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DealBook: F.B.I. Arrests Madoff’s Brother

June 29, 2012 by Leave a Comment

Peter Madoff was driven to Federal District Court in Manhattan on Friday to plead guilty to criminal charges.Andrew Gombert/European Pressphoto AgencyPeter Madoff was driven to Federal District Court in Manhattan on Friday to plead guilty to criminal charges.

1:00 p.m. | Updated

Peter B. Madoff, who was arrested early Friday, pleaded guilty to criminal actions that enabled his brother, Bernard L. Madoff, to carry out the largest Ponzi scheme in history.

While Peter Madoff, 66, acknowledged wrongdoing, he said in the hearing at the Federal District Court in Manhattan that he did not know of the fraud that wiped out about $65 billion in paper wealth.

The formal charges against Peter Madoff, 66, included falsifying documents, filing false tax returns and lying to regulators. Prosecutors said that from 1998 to 2009, Peter Madoff, who served as the senior legal and compliance officer for his brother’s firm, received $40 million from the firm, on which he didn’t pay taxes. He avoided government detection by disguising those payments as loans or backdated stock trades, according to prosecutors.

“I am deeply ashamed of my actions. I want to apologize to anyone who I harmed and to my family,” Peter Madoff said, choking back tears, at the hearing. “I’m here today to take responsibility for my conduct.”

Earlier on Friday, the Federal Bureau of Investigation arrested Peter Madoff at his lawyer’s office in Manhattan, according to a spokesman for the agency. At the federal court, he was unaccompanied by family members. No victims in the Madoff scheme spoke at the hearing.

As part of his guilty plea, Peter Madoff has agreed to a 10-year prison term. He has also agreed to forfeit $143 billion, a penalty that is based on the size of the fraud rather than his ability to pay. The sum is an indication that the government will seize all of his money.

There had been some speculation that Peter Madoff’s deal with the government included a promise by prosecutors to not bring any charges against his daughter, Shana Madoff Swanson, who also served as a lawyer and compliance officer at the firm. But his plea agreement does not protect anyone else from potential criminal charges, according to people briefed on the matter.

Bernard Madoff has served three years of a 150-year prison term at a federal prison in North Carolina after confessing to running the Ponzi scheme.

 

Article source: http://dealbook.nytimes.com/2012/06/29/brother-of-bernard-madoff-arrested/?partner=rss&emc=rss

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DealBook: Top Courts in U.S. and Britain Enter the Madoff Fray

June 21, 2012 by Leave a Comment

Bernard L. MadoffStephen Chernin/Getty Images The Supreme Court will decide whether to take up the issue of how victim losses in Bernard L. Madoff’s Ponzi scheme should be calculated.

This month, as Bernard L. Madoff completes the third year of a 150-year sentence for masterminding his global Ponzi scheme, the top courts in the United States and Britain are tackling issues that could have a multibillion-dollar impact on thousands of his victims.

On Thursday, the United States Supreme Court justices will confer on whether to take up the fiercely disputed issue of how victim losses in the Madoff scheme should be calculated.

A federal bankruptcy judge and a Federal Appeals Court in Manhattan have blessed the method employed by the Madoff bankruptcy trustee, Irving H. Picard. That approach measures losses as the difference between the cash deposited and the cash withdrawn from Madoff accounts in the years before the Ponzi scheme collapsed in December 2008. Those out-of-pocket cash losses total less than $20 billion, according to Mr. Picard.

Lawyers for investors who recovered all the cash they invested with Mr. Madoff before his arrest are urging the justices to order Mr. Picard to base victim claims on the final statements they received from Mr. Madoff in November 2008. Total losses based on the last-statement method exceed $60 billion, the trustee reports.

In March, the Supreme Court asked the Securities and Exchange Commission to submit a brief on the question. That brief was filed on May 24, and it urged the justices to let the prior rulings stand.

To rely on the final statements that Mr. Madoff mailed to customers “would treat fictional profits and securities transactions — all of which were invented and many of which could not possibly have occurred at the prices Madoff claimed — as if they were real,” the commission’s lawyers argued.

A vast majority of petitions for Supreme Court review are denied. Nevertheless, Mr. Picard says he has been obliged to set aside most of the roughly $11 billion in assets he and the government have collected until a final “unappealable” decision has been reached in the case. If the Supreme Court decides to review the issue, that final reckoning would be further postponed.

And if the justices rule against Mr. Picard, the fundamental arithmetic of the Madoff fraud will change. The number of victims eligible to share in the $11 billion would increase sharply; consequently, victims with out-of-pocket losses would receive far less than they now stand to recover.

The court’s current term ends just days after the justices meet to consider whether to hear the appeal, which could mean that parties to the dispute will soon know whether this long-running drama is finally over, or just nearing its final act.

Across the Atlantic, the Supreme Court in Britain is weighing a second decision that will drastically affect Mr. Picard’s efforts to recover cash withdrawn from the Madoff scheme by offshore investors.

The case, Rubin v. Eurofinance, did not arise from the Madoff fraud, but the trustee considers it so critical to his global recovery efforts that he has engaged British lawyers to represent him in the matter.

The British case stems from a dubious cash rebate scheme that operated in the United States for several years before it filed for bankruptcy in Manhattan in late 2005, leaving its 30,000 creditors with $160 million in claims against the scheme’s British founders. The founders did not defend themselves in the American court, and in July 2008, a bankruptcy judge — who termed their scheme “deceptive” — ruled that they had defaulted in the case and held them liable for the full amount owed to their creditors.

The receivers have asked the courts there to enforce the default judgment imposed by the American court.

Initially, in keeping with more than a century of tradition, a British trial court refused to recognize the receivers’ claims because they were not based on a judgment obtained from a local court. But in 2010, a court of appeals reversed the trial judge and ruled that the American default judgment should be enforceable in Britain.

On May 24, a hearing was held on the issue by the Supreme Court in Britain, which replaced the House of Lords as the “court of last resort” in 2009. Among the parties given permission to intervene in the case is Mr. Picard, represented by counsel under the direction of the London firm of Taylor Wessing.

According to Nick Moser, a lawyer with Taylor Wessing in London, the outcome of this landmark dispute will be enormously important to the Madoff trustee and to any plaintiff trying to enforce a foreign court’s bankruptcy judgment against a defendant residing in Britain and perhaps in other jurisdictions guided by British law — which includes several Caribbean countries popular with the offshore hedge funds that invested in the Madoff scheme.

The Madoff trustee has obtained significant default judgments from hedge funds based in London and the Caribbean. If the British appellate court is upheld, the odds of collecting on those awards could greatly improve.

As the Eurofinance case indicates, the Madoff trustee’s search for assets stretches far and wide. Of the 1,050 lawsuits his lawyers filed, at least 70 have international defendants, according to his most recent interim report to the Federal Bankruptcy Court in Manhattan. Law firms have been engaged to represent the trustee in litigation in Bermuda, British Virgin Islands, Cayman Islands, Gibraltar Luxembourg and Switzerland.

Lawyers working on his behalf are also conducting investigations in Austria and Italy, where the defendants include Bank Austria, UniCredit and Sonja Kohn, a Viennese financier who played a role in supplying more than $9 billion in cash to Mr. Madoff. Ms. Kohn’s lawyers say she was innocent of any knowledge of Mr. Madoff’s fraud, and the giant banks deny any liability for investor losses.

Early this year, Mr. Picard and the London trustees liquidating Mr. Madoff’s British affiliate joined forces to obtain a British court order freezing Ms. Kohn’s assets and giving them access to potentially helpful documents in the case.

The London litigation against Ms. Kohn and her co-defendants may prove crucial, since a related lawsuit that Mr. Picard filed against them in Manhattan is on shaky ground. It is one of hundreds of cases that were removed from bankruptcy court this spring for separate consideration by a Federal District Court judge, Jed S. Rakoff.

In some cases, including the Kohn litigation, Judge Rakoff has already rejected the trustee’s claims for damages, ruling that he doesn’t have the legal right to sue the giant banks and other financial institutions that did business with Mr. Madoff and his feeder funds.

Judge Rakoff also has sharply restricted the trustee’s efforts to recover cash that various Madoff investors withdrew from the Ponzi scheme before its collapse.

Those decisions, which affect tens of billions of dollars sought by the Madoff trustee, have begun the journey up the appellate escalator that carried the crucial issue of the trustee’s claims calculations to the doorstep of the Supreme Court.

Brief for the S.E.C.

Order in re The Consumers Trust

Article source: http://dealbook.nytimes.com/2012/06/20/top-courts-in-u-s-and-britain-enter-the-madoff-fray/?partner=rss&emc=rss

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Letters: Letters: Symbols vs. Causes

December 17, 2011 by Leave a Comment

Re “A Lasting Shadow” (Dec. 11), which looked at the effects of Bernard Madoff’s Ponzi scheme three years after his arrest:

Continuing to serve up Mr. Madoff as “a symbol of our troubled financial times” distracts from the real problems and broken regulatory systems that have led to our troubled financial times. Everyone agrees that Mr. Madoff broke the rules. But the damage done by those acting as allowed by our ineffective rules costs the public much more.

“Our troubled financial times” are the product of a bubble economy fueled by cheap money, an abject failure by rating agencies, regulatory agencies that have been hamstrung by regulations written by financial lobbyists, and a laserlike focus by some bank leaders on yearly bonuses. With the possible exception of the Federal Reserve, no entity in our current financial world focuses on stability, sustainability and success.

There has been no serious attempt to address any of these problems. Mr. Madoff’s antics, like those of professional wrestlers, seem just an entertaining diversion. Chris Cannon

San Francisco, Dec. 11

Article source: http://feeds.nytimes.com/click.phdo?i=d4eeb9253775bd6a078935a581f57b3f

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Bernie Madoff’s Lasting Shadow, 3 Years After His Arrest

December 10, 2011 by Leave a Comment

— Bernard L. Madoff, in an e-mail on Oct. 11, 2011

BERNIE MADOFF can’t let go.

He still hangs on each nugget of news from the outside, still points fingers, still spins his own story.

And, on occasion, he still mourns — something, he says, he will do for the rest of his life.

But these musings from prison, conveyed in dozens of e-mails to a reporter for The New York Times over the last year, are merely comments from the sidelines. For him, the case of the United States of America v. Bernard L. Madoff is officially over.

But for those he ensnared, the Madoff story drags on. It began three years ago today, when F.B.I. agents arrested a man who, to the world, was a wizard of Wall Street. Mr. Madoff soon confessed to a Ponzi scheme that became a symbol of our troubled financial times. Its unraveling took tens of billions of dollars of fictional wealth from thousands of victims around the world.

Mr. Madoff will mark this day in a federal prison in Butner, N.C., where he is serving a 150-year sentence. For countless others affected by his crimes — the lawyers and prosecutors still trying to unravel his scheme; the victims still hoping to recover money; and the Madoff family, who remain targets of public suspicion and hostility — today is but a milepost on a long, long road.

The Trustee: A Hunt for Billions

THIS might have been a triumphant year for Irving H. Picard, the lawyer appointed to unravel the Madoff estate and try to compensate victims.

To date, almost $11 billion has been recovered, more than half of the estimated $18 billion in cash that vanished in the Ponzi scheme.

For Mr. Picard, the trustee, 2011 began with court approval of a $7.2 billion settlement by the estate of Jeffry Picower, a longtime Wall Street investor who had profited enormously from his Madoff accounts. Other settlements this year made roughly $1 billion more available for victims.

The year also brought vindication when, last summer, a federal appeals court approved Mr. Picard’s formula for determining who should be paid first — a formula that some Madoff investors had denounced as illegal.

But as Mr. Picard and David J. Sheehan, his chief counsel at Baker Hostetler, reach the third anniversary of their difficult but well-paid work, they are still struggling to make headway in the federal courts, and in the court of public opinion.

Their first priority for 2012 will be to appeal several lower court rulings that, together, could reduce by about $11 billion the total they had hoped to recover through future litigation and settlements. The rulings also could rewrite the bankruptcy laws that govern nearly 1,000 lawsuits they have filed.

At issue is whether Mr. Picard has the legal right to sue Mr. Madoff’s bank and other third parties on behalf of defrauded investors. Also in question is whether there is a safe harbor in the law that prevents Mr. Picard from recovering fictional profits that Madoff investors withdrew before the Ponzi scheme collapsed.

And, finally, there is a question of the level of proof Mr. Picard must show for his claims that sophisticated investors — specifically, the owners of the New York Mets — were “willfully blind” to the fraud and therefore should return profits and some of their principal.

Handicappers on the legal sidelines say Mr. Picard faces an uphill fight on the first issue but they give him better odds on the second.

“He’s had a setback,” said Anthony Sabino, a law professor at St. John’s University, but chances are that Mr. Picard will prevail on the safe-harbor question.

As for the third question, all bets are off. The willful blindness issue has been spotlighted in the Mets case by Judge Jed S. Rakoff of Federal District Court in Manhattan, who is known for bucking conventional wisdom. But in Mr. Picard’s favor, Judge Rakoff did not dismiss that element of the Mets case entirely and will allow the trustee to press it at trial in March, said Thomas S. Harty, a lawyer with Cozen O’Connor in Philadelphia.

Such legal uncertainties will hang over the Madoff case through the coming year, if not beyond. But there is no way to appeal verdicts rendered in the court of public opinion against Mr. Picard and his employer, the Securities Investor Protection Corporation, which provides a limited safety net for clients of failed brokerage houses.

For the last three years, Mr. Picard and SIPC have been fiercely criticized at Congressional hearings, on the Internet, in court filings, in several books and in many news media interviews.

Article source: http://www.nytimes.com/2011/12/11/business/bernie-madoffs-lasting-shadow-3-years-after-his-arrest.html?partner=rss&emc=rss

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S.E.C. Punishes 8 Workers in Mistakes Related to Madoff

November 12, 2011 by Leave a Comment

The sanctions stem from Inspector General H. David Kotz’s 2009 report on the agency’s dealings with Mr. Madoff, according to John Nester, an S.E.C. spokesman. Mr. Kotz had urged the S.E.C. to act on an “employee-by-employee basis” to prevent a recurrence of mistakes that kept the agency from halting the fraud.

Of the 21 people “whose performance or conduct were called into question” by Mr. Kotz, 10 were not subject to review because they had already left the S.E.C., Mr. Nester said. Of those remaining, nine were recommended for discipline, and one of them left the agency before the matter was resolved, he said.

“We thoroughly examined all factors relevant to the imposition of discipline, including employees’ performance history — both before and since the Madoff events,” he said.

An official who was recommended for firing was given a 30-day suspension and a pay reduction after it was determined that the firing would hurt agency operations, Mr. Nester said. Several others were given suspensions ranging from three to 30 days, with some reduced in pay grade. Two people received “counseling memos,” the mildest level of agency discipline.

“The S.E.C. could have uncovered the Ponzi scheme well before Madoff confessed” in 2008, according to Mr. Kotz’s report, which detailed the agency’s failure to act on tips about Mr. Madoff’s multibillion-dollar fraud. The internal investigation didn’t find misconduct or “inappropriate influence” from senior officials in reviews of Mr. Madoff, who is serving a 125-year prison term after he pleaded guilty in 2009 to defrauding clients.

The S.E.C. hired a Washington law firm, Fortney Scott, to make disciplinary recommendations, with the S.E.C. chairwoman, Mary L. Schapiro, making the final decisions, Mr. Nester said. He declined to identify employees or the offices where they worked.

Article source: http://feeds.nytimes.com/click.phdo?i=d1d863d9488bbdf464c4058590b5f5b3

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Madoffs Tried to Commit Suicide, Wife Says

October 27, 2011 by Leave a Comment

Mrs. Madoff said in an interview with The New York Times: “I don’t know whose idea it was, but we were both so saddened by everything that had happened. It was unthinkable to me: hate mail, phone calls, lawyers.”

The situation was “just horrific,” she continued. “And I thought, ‘I just can’t, I can’t take this. I don’t know how I’ll ever get through this, nor do I want to.’ So we decided to do it.”

According to Mrs. Madoff, who has been living in seclusion in Florida, she and her husband “were both in agreement — we were both sort of relieved to leave this place. It was very, very impulsive.”

Mrs. Madoff came under a fierce media spotlight after her husband’s arrest, unable to leave her apartment without being followed by photographers and being shunned by lifelong friends who had been her husband’s victims.

His victims stretched around the world, with paper losses in the vast Ponzi scheme totaling $64.8 billion and cash losses nearing $18 billion. Those who lost money in his long-running fraud included major charities, university endowments, offshore hedge funds and thousands of middle-income investors. Many of those investors were members of the Madoffs’ extended family.

More important to both of them than the media firestorm they faced, she said, was that she had become instantly estranged from her two sons, Mark and Andrew, who had turned in their father to law enforcement officials and precipitated his arrest on Dec. 11, 2008. He pleaded guilty three months later and is serving a 150-year sentence at a federal prison in Butner, N.C.

Christmas Eve had been a sorrowful evening, she said. She and her husband had spent it gathering together and wrapping some treasured jewelry and a few gift items they wanted to send to loved ones before they died.

Guessing at the required postage, Ruth Madoff covered the packages with stamps and mailed them to a few relatives and friends, enclosing short notes of affection and apology.

Mrs. Madoff said in the interview that she and her husband had discussed how many pills each should take — she weighed barely 100 pounds, he was heftier and taller — and then they both swallowed handfuls of what she thought was Ambien before climbing into their chintz-draped canopy bed.

Although she recalled the emotional pain she and her husband felt that evening, she also said she was “glad to wake up” from a long drug-induced slumber the next day. “I’m not sure how I felt about him waking up,” she added.

Mrs. Madoff said the couple never discussed suicide again, nor was she aware of her husband ever making another attempt. “But I have no idea why he didn’t — I don’t know how he lives with it all.”

In an e-mail from prison, her husband acknowledged that suicide “crossed my mind” after his arrest. Two factors deterred him, he said. He felt he could help in the effort to recover assets for his victims, and he “could not abandon my family.”

His family was shattered by his crime, cut off from one another by legal concerns and under constant suspicion in the media. Burdened by anger and grief, Mark Madoff committed suicide in his downtown Manhattan loft on Dec. 11, 2010, the second anniversary of his father’s arrest.

In recent media interviews, Mark’s widow, Stephanie Madoff Mack, disclosed that it was her husband’s second suicide attempt. In October 2009, he checked into a hotel near their home and took a large number of sedatives. He survived and underwent therapy, according to his widow’s account.

After years of silence and seclusion, Ruth Madoff agreed to talk with a Times reporter about the worst years of her life because her son Andrew had asked her to help promote a new authorized biography, “Truth and Consequences: Life Inside the Madoff Family,” to be published Monday by Little, Brown.

The information about the suicide attempt was first reported Wednesday evening by CBS News. An article based on Mrs. Madoff’s entire interview with The Times will appear on nytimes.com on Sunday evening. The interview was granted in exchange for an agreement not to publish the full report until then.

Article source: http://feeds.nytimes.com/click.phdo?i=fc58992d07e921e373af8ea510aa916b

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Full Tilt Poker Site Misused Players’ Money, U.S. Says

September 21, 2011 by Leave a Comment

That is the essence of a civil complaint that federal prosecutors filed on Tuesday. It asserts that players around the world entrusted Full Tilt with $390 million in gambling money, and that the company promised to keep those funds in secure accounts. In reality, prosecutors found, the money wasn’t there; instead, much of it had been transferred to the owners and management of Full Tilt, some of whom were themselves among the most prominent and popular poker players in the world.

“Full Tilt was not a legitimate poker company but a global Ponzi scheme,” said Preet S. Bharara, the United States attorney for the Southern District of New York in Manhattan, whose office filed the complaint on Tuesday.

Barry Boss, a lawyer for Full Tilt, which had its headquarters in Ireland, was on a flight and unavailable to comment, a person at his office said.

Prosecutors said they first exposed the scheme this spring while investigating other problems at Full Tilt Poker and two other poker sites, Poker Stars and Absolute Poker, all of which were based outside the United States. In April, the government shut down access to the sites for American players, arguing that they were violating fraud and money-laundering laws.

Before that, American players had wagered hundreds of millions of dollars on the sites. From their home computers, players would put money into accounts with the virtual poker clubs and then bet against one another.

Full Tilt, like the others, told players that it kept their money — including their winnings — in accounts that they could tap into or close out at any time. And the company had a reputation for paying back players in a timely fashion.

When the sites were shut down, prosecutors worked out agreements with them to help them repay players what they were owed.

But reimbursements to Full Tilt players slowed or stopped altogether. The money available turned out to be insufficient, according to prosecutors, because the owners and board members of Full Tilt had themselves tapped those accounts for $440 million since April 2007.

The management’s luck, it would seem, ran out.

Among those profiting, the complaint claims, were some of the biggest names in poker: Howard Lederer, nicknamed the Professor, is said to have received payouts of $42 million. Chris Ferguson, nicknamed Jesus in the poker-playing community for his long hair, received at least $25 million and was “owed” $60 million more, prosecutors said. The two men could not be reached for comment.

Greg Brooks, an accomplished poker player who was once a regular player at Full Tilt, said the federal complaint was a painful eye-opener about what was happening behind the scenes at Full Tilt. In the past, he said, he regularly received sums in excess of $100,000 from Full Tilt, paid within a week of his request, suggesting that he could get access to his money whenever he wanted.

“My impression was that things were working well for years. I had no inkling, not even the slightest guess it wasn’t like that,” he said.

Mr. Brooks, who lives in New York, said he was owed a sum in the “low- to mid-six figures” by Full Tilt that he doubts that he will get back. (He said he was reimbursed a substantial but lesser amount by Poker Stars.) And he added that he was particularly upset with some of the fixtures in the poker community who, he said, paraded around as “brand ambassadors” for Full Tilt. Their behavior, he said, represented a major breach of trust and honor among players. “There’s an inherent level of trust and handshaking in the poker community that is unique to it,” he said.

In its complaint, which is meant to amend the original criminal complaint unsealed in April, the government asks that the members of Full Tilt management forfeit illicitly gained funds. Under federal rules, Full Tilt players could have the opportunity to petition for their money once the lawsuit is resolved.

Some advocates for legalizing online poker pointed to the complaint as another reason that the activity should be federally licensed and regulated.

“This is a system that has been forced into place by the failure of the U.S. to regulate online gambling,” said Lawrence Walters, a Florida lawyer who specializes in gambling and First Amendment law, arguing that players had to send money to risky overseas accounts. “The prohibitionists have gotten their way so far.”

He also quibbled with the government’s characterization of Full Tilt as a Ponzi scheme. He said that the government was using a “focus-group” tested term to get attention, when the allegations suggest that the management of Full Tilt may simply have been lying to players and possibly embezzling funds.

He also said he didn’t think that what prosecutors said happened at Full Tilt was happening in the rest of the industry.

“This is not endemic to the industry,” Mr. Walters said. “Sites live and die on their reputation. To the extent sites get a reputation for slow pay or no pay, that will quickly circulate.”

Article source: http://feeds.nytimes.com/click.phdo?i=81da9b518feb09a963b6528b40587605

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DealBook: Postcrisis, New Investment Tactics to Lure the Ultra Wealthy

August 12, 2011 by Leave a Comment

Girish Reddy, a founder of Prisma Capital Partners, seeks to avoid specialty overlap in the hedge funds he invests in.Hiroko Masuike/The New York TimesGirish Reddy, a founder of Prisma Capital Partners, seeks to avoid specialty overlap in the hedge funds he invests in.

Funds of hedge funds are changing their ways.

For decades, the money managers, which invest across a number of hedge funds, lured big institutions with the promise of diversification. They justified the extra fees by saying their extensive due diligence would help protect investors from major blowups.

Then the financial crisis struck, and the strategy failed. Weighed down by the added expenses, the baskets of funds lost on average more than individual portfolios.

Some failed to detect fraud in their underlying holdings. Fairfield Greenwich Advisors and Tremont Group Holdings lost billions of dollars when Bernard L. Madoff’s fund turned out to be a huge Ponzi scheme.

Since then, the investments have been a tough sell. Assets in funds of funds stand at $667 billion, some $130 billion below their 2007 peak. By contrast, the overall hedge fund industry just reached new record highs, with more than $2 trillion, according to Hedge Fund Research. Increasingly, institutional investors are opting to pay consultants to advise them on allocations, or are investing directly into hedge funds themselves. Ultrawealthy individuals, once major investors in funds of funds, have yet to return full force since 2008.

Amid the wreckage, some funds of funds are adapting their strategies and enhancing their services. They’re also looking to new lines of business, as investors seek out lower fees and greater protection in the aftermath of the crisis.

“The needs of the client have changed and the demands have increased,” said Henry P. Davis, managing director at Arden Asset Management, a fund of funds that manages about $8 billion, down from $12 billion at its peak. “It’s been a pressure that has been constructive, in terms of strengthening and broadening the scope of what you have to offer.”

Arden, for example, is now helping clients vet other potential alternative investments. Investors have access to more than 40,000 reports on external hedge funds that the firm has written over its 18-year history. Arden executives also provide consulting services, joining clients for onsite visits at money managers they’re considering.

In the current market, investors are also seeking established firms with heft. Behemoths like the Blackstone Group, which manages some $37 billion in its fund of funds business, have had little trouble raising money.

To help gain size, smaller firms are pairing with competitors, giving them new sources of capital and investors. In June, Arden announced an agreement to manage an additional $1.3 billion in assets for another money manager in the space.

Others are tailoring products to the needs of specific investors, rather than creating one-size-fits-all portfolios.

At Prisma Capital Partners, a fund of funds started by three former partners at Goldman Sachs, some 70 percent of assets are dedicated to customized portfolios that consider clients’ risk tolerance, their cash needs or the mix of their overall holdings.

Prisma is also more active than the typical fund of funds. The firm regularly analyzes its holdings and changes its lineup to take advantage of market opportunities and avoid overlap. For example, Prisma may opt to drop a manager who trades insurance products for one that specializes in mortgage-related investments.

“Our process tries to identify the specialists who have very defined areas of expertise in order to avoid overlap,” Girish Reddy, a founder and managing partner, said. “We don’t want five of our managers in the same position.”

The flexible strategy has appealed to investors. Prisma’s assets have swelled to nearly $7 billion, up from $5 billion before the crisis.

Niche funds of funds are also in vogue.

Dorset Management, a New York-based asset manager, is planning to start a commodities-focused fund of funds in the coming months, according to a person with knowledge of the matter. Some funds of funds are marketing so-called seeding platforms, which buy pieces of hedge funds in their infancy.

Liongate Capital Management, which runs about $3.2 billion, focuses on hedge funds with $500 million to $2 billion. It allows the firm to distinguish itself from larger rivals, whose asset loads make it difficult to invest in portfolios of that size. Liongate, which has had annualized returns of 9.45 percent since 2004, has pulled in about $2 billion since the financial crisis, reaching a new peak in assets.

“Fund of funds that are of a midsize like us have to differentiate themselves,” said Jeff Holland, a managing director at Liongate.

SkyBridge Capital, the firm run by Anthony Scaramucci, is trying to attract assets with a different type of vehicle that has a lower minimum. Clients pay only $50,000 to get access to a portfolio that invests in multibillion-dollar hedge funds like Third Point and SAC Capital.

Over all, SkyBridge manages about $8.5 billion across its funds.

While investors must still earn at least $200,000 a year or have a net worth in excess of $1 million, it is a far cry from the $10 million minimum investment required for many top hedge funds.

Mr. Scaramucci says he is trying to broaden the distribution channels for hedge funds, which have historically been reserved for the ultrawealthy and institutions. To do so, he is also charging a fraction atop the hefty hedge fund fees, roughly 1.5 percent of the assets. A typical fund of funds charges 1 percent of assets and takes 10 percent of profit.

“The fund of funds community is going out and identifying people that need services,” Mr. Scaramucci said.

The tactic seems to be working. Since June of last year, the business has grown to about $1.7 billion in assets under management from about $600 million.

Article source: http://feeds.nytimes.com/click.phdo?i=102b98f07a94dcc33378086f03ff1e67

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DealBook: Mortgage Executive Receives 30-Year Sentence

June 30, 2011 by Leave a Comment

A federal agents escorts Lee B. Farkas, a former mortgage industry executive, after a court appearance in June 2010 in Ocala, Fla.Bruce Ackerman/Ocala Star-BannerA federal agents escorts Lee B. Farkas, a former mortgage industry executive, after a court appearance in June 2010 in Ocala, Fla.

A federal judge sentenced Lee B. Farkas, a former mortgage industry executive, to 30 years in prison, far short of the 385-year penalty sought by prosecutors.

The case against Mr. Farkas, who was convicted of masterminding one of the largest bank fraud schemes in history, stands as the single biggest prosecution stemming from the financial crisis.

As chairman of mortgage firm Taylor, Bean Whitaker, Mr. Farkas orchestrated a plot that caused the demise of Colonial Bank and cheated investors and the government out of billions of dollars, prosecutors say.

Mr. Farkas led a minor financial firm based in Florida, and his crimes began well before the crisis struck. So while the case is a defining moment for the government, its relative obscurity also highlights the continued struggle to prosecute financial fraud in the wake of the crisis.

Other than Mr. Farkas and a string of small fry mortgage fraud prosecutions, no senior financial executives have been imprisoned. Even now, federal prosecutors have yet to bring charges against an executive who ran a large Wall Street institution leading up to the crisis.

A 2009 case against hedge fund managers at Bear Stearns ended in acquittal. Prosecutors also recently dropped perhaps their biggest case related to the crisis, an investigation into Angelo R. Mozilo, the former head of the subprime lending giant Countrywide Financial.

Mr. Farkas, 58, appeared in federal court in Alexandria, Va., on Thursday, wearing a green prison jumpsuit.

His sentence, while steep, falls short of the 150 years given to Bernard L. Madoff for running a huge Ponzi scheme.

Mr. Farkas’s fellow Taylor Bean executives fared far better. The firm’s former chief executive and treasurer, among others, pleaded guilty and cooperated in the case against Mr. Farkas. The executives received sentences ranging from three months to eight years.

The government, aiming to send a message to the financial industry, had asked the judge to impose the maximum penalty on Mr. Farkas, a 385-year sentence.

“Sentencing him to the maximum penalty allowed by law will send the most forceful and unequivocal message to senior corporate executives that engaging in fraud and deceit in order to pump up your company or line your own pockets is unacceptable and will have severe consequences,” prosecutors said in a recent court filing.

Mr. Farkas’s lawyers had asked for a 15-year sentence, saying his actions were intended to keep Taylor Bean and Colonial Bank in business. Mr. Farkas took the stand during the trial to deny any wrongdoing.

In recent weeks, his friends and supporters sent letters to the judge that painted Mr. Farkas as a kindhearted humanitarian, someone who always “displayed integrity.” Mr. Farkas once paid a stranger’s medical bills, often donated to the local salvation army’s Christmas fund-raiser and even offered up his private jet to transport a mother and her baby to New York for cancer treatment, they said.

A federal jury in Virginia was unmoved. In April, after a 10-day trial and little more than a day of deliberations, the jurors found Mr. Farkas guilty on 14 counts of securities, bank and wire fraud and conspiracy to commit fraud.

Mr. Farkas’s $2.9 billion scheme began in 2002, prosecutors say, when Taylor Bean was facing mounting losses. To hide the losses, Taylor Bean executives secretly overdrew the firm’s accounts with Colonial Bank. The lender, aiming to cover up the overdrafts, sold Colonial about $1.5 billion in “worthless” and “fake” mortgages. The government, in turn, guaranteed the bogus loans.

When Colonial started to struggle, Mr. Farkas helped convince the bank to apply for $570 million in taxpayer bailout funds. The Treasury Department initially approved the rescue loan, but ultimately withdrew the offer.

Colonial filed for bankruptcy in August 2009, making it one of the largest bank failures during the crisis.

Mr. Farkas, meanwhile, diverted more than $40 million from Taylor Bean and Colonial to “finance his lifestyle,” prosecutors said. He used the funds, according to the government, to buy a private jet, vacation homes and a collection of vintage cars.

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