Steven A. Cohen accepts two-year SEC ban on outside money


The hedge fund manager Steven A. Cohen has agreed to a two-year ban from supervising funds that manage outside money, to resolve U.S. Securities and Exchange Commission charges that he failed to supervise a former portfolio manager convicted of insider trading.

The SEC on Friday also said Cohen agreed to retain an independent consultant to review activity at his firm Point72 Asset Management, which invests the billionaire's fortune, and that the firm will be subject to examinations by the regulator.

Cohen did not admit or deny the SEC's findings that he failed to properly oversee Mathew Martoma, who was convicted of insider trading over trades he made in 2008 at the CR Intrinsic unit of SAC Capital Advisors LLC, as Point72 was once known.

“The strong combination of a two-year supervisory bar and additional oversight requirements achieves significant and immediate investor protection and deterrence, while ensuring that the activities of his funds are closely monitored going forward,” Andrew Ceresney, head of the SEC enforcement division, said in a statement, referring to Cohen.

In a memo to Point72 employees obtained by Reuters, Cohen said he expects to be able to manage outside money effective Jan. 1, 2018 provided that he complies with the settlement, though that “does not necessarily mean” he will do so.

“Inevitably, some will ask why I agreed to settle,” Cohen wrote. “The longer the pending litigation lingered, the more it distracted from the world-class Firm that we are building. Resolving the case gives us certainty and opens a path to raising outside capital in the future if we believe that is in best interest of the Firm.”

SAC pleaded guilty to fraud in 2013 connection with charges related to insider trading by its employees, and paid $1.8 billion in criminal and civil settlements with U.S. authorities. Cohen was not criminally charged.

Bikur Cholim head’s role revealed in annuities scheme


Although the final legal shoe appears to have dropped in an $850,000 ” target=”_blank”>as reported by the Journal in March and described in detail in a July 31 SEC report, assisted Horowitz in identifying, meeting with and obtaining personal information from terminally ill Jews, with whom he likely came into contact through his role at Bikur Cholim. The scheme, according to the SEC, took place between July 2007 and February 2008. 

Horowitz also enlisted the help of a New York securities broker, Moshe Marc Cohen, in finding more annuitants and identifying investment firms who would issue the variable annuities.

As of press time on Sept. 22, Ten had not responded to repeated telephone calls or emails. He settled with the SEC for about $200,000 in March but, because the agency had not then settled with Horowitz, many now-public details of the case were kept private at that time.

According to the SEC, Horowitz, the scheme’s architect, duped insurance companies into issuing variable annuities to terminally ill people. Variable annuities are typically long-term investment products that pay variable periodic payments to the annuitant (the person in whose name the policy is issued) and a guaranteed death benefit to the annuitant’s beneficiary. Money is paid upfront, and more can be invested over time in stocks, bonds and mutual funds. Variable annuities are typically drawn upon during retirement or designated as death benefits for heirs. 

Particularly attractive for individuals is the money-back guaranteed death benefit, which ensures that even if the market tanks on an initial $2 million investment, for example, the deceased’s heirs still will receive $2 million.

But when issued to terminally ill people, it is a guaranteed losing proposition for the issuing companies and a risk-free, sure winner for the beneficiaries. In the scheme, some of the beneficiaries included Horowitz’s close relatives, who made more than $900,000 in profits, and Horowitz himself, who made $317,724 in commissions, according to the SEC.

Greg Yaris, Horowitz’s attorney, characterized his client’s violation as a record-keeping error, which he also said when interviewed by the Journal in March.

“All that the SEC could come up with against him is that somebody in an office made a mistake on one question on an application,” Yaris said of the first section of the SEC’s report, which consists of their detailed findings and to which Horowitz did not sign his name and “neither admitted nor denied anything.” 

“The facts that someone might see as salacious in the front half [of the SEC report] are just the SEC’s spin,” Yaris said. In an annex to the report, however, Horowitz admitted to listing terminally ill people as annuitants on 14 contracts and violating federal securities law.

The scheme operated as follows: Around May 2007, the SEC says, Horowitz found out how to “exploit” certain weaknesses in the structure of variable annuities. 

For one, the issuers (insurance companies) did not require that annuitants receive physical examinations, and, second, when annuitants died, even if only a day after the policy was issued, the beneficiary would receive the death payout. 

Horowitz sought a way to get insurance companies to sell him variable annuities on terminally ill people (some died within days or weeks after the policies were issued), so that the short time horizon of the guaranteed profitable investment could make him and the beneficiaries substantial amounts of money. 

The insurance companies that issued these policies require that the investor intends to hold them for a minimum period of time and that the purchaser not be a stranger to the annuitant. The SEC says Horowitz dishonestly said that the annuities would be held for 20 to 40 years and that the purchasers had a “partner” relationship with the annuitants. Had Horowitz named as beneficiaries friends or family members of the terminally ill annuitants, it is possible that those relatives would have realized Horowitz’s plan and would not have agreed to provide him with their signatures or information he would have needed to list them as annuitants.

David Thetford, a securities compliance analyst in Chicago for Wolters Kluwer Financial Services, a multibillion-dollar consulting firm, explained that insurance companies that issue variable annuities like the ones offered by Horowitz have expenses that require time to be recouped. 

“This is a long-term investment,” said Thetford, a former auditor for the National Association of Securities Dealers, now known as FINRA. “It’s not designed to be traded or bought and then immediately sold. It’s a long-term investment for retirement.”

To make good on his plan, Horowitz needed three things: investors with enough cash to purchase large policies, terminally ill people, and someone who could both identify and meet with them — and the last in this list is where Ten came in. 

As founder and president of Bikur Cholim in Los Angeles, Ten continues to work daily with sick patients, some of whom are terminally ill. The SEC found that Ten helped find dying people and obtained their personal identification information and “health data” to confirm that they were in fact nearing death.

The SEC’s report says that in May 2007, after a “series of closed-door meetings between Horowitz and Ten” at the Bikur Cholim office, Ten created a fictitious charity called “Raphael Health”  — the sole purpose of which was to obtain the Social Security numbers, dates of birth and official medical information from terminally ill patients. Raphael Health, the SEC says, would donate $250 to $500 to each patient on the condition that they meet with Ten, provide their name and address, date of birth, Social Security number, medical diagnosis and confirmation of hospice care.

Between July and December 2007, Ten “met with multiple hospice patients” at their homes. The SEC says Horowitz attended many of those appointments. A social worker who attended one of the home visits told the SEC that Ten lied, saying Raphael Health’s donors wanted to learn the stories of the people they were supporting, which required Ten meeting them face-to-face. 

“Horowitz’s true purpose in visiting patients was to confirm that they were in fact dying, and, therefore, that they were suitable annuitants,” the report reads, adding that between July and December 2007, at least six patients identified by Ten were listed as annuitants in at least 18 annuities sold by Horowitz. Ten received at least $130,000 in payments from Horowitz.

“Jane Doe 1,” as identified by the SEC, was one terminally ill patient identified by Ten that Horowitz used in a $1.7 million variable annuity. When Jane Doe 1’s husband, John Doe 1, approached Ten in July 2007 for assistance with his wife, who was dying of colon cancer and needed round-the-clock nursing, Ten soon thereafter came to the family’s house with Horowitz “under the pretense of providing charitable assistance.” 

According to Scott Sobel, the family’s attorney, while at the home Ten spoke with John Doe 1 about the family’s financial needs and obtained his signature on a health care records release form.

Both the SEC and Sobel say that neither Ten nor Horowitz mentioned variable annuities in their meeting with Jane Doe 1 and her husband. After the meeting, Ten emailed to Horowitz Jane Doe 1’s name, Social Security number and birthdate. On July 31, 2007, Horowitz sold a variable annuity contract worth $1.7 million to his “close family member” — in that contract, Jane Doe 1 was the annuitant, unbeknown to her and her husband. Horowitz earned $28,500 in commissions on the sale, according to the SEC.

Six days later, on Aug. 5, Jane Doe 1 died. Her husband emailed Ten asking for about $1,200, half the cost of home-nursing care since Ten’s visit, which the husband presumed Ten would pay. When Ten did not respond by Aug. 21, John Doe 1 wrote to Ten again asking him to “use the money for someone else that is more in need.”

Ten, without John Doe 1’s knowledge, retrieved a copy of Jane Doe 1’s death certificate and sent it to Horowitz, who in turn used it in his death benefit claim that he submitted to the insurance company. On Oct. 19, 2007, the investor on Jane Doe 1’s policy received just over $2 million on his $1.7 million purchase, a 17.7 percent rate of return in less than three months. 

In a subsequent case in November 2007 involving “Jane Doe 2,” a woman dying of stomach cancer, Ten’s Raphael Health paid $405 to fulfill her wish of going with her children to Disneyland. That support, though, was conditioned on Jane Doe 2 providing personal information and meeting with Ten and Horowitz. 

This time, Ten purchased a $1 million policy with Jane Doe 2 as the annuitant and immediately received $50,000 from the company as a 5 percent bonus for investing a minimum of $1 million. 

In forms filed with the insurance company, Horowitz falsely stated that Ten intended to hold the annuity for 27 years. On Dec. 20, less than a month after Ten purchased the policy, Jane Doe 2 died. Ten sent Horowitz her death certificate. Horowitz sent a claim to the insurance company. The company sent Ten $1,050,322.60 for the three-week investment.

In response to a query from the Journal, a spokesperson for Cedars-Sinai wrote in an email that the hospital has “never provided Rabbi Ten or his team with any protected health information” and that “Cedars-Sinai no longer permits Bikur Cholim to provide services at the hospital.” The hospital, one of the city’s top health providers for the Jewish community, cut ties with the group after the SEC released its allegations against Ten in March. 

A hospital spokesperson wrote in an email that “there has been no fall-off in services” to Jewish patients, because the hospital is using more of its own resources and working with other community organizations to assist Jewish patients with their religious needs, including Chai Lifeline.

A spokesperson for the UCLA health system wrote in an email that Ronald Reagan UCLA Medical Center has never provided Ten or Bikur Cholim with patient data, but that the group makes a weekly challah donation for Jewish patients in the hospital during Shabbat. The spokesperson added that after Rosh Hashanah, UCLA will rely instead on another donor to provide the challahs, but that the decision is solely a financial one.

In all, the SEC determined Horowitz received more than $317,000 in sales commissions and at least $30,000 from close relatives when they profited from the annuities. The SEC stripped Horowitz of his broker license and fined him a total of $850,749.21. Ten, according to a March 13 SEC press release, paid back $181,147.64 in illegitimate profits, as well as interest of $20,858.80 and a penalty of $90,000.

Horowitz’s and Ten’s scheme is not without precedent; insurance companies are constantly on the watch for people who attempt to game the system.

Joseph Caramadre, a Rhode Island attorney, was sentenced to six years in federal prison in 2013 after pleading guilty to fraud and conspiracy for running a variable annuities scheme similar to Horowitz’s. Caramadre argued, though, he was only taking advantage of a gap created by the insurance industry and he was sharing his profits with families that needed money to assist dying loved ones.

With Horowitz, though, neither criminal nor civil court was an option, as the SEC opted to keep the case in its own administrative court, where defendants like Horowitz lack many of the protections afforded to defendants in a jury trial. 

The SEC’s administrative law judge, following SEC procedural rules, can limit the discovery period and uses the “preponderance of the evidence” standard rather than the “beyond a reasonable doubt” standard that is afforded to criminal defendants. Following reforms initiated by the 2010 Dodd-Frank law, the SEC now has an easier time prosecuting potential lawbreakers in-house instead of in court — and in a shorter time frame. The time that elapsed between the SEC charging and settling with Horowitz was only about four months. Yaris said that reaching a settlement made sense for his client, because “the cost of fighting and the risk of fighting in their forum was too great.”

When asked why the SEC opted to keep the case in its own administrative court instead of filing a civil lawsuit against Horowitz, an agency spokesperson declined comment. 

SEC charges L.A. Jewish leaders in alleged variable annuities scheme


Since the 1990s, Rabbi Harold Ten has been helping gravely ill Jews and their families navigate the health care system. Ten is the president of Bikur Cholim, a nonprofit that can get patients kosher meals in their hospital rooms or provide them with free loans of medical equipment. He’s known for calling local rabbis each week to find out which of their congregants are sick and then organizing volunteers to visit those individuals.

But in 2007, Ten, who also goes by Heshy or Hershy, is alleged to have also been using his knowledge of the healthcare system to enrich himself in a highly unusual way. According to charges released by the Securities and Exchange Commission (SEC) on March 13, Ten played a key role in an alleged scheme that allowed a ring of brokers, investment advisers and their clients to profit from the deaths of terminally ill patients.

The process involved the purchase of variable annuities, an investment vehicle typically made on a long-term basis and used by investors to provide them with income after retirement, and to provide their heirs with a death benefit. In the alleged scheme that the SEC says was orchestrated by Los Angeles-based broker Michael A. Horowitz, however, Horowitz’s investor clients purchased annuities that named terminally ill patients as the annuitants — allowing the investors to collect the death benefit payout very quickly and reap large profits at the expense of the insurance company that issued the annuities. Horowitz himself allegedly earned more than $300,000 in commissions on the sales of the annuities.

A number of Jewish leaders in Los Angeles have been implicated in the alleged scheme, including Horowitz’s father, Richard Horowitz, who is co-founder of Aish HaTorah in Los Angeles, which, according to its Web site, is a “worldwide educational organization helping unaffiliated Jews understand the essence of Judaism.” In addition to serving as international president of Aish HaTorah, Richard Horowitz is vice president of the Association for Jewish Outreach Professionals.

Richard Horowitz and the other principal of his life insurance brokerage, Marc Firestone, received $420,000 in commissions on 12 annuities that named terminally ill patients as annuitants sold in a one-month period in 2007. The two men settled with the SEC for a combined sum that exceeded $545,000. 

In a letter addressed to clients and friends shared with the Journal by Horowitz’s lawyer and intended for circulation on his firm’s Web site, Horowitz referred to the underlying actions as “a record keeping violation.”

Michael Horowitz is still fighting the SEC’s action, as is the other broker implicated in the scheme, Moshe Marc Cohen of Brooklyn, N.Y. A major supporter of Adas Torah, an Orthodox Jewish congregation in the Pico-Robertson neighborhood, Michael Horowitz denied the SEC’s allegations in a statement posted on his firm’s Web site, saying that he “was merely a salesperson selling a product designed and marketed by a major life insurance company.”

Two certainties in this annuity: Death and profits

According to Greg Yaris, who has served as the attorney for the Horowitz family and for Richard Horowitz’s firm for 20 years, Michael Horowitz first learned about the annuities at a seminar put on by the unnamed insurance company held in Santa Barbara in 2007. There were, Yaris said, three essential characteristics that made it possible for Michael Horowitz to turn the insurance company’s variable annuities into a vehicle to produce sure-fire profits.

First, though the beneficiary of a life insurance policy must have what’s known as an “insurable interest” in the life of the person whose death will trigger the payout — a wife can take out an insurance policy on her husband, but a stranger can’t — the annuity contract designed by this insurance company included no such requirement.

Second, if the value of the annuity was less than $2 million, the insurance company did not require a medical test on the annuitant.

And third, the company offered a 5 percent bonus to anyone buying an annuity with a face value above $1 million — meaning that an investor who bought an annuity for $1 million would instantly be credited an additional $50,000 as a bonus from the insurance company.

That’s just what Ten did in November 2007. Until that point, Ten’s primary involvement in the alleged scheme had been limited to identifying terminally ill patients who could act as annuitants.

“We knew he had relationships in the health care field,” Yaris explained, “so Michael asked Rabbi Ten ‘to identify individuals who would not object to Michael using their name and social security number on an annuity in exchange for compensation.’ ”

In exchange for their names and social security numbers, these terminally ill people were paid a few hundred dollars apiece — between $250 and $500, according to the SEC’s order against Ten. This personal information was essential to make the alleged scheme work, and Horowitz paid Ten at least $130,000, according to the SEC.

Ten later became an investor on the life of one of the terminally ill patients. On Nov. 19, 2007, according to the SEC order, Ten traveled to visit a female hospice patient who was dying of stomach cancer. She had previously informed the hospice care provider that she wanted “to take her children to Disneyland before she passed away,” and Ten’s new charity, Raphael Health, reimbursed the hospice for the cost of that trip — $405, according to the SEC — on the condition that the hospice provide him with the patient’s ID and health data.

According to Yaris, Michael Horowitz had stopped selling the annuities through his employer, Morgan Stanley in October 2007, yet he accompanied Ten on the trip to the patient’s home that November. During the meeting at the house of the patient, referred to as Jane Doe in the SEC order, “neither Ten nor Horowitz mentioned variable annuities or proposed designating Jane Doe as an annuitant,” the SEC document states.

On the drive back from her home, Horowitz offered and Ten agreed to purchase an annuity on the patient’s life, according to the SEC order. Ten invested $1 million in the annuity, which was issued on Nov. 26. Because of the size of his investment, Ten’s account was immediately credited with a bonus of $50,000.

On Dec. 20, 2007, the patient died, and Ten netted $50,347.64 on his $1 million investment. Ten agreed to pay more than $290,000 to the SEC as a condition of his settlement.

How Ten came to have access to such a large amount of capital to invest with Horowitz is unclear; Ten declined the Journal’s request for an interview. Asked to comment in writing on his involvement in this alleged scheme in general, and about his investment in this annuity in particular, Ten declined to comment on either in the brief statement he provided.

“It should be emphasized that the SEC Consent Decree does not name Bikur Cholim nor allege that Bikur Cholim engaged in any improprieties whatsoever,” Ten wrote in an e-mail to the Journal, ”and it would be a tragedy for an unrelated matter to impact the thousands whom we serve or my steadfast commitment to Bikur Cholim.”

Unseemly? Yes, but that’s irrelevant

This isn’t the first case of an investor naming terminally ill people as annuitants on variable annuities; in a separate case involving Joseph Caramadre of Providence, R.I., the defendant was sentenced to six years in a federal prison last December for doing something very similar. He paid terminally ill people $2,000 in cash in exchange for their agreeing to sign on as annuitants for variable annuities that would then be purchased by investors.

But in that case, family members of the annuitants alleged that their loved ones took the money but hadn't fully understood what they were doing. Some terminally ill participants were allegedly purposefully deceived about what they were signing; some were said to have had their signatures forged. 

In this current case, Michael Horowitz said in the statement posted on his firm’s Web site that he never “improperly obtained any information, private or otherwise, from any annuitants, nor did I authorize any other person to improperly obtain information on my behalf. All information provided by annuitants was voluntarily provided.”

Even though the annuity contract did not require the signature of the annuitant, attorney Yaris said that Horowitz obtained signatures of all the annuitants on a one-page waiver form, “just to be sure that they consented to the use of their name and social. The fact that the insurance company didn't require their signature doesn't mean we have the right to use their information.”

According to the SEC, Horowitz and the others did not have the right to use that information; indeed, the agency accuses them of stealing it. The agency alleges that Horowitz and Cohen deceived both the patients whose identities they used and the firms for which they worked.

“This was a calculated fraud exploiting terminally ill patients,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit in a statement. “Michael Horowitz and others stole their most private information for personal monetary gain.”

Nearly everyone agrees that businesses that profit when people die just somehow feels wrong. But even as Caramadre acknowledged as much when his story was reported on Chicago Public Media’s radio show “This American Life” in 2012, he claimed he was nevertheless acting “morally, ethically and legally.”

Yaris made the same argument in an interview with the Journal on March 17.

“Whether or not the transaction is unseemly is irrelevant from a legal perspective,” Yaris said. “There was nothing illegal about the annuity contract, nor was there any violation of the contract. Ultimately, this is a contract between an insurance company and an investor. And the insurance company never sought to recover any of the monies it paid to the investors.”

Unlike Caramadre, Horowitz is not facing criminal charges. Yaris said that he’s seen a draft of the SEC complaint against Horowitz, although his client hasn’t yet been served. When, and if, that does happen, a judge will have 300 days in which to hear the case. The decision can also be appealed, first to the SEC and later to the 2nd Circuit Court of Appeals in Washington, D.C.

Yaris said his client would have settled with the SEC if the SEC weren’t demanding that he lose his securities license for life, in effect banning him from his chosen profession. Yaris also said he doesn’t know how far Horowitz would take the case.

“Michael would like to clear his name,” Yaris said. 

John Farahi sentenced to 10 years for Ponzi scheme


John Farahi, a popular Iranian-Jewish radio talk-show host and investment adviser, was sentenced in U.S. District Court on March 18 in downtown Los Angeles to 10 years in federal prison for operating a multi-million-dollar Ponzi scheme against local Iranian-Americans. Farahi, 56, also was ordered by the court to pay more than $24 million in restitution to close to 60 victims.

Last June, Farahi pleaded guilty to felony charges of mail fraud, loan fraud, selling unregistered securities and conspiring with David Tamman, his attorney at the time, to obstruct the U.S. Securities and Exchange Commission (SEC) investigation into his case. 

According to an SEC press release, the statutory maximum penalty for the four charges to which Farahi pleaded guilty is 75 years in federal prison; however, under the terms of Farahi’s plea agreement, the government agreed to recommend a sentence of no more than 10 years in prison.

The SEC indicted Farahi in 2010, alleging that through his Beverly Hills firm, NewPoint Financial Services Inc., he defrauded Iranian-American investors of millions of dollars. It was alleged that he misled investors by telling them their funds were being invested in unsecured corporate bonds, FDIC-insured certificates of deposit, government bonds and corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program (TARP). 

According to the indictment, Farahi had instead transferred his investors’ money directly into his own personal accounts to pay for building his mansion in Beverly Hills and purchasing a yacht, as well as into risky stock-market options that resulted in more than $18 million in losses for investors. 

The 2010 suit also stated that since 2003, Farahi used his radio program, “The Economy Today,” featured on the L.A.-based Farsi-language Radio Iran KIRN-AM (670), to target members of L.A.’s Iranian-American community, recommending they make appointments at his firm.

Iranian-Jewish community leaders and creditors have kept quiet about Farahi and other Iranian-Jewish investors charged in recent years with running Ponzi schemes, in keeping with a long-standing community taboo against publicly discussing potentially embarrassing incidents. Iranian-Jewish community leaders at the Beverly Hills-based Nessah Synagogue and West Hollywood-based Iranian American Jewish Federation did not return calls seeking comment. 

But this isn’t the only time the community has been targeted by a Ponzi scheme. Ezri Namvar, 62, a longtime leading Iranian-Jewish businessman and philanthropist in Los Angeles, was sentenced in October 2011 to seven years in federal prison for stealing $21 million from four clients. Namvar also was ordered by the court to pay back $21 million in restitution to his victims, yet he is believed to have allegedly bilked investors — who put money into his $2.5 billion real estate portfolio before the 2008 market crash — out of hundreds of millions of dollars. 

SEC halts Ponzi scheme targeting Persian Jews in L.A.


A Ponzi scheme targeting the Persian-Jewish community in Los Angeles was shut down by the U.S. Securities and Exchange Commission.

The SEC obtained an emergency court order on April 13 to stop the scheme.

According to the SEC, Shervin Neman, also known as Shervin Davatgarzadeh, allegedly raised more than $7.5 million from investors in the Persian-Jewish community, of which he is a member, by posing as a hedge fund manager.

Neman, 30, of Los Angeles, told investors that he had a hedge fund called Neman Financial L.P., which invested in foreclosed residential properties that would be quickly flipped for profit, as well as in Facebook shares and other high-profile initial public offerings, according to the SEC.

Instead he allegedly used the investors’ money to pay off other investors and finance his extravagant lifestyle. Neman spent nearly $1.6 million of investor funds to buy jewelry and high-end cars, as well as to finance his wedding and honeymoon, other vacations and VIP tickets to sporting events, according to the SEC.

Judge Jacqueline Nguyen of the U.S. District Court for the Central District of California granted the SEC’s request for a temporary restraining order and asset freeze against Neman.

“By exploiting investors’ trust in him, Neman was continually able to raise more money to pay back existing investors and finance an extravagant lifestyle,” Michele Wein Layne, associate regional director of the SEC’s Los Angeles office, said in an SEC statement.

Is Bernie Madoff Jewish?  Very. Oy.



Bernard Madoff at a 2007 roundtable discussion with Justin Fox, Ailsa Roell, Robert A. Schwartz, Muriel Seibert, and Josh Stampfli.



“It’s all just one big lie.”

With those words Bernard Madoff confessed to senior executives of Bernard L. Madoff Investment Securities that the $17 billion hedge fund company  he  founded was nothing more than a Ponzi scheme.
 
According to Timeonline.com, Madoff is at the center of “the largest investor swindle ever blamed on a single individual.”
 
Madoff was arrested Thursday by Federal agents and charged with securities fraud.  In its complaint the Securities and Exchange Commission said Madoff was at the head of an “ongoing $50 billion swindle.”  He could face 25 years in prison.

The news that broke today on the front pages of the New York Times and the Wall Street Journal reverberated in Jewish communities across the world.

“A lot of Jewish charities had investments with him,” one prominent investor — who said he had no connection to Madoff — told The Jewish Journal. “So did a lot of Jews.”

The collapse of the Madoff business leaves a mess that is yet to be sorted out and whose victims are just coming to the fore.

But what’s already clear is that Madoff used his ties to the Jewish community to garner at least some of his ill-used funds.



UPDATE SUNDAY 1:41 p.m.:

By Sunday the initial casualty reports showed that Madoff’s crimes reached deep into the Los Angeles Jewish community. 

“It has come to our attention that the Jewish Community Foundation [Los Angeles] is included among a number of major institutions as well asindividuals who may have been victimized by an alleged fraud,” wrote Jewish Community Foundation Board Chair Cathy Siegel Weiss and President and CEO Marvin Schotland in a letter sent to board members.

Regretfully, the Foundation was one of those clients. Mr. Madoff was highly regarded and his firm has been one of the most prominent firms on Wall Street for decades. We were shocked to learn of this alleged fraud.

Some $18 million of the Foundation’s Common Investment Pool (currently valued at 11% of its assets) was invested with Madoff, according to the letter.The CIP represents endowments from a variety of long-established Jewish organizations. The Journal is investigating which participants were involved and how much they stand to lose, and whether officials can expect any sort of remediation.

Meanwhile, there are reports that many other local institutions and individuals have been hit by the scandal.  Senior Writer Brad Greenberg and blogger Dean Rotbart are investigating and verifying these reports and will have updates here.



Madoff is a trustee of the Yeshiva University and a long-time philanthropist in Jewish circles.
 
According to Yeshiva University, “Bernard L. Madoff, a member of the University’s Board of Trustees since 1996, was elected chairman of the Board of Directors of Sy Syms School of Business in 2000. Mr. Madoff is chairman of Bernard L. Madoff Investment Securities, one of the nation’s largest third-market dealers in New York Stock Exchange and over-the-counter securities.
A benefactor of the University, Mr. Madoff recently made a major gift to the Sy Syms School.”
 
The first known charity victim, according to JTA, is the The Robert I. Lappin Foundation in Salem, Mass. which gave away about $1.5 million to Jewish causes.
 
After Madoff’s arrest, The Robert I. Lappin Foundation in Salem laid off all of its employees and locked its doors on Friday after its benefactor’s assets were frozen because they were invested with Madoff.

“Mr. Lappin investments were frozen,” the foundation’s executive director of the foundation Deborah Coltin told JTA. “The assets are frozen. We have no money. The foundation cannot access its money.”

Lappin, who was reached by JTA Friday afternoon, said that he lost $8 million – the entirety of his foundation’s money – because it was invested with Madoff. Lappin, who had been involved financially with Madoff since 1991 also took a “significant” hit personally. He said that he knew nothing of Madoff’s fraudulent activities.

The foundation, which gave away about $1.5 million per year to Jewish causes, let go all of its workers, one fulltime employee and six part-time employees.
 
Forbes details the fall of Madoff
 
“Bernard Madoff is a longstanding leader in the financial services industry,” his lawyer Dan Horwitz told reporters outside a downtown Manhattan courtroom where he was charged. “We will fight to get through this unfortunate set of events.”
 
A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.
 
The SEC filed separate civil charges.
 
“Our complaint alleges a stunning fraud — both in terms of scope and duration,” said Scott Friestad, the SEC’s deputy enforcer. “We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors.”
 
The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.
 
Madoff had long kept the financial statements for his hedge fund business under “lock and key,” according to prosecutors, and was “cryptic” about the firm.
 
And Reuters has the story here:

REUTERS – Edith Honan and Dan Wilchins:
 

NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion “Ponzi scheme” in what may rank among the biggest fraud cases ever.

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.

Madoff told senior employees of his firm on Wednesday that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme”, with estimated investor losses of about $50 billion, according to the U.S. Attorney’s criminal complaint against him.

A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.

On Thursday, two agents for the U.S. Federal Bureau of Investigation entered Madoff’s New York apartment.

“There is no innocent explanation,” Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he “paid investors with money that wasn’t there”, according to the complaint.

The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.
U.S. prosecutors charged Madoff, 70, with a single count of securities fraud.

They said he faces up to 20 years in prison and a fine of up to $5 million.
The Securities and Exchange Commission filed separate civil charges against Madoff.

“Our complaint alleges a stunning fraud — both in terms of scope and duration,” said Scott Friestad, the SEC’s deputy enforcer. “We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors.”

Dan Horwitz, Madoff’s lawyer, told reporters outside a downtown Manhattan courtroom where he was charged, “Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events.”

A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.

Authorities, citing a document filed by Madoff with the U.S. Securities and Exchange Commission on Jan. 7, 2008, said Madoff’s investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors.

The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.

CONSISTENT RETURNS

An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.

The fund told investors it followed a “split strike conversion” strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.

Jon Najarian, an acquaintance of Madoff who has traded options for decades, said “Many of us questioned how that strategy could generate those kinds of returns so consistently.”

Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.

“He always seemed to be a straight shooter. I was shocked by this news,” Najarian said.

‘LOCK AND KEY’

Madoff had long kept the financial statements for his hedge fund business under “lock and key,” according to prosecutors, and was “cryptic” about the firm. The hedge fund business was located on a separate floor from the market-making business.

Madoff has been conducting a Ponzi scheme since at least 2005, the U.S. said. Around the first week of December, Madoff told a senior employee that hedge fund clients had requested about $7 billion of their money back, and that he was struggling to pay them.

Investors have been pulling money out of hedge funds, even those performing well, in an effort to reduce risk in their portfolios as the global economy weakens.

The fraud alleged here could further encourage investors to pull money from hedge funds.

“This is a major blow to confidence that is already shattered — anyone on the fence will probably try to take their money out,” said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass noted that investors that put in requests to withdraw their money can subsequently decide to leave it in the fund if they wish.

Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website.

Madoff remains a member of Nasdaq OMX Group Inc’s nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell according to the website.

The website also states that Madoff himself has “a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.”

In the wake of the scandal, Internet message boards are alive with anti-Semitic vitriol.
 
The web site dealbreaker.com provides a list of Madoff’s victims supplied by CNBC’s  David Faber:

  • Fund of Funds
  • European banks
  • remont Advisers
  • “market confidence”
  • JEWS

The comments on that page reveal the kind of anti-Semitic writing that scandals involving Jewish financiers unleash with clockwork precision.
 
A sampling:

  • LOL Jews!…
  • Looks like a lot of Jews might be converting to Muslim soon….in prison….
  • Now that the JEW has been thrown down the well, is our country free?LETS THROW A BIG PARTY!!!

The message boards at the web site Stormfront, where neo-Nazis go to play, is rife with comments like, “One of satan’s children doing what comes naturally.”

Hey. If it’s small comfort the prosecutor in the case is Jewish, and it was Madoff’s sons who turned their crooked dad in.

Thousands of small Jewish investors who played by the rules and worked and saved are now financially ruined because of this man. For all but your garden variety bigots, one horrifically monstrously putrid apple doesn’t mean squat about the whole tree.

 

Alan shrugged


What went wrong?

Greed is only part of it. Yes, the people who sold subprime loans to unqualified buyers were concerned about their cut, not about ARMs spiking and home prices falling. Yes, the Wall Street wizards who sliced and diced collateralized debt obligations were greedy for big paydays and living large.

But invoking greed actually explains little, no more than invoking lust or envy or any other human urge. The mystery isn’t why people are greedy; it’s how greed gets the better of them.

At a private fundraiser in Houston, when he thought there was no risk of being recorded, George W. Bush offered this explanation for our troubles: “There’s no question about it, Wall Street got drunk—that’s one of the reasons I asked you to turn off the TV cameras—it got drunk and now it’s got a hangover. The question is how long will it [take to] sober up and not try to do all these fancy financial instruments.”

There is no reason to question President Bush’s credentials for knowing a drunk when he sees one. But Bush, though he says he can’t remember a day from prep school to his 40th birthday when he didn’t have a drink, also insists that he has never been an alcoholic. He just drank “too much.” When he stopped, he didn’t acknowledge that he had a disease; what was wrong, it seems, was just typical youthful irresponsibility and a too-protracted youth.

So Wall Street’s problem, in the president’s mind, is not a systemic pathology, not an illness that comes on the same chromosome as the profit motive. Instead, it’s the behavior of a frat boy on a bender, the reckless phase of a good-time Charlie rather than the symptom of profound disease.

Bros will be bros; greed, like stuff, just happens.

A quite different explanation comes from a man to whom Bush gave the Presidential Medal of Freedom, and who is the intellectual parent of this collapse: “>speech at Georgetown University earlier this month, he attributed it to “lack of trust in the validity of accounting records of banks and other financial institutions” in the past year. Trust! Who knew?

So it’s not competitive markets and “Atlas Shrugged”-style enlightened self-interest that makes economies work. It’s “reputation and the trust it fosters.” Wealth creation, Greenspan says, requires trusting the people with whom we trade. The better your reputation, the more I trust you, the more able I am to take risks and accumulate more capital. When people “let concerns for reputation slip” the way they have in recent years, when counterparties are “not always truthful,” lenders are hesitant to lend, and credit freezes up.

But even an apostle of free markets like Ronald Reagan said, though in a different context, “Trust, but verify.” For years, credit-rating agencies like“>words of Nobel economics laureate Joseph Stiglitz, “performed the alchemy that converted securities from F-rated to A-rated” with no apparent damage to their reputations.

For years, the sterling reputations of Bear Sterns, Lehman Brothers and Merrill Lynch served as a substitute for transparency. For years, federal efforts to monitor the trustworthiness of big banks were fought tooth and nail by the same Alan Greenspan who nevertheless says that trust is everything.

James Madison warned us in Federalist No. 51 that men are not angels. Lincoln, while appealing to “the better angels of our nature,” nevertheless acknowledged our darker inclinations.

Anyone who’s been anywhere near a big investment bank knows that the gentlemen who run them have more in common with Hollywood buccaneers and Washington barracudas than they do with the Marquess of Queensbury. Maybe on Planet Fountainhead the economy runs on trust, but on this one, reputations aren’t warrants of integrity, they’re commodities marketed by the branding industry and burnished by the business journalism business.

Bill Moyers,

Gotcha? You betcha!


John McCain and Sara Palin have been complaining that there’s too much “gotcha journalism” going around.

If only.

When they say “gotcha journalism,” what they’re really trying to do, of course, is to demonize journalism itself — to de-legitimize asking tough questions, and following up with more tough questions when the answers are mealy-mouth evasions, and holding politicians accountable when they inadvertently emit a truth.

McCain says gotcha journalism is reporting that Palin, at a public event, told a voter her thoughts about attacking terrorist targets in Pakistan — which inconveniently is the same view that McCain is excoriating Obama for holding.

The McCain camp cried gotcha journalism when Charles Gibson asked Palin whether she agrees with the Bush Doctrine, and when Katie Couric asked her what Supreme Court cases she disagrees with, and when Gwen Ifill asked her about the powers of the vice president. But I didn’t hear Republicans complain about gotcha journalism when debate moderator George Stephanopoulos twice asked Obama, “Does Reverend Wright love America as much as you do?”

If gotcha journalism means asking presidential candidates which of their dreams will have to be deferred because of the $700 billion bailout, as a frustrated Jim Lehrer did again and again, then maybe we need more of that kind of questioning, not less.

We certainly could have used more gotcha journalism during the decade leading up to the worst economic debacle since the Great Depression.

In 1999, when the Glass-Steagall Act was repealed, letting commercial banks go into the investment banking and insurance businesses, the country would have been a lot better off if the mainstream media had paid gotcha attention to the downside of deregulation, instead of being obsessed by the mythical Y2K bug.

In 2000, when Senator Phil Gramm slipped a measure forbidding the SEC and the CFTC from regulating credit default swaps into the omnibus spending bill, imagine if the press had blown the whistle on that lobbyist-owned legislator taking advantage of the final moments of a lame-duck session of Congress instead of focusing single-mindedly on the hanging chads story.

In 2003, when Alan Greenspan told global investors that he was going to keep the Fed Funds rate at an unappetizing one percent, thus opening the global floodgates to the mortgage backed securities industry, just think what might have happened if the surge in no-income-no-asset mortgages had been covered as intensely as the goings-on at Michael Jackson’s Neverland Ranch.

In 2006, when the size of the global collateralized debt obligation market approached $2 trillion, with Bear Stearns, Merrill Lynch and Wachovia becoming the top CDO underwriters, consider how investigative journalism might have revealed the fatal vulnerability of those houses to toxic assets when the housing bubble would inevitably burst, rather than spending its energies falsely convicting the Duke lacrosse team of rape.

In 2007, when the subprime mortgage fiasco hit, think how things might have played out differently at Fannie Mae and Freddie Mac if cable news had spent as much time covering the liquidity crisis as it did the death of Anna Nicole Smith.

In 2008, when SEC chairman Chris Cox told the Senate Banking Committee that he wanted no increased authority and no increased budget to oversee conflict-of-interest riddled credit rating agencies like Moody’s, what if the consequences of Cox’s emergency ban on naked short-selling – bizarrely lasting only one month and affecting only 19 companies — had been pursued as aggressively as the first photos of the Brangelina twins?

We could have used a whole lot more gotcha journalism about Wall Street and banking deregulation than most people regularly encountered over the past decade. And we would have been better served as citizens if terms like “naked short selling” and “mark-to-market” and the rest of the gobbledygook now haunting us had long ago become part of the minimum daily dose of financial literacy delivered to us by the news media.

The exceptions to this journalistic inability to know what’s important, and to explain what’s difficult, are worth celebrating. Chief among them are public radio programs like “>Planet Money, and public radio reporters like “>Adam Davidson.

There’s no better way for a lay person to understand the current crisis than by listening to two episodes of This American Life – ““>Another Frightening Show About the Economy,” which aired last weekend. And while you’re at it, check out the ““>two

The Spinka money trail — and the informant who brought them down


The first snow flutters hesitantly in Brooklyn. Men wearing fur streimel hats and women wearing sheitls walk briskly past the corner of 15th Avenue and 58th Street in Boro Park as if nothing extraordinary has happened here.

And why not? The kosher shops of this self-contained ultra-Orthodox neighborhood — practically a city onto itself — are still a few blocks down, and here on this bleak corner, there are only three orange school buses parked in front of a four-story, dark-red brick building, which sits on a residential street, where tall, narrow houses nearly overlap. The structure (photo below) is rather nondescript and unimposing — garbage bags are piled haphazardly by a front gate, bars protect the windows, young boys can be heard chanting from behind the locked door and a white sign with sky blue Hebrew lettering reads: “Yeshiva Imrei Yosef Spinka.”

yeshiva imrei yosef spinka

A buzzer sounds. The door opens. No one asks who rang the bell. Up the four steps, a reception window sits empty. Hazy yellow fluorescent lights illuminate the narrow hallways adorned with graying yellow paint and frayed industrial carpeting. If there are millions — or even thousands — of dollars going to the Spinka yeshiva, it certainly doesn’t seem like it’s coming here.

This despite the fact that on Dec. 19, 2007, the U.S. Attorney General’s Office filed an indictment in the U.S. District Court for the Central District of California naming the Chasidic yeshiva and four other Spinka organizations, as well as eight people, in a multimillion dollar tax fraud and money-laundering ring that stretched from Brooklyn to Los Angeles to Israel and elsewhere.

Two of those indicted are Rabbi Naftali Tzi Weisz, 59, the Grand Rabbi of Spinka, a Brooklyn-based Chasidic sect, whose yeshiva is in this undistinguished building, and his gabbai (assistant), Moshe Zigelman, 60.

Weisz is just one of a number of Grand Rebbes of Spinka, a Chasidic sect that yaacov zievaldoriginated in Romania in the 19th century. He is the great-great-grandson of the founding rabbi, and one of about a dozen Grand Spinka Rebbes who live in Boro Park or Williamsburg, in Brooklyn, or Bnei Brak and Jerusalem in Israel.

Four Los Angeles men were among those charged with taking part in the scheme: Yaacov (Yankel) Zeivald, 43, a self-described scribe (sofer) from Valley Village (photo, right); Yosef Nachum Naiman, 55, the owner of Shatz Et Naiman, d.b.a. Jerusalem Tours; Alan Jay Friedman, 43, a businessman from Pico-Robertson who sits on the board of the Orthodox Union; and Moshe Lazar, 60, owner of Lazar Diamonds, a Los Angeles jewelry company.

Although many of the details of the case have not yet been revealed — a trial date is set for Feb. 12, but the defendants’ lawyers say it will be postponed at least a year — what is emerging from the indictment, the search warrant and other documents of public record is a complex money-laundering scheme. According to the documents, people donated money to the Spinka institutions but then received 80 percent to 95 percent of their donations back, yet wrote off the full amount on their taxes.

These charges are just the beginning of a much larger case, Daniel J. O’Brien, an assistant U.S. attorney in the major frauds section, based in Los Angeles, said in an interview with The Journal.

“There were many other people that contributed in this fashion that would be the subject of government investigations,” O’Brien said.

While O’Brien said he has documentation that the Spinka institutions took in about $750,000 through the scheme — then writing receipts for $8.7 million — in 2007 alone, the assistant U.S. attorney believes the fraud has been going on for decades: “I believe this goes on beyond living memory,” possibly for generations.

This is certainly not the first time an ultra-Orthodox sect has been accused of attempting to break the laws of the secular government — aramos, or schemes, were perpetrated over the centuries in the shtetls of Europe. In the last decade, arrests have occurred in religious communities in Brooklyn, Lakewood, N.J., and upstate New York.

However, this particular case has shocked Los Angeles’ ultra-Orthodox community, not only because Los Angeles had largely been exempt from such cases in the past, but also because some of the city’s prominent members have been charged as being at the center of the scheme.

As a result, the case has sparked a fierce debate about the type of behavior that is acceptable for observant people and what type of religious community Los Angeles would like to be. But there’s also debate about the laws of a moser, an informant, because one person who was not charged was the primary source of information for the federal case — though he allegedly started out as one of the perpetrators.

THE BEGINNING

On June 29, 2004, the U.S. Securities and Exchange Commission filed civil fraud charges against Robert A. Kasirer and four executives of Heritage Healthcare of America, which sold $131 million in bonds to 1,800 investors in 36 states from 1996-1999, claiming that the money would be used to fund 10 health care facilities. In October of that year, Kasirer approached the federal government and “expressed a desire to plead guilty to criminal charges arising out of the investigation and agreed to reveal other criminal conduct he and others had committed, with a view that any sentence he might receive would be reduced,” according to an affidavit for a search warrant submitted by FBI Special Agent Ryan Heaton on Dec. 18, 2007.

Although the search warrant affidavit identifies Kasirer only as “confidential witness (CW-1)” and the recent grand jury indictment refers to a witness named only as RK, the companies in the affidavit attributed to CW-1 and RK are run by Kasirer, and several members of the Los Angeles community, who asked for confidentiality, have confirmed his involvement.

In 2004, under federal surveillance, the informant identified in the transcript as CW-1 resumed activities he admitted to having conducted with the Spinka since 1990, in which “he caused several million dollars in contributions to be mailed to the tax-exempt organizations operating within the umbrella of Spinka,” he is quoted in federal documents as having told the FBI.