Securities Fraud Attorney Blog

Below is a CNBC guest blog by Ross Intelisano on the two year anniversary of Madoff's arrest.

Madoff Two Years Later - It'll Never Be the Same
by Ross B. Intelisano - Rich & Intelisano, LLP

December 11, 2008 started like a typical year-end work day. Then the phone rang with a hysterical retired widow screaming and crying that she had just lost almost all of her money investing with Bernie Madoff. That might seem strange to many, but we receive calls like this all of the time. Our law firm represents investors who've been defrauded by Wall Street. But the phone kept ringing, all day, every day, from December through February. And the numbers were staggering; tens or even hundreds of millions of dollars lost. Generations of wealth were completely wiped out. We knew immediately. This was going to be the largest fraud ever, and by a long shot. And it was. $18 billion. Almost ten times larger than any other Ponzi scheme.

It became clear very early that the direct Madoff investors were doomed. SIPC would provide it's limited coverage and hopefully litigation would scrape some money back. But that didn't stop direct Madoff investors from calling. For about four hours every day we heard the most awful financial stories: sick seniors with no money for medicine, retirees who were now refugees. Although we knew we couldn't help these people legally, we spent three months providing emotional support to investors, some of whom were friends of friends, parents of colleagues, and even my wife's middle school teacher's family. It was the most torturous time of my professional career.

Prior to Madoff, when I told people what I did for a living, I often heard responses like, "Really? There's fraud on Wall Street." Since Madoff, it's been "You must be really busy." Uh, yes.

Unbeknownst to many people, most Madoff investors were not directly invested with Madoff but were indirect investors; those who got to Madoff through feeder funds often recommended by third party advisors. Many of the indirect Madoff investors had no idea that there money ended up in a Madoff feeder fund. These are the most tragic stories, often including people of modest wealth who lost most of their savings. There has been substantial backlash levied against direct investors alleging greed, ignorance and worse. But the unsuspecting indirect Madoff investors hired investment professionals to look after them. Some of these advisors did whatever they could to direct client money to Madoff feeder funds and represented that it was appropriate for clients' safety needs. There lies the greed. When Madoff blew up, the advisors shrugged their shoulders and cried, "how was I supposed to know?". That is as much a sham as Madoff himself.

Luckily, we've been able to help a bunch of indirect Madoff investors recover money from the few third party advisors who were financially viable even after Madoff exploded. Last week, almost two years to the date of Madoff's arrest, the retired widow called me crying again. We had just resolved her case against a third party advisor and it brought back all of her horrible memories of the winter of Bernie Madoff. She told me she still can't trust anyone. I understood. She said it will never be the same again. She's right. Though securities fraud will survive so long as there are brokers and customers, we will never see an $18 billion Ponzi scheme that destroyed so many families. Ever.

Below is a New York Times piece about the Firm's $20.6 million arbitration award against Goldman Sachs being upheld by Judge Rakoff in a sternly written opinion.

DealBook - A Financial News Service of The New York Times
November 30, 2010, 6:16 pm
Goldman's $20 Million Consequence
By SUSANNE CRAIG

Goldman Sachs made its bed. Now Judge Jed S. Rakoff says the Wall Street firm has got to lie in it.

In 2008, Goldman chose to fight a case in arbitration rather than court. On Tuesday, in a sharply worded attack on the system, Judge Rakoff of the United States District Court in Manhattan said that Goldman would have to live with the findings of the arbitration panel. In this instance, those consequences could amount more than $20 million.

"Although arbitration is touted as a quick and cheap alternative to litigation, experience suggests that it can be slow and expensive. But it does have these `advantages'; unlike courts, arbitrators do not have to give reasons for their decisions, and their decisions are essentially unappealable." Judge Rakoff wrote in his opinion. Goldman "having voluntarily chosen to avail itself of this wondrous alternative to the rule of reason, must suffer the consequences."

The case stems from the collapse of the Bayou Group, whose former chief executive, Samuel Israel III, is now serving 20 years for fraud. Goldman cleared trades for the hedge fund for years. In 2008, unsecured creditors of Connecticut-based Bayou filed a claim against Goldman, arguing the firm ignored signs of wrongdoing at Bayou.

Under the terms of its contract with Bayou, Goldman could have applied to fight the case in bankruptcy court. But instead the firm opted for arbitration.

"Both sides could theoretically have agreed to waive the arbitration clause and litigate in court, but either could have insisted on arbitration," says a Goldman spokesman, who declined to comment on the decision.

That strategy didn't pan out. Earlier this year, a three-person Financial Industry Regulatory Authority panel ordered the firm to pay $20.6 million to the unsecured creditors of the Bayou Group.

But Goldman wasn't happy with the findings, and in July it moved to vacate the arbitration award - the largest ever levied against the firm. In taking the matter to court, the firm argued the panel had "manifestly disregarded the law" and exceeded its authority under the Federal Arbitration Act.

In early November, Judge Rakoff denied the request. On Tuesday, he expounded on the matter in a 13-page opinion, taking jabs at both arbitration and Goldman. Judge Rakoff, known for his sharp wit and blunt talk in big Wall Street cases wrote, "a court, unlike an arbitrator, must state its reasons and subject them to appellate scrutiny."

The firm is not out of options yet. It can appeal Judge Rakoff's decision to the Second Circuit Court of Appeals.

If ultimately upheld, the Bayou award could have ramifications across the financial sector. Wall Street firms, which handle billions of dollars in transactions, say that their job is to clear trades, not police clients. This award could raise the standard for clearing businesses.

John G. Rich, a partner at New York law firm Rich & Intelisano who represented the Bayou creditors, said, "The Bayou investors are gratified that the judge gave proper deference to the arbitrators' findings about Goldman's conduct."