In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in connection with their investments in the Fairfield Sentry Hedge Fund, Claimants sought $2,473,195.46 in compensatory damage, punitive damages, return of commissions and fees, pre-and post-judgment interest, costs and fees; and asserted causes of action for:
In the Matter of the FINRA Arbitration Between Jorge Braver, Gustavo Kogan, Ralif Limited, and Triac Enterprises Limited, Claimants, vs. EFG Capital International Corp., Respondent (FINRA Arbitration (10-00840, July 6, 2012).
SIDE BAR: Started in 1990, the Fairfield Sentry fund purportedly invested over $7 billion with Bernard Madoff, and became one of the largest victims of his Ponzi fraud. Fairfield Sentry is referenced as a so-called Madoff feeder fund.
Respondent EFG Capital generally denied the allegations and asserted various affirmative defenses.
In April 2010, Respondent EFG Capital filed a Partial Motion to Dismiss asserting, among other things, that certain of the claims are ineligible for arbitration pursuant to FINRA Code Rule 12206.
SIDE BAR: FINRA's Rule 12206 (also known as the "Eligibility Rule") provides that no claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The determination of whether FINRA's Eligibility Rule applies is left for the FINRA Arbitration Panel.
Claimants countered by asserting that their claims arose from occurrences and events that occurred within six years of the arbitration submission date. In November 2010, the FINRA Arbitration Panel granted Respondent's Partial Motion to Dismiss,which resulted in the dismissal of certain disputed purchases executed from 1999 through September 2002.
In May 2012, pursuant to a settlement, the parties submitted to FINRA a Stipulation for an Award of Dismissal and Expungement of the Central Registration Depository (the "CRD") record of non-party broker Richard J. Daugherty ("Daugherty").On May 29, 2012, the Panel conducted a recorded telephonic expungement hearing concerning non-party Daugherty.
In accordance with the parties' Stipulation, the FINRA Arbitration Panel dismissed with prejudice Claimant's claims. The Panel recommended the expungement of all references to the arbitration from non-party Daugherty's CRD because he was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. Pointedly, the Panel explained that it had found that there were:
[R]epeated warnings from Respondent and non-party broker Daugherty to Claimants of risks involved in the Madoff hedge fund (the Panel reviewed exhibits of letters to Claimants advising them of risks in the subject hedge fund), and that Respondent and non-party Daugherty advised Claimants to sell their positions or at least to limit their investment to 20% of the total. It was further shown that Respondent and non-party Daugherty did execute due diligence and continuous monitoring of the hedge fund. In spite of this (and many other inquiries), the subject hedge fund deceived everyone, including the SEC. Additionally, Claimants were told, and they acknowledged, that their funds were held in BMIS, a very small broker, investment advisor, as opposed to a large international bank. Claimants did nothing about this risk assessment. In paragraph 4 of the Confidential Settlement Agreement and General Release dated March, 2012, Claimants agree to release Respondent and non-party broker Daugherty from all claims and liabilities in this case.
In commenting on the Madoff Ponzi, I have often decried the abysmal lack of substantive due diligence undertaken by many of Madoff's victims, as well as by the feeder funds themselves and the feeder funds's customers. As I recently noted during an interview on "Marketplace Morning": New settlement comes out of Madoff Ponzi scandal (June 25, 2012) concerning last month's announced $400 million settlement by money manager Ezra Merkin, whose customers lost billions through his funneling of their funds to Madoff:
Bill Singer: The average American will spend days if not weeks looking into buying a used car and test driving that car. But they will without a second thought write out a check to someone they know nothing about to put in an investment that they haven't confirmed and then whine and complain and cry when they find out they've been defrauded.
This FINRA Arbitration Panel's harsh critique of Claimants's actions (and inactions) underscores my similar observations about many of Madoff's victims. The arbitrators characterize Claimants conduct as failing to acknowledge repeated warnings about the risks of the feeder fund and its relationship with Madoff. In that vein, the arbitrators point out that the Respondent EFG and Daugherty went so far as to advise Claimants to sell their positions or cap it.
My criticism of the investment practices of too many Madoff investors should not be misunderstood - my heart goes out to those who were fleeced by Bernie Madoff and further victimized by the overly compliant feeder funds. Nonetheless, closing one's eyes to warnings and relying upon the unverified word of a broker or advisor is exactly the behavior that many fraudsters and con artists count on.
The Wall Street that many investors thought they knew (but likely never did) before the Great Recession is long gone, along with many brokerage firms that were household names. Investor confidence is now replaced with distrust in the integrity of the markets and their participants; which, if you think about it, might be a change for the better. In recent years, we have been shaken by revelations of alleged self-dealing by the venerable Goldman Sachs, of bumbled trades by JP Morgan, of missing funds at MF Global, and a whole host of miscues, missteps, and misconduct by Morgan Stanley, Merrill Lynch, UBS, Wells Fargo, and others. The disconnect between what you were led to believe and what turned out to be the truth is a massive chasm.
Prudent investing is not accomplished merely by writing out a check to transfer your life savings to a purported Wall Street icon who assures you that your money is safe and well invested according to an investment strategy that's just far too complicated to be explained to you. There can be no more emphatic refutation of the misplaced-confidence approach to investing than to read the tragic stories of many of those sucked into the Madoff vortex. For those of you who may be confronted with similar opportunities in the future to invest with a purported stock market genius or in a no-lose program, think of the opportunity as little more than buying a used car. Kick the tires. Open the hood. Ask for the background history. Take the car for a test drive. Go online and do some research. Have an independent, skilled mechanic check everything out. Get the deal in writing and don't be afraid to negotiate.