PatrickPretty.com

Day: November 5, 2009

  • FBI Arrests 14, Including 2 Lawyers, In Major Insider-Trading Probe; SEC Says Attorneys Provided Tips For Kickbacks In Latest Scandal That Rocks Wall Street

    As the FBI and IRS executed search warrants at the Florida office of attorney Scott Rothstein this morning amid allegations he ran a covert Ponzi scheme that could have drained as much as $500 million from investors, prosecutors up north were concentrating on arresting lawyers in a separate case involving insider trading on Wall Street.

    U.S. Attorney Preet Bharara of the Southern District of New York announced the arrests of attorneys Arthur J. Cutillo of the prestigious law firm Ropes & Gray LLP of New York, and Jason Goldfarb, a New York attorney.

    Cutillo and Goldfarb were among 14 people charged in a case with ties to the alleged Raj Rajaratnam insider-trading scandal at the Galleon Group. Rajaratnam’s arrest last month rocked Wall Street.

    Today’s news demonstrated again that law-enforcement and regulatory agencies in all corners of the United States are seeking to put an end to a wave of financial crime that could undermine the public’s confidence in the markets and imperil economic recovery in the age of the corporate bailout.

    “When Wall Street professionals or others exploit inside information for an illegal tip-and-trade binge, they undermine the level playing field that is fundamental to our capital markets,” said Robert Khuzami, director of the SEC’s Division of Enforcement. “These defendants thought the rules that apply to all investors did not apply to them, but the one rule they cannot avoid is the rule of law. Now they face the prospect of financial penalties, industry bars, and even jail time for their indiscretions.”

    ‘A Bag Of Cash’

    Attorneys will not be permitted to ignore the law and hide behind their legal shingles, added Scott W. Friestad, associate director of the SEC’s Enforcement Division, using stark language.

    “Today’s action highlights the apparent ease with which far too many lawyers, hedge funds and Wall Street traders are willing to break the law to obtain a bag of cash, a trading advantage or other perceived benefit,” Friestad said. “It is fundamentally unfair for these individuals to profit at the expense of honest investors and compromise the integrity of our markets.”

    Although the emerging Rothstein Ponzi allegations in Florida are not connected to the Galleon Group insider-trading investigation in New York, California and elsewhere, dramatic developments last night and this morning in Fort Lauderdale were a stark reminder that financial crimes that were once unthinkable suddenly have become commonplace in the aftermath of the arrests of Bernard Madoff, Tom Petters, Allen Stanford, Arthur Nadel, Nicholas Cosmo and others implicated in Ponzi schemes for mind-boggling sums.

    Agents in Fort Lauderdale hauled away dozens of boxes of evidence, seized computers and thumb drives, copied computer hard drives, took control over an unspecified amount of cash, sifted through financial and other records — and also seized the key to a Ferrari.

    Though Rothstein has not been charged, the case has become a spectacle in Florida. The state has been rocked by one financial scandal after another involving allegations of mortgage fraud, hedge-fund fraud, affinity fraud targeting vulnerable residents, HYIP fraud, autosurf Ponzi scheme fraud and Ponzi schemes in general.

    In New York, far north of Florida’s warm climate, Bharara and the FBI released some of the details surrounding today’s arrests of lawyers and Wall Street insiders. For its part, the SEC made a separate flow chart to demonstrate how part of the fraud worked.

    SEC Flow Chart" Source: SEC
    SEC Flow Chart: Source: SEC

    Attorney Cutillo “had access to confidential information about at least four major proposed corporate transactions in which his firm’s clients participated,” the SEC said. “Through his friend and fellow attorney Jason Goldfarb, Cutillo tipped this inside information to Zvi Goffer,” a proprietary trader at Schottenfeld Group of New York.

    “Goffer promptly tipped four traders at three different broker-dealer firms and another professional trader Craig Drimal, who each then traded either for their own account or their firm’s proprietary accounts,” the SEC said.

    Cell Phone Intrigue Part Of Allegations

    In allegations that read like a cross between an Ian Fleming and Robert Ludlum novel, the SEC outlined some of the case.

    “Goffer was known as ‘the Octopussy’ within the insider trading ring due to his reputation for having his arms in so many sources of inside information,” the agency said. “Cutillo, Goldfarb, and Goffer at times used disposable cell phones in an attempt to conceal the scheme. For example, prior to the announcement of one acquisition, Goffer gave one of his tippees a disposable cell phone that had two programmed phone numbers labeled ‘you’ and ‘me.’

    “After the announcement, Goffer destroyed the disposable cell phone by removing the SIM card, biting it, and breaking the phone in half, throwing away half of the phone and instructing his tippee to dispose of the other half,” the SEC charged.

    Read the SEC news release.

    Read Bharara’s news release on the criminal charges to get the full list of defendants, at least five of whom already have pleaded guilty.

    Read part of the South Florida Business Journal’s ongoing coverage of the Rothstein allegations, which are not connected to the insider-trading case announced in New York today.

  • Important Filing Deadline In ASD Prosecution Nears

    Andy Bowdoin
    Andy Bowdoin

    Tomorrow is the deadline for prosecutors to advise U.S. District Judge Rosemary Collyer how they plan to proceed with the December 2008 forfeiture complaint filed against assets of AdSurfDaily Inc.

    A month ago Judge Rosemary Collyer pointed out that no person or entity had filed claims to property seized in the complaint, the second tied to ASD-connected assets. The first complaint was filed in August 2008 and was nearly litigated to conclusion in January 2009, with ASD President Andy Bowdoin’s submission to the forfeiture of tens of millions of dollars “with prejudice.”

    Bowdoin, 74, changed his mind about giving up the money in February, and reentered the August case as a pro se litigant after meeting with a mysterious “group” of ASD members.

    Prosecutors now say Bowdoin is a “delusional” con man who “cannot manage to keep his stories straight,” arguing that he is telling Collyer one thing and members another. On Sept. 28, the U.S. Secret Service filed a transcript of a conference call Bowdoin held with members Sept. 21.

    In the transcript, Bowdoin repeatedly told members the government had seized money from them. He specifically used the phrase “your money” four times in the short recording.

    Prosecutors said Bowdoin’s words to members were at odds with his own court filings in which he claimed ownership of the seized assets — and also at odds with the filings of Charles A. Murray, one of Bowdoin’s attorneys.

    Prosecutors quoted from a September filing by Murray, who has been arguing that Collyer should permit Bowdoin to change his mind after advising the court in January that he was giving up the money and did not intend to reassert his claims in the future.

    “Mr. Bowdoin’s release in the above-captioned case is illogical,” prosecutors quoted Murray as saying. “He received nothing of value for the release. Bowdoin has consistently demonstrated an intent to aggressively defend ownership of his property in the civil in rem forfeiture proceeding.”

    Prosecutors were quoting from Page 2 of this Sept. 14 filing on Bowdoin’s behalf by Murray.

    One week later — on Sept. 21 — Bowdoin held the conference call, using the phrase “your money” four times to describe to members the assets he had told Collyer belonged to him,  prosecutors said.

    Bowdoin’s official court claims to the property date back to Aug. 15, 2008, less than two weeks after the seizure. No claims to any of the assets seized in the December forfeiture complaint that followed appear in the record of the case.

    Potential December claimants included Bowdoin, his wife, Edna Faye Bowdoin, George Harris, Judy Harris and Hays Amos. Judy Harris is married to George Harris, the son of Edna Faye Bowdoin and Bowdoin’s stepson. Hays Amos is a former employee of ASD.

    ASD money was used to buy a car registered to Amos, and also a car registered to George and Judy Harris, prosecutors said. It also was used to buy a car for Bowdoin/Harris Enterprises Inc., which prosecutors said was set up by George Harris and Edna Faye Bowdoin to help Andy Bowdoin and Edna Faye Bowdoin hide assets.

    At the same time, prosecutors said, more than $157,000 in ASD money was used to retire the mortgage on the home Judy and George Harris shared in Tallahassee, and to purchase a Cabana boat, jet-skis, haul trailers and other marine equipment. Bowdoin also spent $800,000 cash to purchase a building in Quincy — initially to the delight of the Gadsden County Chamber of Commerce, but later to its embarrassment.

    The Gadsden Chamber went on to contact the FBI about ASD, questioning whether the company was legitimate, prosecutors said.

    George and Judy Harris emerged later as the purported owners of the AdViewGlobal (AVG) autosurf, which launched in the aftermath of two forfeiture complaints filed against ASD’s assets and a separate racketeering lawsuit filed against Bowdoin and ASD attorney Robert Garner.

    Florida now has dissolved both ASD and Bowdoin/Harris Enterprises for failure to file required annual reports. The state gave the firms nearly a five-month window to file, but neither firm — both of which purport to be legitimate — followed through.

    Within hours of the breaking news about Florida’s actions against the firms, a poster on the Pro-ASD Surf’s Up forum described it as a conspiracy between the federal government and state authorities in Florida.