that were in charge of overseeing the regulatory agencies that are being blamed for everything from acts as incredulous as looking the other way on Madoff, to simply not admitting that they lacked the knowledge needed to understand the complex financial instruments they were in charge of regulating. No matter how you view it, this was a massive failure of the regulators and a direct reflection on certain members of Senate and Congress whose committees were directly responsible for oversight.

The failure did not take place within the hedge funds. In fact, many survive in spite of the failure of the system. The ones that have gated, the ones that have restructured and even those that have failed, most are victims of the system rather than that of a flawed strategy. The system that was supposed to regulate, and protect them, failed them. The government checks and balances that oversee the regulators failed them. Hedge funds have actually been a scapegoat of blame. They are far from responsible for any of our systemic issues, so why call for regulation? The industry has not been offered any TARP funds and has managed to survive without any help from the government, so why regulate them now? The taxpayers have already paid enough between the bailout and the flailing economy, spending more to regulate an industry that survived economic turmoil without incident, would simply be adding insult to injury.

Thursday, June 11, 2009

Former CEO of USXP Richard Altomare Out of Appeals

Richard Altomare is a well known figure through out the penny stock industry. He was once the CEO of Universal Express, a publicly traded company on the bulletin board whose stock traded hundreds of millions of shares, daily, but eventually filed for bankruptcy. He had hoped to have the highest court in the nation hear his case. On Monday, the Supreme Court turned down his request.

While blaming short sellers for the companies trading woes, Altomare and his cohorts lived well by continually issuing and selling stock. This activity continued for almost a decade. Universal Express was a company whose bosses were in constant violation of securities laws. Incredulously, the appeal brief argued that as the company had been through bankruptcy, it could issue all the shares it wanted without regard to securities laws.

Amusingly, at one point, after negative press, Altomare and his USXP friends took out a full page ad in The
Times to denounce a particular writer, the S.E.C. and of course the- "bad guys" -the short sellers. Ironically, according to The Times advertising department, the ad was never paid.

Tuesday, June 9, 2009

Deutsche Bank Shutters Global Masters Fund

June 9, 2009

Last year, amid turmoil, Deutsche Bank closed its fund Topiary. The fund, with US $1.3 billion, was the sister fund of Deutsche Banks Global Masters Fund. According to Financial News the decision was made in February to shutter another Deutsche Fund, Global Masters.

The liquidation of Global Masters has reportedly been delayed by a redemption gate imposed by one of its portfolio funds. This type of gate has become extremely common as managers weigh the needs of the redeeming investor versus the needs of the investors who choose to stay, both groups need to receive the same fiduciary treatment. In addition many other factors come in to play, such as cash on hand, costs of closing and of course the losses incurred when selling into a weak market.

The German bank is finalizing plans to shut its Global Masters fund of hedge funds following a brutal 2008 and major redemptions. The fund which once managed almost US $10 billion, had fallen to just US $2 billion in assets. The fund fell, as investors fled, following an 18% drop in the previous year.

The fleeing of the fund of funds investor has become the unfortunate downfall of many hedge funds. It is also the beginning of the end of the fund of fund business. This type of investor seems to have the fatal and distinct inability to understand that as they extinguish all leverage with one hand and then redeem all funds with another, they are making reactionary decisions that will lead not only to their own losses, but also to their own extinction.