Feds Win Detention for Disbarred Lawyer in Alleged Investment Scam
Mark Hamblett, New York Law Journal, 02-26-2009

The Bail Reform Act is getting a real workout during the latest spat of white-collar criminal prosecutions in the Southern District of New York.

The government won the most recent round in a series of high-profile arguments over pretrial detention under the 1984 statute Wednesday when Judge Denise Cote set virtually unreachable bail conditions for Arthur Nadel, a disbarred lawyer turned hedge fund adviser accused of swindling tens of millions of dollars from investors.

"If the defendant can't be trusted not to flee," Judge Cote said, "then the taxpayers have provided a mechanism to deal with that situation. That's detention."

Nadel surrendered to authorities in Florida on Jan. 27 after two weeks on the run. His flight was prompted when a partner in his business, concerned about revelations in the Bernard Madoff alleged multibillion-dollar Ponzi scheme case, suggested an outside audit of Nadel's finances.

Madoff's name, and that of attorney Marc S. Dreier, who is charged in a $400 million fraud, were invoked during the two-hour bail hearing before Cote.

Both Madoff and Dreier are out on bail, although confined to their apartments, and both have been the subject of drawn-out bail battles between defense lawyers and prosecutors over the meaning of Bail Reform Act, 18 U.S.C. 3142(e).

Nadel's attorney, Todd Foster of Cohen, Jayson & Foster in Tampa, Fla., tried to draw comparisons with the Madoff and Dreier cases, but to no avail.

One similarity among the three cases is that there has been no time wasted on protestations of innocence. And Nadel, like Dreier and Madoff before him, has promised to assist prosecutors and the Securities and Exchange Commission track down the missing funds.

Madoff was initially allowed to stay out of jail pretrial because prosecutors needed his cooperation in finding out where the money went, and, hopefully, who else was involved. The government later tried to have his bail revoked because he and his wife mailed more than $1 million in jewelry and watches to family and friends but Magistrate Judge Ronald Ellis, and then Judge Lawrence McKenna, read the Bail Reform Act as allowing Madoff to stay out.

Foster quoted from Ellis' ruling in the Madoff case Wednesday to the effect that it was up to the government to prove there was a serious risk of flight going forward. He also cited the Dreier case.

Dreier was initially denied bail and then assigned bail conditions so severe that it was virtually impossible for him to win his release. But after weeks of cooperating with authorities and a court-appointed receiver to track down and identify assets, Dreier was indicted and sent to Judge Jed S. Rakoff, who set conditions that allowed him to make bail two months after he was jailed.

Wednesday, Assistant U.S. Attorney Maria Douvas, who is handling the Nadel case along with fellow prosecutor Reed Brodsky, drew two distinctions between this case and the Dreier matter.

Dreier, Douvas said, had shown a measure of cooperation by giving a full accounting of "tens of millions of dollars" that was missing. She also noted that Rakoff allowed Dreier to be released, in part, because he is paying for an "armed security guard" at his apartment.

In their memorandum in opposition to bail, Douvas and Brodsky said that Nadel's supposed cooperation to date has amounted to nothing more than "not contesting" the fraud allegations leveled against him.

Nadel, 76, was charged in an information with securities fraud and mail fraud. The prosecutors say he bilked over 250 investors and partners while stating that returns on investments in two groups of funds he oversaw between 1999 and 2007 averaged more than 20 percent a year.

The prosecutors say he told investors that he had as much as $300 million invested at one point when the actual amount was a fraction of that. Investors lost more than $100 million in all, the government said in court papers, due to "Nadel's greed and self-indulgence."

FLIGHT RISK SHOWN

Judge Cote, at least in the context of Nadel's case, had a very different take on the Bail Reform Act than her colleagues in the Madoff and Dreier cases. In fact, she already had told the parties during the first phase of the bail hearing on Feb. 13 that she intended to set tough bail conditions for the Florida resident.

Wednesday, Cote first said the government has "easily" carried its burden under the act by showing that Nadel was a flight risk.

She then examined whether the government had shown that there were no conditions or combination of conditions that could be imposed on Nadel that would reasonably assure his appearance.

Working down the list of factors to be considered under §3142(b), the judge said the nature and the circumstances of the crime worked against Nadel because he committed, over several years, a "massive" and complex fraud that involved a great deal of planning and organization and included "many false statements."

The judge said evidence of Nadel's guilt was "overwhelming" and he was likely to face the equivalent of a life sentence if convicted.

The judge also said she could not "ignore his behavior" in January, when, once Nadel heard demands for an audit "he ran," fleeing to a number of different cities, changing hotels within cities to avoid detection and returning only after the FBI was moving in on him.

The judge said that one of the factors in §3142(b) was not relevant to her decision -- the idea that Nadel might pose a continuing non-violent threat to the community or his victims because he would have access to ill-gotten gains if he were released.

The judge said that only "roughly half" of $63 million in missing money has been accounted for to date. Douvas had told the court that Nadel had collected some $63.9 million in fees and profits from investors and that authorities are still trying to locate some $30 million.

Cote also noted that people who know Nadel best are hardly rushing to him in support.

"It is telling that people who know the defendant best, including people who have assets, are unwilling to come forward on his behalf," the judge said. "None of them are willing to put their name and their assets on the line."

Cote was not impressed with Nadel's offer, like Madoff and Dreier, to essentially make his home "a prison" while he awaits trial. She said electronic monitoring is a "useful tool, but it is not a perfect tool" because it does not prevent a person from fleeing. Rather, it only gives authorities a time-line off which to work to find a defendant.

The judge imposed a $5 million bond secured by $1 million in cash and signed by four financially responsible parties -- "people close to him who have substantial assets."

The judge also set as a condition that Nadel disclose what happened to the money he withdrew on a number of occasions following October 2008, money "apparently withdrawn in anticipation" that the fraud was about to be discovered. Nadel, she said, is also to cooperate with the receiver appointed in a companion civil case filed in Florida by the Securities and Exchange Commission.

Nadel, wearing the prison blues of the Metropolitan Correctional Center, was then led out of the courtroom and taken back to his cell.

"I don't think he had a million dollars," Foster said after the hearing, adding that he hoped to renew his bail argument and ask for a reduction of terms once Nadel has shown, "what we have promised from the beginning," a willingness to cooperate with authorities.

Department of Justice Press Release:

United States Attorney Southern District of New York
FOR IMMEDIATE RELEASE
JANUARY 27, 2009 CONTACT: U.S. ATTORNEY'S OFFICE
HERBERT HADAD
YUSILL SCRIBNER,
REBEKAH CARMICHAEL
JANICE OH

PUBLIC INFORMATION OFFICE
(914) 993-1900
(212) 637-2600

FORMER HEDGE FUND MANAGER ARTHUR G. NADEL ARRESTED ON FRAUD CHARGES

LEV L. DASSIN, the Acting United States Attorney for the Southern District of New York, and JOSEPH M. DEMAREST, JR., the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation ("FBI"), announced today that ARTHUR G. NADEL, 76, of Sarasota, Florida, was arrested this morning on securities and wire fraud charges. As alleged in the two-count Complaint unsealed today in Manhattan federal court:

NADEL was the investment adviser for six funds. Three of the funds (referred to in the Complaint as the "Group I funds") -- Viking IRA Fund LLC, Viking Fund LLC, and Valhalla Investment Partners LP -- had been established by Valhalla Management and Viking Management, general partnerships that had been created by two individuals identified in the Complaint as Partner-1 and Partner-2. The other three funds (referred to in the Complaint as the "Group II funds") -- Victory IRA Fund Ltd., Victory Fund Ltd., and Scoop Real Estate LP -- were established by Scoop Management and Scoop Capital LLC, general partnerships that NADEL himself had created. NADEL, who was based in Sarasota, Florida, traded for all of these funds through a broker in New York City.

Documents provided by the SEC indicate that over one hundred investors, located throughout the United States, invested in these various funds. As late as September 2008, documents sent to one investor falsely indicated that the Valhalla and Viking funds ("Group I") had a total of $210 million in assets, divided approximately equally among them. Records recently obtained from the fund custodians show that, as of the end of 2005, over $60 million had been invested in the Group II funds.

However, those records also show that, at as of end 2008, there was in fact less than $125,000 in net liquidating value in all of the funds combined. Partner-2 has also advised that one $900,000 wire transfer made from the Valhalla Investment Partners LP fund in August 2008, based on a wire request with the signature of "Art Nadel," was not authorized. Partner-1 has advised that NADEL had also, for years, resisted hiring an independent certified public accountant to audit the funds, and only agreed to do so after the arrest of BERNARD MADOFF. On January 13, 2009, Partner-2 sent NADEL a letter relating to hiring an independent certified public accountant for this purpose.

The next day relatives of NADEL reported to Sarasota police that NADEL had left a note reflecting that he was no longer going to be around. In addition, what appears to be a handwritten letter from NADEL to his wife was discovered in a shredding machine at his offices in Sarasota; that letter states in part that "[t]he avenues to money for you will likely be blocked soon."

NADEL was arrested following his surrender to the FBI this morning and is expected to be presented before a United States Magistrate Judge in Tampa federal court at 3 p.m. today.

NADEL is charged with one count of securities fraud and one count of wire fraud. The securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million, or twice the gross gain or loss from the offense.

The wire fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $250,000, or twice the gross gain or loss from the offense.

Mr. DASSIN praised the work of the FBI in the investigation of this case, and thanked the United States Securities and Exchange Commission for its assistance. He added that the investigation is continuing.

Assistant United States Attorneys REED M. BRODSKY, MARIA E. DOUVAS, and JEFFREY ALBERTS are in charge of the prosecution.

The charges contained in the Complaint are merely accusations, and the defendant is presumed innocent unless and until proven guilty.

From Betsy Combier: And then there is R. Allen Stanford...

Stanford: Signs That Should Have Worried Investors
The Stanford scandal also raises questions as to whether the SEC, which had been investigating the firm for three years, should have acted sooner
By Matthew Goldstein, Business Week

R. Allen Stanford can blame Bernard Madoff for bringing down his financial empire.

Regulators had been looking at Stanford's firm and its suspiciously high-yielding certificates of deposit on and off for at least three years. But it wasn't until late December—the week after authorities learned about Madoff's alleged $50 billion Ponzi scheme—that the Securities & Exchange Commission bore down on Stanford Financial Group. The timing isn't coincidental, say people close to the probes. After the Madoff scandal erupted, the SEC quickly assigned a seasoned attorney to Stanford's case. That investigator worked around the clock. Less than two months later, the SEC charged Stanford with running an $8 billion scam. A spokesperson for Stanford Financial directed inquires to the SEC.

With each new scandal, regulators are taking heat for not moving fast enough to protect investors. Madoff's operation first raised red flags more than a decade before the SEC brought charges.

There were warning signs about Stanford as far back as the early 1990s. In the course of the SEC's three-year investigation, a number of former employees at Stanford Financial voiced concerns about the firm in lawsuits and public arbitration cases. In a 2006 lawsuit, one accused Stanford of running a "Ponzi scheme, or pyramid scheme." The suit was settled for an undisclosed sum. Says New York securities lawyer Ross Intelisano: "A speedier complaint would have saved a lot of investors."

That's almost certainly true. Stanford Financial posted strong growth during that three-year period. Investors poured at least $2.5 billion into the affiliated offshore bank that issued the CDs from 2006 to 2008. "They eventually found [problems]," says Houston securities lawyer Thomas Ajame, who is fielding calls from Stanford Financial investors considering suing the firm. "But [Stanford Financial] was ready to collapse."
A Fine Line

Regulators defend their practices, saying they have to balance the needs of investors with those of financial firms. If the SEC acts too soon, it can damage the reputation of a firm that has done nothing wrong. If it acts too late, it risks harming investors. The SEC says it didn't get solid information about the case until late last year. "We have to walk a fine line," says Rose Romero, an SEC regional director in Fort Worth. "We don't want a run on the bank."

To the outside world, Allen Stanford portrayed an image of wealth and respectability. The larger-than-life Texan, who was knighted by the government of Antigua in 2006, shelled out big bucks to get his firm's name plastered on tennis tournaments, cricket matches, and even PGA golfer Vijay Singh's wardrobe. Stanford treated top clients to trips to Antigua on the corporate jet.

Tomas Morales, a 35-year-old resident of Venezuela, first started investing with Stanford Financial three years ago. He says one of its bankers told him the account would protect him from possible upheaval in the country since the money would be held by an offshore bank. "I thought Stanford was a good name, a bank in which I could [have] confidence," says Morales. "I doubt I will ever see my money again."

The entire operation may have been nothing more than a well-crafted illusion. It doesn't take more than some cursory Web research to discover the dubious roots of Stanford Financial's affiliated bank that issued the questionable CDs. The offshore bank—then called Guardian International Bank—first started operating from the British territory of Montserrat in the Caribbean. Back then it focused mainly on Latin American investors, offering them a three-year CD with an annual yield of 10.25%. In 1991 the local government moved to revoke Guardian's banking license under hazy circumstances. Following the incident, Stanford relocated to Antigua and renamed the affiliate Stanford International Bank.

Some basic digging yields other troubling details about Stanford Financial and its offshore bank. The board that oversaw the bank was dominated by insiders—either friends or relatives of Stanford. The bank's annual reports offered few specifics about the CDs sold by Stanford Financial. And even though its assets had grown exponentially, the offshore bank continued to rely on the same tiny auditor it used in Montserrat, C.A.S. Hewlett. Hewlett didn't return calls for comment.

The firm had also had prior run-ins with regulators. In November 2007, the Financial Industry Regulatory Authority, a major private-sector oversight body, slapped Stanford's brokerage group with a $10,000 fine. The firm hadn't properly disclosed that some of its brokers sold the CDs of the affiliated bank. Regulators saw this as a potential conflict of interest. Now they're alleging there was much more.

With Peter Wilson in Venezuela.
Goldstein is a senior writer at BusinessWeek.

Comments made online:

LaVern Isely Feb 25, 2009 5:42 PM GMT What the world needs is more investigative reporters, particularly in the world of finance. the two incidents involving Bernard Madoff and R. Allen Stanford are interesting. In Mr. Madoff's case, he was a hedge fund dealer trying to pretend that hedge fund dealers could replace banking. In Mr. Stanford's case, he was a banker dealing offshore, ignoring the rules and safeguards and making up his own rules. Fed Chm Bernanke should have been all over him on this because he's the top banker, as well as the top banking regulators--Treasury Secretary Paulson and FDIC Chm Sheila Bair. Is this what happened when they got rid of the GLASS-STEAGALL ACT--they can't define the difference between the banks and stock market? I think Mr. Bernanke's term should come due the same time the president gets elected. I wish some good investigative reporter would look into why we should reinstate the GLASS-STEAGALL ACT. I've enjoyed reading Business Week, which should be the premier reporting on the business industry and they had one excellent reporter, who now writes for Portfolio, Gary Weiss, who I formerly read articles by him in Business Week over 16 years ago. AARP Member, LaVern Isely

BIGWEEDS Feb 19, 2009 9:40 PM GMT Folks, I vote that the all of the people that worked on the so-called investigations of various firms that turned out to be really bad dudes return all of the pay and then send ten times that amount to the group that is trying to recover assets....oh...one more thing....FIRE ALL OF THESE SO_CALLED INVESTIGATORS!! Regards

Truth Feb 19, 2009 7:50 PM GMT They've talked to Allen's dad in Mexia and a couple former brokers. They should be talking to Harry Failing of Sugarland, TX, Allen's longtime personal tax accountant (who has an expired CPA license as of Dec 2008 btw).

Big Al Feb 19, 2009 5:50 PM GMT FINRA and the SEC both had sufficient notice of problems withing the Stanford organization to take action if they wished to. We know at least one attorney for stanford (Thomas Sjoblom at Proskauer Rose) was an SEC career attorney who left to shill for Stanford. Bernerd Elmer Young was a NASD/FINRA senior regulator who left to shill for Stanford as Chief Compliance Officer. Consummate regulatory insiders going over to help a firm evade regulatory oversight. They cashed in big time and the investing public got fleeced. WHERE IS CONGRESS AND WHY AREN'T THEY CALLING FOR HEARINGS????!?!?

xyz123 Feb 19, 2009 5:22 PM GMT The SEC actually defends their practice of, "balance the needs of investors with those of financial firms?!" And therein lies the problem. Our government is not, "for the people, and by the people." It is for, big businesses which influence the workings of our government. Influence them to their advantage, "over the people, and above the people," so as to take all our money enriching the few.

GLL Feb 19, 2009 5:20 PM GMT Our watchdog organizations are toothless. The politicians that watch the watchdogs are to busy kissing the ring of the perps as he stuffs their reelection fund with more dollars. Corruption at the level we are observing is capable of destroying our economic system and bringing our nation down. It has happened in the past to other nations (Rome) and we are not immune. Would somebody that leads please stand up and start cleaning out the stalls? Before it is to late.

BCR Feb 19, 2009 3:39 PM GMT A couple of "old sayings" might apply here... There's no free lunch. If it's too good to be true, it probably is. And finally... Buyer Beware.

sjfone Feb 19, 2009 1:36 PM GMT SEC what SEC.

Sally in Chicago Feb 19, 2009 12:02 PM GMT ABC is reporting that he's in bed with the MExican drug cartel. You would think the FBI would have known about it.

Allen Stanford Feb 19, 2009 10:47 AM GMT From His own Quote: "When investing, you must stay true to your fundamentals, to your foundation, whether times are good or times are bad. But most importantly, when the market is booming and everything is going your way, don't let greed cloud your common-sense judgment." R. Allen Stanford, Chairman of the Board Commencement Address, University of Houston, 14 May 2005