Securities Fraud: When Your Securities Are Not Secure

Chicago, ILAlthough it has been approximately 6 months since Bernard Madoff's arrest sent shockwaves through the investment industry, the fallout from that arrest still continues. More lawsuits have been filed in the case, alleging securities fraud. People who invested in stocks and securities with Madoff are worried they may not get their money back. Meanwhile, other investors are filing lawsuits against their financial managers alleging stock fraud.

According to a report in The Wall Street Journal, people who invested in 2 feeder funds to Madoff have filed lawsuits against Madoff, the fund manager and other defendants, alleging they lost $3.5 billion. The lawsuit was filed on behalf of investors in the Kingate Global Fund Ltd. and Kingate Euro Fund Ltd. The funds already face a lawsuit filed by the court-appointed trustee for Madoff's investment firm. That suit seeks the return of money withdrawn from Madoff's firm just prior to his arrest.

The investor lawsuit alleges the fund manager and other defendants ignored warning signs that Madoff was involved in a Ponzi scheme. The lawsuit alleges fraud, breach of fiduciary duty and negligent misrepresentations against the defendants.

Meanwhile, the court-appointed trustee, Irving Picard, has also filed a lawsuit against Jeffry Picower, alleging the investor made a minimum of $5 billion off Madoff's Ponzi scheme. Picard alleges Picower "knew or should have known," he was profiting from fraud because his returns were implausibly high. According to the lawsuits, annual rates of return were above 100 percent and some returns were as high as 950 percent.

Picower, reportedly a friend of Madoff, ran the Picower Foundation, a philanthropic fund that supported a variety of programs. According to Reuters, the foundation shut down in December due to losses from investments with Madoff.

Picard is attempting to recoup money for investors who were allegedly defrauded out of their investments in the Ponzi scheme.

In still other Madoff-related news, at least 1 group of investors has asked a bankruptcy judge to review how their losses are calculated. According to The New York Times, the investors say they should be credited for the value of their investments shown on their last account statements. That can add up to more than $64 billion. Currently, Picard is calculating losses by taking the total amount each customer invested and subtracting the amount withdrawn before the Ponzi scheme fell apart.

One of the lawyers involved in the case said that under the current method of calculating losses, many investors would not receive any money, even though they were affected by the alleged fraud.

In response to Madoff's Ponzi scheme, the US Securities and Exchange Commission (SEC) has voted to impose new rules on money managers and investment advisors. The new rules would allow surprise inspections on investment advisors by independent auditors. Meanwhile, some money managers would have to take yearly compliance exams to show they can properly protect investors' assets, according to a Bloomberg report.

The SEC has faced criticism that it should have caught Madoff's scheme. A Ponzi scheme is one in which investors who pull out more money than they invested are paid with money invested by new clients, rather than by actual investment returns. As long as there is more money being invested than being withdrawn, the scheme can go without collapsing. It is when investors begin pulling out their money at a greater rate than new money is being invested that the scheme begins to fall apart.