Brad Stinn Sentenced – Every Choice Has A Consequence – Update by Chuck Gallagher Ethics Speaker

On of the most viewed Blog entries was the one about Brad Stinn and Friedman’s Jewelers.

Pump up those sales! We’ve got to make the quarter! How often are those command heard and how tempting is it to make the wrong choices in order to please the investing public and Wall Street?

Following six weeks of trial – Bradley Stinn, age 47, – former CEO of Freidman’s, Inc. and Crescent Jewelers, found himself being convicted of securities fraud, mail fraud and conspiracy. Likewise, in addition to Stinn’s conviction, the former CFO, Victor Suglia and form Controller, John Mauro have entered guilty pleas into what was a massive accounting fraud.

Having been found guilty, the wheels of justice in the federal system move slowly at times.  Many have wondered just what outcome would befall Brad Stinn  who some hated and others sympathized with.  Well, today the verdict has been handed down.

His sentence:

12 years in federal prison

3 years probation

$4M restitution

He should report sometime in the next 60 days

Speaking from experience, Stinn will be required to serve 85% of his active sentence, which means that he’ll serve 122.4 months – which is a long time!

US Attorney’s New Release:

Bradley Stinn, the former Chief Executive Officer of Friedman’s Inc. and its affiliate, Crescent Jewelers, was sentenced today to 12 years’ imprisonment for securities fraud, mail fraud, and conspiracy. On March 24, 2008, following a six-week trial, a federal jury in Brooklyn convicted Stinn on all counts in the indictment and returned a forfeiture verdict against him in the amount of $1,019,000. The trial and sentencing proceeding were held before Senior United States District Judge Nina Gershon.

The sentence was announced by Benton J. Campbell, United States Attorney for the Eastern District of New York.

During the period of the conspiracy, Friedman’s was a national jewelry chain whose shares were traded on the New York Stock Exchange. The evidence at trial established that Stinn led a multi-year securities fraud scheme that inflated Friedman’s reported financial performance and hid from the market the serious problems the company had collecting money owed for hundreds of millions of dollars of jewelry that it had sold on credit. As part of the scheme, Stinn and his co-conspirators repeatedly lied to shareholders and the investing public about Friedman’s financial performance, made false and fraudulent representations to Friedman’s auditors, and manipulated the company’s accounting in order to prevent auditors from discovering the falsity of Friedman’s financial statements. As found by the court at sentencing, Stinn’s fraud scheme resulted in Friedman’s shareholders and other victims of the scheme losing more than $20 million.

Several months after the announcement of the government’s investigation in November 2003, Friedman’s stock was de-listed from the New York Stock Exchange. Friedman’s ultimately filed for bankruptcy in January 2005.

As always, this blog is open for comments.

Do you think that this sentence is fair?

Would you, if you had the opportunity to serve on a jury, have given Brad – more, less or this amount a punishment for his guilty plea?

COMMENTS ARE WELCOME!

Funeral Fraud – LA Women Charged in $1 Million Fake Funeral Scam – AMAZING!

I have heard of many things, but this one ranks high in creative approaches to scamming.  The R I P button likely stands for Resides In Prison cause that’s where these two will go if the charges alleged are proven.

According to the US Attorney’s office in LA – two women – allegedly participated in a scheme to cash life insurance policies for fictitious individuals and stage  funerals to create the appearance that the individuals had died.

According to the indictment, Shilling, a phlebotomist, and Crump, an employee at a now-defunct Long Beach mortuary, defrauded multiple insurance companies over a three-year period by cashing life insurance policies for non-existent identities, whom they claimed had died. As part of the scheme, Shilling and Crump allegedly caused the preparation of bogus death certificates, purchased burial plots and staged phony funerals to lend credibility to the scheme. When staging the funerals, the women allegedly filled caskets with various materials to make it appear they contained actual corpses.

Shilling and Crump allegedly defrauded several lending companies that advance cash to cover funeral expenses in exchange for a portion of the decedent’s life insurance policy. Shilling, Crump and their accomplices allegedly filed false documents with the County of Los Angeles stating the remains of one man were cremated and scattered at sea, when in fact no corpse existed. The indictment further alleges that defendant Crump offered a medical doctor $50,000 to create records supporting the fake death certificate.

According to a report in Connectingdirectors.com:

The US Attorney stated said the “dead” were likely fictitious people, but said identities of real people may have been stolen.

In one funeral at a Long Beach mortuary, authorities alleged that the women loaded a casket with various items to simulate the weight of a corpse they called “Jim Davis.” They purchased a plot in a Compton graveyard, had a funeral and had the casket buried.

In addition to the life insurance claims, which included a $250,000 policy, prosecutors said the women secured payments from financing companies to pay for inflated funeral costs.  We talked with representatives from American Funeral Financial (one of our sponsors) to ask about precautions for such activity.

We (at American Funeral Financial) work hard to provide service to our customers – the many funeral homes and cemeteries across the country that rely on us for funeral funding.  This story is quite amazing and not remotely normal in the standard course of business.  We make sure that we know our customers and have a comfort level of their viability before we enter into any funding transactions.  The steps we deal with to make funeral funding decisions should prevent this type of fraud from happening.  Still this is quite amazing.

Shilling and Crump were charged with mail fraud and wire fraud in connection with a scheme to defraud insurance companies and lending companies out of more than $750,000.  Two other women, Lydia Eileen Pearce, 37, owner of a mortuary in Long Beach, and Barbara Lynn, 54, a notary from Los Angeles, previously pleaded guilty in the alleged scam, said Montero, and he believed that more arrests were likely.

If convicted, they could face 20 years in prison.

YOUR COMMENTS WELCOME!

Dumb but Premeditated Fraud – Stephanie L. Mayer of Simpsonville, SC Pleads Guilty

As I leave Pittsburgh, PA from a speaking engagement on ethics and fraud, I couldn’t help but stop when I read about a 38 year old Simpsonville, SC woman and her attempt at fraud.  A “Bernie Madoff” she isn’t as her fraud lacked creativity and ended quickly.

Every choice has a consequence.  That is a statement that I speak often as I address groups nationwide.  Whether it is Bernie Madoff, his accountant (now charged with fraud), Robert Stanford, Gordon Grigg or a host of others, the reality is whether the fraud lasts for some time or is short lived – in the case of Stephanie L. Mayer – there is a consequence for choices that we make.  If those choices are unethical, then the consequences can’t be good.

According to the US Attorney’s office:

In February 2008, Meyer opened accounts at four brokerage firms including the ultimate victims, The Vanguard Group and Ameriprise Financial.  Meyer then deposited worthless checks into the accounts, which resulted in fictitious or “phantom” balances.  Meyer then withdrew $175,000 from the credited Vanguard account and $130,000 from the Ameriprise account before the fraud was detected.

Without intending to sound judgmental, the “real impact” of the current recession wasn’t felt till late summer ‘08 or certainly the fall ‘08.  Therefore, the question is – what motivated Mayer to take such radical action.  She had to know that passing worthless checks to set up brokerage accounts was a venture that had a short life.

Of course – as reported in the Greenville News – “Until June 2008, Meyer deposited $5.4 million in checks spread across the firms from bank accounts that didn’t have sufficient funds to cover the checks, according to the charges.  She also pleaded guilty to mail fraud charges for mailings to Minnesota and Pennsylvania, according to the charges.”

BACKGROUND OF A FRAUD:

Frauds, regardless of type, need three things in order to take life – (1) Need; (2) Opportunity and (3) Rationalization.  The question related to the Mayer fraud is what was her (1) need and (2) rationalization?  The obvious opportunity was the method of execution of the fraud – which was amateurish and dumb.  How Mayer effected her fraud shows her lack of experience and hopefully will be taken into account in her pre-sentence report.

Her guilty plea could result in a penalty of up to 20 years in prison and a fine of up to $250,000.00 on each of the two counts to which she pled guilty.  While, I would suspect that Stephanie L. Mayer is an amateur fraudster, in the current environment, I would not be surprised if she received a prison sentence of well over three years.

If you know Stephanie and might comment on her motivation – please know that YOUR COMMENTS ARE WELCOME.

David G. Friehling, CPA for Bernie Madoff Investment Securities Charged with Fraud! And The Dominios Begin To Fall…

With a $65 Billion Ponzi scheme in play and Bernie Madoff electing to plead guilty, it is no great surprise that others will being to fall as the government widens the responsibility net for the largest Ponzi scheme in US history.

I must admit this hits home and was something I expected.  Although I wish I could say something different, I, too, was a CPA, created a Ponzi scheme and spent time in Federal prison.  It is no fun.  And, without a doubt, Friehling will spend time there himself – although my guess – his sentence will much longer than mine.

Yesterday, David G. Friehling, CPA (licensed in the State of New York) was charged with securities fraud, aiding and abetting investment adviser fraud, and  four counts of filing false audit reports with theExchange Commission (“SEC”).   Friehling is the sole practitioner at Friehling & Horowitz, CPAs, P.C. in New York.  As a point of reference, Friehling was the son-in-law of Jerome Horowitz (his former accounting partner) who didn’t live to see it all unravel.  He dided on March 12, the day Madoff plead guilty.

According to a news release issued by the US Attorney’s office:

From 1991 through 2008, F&H was the accounting firm retained by BLMIS (Bernie L. Madoff Investment Securities) purportedly to audit BLMIS’s financial statements. FRIEHLING created BLMIS’s certified and purportedly audited financial statements, including balance sheets, statements of income, statements of cash flows, and reports on internal control. FRIEHLING falsely certified that he had prepared such statements in accordance with Generally Accepted Auditing Standards (“GAAS”) and in conformity with Generally Accepted Accounting Principles (“GAAP”). Those financial  statements were filed with the SEC and sent to clients of BLMIS.   BLMIS paid FRIEHLING approximately $12,000 to $14,500 per month for his services between 2004 and 2007.

Sorry, but before going any further, one must question the payment.  $14,500 a month is a small price to pay for disgusing a fraud considering that Friehling will be facing certain loss of his license and a lot of time in Federal Prison.  But, there is more…  the news release goes on to say:

FRIEHLING failed to conduct audits that complied with GAAS and GAAP by, among other things, failing to: (a) conduct independent verification of BLMIS assets; (b) review material sources of BLMIS revenue, including commissions; (c) examine a bank account through which billions of dollars of BLMIS client funds flowed; (d) verify liabilities related to BLMIS client accounts; or (e) verify the purchase and custody of securities by BLMIS. FRIEHLING also failed to test internal controls as required under GAAP and GAAS standards. For example, FRIEHLING did not take any steps to test internal controls over areas such as BLMIS’s redemption of client funds, the payment of invoices for corporate expenses, or the purchase of securities by BLMIS on behalf of its clients. Further, commencing at least as far back as 1995, FRIEHLING did not maintain professional independence from his audit client, BLMIS.   Specifically, FRIEHLING and/or his wife had an account at BLMIS with a year-end net equity of more than $500,000 — the maximum amount that, under SEC rules, he could have invested with a broker-dealer client and still maintain his independence.

According to the SEC’s complaint, Friehling similarly did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies. Afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.

Articles in Forbes stated the following:

“Friehling essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected,” said James Clarkson, acting director of the SEC’s New York Regional Office. “For all those years, Friehling deceived investors and regulators by declaring that Madoff’s enterprise had a clean audit record.”

Madoff has said his business didn’t become a Ponzi scheme until the early 1990s, around the time that Horowitz retired and Friehling took over. He was not accused of wrongdoing in the court complaint.

Numerous reports claim that Friehling and family had $14 million invested with Madoff two months before his confession to the largest financial fraud in US history.  Since 2000, Friehling withdrew about $5.5 million from those accounts, the SEC stated.

WHERE FROM HERE?

Bernie Madoff, while perhaps brilliant (in his own way) is not capable – in my opinion – of pulling off a fraud of this magnitude without help.  I am not suggesting that Friehling knew about the Ponzi scheme (he says he didn’t), but it is likely that he’ll be found guilty on most of the charges as there is no doubt that he’s (at a minimum) negligent.  Selling his license for money seems very clear.

But, from these headlines, I suspect there will be a demand for more “accountability” for audited financial statements and regulations placed on compliant CPA’s.  That is not the answer.  I have stated before and will again, you cannot legislate or regulate ethics or morality.  If a person elects to be dishonest…they will be dishonest regardless of the rules in place.

Friehling was a puppet for Bernard Madoff.  Most people (although most will deny it) have a price.  It appears that Friehling’s price wasn’t all that much.  Comfortable yes – rich no!  And knowing that his reputation is ruined, his license all but gone and many many years in prison facing him, I know that Friehling wishes he’d never met Bernie Madoff.  Hind sight is 20/20 and there is no doubt with all that is facing this CPA – Friehling is just beginning to face the consequences of his choices.

Every choice has a consequence!

My prediction – Friehling isn’t the only pawn is this massive fraud to fall.  There will be others so stay tuned…

FRIEHLING, 49, faces a statutory maximum sentence of 105 years in prison.

YOUR COMMENTS WELCOME!

Bernie Madoff – Text of Court Statement

Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business, Bernard L. Madoff Securities LLC, which was located here in Manhattan, New York at 885 Third Avenue. I am actually grateful for this first opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. As I engaged in my fraud, I knew what I was doing was wrong, indeed criminal. When I began the Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest and this day would inevitably come. I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients who gave me their money. I cannot adequately express how sorry I am for what I have done. I am here today to accept responsibility for my crimes by pleading guilty and, with this plea allocution, explain the means by which I carried out and concealed my fraud.

The essence of my scheme was that I represented to clients and prospective clients who wished to open investment advisory and individual trading accounts with me that I would invest their money in shares of common stock, options and other securities of large well-known corporations, and upon request, would return to them their profits and principal. Those representations were false because for many years up and until I was arrested on December 11, 2008, I never invested those funds in the securities, as I had promised. Instead, those funds were deposited in a bank account at Chase Manhattan Bank. When clients wished to receive the profits they believed they had earned with me or to redeem their principal, I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds. The victims of my scheme included individuals, charitable organizations, trusts, pension funds and hedge funds. Among other means, I obtained their funds through interstate wire transfers they sent from financial institutions located outside New York State to the bank account of my investment advisory business, located here in Manhattan, New York and through mailings delivered by the United States Postal Service and private interstate carriers to my firm here in Manhattan.

I want to emphasize today that while my investment advisory business — the vehicle of my wrongdoing — was part of my firm Bernard L. Madoff Securities, the other businesses my firm engaged in, proprietary trading and market making, were legitimate, profitable and successful in all respects. Those businesses were managed by my brother and two sons.

To the best of my recollection, my fraud began in the early 1990s. At that time, the country was in a recession and this posed a problem for investments in the securities markets. Nevertheless, I had received investment commitments from certain institutional clients and understood that those clients, like all professional investors, expected to see their investments out-perform the market. While I never promised a specific rate of return to any client, I felt compelled to satisfy my clients’ expectations, at any cost. I therefore claimed that I employed an investment strategy I had developed, called a “split strike conversion strategy,” to falsely give the appearance to clients that I had achieved the results I believed they expected.

Through the split-strike conversion strategy, I promised to clients and prospective clients that client funds would be invested in a basket of common stocks within the Standard & Poor’s 100 Index, a collection of the 100 largest publicly traded companies in terms of their market capitalization. I promised that I would select a basket of stocks that would closely mimic the price movements of the Standard & Poor’s 100 Index. I promised that I would opportunistically time these purchases and would be out of the market intermittently, investing client funds during these periods in United States Government-issued securities such as United States Treasury bills. In addition, I promised that as part of the split strike conversion strategy, I would hedge the investments I made in the basket of common stocks by using client funds to buy and sell option contracts related to those stocks, thereby limiting potential client losses caused by unpredictable changes in stock prices. In fact, I never made the investments I promised clients, who believed they were invested with me in the split strike conversion strategy.

To conceal my fraud, I misrepresented to clients, employees and others, that I purchased securities for clients in overseas markets. Indeed, when the United States Securities and Exchange Commission asked me to testify as part of an investigation they were conducting about my investment advisory business, I knowingly gave false testimony under oath to the staff of the SEC on May 19, 2006 that I executed trades of common stock on behalf of my investment advisory clients and that I purchased and sold the equities that were part of my investment strategy in European markets. In that session with the SEC, which took place here in Manhattan, New York, I also knowingly gave false testimony under oath that I had executed options contracts on behalf of my investment advisory clients and that my firm had custody of the assets managed on behalf of my investment advisory clients.

To further cover-up the fact that I had not executed trades on behalf of my investment advisory clients, I knowingly caused false trading confirmations and client account statements that reflected the bogus transactions and positions to be created and sent to clients purportedly involved in the split strike conversion strategy, as well as other individual clients I defrauded who believed they had invested in securities through me. The clients receiving trade confirmations and account statements had no way of knowing by reviewing these documents that I had never engaged in the transactions represented on the statements and confirmations. I knew those false confirmations and account statements would be and were sent to clients through the U.S. mails from my office here in Manhattan.

Another way that I concealed my fraud was through the filing of false and misleading certified audit reports and financial statements with the SEC. I knew that these audit reports and financial statements were false and that they would also be sent to clients. These reports, which were prepared here in the Southern District of New York, among things, falsely reflected my firm’s liabilities as a result of my intentional failure to purchase securities on behalf of my advisory clients.

Similarly, when I recently caused my firm in 2006 to register as an investment advisor with the SEC, I subsequently filed with the SEC a document called a Form ADV Uniform Application for Investment Adviser Registration. On this form, I intentionally and falsely certified under penalty of perjury that Bernard L. Madoff Investment and Securities had custody of my advisory clients’ securities. That was not true and I knew it when I completed and filed the form with the SEC, which I did from my office on the 17th floor of 855 Third Avenue, here in Manhattan.

In more recent years, I used yet another method to conceal my fraud. I wired money between the United States and the United Kingdom to make it appear as though there were actual securities transactions executed on behalf of my investment advisory clients. Specifically, I had money transferred from the U.S. bank account of my investment advisory business to the London bank account of Madoff Securities International Ltd., a United Kingdom corporation that was an affiliate of my business in New York. Madoff Securities International Ltd. was principally engaged in proprietary trading and was a legitimate, honestly run and operated business.

Nevertheless, to support my false claim that I purchased and sold securities for my investment advisory clients in European markets, I caused money from the bank account of my fraudulent advisory business, located here in Manhattan, to be wire transferred to the London bank account of Madoff Securities International Limited.

There were also times in recent years when I had money, which had originated in the New York Chase Manhattan bank account of my investment advisory business, transferred from the London bank account of Madoff Securities International Ltd. to the Bank of New York operating bank account of my firm’s legitimate proprietary and market making business. That Bank of New York account was located in New York. I did this as a way of ensuring that the expenses associated with the operation of the fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses.

In connection with the purported trades, I caused the fraudulent investment advisory side of my business to charge the investment advisory clients $0.04 per share as a commission. At times in the last few years, these commissions were transferred from Chase Manhattan bank account of the fraudulent investment advisory side of my firm to the account at the Bank of New York, which was the operating account for the legitimate side of Bernard L. Madoff Investment Securities — the proprietary trading and market making side of my firm. I did this to ensure that the expenses associated with the operation of my fraudulent investment advisory business would not be paid from the operations of the legitimate proprietary trading and market making businesses. It is my belief that the salaries and bonuses of the personnel involved in the operation of the legitimate side of Bernard L. Madoff Investment Securities were funded by the operations of the firm’s successful proprietary trading and market making businesses.

Your Honor, I hope I have conveyed with some particularity in my own words, the crimes I committed and the means by which I committed them. Thank you.

Bernie Madoff in Jail! It’s Not “Club Fed” I Know – I’ve Been There…

There was cheering from the crowd when Madoff was immediately taken to jail.  Emotions are running high and will do so for years to come.   But this is not a joyous day.  Many victims lives have been radically transformed by the financial crime Madoff effected.  Likewise, Madoff’s life as he knew it is over.  Leaving the comfort of normal life to go to prison is a radically different experience as well.

I know – regretably I have been there for exactly the same crime Madoff plead guilty to today.

Every choice has a consequence.  Many were victimized by Madoff et al and both the victims and Madoff, himself, are facing the consequences of choices made.

Madoff made the following comments in court today.

“I operated a Ponzi scheme.  I thought it would end quickly, but it proved impossible.  I am ashamed for these criminal acts. I always knew this day would come.”

I was asked today on CBS radio – KRLD – by Ernie and Jay about the mentality of how something like this could happen.  Is it possible that Madoff just was out to steal from folks?  The answer is simply – NO.

While I don’t personally know Bernie Madoff, I know the thought process that ends in federal prison.  Madoff is a smart man.  In fact, I would say that he was brilliant in his ability to effect such a scheme successfully for so long.  That is rather amazing.  But, for a time, I suspect when he first got started, Madoff was legitimate.

To effect a fraud like this, there must be three components: (1) need; (2) opportunity and (3) rationalization.  My best guess is that Madoff had two needs that came together when he began this in the early 90’s – (a) emotional need – he would not admit that he was faliable; and (b) money – in that he likely lost money and was unwilling to admit that fact.  Hence, he entered into the second  part of creating such a fraud – he took advantage of his name and notariety to gain more money – more investors or more victims.

CNN reported: Madoff admitted that he never invested his clients’ money, and that he deposited the funds into a “Chase Manhattan” bank.

At that point, Madoff crossed the line of investing and became an outright fraud.  Amazingly, instead of continuing to invest clients money hoping for the big win, Madoff just deposited the money in the bank.  Of all revelations, that was the most amazing.  Effectively he just gave up, committed the crime and waiting until the house of cards fell.

TONIGHT FOR MADOFF:

As I type this I can speak first hand from experience, Madoff just entered a phase of life that is totally foreign and for which he is unprepared.  Likely, as he was removed from the court room, he went to processing where he removed his clothing and was issued prison issue clothing.  It is doubtful that he was allowed to keep much other than one set of “street” clothes that might be used for limited visiting privileges or meetings with legal counsel, etc.  He would have likely been handed his bed linens and escourted to his holding cell.   Unless because of his age he was assigned a lower bunk, he would be given the upper bunk as those with more time in the facility get the privilege of lower.  His meals would be a step above a Swanson’s TV dinner – maybe – and the routine is strict.

Counted multiple times per day, Madoff will soon find that he’s no more than anyone else incarcerated, an inmate.  Inmates will likely acknowledge him, but not consider him any more than they.  In fact, it is likely that many will avoid him fearing that what they might say to him will be used against them (they fear he’d become a snitch) in order to gain favor with the judge for a lighter sentence.

Tonight will be one of the longest nights of Madoff’s life.  He will wonder to himself – time and time again – what he has done and why.  Those thoughts will haunt him for the rest of his life, which from a free man’s perspective, has ended.

THE VICTIMS:

Now here’s where I should stop, but for whatever reason, I can’t.  I understand the anger, and desire for revenge that many feel.  It is natural as your trust has been violated.  This is no different than feeling that one has when a marriage ends with the distrust created by adultery.

Many would say that I am the least to offer advice.  Perhaps that is true, but I’m going to try.  First, from a practical perspective seek the legal help you need to recover what you can.  Know that there are possible sources for some recovery including the application of IRC Section 165(c)(2).  I am not an expert in that area, but I have a guest blog from someone who is.  Go there it might be helpful.

Beyond the legal recourse against Madoff and those involved – and I suspect that others will fall from this as well, may I say – with respect – put your loss into perspective.  We come into this world with nothing and leave that way as well.  Money – security – certainly are important, but it is afterall only material.  The longer one harbors anger or hate, the worse life becomes.  Finding the ability to recognize that Madoff will suffer and reap the consequences of his choices is significant.

Your life has changed – so has his.  No one walks away from this feeling good or whole.  The ultimate outcome, however, for you and your well being will, in large part, be a function of your ability to forgive.

IN THE LONG RUN:

Having been there, I know the pain of prison.  Some learn from their experience and others never get it.  In Madoff’s case we may never know what the true effect of his life changing experience will bring.  In my case, prison was life changing.  While I am thrilled with freedom, I understand that my time there changed my life and gave me an opportuity to do something positive today that, in fact, helps others.

Sometimes you can actually get lemonade from lemons!

As always – COMMENTS ARE WELCOME.

HERE is what Madoff read to the court.

Bernie Madoff Will Plead Guilty! Fraud Prevention Expert Chuck Gallagher Speaks Out

In what will likely become the biggest investment fraud in US history, Bernie Madoff is set to enter a plea of guilty at a US District Court in Manhattan on Thursday.    According to Assistant U.S. Attorneys Marc Litt and Lisa Baroni a plea hearing is scheduled for March 12, 2009.

According to a CNN report:

Madoff’s attorneys Ira Sorkin and Daniel Horowitz confirmed to CNN that Madoff is waiving his right to a grand jury indictment and that there have been ongoing negotiations regarding a possible settlement.

“We obviously have talked to the government,” said Horowitz. “And we have been professional with each other.” The U.S. attorney’s office in Manhattan had no comment.

Frankly, it would make sense that Madoff would enter a plea.  Anything beyond that would likely result in a sentence or punishment that would be less favorable to Madoff.  Let me, however, say, I don’t think the punishment will be anything to laugh at.  Madoff’s alleged crime is substantial enough that it will earn him many years in federal prison.  Based on his age, I have stated on more than one ocassion that Madoff may never see freedom again.  But, that is just speculation.

PERSPECTIVE:

As many of my readers know, I have been through what Madoff is facing now.  Here’s a reality check – if you fight the federal government, you will likely end up with a substantially longer sentence.  The government (for the most part) will do whatever is necessary to gain a “win”!  The governments role is not to make the victims whole or even to discover who or how many people have been victimized.  The role of the government is to bring those who break the law to justice.  And the easier you make it for them to “win” the more likely one is to receive a moderate to light sentence.

Now, having said that, I also know that there are victims who get angry when they discover that the government doesn’t really care about their loss or their plight.  If a victim can help the government win, then the government is interested.  But, when the US Attorney has sufficient evidence to win or gets an admission of guilt on a plea agreement (which is exactly what Madoff – through his attorneys – will enter on Thursday) they are done.  The rest of victims claim will come in other legal suits that will be brought against a multitude of organizations.

In Madoff’s case – gaining a guilty plea should be easy since Madoff basically admitted guilty publically.  CNN reported:

It was “basically, a giant Ponzi scheme,” Madoff said, according to the government’s criminal complaint. “There is no innocent explanation,” Madoff told two FBI agents, according to the complaint, which states Madoff expected to go to jail.

With a statement like that – it’s an easy win for the goverment.  The issue in the plea agreement is not guilt, but what Madoff will plead guilty to and what sentence has basically been agreed to in advance.  The government will get it’s win, but will the sentence be sufficient to satisfy the victims?  By the way, starting at 10:00 a.m. victims will have a chance to be heard by the judge.  Not that it matters all that much as I would guess that it’s pretty well decided.

REALITY CHECK:

Having been through it, (wish I could say other wise) the process will likely be fairly straight forward.  Madoff pleads guilty to “securities fraud”.  The judge hears from the victims.  The judge accepts Madoff’s guilty plea.

WHAT’S NEXT:

Hum…now that’s a good question.  Thus far Madoff has been under – shall we call it – “house arrest.”  Whether he’ll be allowed to continue that form of confinement or whether the judge will require him remanded to some form of federal prison awaiting sentencing remains to be seen.  Certainly this is public outcry for Madoff to be imprisoned.

There is little chance that Madoff will be sentenced on Thursday.  If this hearing is true to form, it will only be an admission of guilty.  Once entered and accepted, Madoff will have more time to wait until his sentencing hearning.  In my case I had to wait almost six months before being sentenced and then another four months before being required to report to federal prison.

I doubt it will take that long for Madoff, but it will likely take time.

According to the New York Times:

If Mr. Madoff does plead guilty on Thursday, it could nevertheless be several months before he is sentenced, several former prosecutors said. The single count of securities fraud that he faces now carries a prison term of up to 20 years.

The one thing I do find interesting in this case if that the government is only seeking an admission of guilt on ONE count of securities fraud.  With so many victims, it would seem that the government could easily win multiple admissions of guilt on items other than just ONE count of securities fraud.  It makes one wonder if the government isn’t being cooperative due to the backlash that could come if Madoff exposed the incompetence of the SEC?

Just a thought!

QUESTION:

1.  Assuming Madoff Pleads guilty – how much time do you feel he should serve for his crime?

2.  Should Madoff’s sentence be reduced if he helps locate available funds to help with restitution?

3.  Should charitable organizations get preferential treatment when it comes to restitution?

YOUR COMMENTS ARE WELCOME!

Madoff – Grigg – Dryer: Investment Fraud Victims Tax Relief Through IRC SECTION 165 (c)(2)

Moira Souza Shiver, expert on the application of IRC Section 165, has been asked by me to write this guest blog.  The benefits of Section 165 can be substantial, yet there are few who are qualified to understand how to effectively navigate the regulatory maze to gain maximum benefit.  As a business ethics and fraud prevention speaker, I try, through this blog, to provide a useful forum for discussing issues, and there is none more important at this time than the effective use of legal methods to recover loss.

Facts, Fiction and Future

Victims, taxpayers and citizens, in general, are experiencing an extraordinary chapter in American financial history.  Economic challenges, budget deficits and tax implications lead the list of many issues confronting citizens and legislators.  Surfacing in the midst of what appears to be mass chaos is yet another disturbing issue – victims of investment theft suffering irrecoverable losses in their life savings.  One bright spot, with the uncovering of these massive investment scams, the media is finally bringing attention to the fact that there are hundreds of thousands of people across this great country who are suffering tremendously at no fault of their own.

For the last ten years, I have been fighting for financial recovery for victims of investment theft.  There’s been a law on the books since 1954 that helps some victims, but most often it ignores the truly needy in favor of the wealthy.  Unfortunately, it also requires a monumental struggle with the IRS to get the deserved relief.  The pain and suffering these issues caused demanded I shift my focus and become an advocate for victims in three ways:

Investment Fraud Prevention Through Education
Maximize Recovery Through Legitimate Sources
Changes in the Tax Code to Carry Out the Intention of the Law

PROBLEM – LACK OF CLARITY, COUNTLESS (MIS)INTERPRETATIONS & INEXPERIENCED PROFESSIONALS

The $50 billion dollar Bernard Madoff Ponzi Scheme brought this subject to the public, but sadly, and very importantly, it also surfaced so-called experts that began advising victims on the recovery option under Internal Revenue Code Section 165 (c)(2).  Adding to the tragedy of these losses is the fact that those same experts are supplying incorrect information.  As an example: Stanford Law School and a former senior tax attorney for the IRS are both normally sources you can depend on for tax law advice.  They are both valuable sources of information, but in trying to help victims of investment fraud, they recently published information that could cause more problems than they solve.

An article, Long And Winding Path To Tax Relief For Madoff Victims, appeared on accountingweb.com dated February 19, 2009.  Stanford University provided information on the IRC 165 (c)(2) tax deduction, quoting a former IRS official.  This article is an example of a long list of experts serving up misconceptions, serious omissions, wrong answers and lost opportunities.  Add The Wall Street Journal, MSN, the New York Times and even the IRS to your list of experts providing incorrect information, and you begin to understand the seriousness of the problem.

FACTS – CURRENT TAX LAW HELPING VICTIMS OF INVESTMENT THEFT

Current law includes but is not limited to, the following facts:

IRC 165 (c)(2)
•    Law was established in 1954 to help investment fraud victims recover a portion of their losses through tax benefits (much like that of natural disaster loss victims or casualty losses such as a destroyed automobile not covered by insurance).  It was readdressed in 1984 by the Tax Reform Act, which did away with the 10% exclusion/$100 per item reduction.
•    Deduction allows qualifying victims to take their total net loss against ordinary income in a single year.
•    Deduction allows for the taxpayer to go back three years after declaring the loss in the “Year of Discovery” if a Net Operating Loss (NOL) remains, or, they can waive their right to go back, and carry the NOL forward up to 20 years.
•    Deduction allows for up to a 20 year carry forward, with the exception of when the 3 year carry back is utilized, which subsequently creates the potential for a 23 year benefit.
•    Losses in IRA and Pension Funds Do Not Qualify.
•    The taxpayer must prove the investment was made and lost by reasons of theft as defined in the state where the transaction took place.
•    Taxpayer must exhaust all reasonable means of recovery.
•    Taxpayer must be able to prove privity (Private or joint knowledge of a private matter; especially: cognizance implying concurrence (Merriam-Webster) or in practical terms, there was a first hand relationship between the thief and the victim) in order to qualify.  Ponzi scheme victims are generally not held to this requirement but that I’m aware, that exception is not written as fact.
•    (Some) IRS agents consider any form of pending legal action (individual, class action, federal indictments, bankruptcy or receivership) as potential recovery and will deny a claim until such time as that open pursuit of recovery is resolved.
•    IRS requires a victim to provide proof of cost basis (copies of checks, front and back, wire transfer confirmations, disbursements, withdrawals, recovery, etc.).
•    Taxes on phantom income are recoverable in full but are only allowed to be carried back 3 years.  The balance (NOL) can be carried forward up to 20 years.

FICTION – MISINFORMATION COMMONLY GIVEN TO THE PUBLIC

•    Before a taxpayer can claim a deduction, they must first exclude 10% of their Adjusted Gross Income and $100 per item – Wrong.  Although originally an aspect of the deduction, this exclusion was eliminated 25 years ago by the Tax Reform Act of 1984.
•    2 Year Net Operating Loss Carry Back – Common misconception.  Other than in 2002, when Congress allowed an exception allowing for 5 years, the carry back has always been 3.  The 2 year carry back does not apply to investment losses caused by theft.
•    Up to 50% recovery of loss – Misleading.  In my experience, taxpayers should expect to receive a total benefit between 10 – 20% of their loss.  Although there may be an exception out there somewhere, I’ve never seen any victims receive even close to a 50% benefit.
•    The deduction is taken in the year victims discover the money is gone – Maybe but not likely.  Convincing the IRS of the right year to take the deduction is complicated.  The big issue is the taxpayer having “exhausted all reasonable means of recovery”.  The “year of discovery” determination will vary from agent to agent.
•    The deduction is simple to obtain – Really?  It takes a knowledgeable and experienced 165 tax preparer to guide both taxpayers and the IRS agents through this process.  I promise you, you should be prepared to be fully prepared.  Taxpayers should expect to be reviewed carefully.

FUTURE – NEW PROPOSED LEGISLATION

For some time, I have been trying to get Congress to see the need for changes in the law.  The size of the Madoff ponzi scheme helped me with my mission to get congresses attention.  In doing so, they are now discovering how prevalent investment theft and ponzi schemes are in America.  Congressman Kendrick Meek of Florida’s 17th district moved quickly and proposed new legislation on February 24, 2009.  I’m thrilled to see it happen, but it did not go far enough.

Proposed changes to current tax law.

•    Will allow a 10 year carry back (or length of time in fraudulent investment, whichever is lesser) on cost basis and taxes paid on phantom income verses the current carry back of 3 years.  Given the fact that a great deal of injured investors are in the retiree/elder categories and have had little to no income over the last several years, this change will hopefully increase the chance of them reaching a year where significant taxes were paid.
•    Proposes to provide assistance to individuals who contributed to charitable organizations.  This is a new aspect to the law and it needs to be further examined in order to determine just who gets what benefits?  It’s not clear on how this will work and I’ll have to wait for more details before I can comment.
•    New legislation uses the word “estimate” verses “ascertained”.  This may be a big help in the filing of the claims in a reasonable amount of time, but it is not definitive and more work needs to be done.

FUTURE – CONTINUED – QUESTIONS NOT ADDRESSED

•    Will the complicated terms “Year of Discovery, Privity, Scienter, Cost Basis and Complete and Final Transaction” be defined in a way that makes it reasonable for the taxpayer to meet the requirements for filing?  Regardless of what legislation is proposed or passed, unless these issues are defined in a way that tax payers, their tax professionals and the IRS alike can understand, little if any of this assistance will reach the intended recipients.
•    Why is this limited to just ponzi schemes?  Although certainly less publicized, other forms of investment fraud are still investment fraud and all qualifying victims should be given the same consideration,
•    Will the new legislation actually limit the amount of time before a victim can claim the deduction and the IRS can take to approve it? The current process often takes so long that victims lose everything, including benefits, their homes and even their lives, before the help arrives.
•    Will IRA and pension savings be added to the forms of acceptable losses/victims?  A huge constituency of victims falls into this category and although technically they never paid taxes, they still worked hard for their money and would have paid them when the time arose.  The money was withdrawn, the perpetrator was enriched and he or she should owe the taxes.  Regardless of whether the IRS actually receives them, the victim should be entitled.
•    Would a uniform tax rate potentially be the better and fairer way to go?  Although the current proposed legislation goes far in trying to help, there are still a group of individuals that will be left helpless.  As many of these individuals paid on average 15 – 20 % in taxes when the money was made, it doesn’t seem quite fair that they are penalized for having grown older or now having no income.

SOLUTION

I’d start with definable (and reasonable) guidelines for tax payers and professionals.  Next would be setting up fair opportunities for recovery across the board, regardless of tax bracket or age.  And finally would be the creation of an organization, or an IRS qualifying exam, that sets the standards for professional services.  Setting these guidelines and standards, much the same as what CPAs, doctors, attorneys, etc. must adhere to or lose their standing, would help satisfy the IRS that the claims are legitimate, would provide the relief that so far is nearly impossible to receive and insure that the professionals assisting these victims are qualified and making claims in good faith.  By enacting legislation that gives the IRS authority to qualify those who represent taxpayers, they’d not only protect the victims, they’d protect all taxpayers against fraudulent or unworthy claims.

It was a breath of fresh air to finally see someone step up and try to help these people and I applaud Congressman Meek.  He’s taken the first step, and with a few additions, he could make this law something to be proud of.

Join my voice and let Congressman Meek know that these other issues are important and will make a big difference.

Congressman Meek can be contacted at:

Kendrickmeek.house.gov
Washington, DC
1039 Longworth House Office Building
Washington, DC 20515
Phone: 202-225-4506
Fax: 202-226-0777
Monday–Friday, 9 AM – 6 PM

Moira Souza Shiver
MSS Advocacy Group
mss165.com

Stanford Financial Group Chief Investment Officer – Laura Pendergest-Holt – Arrested! Stanford Won’t Go Down Alone…

The third ranking executive of the Stanford Financial Group – Chief Investment Officer Laura Pendergest-Holt was arrested by the FBI on charges that she obstructed a government proceeding.  Appearing before a federal magistrate in Houston on Friday, Pendergest-Holt is accused of making “several affirmative misrepresentations” to SEC investigators who were seeking to learn about a scheme to defraud investors and account-holders of billions of dollars in deposits.

The FBI and IRS are actively conducting a criminal investigation(s) of Stanford’s allegedly fraudulent dealings, which was confirmed in court documents.  A CNN article reports:

“Since June of 2008 I and others on behalf of the FBI, special agents with the Internal Revenue Service, and postal inspectors have been conducting an investigation into allegations that executives of Stanford Financial Group … have defrauded investors and account-holders of more than $8 billion in deposits,” said FBI agent Vanessa Walther in an affidavit filed with the charges against Pendergest-Holt.

“We have been conducting this investigation parallel to an investigation being conducted by the Securities and Exchange Commission,” the affidavit says.

Bloomberg reports:

The Securities and Exchange Commission sued Pendergest- Holt, Stanford Chairman R. Allen Stanford, and Stanford Chief Financial Officer James M. Davis on Feb. 17, accusing them of misleading investors about $8 billion in certificates of deposit in Antigua-based Stanford International Bank.

Keeping in mind an arrest is not a conviction, her attorney stated:

“She is extremely disappointed in the path the SEC and law enforcement are taking,” said Pendergest-Holt’s lawyer Dan Cogdell. “She has been cooperating for weeks, and now she is falsely charged for a crime she didn’t commit.”

The full Bloomberg report is here.

Thinking that at one time she might be the one to topple the house of cards and send Stanford to prison for a very long time, one might ask if her arrest is just a ploy to put pressure on her to provide exactly what the government wants.  Perhaps she did withhold data – which one can go to prison for – or perhaps it’s a power squeeze.  Either way, the choices made by Pendergest-Holt in the past are surely producing consequences today – and likely will for years to come.

As a business ethics and fraud prevention speaker, one this is sure – there will be more to come….

O.K. SO HERE IS SOME MORE…

The Wall Street Journal Law Blog reports on the Pendergest-Holt criminal charges.  Pulling from a story from the Northeast Mississippi Daily Journal, the WSJ Law Blog reports:

A bit strange, however, is the story’s several mentions of Pendergest-Holt’s looks. The story notes that while the Baldwyn, Miss., native, now 35, “had no financial services or securities industry experience” before joining SFG in 1997, “less than a decade later she was managing more than $15 billion in assets and running a worldwide team of equity, policy and sector anaylsts.”

According to the story, Pendergest-Holt had a “killer combination of beauty, brains and connections,” was was “an expert number-cruncher” and “has been described as strikingly beautiful and statuesque.”

Wow…I’ve heard that one should look the part, but $15 billion under management…well one would assume that there would be a string of credentials that would support such responsibility.  But then, reality check, it seems that it really was all part of a big illusion.  Maybe striking looks just makes the illusion easier to pull off.

YOUR COMMENTS WELCOME!

Madoff Ponzi Scheme – How Do Folks Get Defrauded? Comments by White Collar Crime Speaker Chuck Gallagher

Since the middle part of December when the Madoff scandal broke – the main question that has come up with each and every interview I’ve done is – how did these folks get defrauded?  If people can figure out how such a massive fraud was pulled off, perhaps they can begin to understand how to protect themselves.  Madoff’s victims fell into what I call the PIT.  And, once you take that first step into the slippery slop falling into the PIT it is hard to get out.

THE   P I T:

The first part of most any financial fraud starts with the PROMISE ( P ).  Fortunately I was not a Madoff investor, but from all the reports thus far the attraction was that Madoff – because of his superior mind and amazing system – could produce consistent high returns regardless of market fluctuations.  That was the PROMISE.

Now think of it, if someone told you that he/she could get you a return that practically no one else could get and get that return for you consistently year after year, wouldn’t you be interested?  Sure you would!  So POINT OF ADVICE:  If you wish to avoid being scammed, understand – if it sounds to good to be true – it LIKELY ISN’T TRUE!

The second part of the fraud triangle is the ILLUSION ( I ).  From different sources in different ways, it has been reported that when one actually examines the statements that Madoff provided his clients – one could see that what they said as compared to the actual market actions were inconsistent.  In other words, Madoff seemed to rely on ignorance of the market and complexity to create – what would seem – the perfect ILLUSION.

Mind you, Madoff (and his team) was good.  Really good.  Rarely do Ponzi scheme operators provide such a grand ILLUSION that is sustained for such a long time.

This second component of being defrauded is actually the hardest to crack.  Why?  Well, think of it, if you were that good at investing you wouldn’t need someone like Madoff.  Therefore, with modern technology one can produce printed or on-line statements that can fool most any experienced auditor.  That said, a great ILLUSIONIST should be able to fool you.  Madoff’s clients were fooled and my of them were experienced investors.

That leads to the third and final component of fraud – TRUST ( T ).  In order to effectively pull a fraud off, someone has to trust the fraudster.  Now, having been a fraudster (not something I am proud of), I understand the mentality.  It is much easier to defraud someone who is close to you and trusts you than it is to defraud a stranger.  It isn’t that fraudsters want to hurt those closest to them, rather, it is just easier to convience someone who is close to you to trust you.

In Madoff’s case after his first victims invested and fell prey to the scam, they became the foundation for others to follow.  Not only was it trust in Madoff, but the trust was based on trust that others had done their homework so that investors that followed didn’t have to do theirs.

I believe in trust.  I also believe in logic when it comes to financial investments.  Therefore, RULE OF THUMB don’t invest with friends or friends of friends.  Seek your own investment resources and know that fraud comes more times than not from someone close to you.  If you do business with strangers, then you will be more careful about who you select and how you select.  The solution is simple.

SUMMARY:

Avoiding fraud is easy if you follow three simple steps:

1. If it sounds too good to be true – it likely is and you may be on your first step into the PIT.
2. If you don’t understand the investment then don’t put your money there.  How many people today would have preferred a boring but safe investment vs. taking the beating (we’ve all taken) in the market collapse of ‘08/’09?
3. Don’t invest with people you know.  If you do, expect to lose all your investment.  If that is comfortable then invest with friends.  Otherwise, follow this rule and you’d dramatically improve your odds at avoiding fraud.

Feel like you’ve been scammed…then make a comment.  Perhaps your comments will help others!