White collar crime

Posted by Winnie Melda on April 23rd, 2019

 United States District Court

Southern District of New York

Securities Exchange Commission v Bernard L. Madoff Investment securities L.L.C

Case number 1: 12-mc-00115

Facts

Madoff was a resident of New York City and the sole owner of Bernard Madoff Investment Securities LLC.  Bernard Madoff founded an investment securities firm early in 1960 as a small Wall Street investment firm. The firm grew first to become one of the largest market makers in the United States owing to its use of innovative computer technology.  Bernard Madoff orchestrated a massive Ponzi scheme through Bernard L. Madoff investment securities, an advisory unit.  By his arrest in 2008, Bernard L. Securities was rated the sixth largest market maker in the United States. The advisory and investment management division was one of the company’s divisions where investors put their money in hedge funds. The hedge fund delivered constant high returns to investors over an extended period. He is a former chairman of the NASQAD stock market Board of Directors.  Madoff oversaw and controlled the investment adviser services and finances at the company. As of 2008, the company had over $ 17 billion in assets under management according to Form ADV for the company filed in January of the year. Bernard Madoff investment securities engaged in three different activities including market making services, investment adviser services, and proprietary trading. According to its website, the firm had been providing quality executions for banks, broker-dealers, and financial institutions since its inception.

Since 2005, Madoff and the firm had been conducting Ponzi schemes through the investor adviser services. He ran his investment adviser activities from a different floor in the New York offices of the firm.  He kept the firm’s financial statement under lock and key and was cryptic about the company’s investment advisory business when discussing business with other employees.

He later disclosed to one senior employee that he was struggling to obtain liquidity necessary to meet clients’ redemption obligations. He also informed another employee of his plan to pay bonuses in December, which had traditionally been paid in February. He later organized a meeting in his apartment with the senior employees where he disclosed that the business was a fraud, and he had been for years paying returns to investors out of principals from other investors. He further stated that the business was insolvent and was basically a giant Ponzi scheme.  The scam was finally exposed by his sons Andrew and Mark, who reported to the authorities.

Legal issue

Violation of the anti-fraud provisions under the federal securities laws

Madoff in an individual capacity through Bernard L. Madoff Investment Securities LLC violated sections 206(2) and 206(1) of the Advisers Act, Section 10(b) of the Exchange Act, under the antifraud Act and section 17(a) of the Securities Act. There was a substantial showing that Madoff and the firm committed several violations of the antifraud of the anti-fraud provisions contained in the federal securities law.

Defense argument and evidence

As evidenced by his submission to his senior employees, Madoff paid investors from funds raised from other investors. Bernard Madoff pleaded guilty to all charges and signed a waiver of indictment.  In his pleading allocution, he admitted to running a Ponzi scheme to satisfy his client’s expectations of high returns that he had promised. He admitted to false trading activities disguised under SEC returns and foreign transfers.

Holding

The S E C filed a motion to freeze particular assets and appoint a receiver in the civil action against Madoff. On December 12, Judge Louis Stanton entered an order to freeze individual corporate and personal assets and appoint a receiver over Bernard L. Madoff Investment Securities, Madoff Ltd, and Madoff Securities International Ltd. In addition, a trustee, Irving H. Picard was appointed by the court for the liquidation of the firm in accordance with Securities Investor Protection Act. The trustee is empowered by the Act to recover money paid out as long as the money would have been the property of the customer had the payment not occurred.

Appointment of a receiver

A receiver for the assets was appointed by the court of Bernard L. Madoff Investment Securities LLC and affiliated entities to preserve the status quo while various transactions were being unraveled to determine the accurate picture of the fraudulent activities. Secondly, the action would also protect the injured parties from further despoliation of their property rights. Thirdly, it was to prevent the dissipation of the defendant’s assets pending further court action. In addition, the appointment of the receiver would serve the purpose of installing a responsible officer who could bring the firms into compliance with the law. Lastly, it was to place the hopeless insolvent entities in bankruptcy to enable the liquidation. To enable these objectives, the receiver was to secure any remaining assets, maximize available assets, prepare an accounting for the assets and facilitate the orderly resolution of anticipated competing claims of those assets.

Asset freeze

The ancillary remedy of the asset freeze was appropriate to ensure availability of sufficient funds to satisfy pending judgment against the defendant and ensure fair distribution to investors. It was appropriate since Madoff had planned to distribute remaining assets to employees, friends, and family.

Appointment of trustee

The trustee responsibilities in liquidation were to gather debtors’ non-exempt property, disposing of assets, managing funds from asset disposals and distributing the funds to creditors.

Decision

The court established that Madoff conducted a fraudulent scheme in Violation of the anti-fraud provision of the federal securities laws. The court also established that the parties acted with scienter in conducting offer and sale of security and in connection with the sale and purchase of securities. By acting with Scienter, the parties had made knowingly made material misrepresentations or omissions. Through the firm, Madoff had conducted a Ponzi scheme in which he misrepresented information to investors that he was investing in securities and that returns were being earned in their accounts. By concealing activities from investors, he made materially false statements concerning the source of investors’ returns in their accounts. The court found all the misrepresentations and omissions to be material since there was a substantial likelihood that a reasonable investor would be influenced by such information in making investment decisions.

Verdict

He was sentenced to 150 years in prison by Judge Chin on June 29 as recommended by the prosecution.

Case related issues that lead to the verdict

The judge noted that the crime was an “extraordinary evil” and the sentence would deter others from committing similar frauds. The judge also noted that he had not received any mitigation letter from Madoff’s family and friends testifying of his good deeds noting that the lack of such support is telling.

Reference

Backgroundnow.com Staff (2009) Bernard L. Madoff: The Five Federal Court Cases Filed December 2008 Backgroundnow.com Staff.

Commerce Clearing House (2013) federal regulation of securities: Federal securities law reporter: laws, regulations, rulings and decisions, forms, currently supplemented and indexed, Issue 2400 Commerce Clearing House.

Carolyn Morgan is the author of this paper. A senior editor at MeldaResearch.Com in custom research paper services. If you need a similar paper you can place your order from urgent essay writing service.