The Back Alley Archives

Dec. 15 (Bloomberg) -- Federal investigators working through the weekend to unravel Bernard Madoff’s alleged $50 billion Ponzi scheme found evidence he ran an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries, two people with knowledge of the inquiry said.

Clients of the undisclosed unit may have included hedge funds, according to the people, who declined to be identified or to name the funds because the probe isn’t public. Investigators from the U.S. Securities and Exchange Commission are looking for signs that others participated in the alleged fraud and are examining why Madoff’s wife’s name appeared on documents linked to transactions under scrutiny, the people said. His wife, Ruth Madoff, has not been accused of any wrongdoing.

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More than a dozen SEC inspectors have been working around the clock examining records at Bernard L. Madoff Investment Securities LLC in New York after his sons told authorities Dec. 10 he’d confessed to orchestrating a Ponzi scheme with more than $50 billion in losses, the biggest in history. People with knowledge of the probe who initially said they suspected the loss estimate was too high now say it may be roughly accurate.

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The $50 billion figure may reflect the amounts of money clients were told they had in their accounts at the firm, not the amounts they originally invested, two of the people said. Customers who believed they had amassed investment gains over time may have been misled, the people said.

Clients facing losses range from New York Mets owner Fred Wilpon’s Sterling Equities Inc. to hedge funds such as Fairfield Sentry Ltd. The alleged scam has ensnared more than 25 companies, including some of the biggest financial-services firms such as BNP Paribas SA in Paris and Nomura Holdings Inc. in Tokyo, which have said they may lose money because of trading or lending tied to Madoff’s firm. In all, companies, individuals and foundations have disclosed about $24 billion of investments with Madoff, according to data compiled by Bloomberg and media reports.

Dec. 8 (Bloomberg) -- Marc Dreier, managing partner and founder of the 250-lawyer New York firm Dreier LLP, was charged by federal prosecutors with cheating hedge funds out of more than $100 million.

Dreier, who has represented publishing executive Judith Regan and U.S. radio broadcaster Clear Channel Communications Inc., was ordered detained by a magistrate judge in Manhattan federal court, where he faces securities and wire fraud charges. The judge will hold a bail hearing on Dec. 11.

“This is a very complex matter, and the facts are beyond the reach of a sound bite,” defense attorney Gerald Shargel said after the hearing. Dreier didn’t enter a formal plea to the charges today. “He’s had a tough several days,” Shargel said.

The charges against Dreier, 58, a graduate of Harvard Law School and Yale College, came on the same day he was sued by Wachovia Corp. for defaulting on $12.6 million in loans. The U.S. says he lied to three unnamed hedge funds when he claimed to represent a New York real estate developer purportedly seeking to sell notes to investors. Dreier told the funds they could buy the notes at a deep discount from the developer and the original note purchasers, prosecutors said in a complaint.

One fund wired about $100 million to Dreier’s account in October after receiving phony financial documents written by the attorney, prosecutors said. Another fund allegedly wired about $13.5 million. The funds were based in New York, Toronto, and Greenwich, prosecutors said.

Government’s Charge

“The developer did not issue any of the notes,” according to the complaint. Dreier “has never been responsible for managing or selling notes on the behalf of the developer.”

Dreier faces a maximum 10 years in prison on the most serious charge.

The U.S. Securities and Exchange Commission filed a parallel civil lawsuit against Dreier today, claiming he raised at least $113 million by marketing bogus promissory notes to hedge funds and other investment funds. About $100 million is missing, the SEC says. Money was returned to at least one buyer who discovered the scheme and demanded a refund.

In recent days, Dreier L.L.P., the Park Avenue law firm that Mr. Dreier founded, has been plunged into chaos. At least $35 million in escrow that was to have been held by the firm seems to be missing, the authorities say, and nearly all of its 250 lawyers are now looking for work.

The amounts pale next to the $50 billion fraud that another high-profile New York figure, Bernard L. Madoff, was accused last week of orchestrating, but they have unnerved lawyers and their clients in the broader legal community.

As the Dreier firm’s lawyers rummage through the law firm’s books, which had been until recently Mr. Dreier’s exclusive preserve, they are finding that bills have not been paid in months. Their health insurance is in default and the firm will not be able to make its $2.6 million payroll on Monday, lawyers there say.

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Mr. Dreier was the only equity partner in the firm, and deals were structured so that only he knew all the specifics and had access to all accounts, people with the firm said in court papers. Mr. Dreier convinced lawyers that such an arrangement was best by emphasizing that it would allow them to concentrate on their first love, the law, while he worried about running the firm.

There would be no executive committee. No partners meetings. Mr. Dreier would handle all administrative chores.

For lawyers there now, the delegation of responsibility means that they are just now figuring out that Mr. Dreier had let their malpractice insurance lapse, exposing them to enormous risk if they are sued by Mr. Dreier’s growing list of potential victims, lawyers said.

At this point, the law firm’s comptroller refused his requests to move millions of dollars. He did agree, though, to Mr. Dreier’s request to be connected to the bank that handled the law firm’s accounts, an assistant United States attorney, Jonathan R. Streeter, said in a bail hearing on Thursday. “He successfully got $10 million transferred out of an escrow account into a personal account that he controlled,” Mr. Streeter said.

TAMPA — Missing Sarasota hedge fund manager Arthur Nadel, charged with fraud in what authorities say was an elaborate Ponzi scheme that bilked investors out of millions of dollars, has turned himself in to the FBI in Tampa and will be held for a Friday hearing.

Nadel, 76, disappeared from his Sarasota home on Jan. 14, telling his wife in a note that he felt guilty and feared he would be killed. Authorities traced him to Louisiana using cell phone records, but his whereabouts in more recent days had been unknown

SARASOTA — Before he traveled by private jet, before he became a philanthropist, before he managed huge sums of money for investors throughout the United States, Arthur G. Nadel was so broke he drove a 16-year-old Ford and argued with an ex-wife over a $100 camera.

"He has no assets, no liquidity, no money in the bank and no resources of any kind,'' Nadel's lawyer wrote a judge in 1995, asking that Nadel be spared from paying alimony. "The husband is financially impoverished.''

Yet in just nine years Nadel went from down-and-out musician — fired from playing the piano at the Homestyle Harmony restaurant — to hedge fund manager responsible for a reputed $350-million.

Today, that money is missing and so is the 76-year-old. He skipped town on Jan. 14, telling his fifth wife in a note that he felt guilty and feared he might be killed.

Federal regulators, who have charged Nadel with fraud, say he misled investors by vastly overstating the value of assets. Two of his companies have agreed to a freeze on whatever is left while the FBI hunts Nadel, thought to have fled at least temporarily to Louisiana.

But if his whereabouts are a mystery, so is this: Why did so many smart people — doctors, lawyers, corporate executives — entrust their fortunes to a man with such a questionable past?

Jan. 27 (Bloomberg) -- Nicholas Cosmo, founder of Agape World Inc. in Hauppauge, New York, swindled investors out of more than $370 million and used the money to pay for limousines, fund a baseball league and pay off a restitution order from an earlier fraud, U.S. authorities said.

Cosmo, 37, operated a Ponzi scheme at least from October 2003 to December 2008 that victimized more than 1,500 individual investors, putting the money into Agape World bank accounts, according to a 51-page affidavit by U.S. Postal Inspector Richard Cinnamo detailing the government’s allegations.

“By paying investors partial returns -- represented to be profits from interest-generating loans -- Cosmo persuaded current investors to invest additional funds in Agape and AMA, and also encouraged new victims to invest in the two companies,” U.S. Attorney Benton J. Campbell’s office said in a statement today.

AMA is Agape Merchant Advance LLC, another Cosmo company involved in the alleged fraud. Cosmo is scheduled to be arraigned later today before U.S. Magistrate Judge E. Thomas Boyle in U.S. District Court in Central Islip, New York. His lawyers, Steven D. Feldman and Arthur G. Jakoby, declined to comment on the charges.

Cosmo, arrested after he surrendered yesterday in Hicksville, New York, claimed he was putting investors’ money into bridge loans to businesses, according to the Cinnamo affidavit, which was unsealed today. Just $746,000 of the money was found in the bank accounts last week, Cinnamo said. Less than $10 million was loaned out, the alleged business of Agape World.

Investors were promised returns as high as 80 percent. They were told their money would be used to fund secured loans to businesses, at interest rates from 6 percent to 16 percent, over periods of up to 90 days, according to the affidavit.