I forgot to post this interesting news from earlier in the week (January 5, Monday) :

“The patriarch of a German family whose assets include a majority stake in HeidelbergCement died on Monday in an act his family attributed to “the desperate situation of his companies caused by the financial crisis”…….

Merckle’s situation echoes those of Olivant chief operating officer Kirk Stephenson and Access Partners’ Rene- Thierry Magon de la Villehuchet, both of whom committed suicide last year. All faced large, rapid financial losses. All were caught out by forces that may have been hard to accept. Merckle was a once-conservative industrialist seduced by the returns available through heavy leverage. Unable to refinance loans taken out to cover trading losses, including an estimated E400m from short-selling VW shares, he faced a very public liquidity crunch…”

More at The Telegraph

Comment:

The first of the suicides was by Kirk Stephenson, the New Zealand born COO of Olivant Advisors.

He apparently threw himself in front of a 100 MPH train at Taplow railway station in Berkshire while under increasing financial pressure from the credit crisis. Olivant is a private equity firm that tried to buy a 15% (1 million P ) stake in Northern Rock before the bank was was nationalized. Stephenson, 47, married and with an 8 year old son, was a well-respected millionaire City financier.

Merckle, 74, known as the German Warren Buffett and once the 92nd richest man in the world according to Forbes, was until the financial crisis worth $9.2 billion.  His holding company owed $6.7 billion to the banks when he was found dead on the tracks outside his home town of Blaubeuren. He left a suicide note behind.  Merckle expanded his grandfather’s pharmaceutical business from 80 employees to over 70,000 but seems to have run it like a family firm, giving employees as many as six years at home to raise children.  That might have been the reason he took his losses so personally. The last straw apparently came when his holding company shorted Volkswagon and the shares went on to quadruple.

The third suicide (which I posted earlier) was that of Rene-Thierry Magon de la Villehuchet, the French manager of Access International, one of the European “feeder funds” for Madoff. Villehuchet was found dead, his wrists and biceps slashed with box cutters, at his NY office, after losing clients over a billion (1.4 at least) dollars. That sum included his own money as well as the money of family and friends. Villehuchet was a French aristocrat whose ancestors made a fortune in shipping in the 17th century and the (apparent) suicide is attributed to the loss of honor and reputation he suffered. Villehuchet did not leave behind a suicide note. Villehuchet’s brother insisted that the return he and others received from the Madoff fund  (which he described as 17 percent distributed over  4 years) was far from excessive. He also insisted that his brother was a modest and honorable man, not a greedy socialite, as he was being portrayed in the media. However, it does look like Villehuchet used excessive leverage (150 percent) that left him with losses greater than his investment.

Item: There was no suicide note in the Villehuchet case.

Item: Villehuchet lived in Westchester County in New York and worked in New York city.

Item: Villehuchet co-founded Access International Advisors with Patrick Littaye in 1994. Littaye had been investing with Madoff for a while. It was Littaye who brought Villehuchet into Madoff’s ambit. Access raised funds in Europe to invest with Madoff (75% of it was with him) through  LUXALPHA  SICAV-American Selection, a fund managed by the bank, UBS. Its objective was “to provide a consistent performance” for investors, who included the Rothschilds and Liliane Bettencourt.

Item: Prior to founding Access, Villehuchet was CEO and Chairman of Credit Lyonnaise Securities, the US Investment Banking arm of the French bank, and prior to joining there in 1987, he ran Interfinance, a broker firm specializing in the European markets that he founded in 1983. Before that, he worked at Banque Paribas from 1970 and it was then he met Littaye who worked there too.

Item: He was working closely with American financiers from at least 1987, from this account. Twenty years of living in New York where most top fund managers were reportedly aware that something was not right with Madoff, and he didn’t know? Shouldn’t he at least have diversified? Instead, one report says he actually put all of his brother’s money into the fund and 20 % of his own (another report reverses the figures). That sounds as if he knew enough about Madoff to be absolutely sure about the deal. How could he so sure? Could he have been  oblivious to the complaints going on from 1999 and earlier?

Not likely. In fact, I would say impossible. Just as it’s impossible that the SEC was simply incompetent on this. As my previous post shows, the SEC was quite capable of rooting out Ponzi schemes of just this sort in several cases. Note the number of times (8) there were investigations into Madoff:

(1) 1992 – an SEC probe of Florida accountants who allegedly sold unregistered securities brings up Madoff’s name (2) 1999 -SEC examiners review trading practices at Madoff’s investment advisory firm (3) 2001 – The SEC’s Boston office notified by Harry Markopolos about questionably stable returns of Madoff’s firm (4) 2004 – SEC investigates Madoff for improper trading practices (5) 2005 -SEC interviews Madoff and family and finds no improper trading practices (6) 2005 – industry-based regulatory office finds no improper trading practices by Madoff’s firm (6) 2005 – SEC investigators meet Markopolos, who calls Madoff’s firm  “the world’s largest Ponzi scheme” (7) 2006 – SEC enforcement investigation says Madoff and a client misled regulators and Madoff agrees to register as an investment adviser (8) 2007 -Financial Industry Regulatory Authority examines Madoff’s firm but takes no action.

No. Someone with oversight of the SEC squashed the investigation.

And Villehuchet, whatever his personal sense of honor, very likely knew what Madoff was all about.

The SEC is going after the small fry, now that’s it’s been caught with its pants down in the case of the biggest fry of them all.

A Philadelphia investment manager, Joseph Forte, has been charged with having swindled around $50 million from 80 investors in a mini Madoff scheme.

It’s not the only such case in the SEC’s files. The Commission just closed up a civil case against Renaissance Asset Fund, Inc.’s  Ronald J. Nadel, and Joseph M. Malone, which charged them with swindling over $16 million from more than 190 investors nationwide, most elderly and belonging to Jehovah’s Witnesses congregations.

“According to the complaint, from at least March 1999 through April 2004, the defendants raised funds for multiple purported projects, including a general fund, an outlet mall, an international currency exchange, and a Swiss bank. Some of the purported projects did not exist, and others were unsuccessful. The defendants misrepresented to investors that their investments would earn returns ranging from 10% to 25% in as little as four months. The defendants also sent quarterly account statements to investors setting forth the fictitious profits their investments had purportedly earned. Based on the representations in these account statements, many investors reinvested their principal and purported profits in other Renaissance projects.

The defendants operated Renaissance’s programs as a Ponzi scheme, paying earlier investors with funds raised from later investors. Nadel also used investor funds to pay for lavish expenses, including country club memberships, car leases, and retail purchases. The majority of investors in Renaissance never received the interest or return of their principal the defendants had promised. …”

Read more at Jehovah’s Witness.Net. Here’s the link to the original SEC complaint in 2006 and here’s the record of the SEC’s administrative proceeding (January, 2008) barring Nadel from selling securities for 5 years.

Comment:

I am posting material that creates a context for the Madoff business. Florida is one place to start because the state is notorious for attracting scamsters lured by its population of wealthy seniors. Reports like the ones I’ve posted show that while the SEC sat on its hands during the Madoff scam, it was doing its job when it came to the smaller fry. In other words, it isn’t the lack of laws or regulation that is the problem. It’s the selective enforcement of laws. And that’s a problem not of structure, as the liberals would have it, but of political culture and corruption.

Supporting that take, here’s another, older piece (1992), “An Oasis Rich in Shady Operators,” Diana Henriques, NY Times, October 4, 1992 which describes scams in the booming 1990s, supposedly the golden age of the markets.

“College Bound is not unique in Boca Raton. Indeed, in the past year, this expensive enclave has experienced the financial equivalent of a cancer cluster. Six local corporations, including College Bound, have fallen under S.E.C. investigation; a seventh has been shut down and its chairman arrested and accused of running a Ponzi scheme. Dozens of other companies based here are little more than corporate shells created by boiler-room brokers, or financially flimsy companies whose chief products seem to be their own stock and news releases boasting of their prospects.

Regulators policing the penny stock market refer to the area’s unsavory brokers as the Boca Bunch, and state investigators have dubbed the area “the Maggot Mile.” The United States Attorney’s satellite office next door in West Palm Beach, once a three-person operation, now keeps 14 attorneys busy. ‘Very Appealing Location’

“Once it was North Miami that had become notorious, then Fort Lauderdale,” said Caroline Heck, executive assistant United States Attorney in Miami. “Now, Boca is a very appealing location.”

Charles A. Harper, the regional administrator for the Miami office of the S.E.C., agrees. “We’ve definitely seen problems moving up the coast.”

And this excerpt below (also from the same Times piece) shows that money-laundering often accompanied the fraud:

“According to court records in Miami, the Bank of Credit and Commerce International, which has since emerged as one of the largest bank frauds in history, opened a branch here just to cater to Munther Ismael Bilbeisi, a Jordanian businessman and Boca Raton resident indicted in August 1991 on tax evasion charges stemming from a coffee-smuggling scheme financed by B.C.C.I. Mr. Bilbeisi left Boca a fugitive.

Cary Maultasch, who testified under a grant of immunity against Michael R. Milken in 1990, still lives here, as do other former Wall Street lions from the scandals of the 1980’s, including Martin A. Siegel, who pleaded guilty to insider trading charges involving Ivan F. Boesky.”

Drugs often played a role in many suspect firms, as this piece from Sept, 08, indicates:

“In 1987, Jerold Weinger was the CEO of a Wall Street brokerage firm crushed under an avalanche of coke.

One of the firm’s partners, six brokers and a receptionist were arrested in a massive U.S. Drug Enforcement Administration Wall Street sweep called Operation Closing Bell. A ninth employee was arrested in the firm’s Florida office. Partner Wayne Robbins ultimately pleaded guilty to drug charges, and seven of the eight others either pleaded or were found guilty of possession, distribution or conspiracy to distribute cocaine, according to the DEA’s New York office.

According to federal court documents filed in the Southern District of New York, brokers at Brooks, Weinger, Robbins & Leeds regularly traded stock tips for cocaine. In one instance, a broker gave cocaine to a principal of another company in exchange for $10,000 worth of stock in that company’s initial public offering. At one point during the sting, a broker was arrested on drug charges and fired from the firm. A day later, he was rehired “because he was a good, trusted source of cocaine.” (“ Fool’s Gold: Desperate clients hand over thousands of dollars for a chance at a job,” Craig Malisow)