Massive Attorney Conflict in Madoff Scam

Integrity in the Courts by Frank Brady – January 6, 2009

On Monday, January 5, 2009, members of the House Financial Services Committee promised widespread reform in the U.S. financial regulatory process- a miserably abused financial machine known for self-serving blindness and favored whitewashing- failings recently brought to light by Madoff’s self-proclaimed $50 billion swindle.

Failed Head-Scratching

Something else was oddly overlooked yesterday, even by members of Congress. As members questioned why such a fraud had not been revealed earlier, they should have also been asking, “What other pertinent information is being withheld right now from the committee and the American people?” Had they asked that simple question, they just might have gotten some sort of answer. But since they didn’t even ask, a farcical New York-styled “investigation” will proceed.

The only hint of the latest Madoff surprise can be gleaned from the growing beads of sweat upon the forehead of Irving H. Picard, the court-appointed trustee for the liquidation of Bernie Madoff’s company. Mr. Picard, an attorney at the Baker & Hostetler law firm, is in the process of conducting a “broad investigation” of Madoff’s affairs, and he was recently able to get $28 million of Madoff money from the Bank of New York Mellon Corporation to fund his courageous efforts. That $28 million is now, most likely, in one of the Baker & Hostetler law firm bank accounts

Crack or Crater

The Congressional Committee needs to digest the reality that the financial regulatory deficiencies are not simply “cracks’ through which a few errant misdeeds crept. The misdeeds are the norm in an era of non-existent oversight, a void of accountability reserved for those who are connected to the right people.

Going back momentarily, there was another hint to the latest Madoff surprise, in addition to Mr. Picard’s perspiration. In a January 2, 2009 Bloomberg News article by Christopher Scinta, David Glovin and Erik Larson, un-New-York-like silence is noted, “George Stamboulidis, an attorney at Baker & Hostetler who represents Picard, didn’t return a call seeking comment.”

(See reference 1 below)

It seems that Mr. Picard’s attorney is the same George Stamboulidis who is enforcing the Bank of New York’s 2005 “Non-Prosecution Agreement.” (See Agreement below) That’s right, the Bank of New York, so to avoid the status as a convicted felon, entered into a “Non-Prosecution Agreement” in 2005 with the U.S. Attorney’s office in New York; and Mr. Stamboulidis was charged with overseeing the bank’s compliance with that agreement. News articles in November of 2005, in the New York Times and Wall Street Journal, point to serious crimes by top management at the Bank of New York. That not-so-proud moment in Banking just might turn out to be the beginning of events to come involving Madoff and the various yet-unnamed financial institutions.

It was no surprise to the many who read Laura Italiano’s December 29, 2008 New York Post story, “Bernie Cash Stash- Offshore loot sought.” (See reference 2 below) In quoting the London Observer, the silence of Picard and Stamboulidis might be best explained by the words of the official receiver of Madoff’s now-defunct fund, Securities Investor Protection Corp. (SIPC) Chief Executive Stephen Harbeck, “There are accounts at New York Mellon Bank that we have been looking at that appear to have sent and received money from offshore locations. We will trace funds wherever the trail goes.” We’ll see about that.

No Worry: Rooster Has Hen House Covered

In theory, Mr. Stamboulidis, of Baker & Hostetler, has been overseeing The Bank of New York’s compliance with the 2005 “Non-Prosecution Agreement” for the last few years. And now, in theory, court appointed Mr. Picard, of Baker & Hostetler, will dutifully conduct “broad investigations,” that just might reveal additional wrongdoings, and possibly by the Bank of New York.

This type of a set-up is considered a “conflict of interest” in most third worlds. But this is New York, the home of George Washington Plunkitt, of Tammany Hall fame, and who so eloquently clarified the difference between “honest” and “dishonest” graft as he became a millionaire off the public teat.

Would it be a surprise to anyone that the Bank of New York, and their successor company may, at some point, become a defendant in one or more of the growing list of Madoff court cases? And especially since the SIPC has said that it has already found oversea transfers for Madoff through the Bank of New York.

The time might have finally arrived for someone- outside of New York- to look into the affairs of The Bank of New York, including that $3 billion the bank recently received in the Fed bailout package. If a review of any worth does ever begin, there are a few other New York banks that could use a closer look.

NY State Ex-Senator George Plunkitt, who had a knack for cheaply buying land before public development plans were announced, wanted his epitaph to read, “He Seen His Opportunities, and He Took ‘Em.” Justice, and the American people, want Congress to restore accountability and impartial oversight. Congress would do well to start with New York. (Frank Brady can be reached at FrankNBrady@gmail.com)

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See Related article, “FBI Swamped with Bank of New York Violations”

1-See Referenced article, "Madoff Accepted $10 Million Six Days Before Arrest"

2-See Referenced article, "Bernie Cash Stash - Offshore Loot Sought"

Here's the Bank of New York "Non-Prosecution Agreement"

U.S. Department of Justice

United States Attorney - Eastern District of New York

United States Attorney - Southern District of New York

IMMEDIATE RELEASE

November 8, 2005

Contacts:Robert NardozaHerbert Hadad / Megan Gaffney

United States Attorney’s Office Bridget Kelly / Heather Tasker

Eastern District of New York

United States Attorney’s Office (718) 254-6323

Southern District of New York

(212) 637-2600 

PRESS RELEASE

THE BANK OF NEW YORK RESOLVES PARALLEL CRIMINALINVESTIGATIONS THROUGH NON-PROSECUTION AGREEMENTWITH THE UNITED STATES 

Bank Acknowledges Responsibility for its ConductAgrees to Pay $38 Million in Penalties and Victim Compensation 

Agrees to Adopt Sweeping Reforms to Address Reporting Failures under the Bank Secrecy Act and Deficiencies in its Suspicious Activity and Anti-Money LaunderingSafeguards

The Bank of New York (“BNY”) has agreed to pay $38 million in penalties and victim compensation to resolve parallel criminal investigations conducted by the United StatesAttorneys’ Offices for the Eastern and Southern Districts of New York relating to BNY’s responsibility for crimes involving fraud and money laundering, as well as BNY’s failure to comply with mandatory reporting obligations under the Bank Secrecy Act. 

The resolution, announced today by ROSLYNN R. MAUSKOPF and MICHAEL J. GARCIA, United States Attorneys for the Eastern and Southern Districts of New York, respectively, MARK J.MERSHON, Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Division, and MICHAEL J. THOMAS, Special Agent-in-Charge, Internal Revenue Service –Criminal Investigation, New York, represents one of the largest financial settlements ever by a U.S. financial institution. Pursuant to an agreement signed today, BNY has admitted its criminal conductand will forfeit $26 million to the United States and pay $12 million in restitution to its victims. 

The bank has also agreed to make sweeping internal reforms to ensure compliance with its anti-fraud and money-laundering obligations, and be monitored by an independent examiner. As a result of BNY’s acceptance of responsibility, its cooperation in the investigations, and its willingness to make restitution and take significant remedial action, BNY will not be prosecuted for the unlawful practices of its officers and employees provided it fully complieswith the terms of its cooperation agreement with the government for a period of three years. BNY is the oldest bank in the United States and the principal subsidiary of The Bank of New York Company, Inc., a publicly traded corporation. BNY maintains retail branch locations across the United States, provides global financial services, and is a leading participant in capital markets throughout the world. 

Overview 

Today’s announcement is the culmination of lengthy investigations by the two United States Attorneys’ Offices, conducted between 1998 and 2004 in conjunction with theFBI and the IRS, that uncovered systemic failures in BNY’s suspicious activity reporting The Bank Secrecy Act requires banks to have anti-money laundering programs sufficient to identify and report suspicious financial transactions to the Financial CrimesEnforcement Network (“FinCEN”), part of the U.S. Treasury Department, by filing SuspiciousActivity Reports (“SARs”). The SAR database is a valuable tool for law enforcement in areasranging from complex financial investigations to terrorism, practices and anti-money laundering procedures. 

These failures permitted criminal fraud and money laundering activities by BNY employees and customers to proceed undetected andunchecked for more than a decade. The SDNY investigation uncovered a scheme, which was facilitated by a corrupt BNY vice president, involving the unlicensed transmission of billions of dollars originating in Russia through BNY accounts in the United States to third-party transferees around the world. 

The EDNY investigation uncovered a scheme involving the submission by a BNY commercial customer of fraudulent loan applications that were supportedby sham escrow agreements executed by a corrupt BNY branch manager, and that resulted in millions of dollars in losses to victim banks throughout the United States. To date, these schemes have resulted in the criminal convictions of at least nine individuals, including aformer BNY vice president and a former BNY branch manager. 

In admitting responsibility, BNY acknowledged, among other things, that it failed to have an effective anti-money laundering program, that it intentionally failed to take steps to report known evidence of suspected criminal conduct by a bank customer and BNYemployees as required under the mandatory reporting obligations of the Bank Secrecy Act even after that evidence came to the attention of senior BNY executives, and that both the bank’sgeneral counsel, managing counsel, and other senior executives repeatedly ignored the bank’s

legal obligations to file the required Suspicious Activity Report (“SAR”), doing so only after the principals of a BNY customer were arrested months later by federal authorities. 

The SAR that was ultimately filed was both inaccurate and incomplete, in that it failed to make any reference to the misconduct of BNY personnel relating to the escrow agreements, or how the escrow agreements were used to defraud other banks. During this period, BNY was already under compulsion to correct problems in its anti-money laundering program pursuant to an agreement between BNY, the Federal Reserve Bank of New York, and the New York State Banking Department that placed the bank under heightened regulatory scrutiny and required enhanced due diligence and suspicious activity reporting procedures by the bank (the“Regulator Agreement”). BNY’s failures allowed the fraudulent activities to continue,resulting in at least $18 million in losses to victims. 

“Banks occupy a pivotal position of trust in both our financial system and our system of law enforcement, one that requires diligence and dispatch in detecting and reporting clear evidence of criminal conduct,” stated United States Attorney MAUSKOPF. “When that trust is knowingly violated at the highest levels of a financial institution, as happened here,fraud and other criminal activities continue unabated, victims suffer staggering losses, and the integrity of our financial systems is seriously undermined. This agreement fixes responsibility for the illegal conduct by bank executives, officers, and employees, secures immediate compensation for victims, and ensures accountability going forward in the exercise of an essential public trust.”

“The Bank Secrecy Act and the anti-money laundering laws are critical to

protecting our financial system, and all United States banks must be vigilant in complying with them,” said United States Attorney GARCIA. “Although this agreement closes the book on BNY’s role in an underground Russian money transfer system that moved $7 billion through BNY accounts, the agreement requires BNY to continue and enhance its money laundering compliance programs and subjects BNY to oversight by an independent examiner for a period of three years."

The Southern District of New York Investigation 

The Southern District of New York investigation focused on misconduct related to the opening in 1996 of accounts at a retail branch of BNY in the names of Benex International Co., Inc. (“Benex”) and BECS International LLC (“BECS”). These accounts were opened by Peter Berlin, a Russian émigré, with the assistance of his wife, Lucy Edwards, also a Russian émigré, who was a BNY vice president. During the next three and one-half years, approximately $7 billion originating in Russia flowed through the Benex and BECS accounts to third-party transferees around the world.The Benex and BECS accounts were part of an underground money transfer business that was operated by a bank located in Moscow and a company located in Queens, New York. From a small single-room office in Queens, company employees executed hundreds of wire transfers per day from the Benex and BECS accounts, using electronic banking software provided by BNY to carry out wire transfer instructions provided by the Moscow bank. 

Despite the obvious money laundering risks associated with such an operation,BNY failed to conduct adequate due diligence or make “know your customer” inquiries with regard to Berlin or the Benex and BECS accounts. Some BNY executives in the Retail Banking Division believed, incorrectly, that Berlin was in the “import/export” business, but no employee ever sought to verify that belief. Other BNY executives in the Cash Management Division understood, correctly, that Benex and BECS essentially acted as payment brokers or money transmitters, whose businesses consisted solely of transferring funds on behalf of other parties, but those executives did not make any inquiry as to whether Benex and BECS were properly licensed as money transmitters.

BNY also failed to monitor adequately the activity in the Benex and BECS accounts, which were the highest fee-producing accounts in the One Wall Street Branch where they were located. Indeed, on the two occasions that employees in the Cash Management Division sought to conduct a money laundering review of Benex and BECS accounts, they were advised by a manager in the Funds Transfer Division that BNY did not have an automated system for reviewing account activity and that it would be impractical to conduct a manual review of the Benex and BECS accounts, given the tremendous volume of activity in those accounts. 

As a result of the failure to monitor the activity in the Benex and BECS accounts, a number of highly suspicious circumstances that should have raised flags about money laundering went undetected. In February 2000, Berlin and Edwards pled guilty to, among other crimes, conspiring to conduct unauthorized and unregulated banking activities, operate an illegal money transmitting business, and launder money to promote wire fraud, in connection with the operation of the Benex and BECS accounts at BNY. Berlin and Edwards acknowledged that the illegal banking network of which the Benex and BECS accounts were a part was designed,in part, to allow Russian individuals and businesses to wire transfer funds in and out of Russia

On March 5, 2004, PLS and seven individual defendants, including Myrna Katz, were charged in a superseding indictment for crimes arising from their involvement in the scheme. Five of the defendants have pled guilty, including Katz. Two defendants, Barry Drayer and Stephen Barker, are scheduled to be tried before United States District Judge Arthur D. Spatt, in violation of Russian currency controls, and thereby to defraud the Russian government of customs duties and tax revenues. Also in February 2000, as a result of the investigation into the Benex and BECS accounts, BNY entered into the Regulator Agreement with the Federal Reserve and NYSBD, referred to above.

The Eastern District of New York Investigation

The Eastern District of New York investigation uncovered that from approximately 1991 to 2002, BNY branch managers and employees working at a BNY retail branch in Island Park, New York, executed unauthorized and materially false and misleading escrow agreements for a BNY commercial customer, RW Professional Leasing Services Corp.(“PLS”) in Island Park, New York, that was engaged in the business of arranging financing formedical providers, ostensibly for the leasing of medical equipment. Although the escrow agreements obligated BNY to act as an escrow agent for other banks that were financing themedical equipment leases, BNY deliberately failed to establish any escrow accounts or performany terms of the escrow agreements. The financing banks relied on the escrow agreements inapproving loan requests totaling tens of millions of dollars.

In October 2005, Myrna Katz, a former BNY branch manager at the Island Parkbranch, pled guilty to making false statements to insured banks in connection with the phony escrow agreements. In pleading guilty, Katz admitted that she executed the escrow agreements. SARs generally must be filed by a bank within 30 days after detecting facts constituting the suspicious activity, and in no event later than 60 days after the detection of suspicious activity. In cases calling for immediate attention, a bank is required to provide telephonic notification to an appropriate law enforcement authority in addition to filing a written report. 

To assist a highly valued customer of the branch secure approval of its loan requests, and that she knew at the time she executed the agreements that they would not be implemented and that no escrow accounts would be established. The scheme proceeded undetected for more than a decade and continued during the period that BNY was bound by the enhanced due diligence and reporting requirements ofthe Regulator Agreement. 

As noted, after learning in early 2002 of the illegal conduct at the Island Park branch, BNY executives, including its general counsel and managing counsel,continued to ignore the bank’s reporting obligations under the Bank Secrecy Act, and intentionally failed to take steps to file a SAR and notify law enforcement authorities in atimely manner. 

In fact, the investigation disclosed that BNY did not file a SAR, or otherwise notify law enforcement of any problem, even after the bank had computed a potential liabilityof $72 million arising from its dissemination of the sham escrow agreements and had learned ofallegations of the fraud from BNY’s outside counsel and various bank funding institutions. Instead, BNY denied any wrongdoing relating to the escrow agreements in communications with various bank funding institutions, concealed information about the employee misconductthat had caused the escrow agreements to be issued, and directed BNY personnel not to discuss the bank’s culpability or liability with any third parties. The report that BNY ultimately filed inJuly 2002 was both incomplete and inaccurate.

Provisions of the Agreement

The United States Attorneys’ Offices for the Eastern and Southern Districts ofNew York have entered into a written agreement with BNY to resolve the criminal investigations of the bank.  Significantly, this agreement secures immediate compensation for victimized bank funding institutions. Under the terms of the agreement executed today: 

• BNY has accepted responsibility for its criminal conduct, and its chairman of the board of directors has signed a statement admitting the criminal conduct indetail.

• BNY has agreed to pay $12 million for purposes of compensating banks for losses arising out of the company’s criminal conduct, and to forfeit an additional $26 million as a penalty for its illegal conduct.

• BNY has agreed to continue cooperating with the investigations in the Eastern and the Southern Districts of New York and has begun to take steps to prevent repetition of the misconduct and criminal activity uncovered during those investigations. BNY fired three branch managers who were involved in overseeing the execution of the sham escrow agreements at the Island Parkbranch, and terminated or disciplined 16 others who were involved in the misconduct. BNY has shared the substance of numerous interviews conductedwith current and former BNY employees, as well as tens of thousands of pages of documents, including internal memoranda and email messages. BNY also waived the attorney-client and work-product privileges to assist the investigations, adopted remedial measures, and made available numerous witnesses for government interviews. 

• BNY has agreed to take numerous remedial actions in response to the misconduct at BNY, including but not limited to the following:the termination or disciplining of employees at all levels of the company whose improper activities and/or lax supervision resulted either in the execution of the sham escrow agreements orthe failure to report criminal activity as required by BNY policy and the Bank Secrecy Act;the creation of a new senior-level position within the Legal Division called Head of Law Enforcement and Investigations,with responsibility for responding to all law enforcement inquiries and coordinating the preparation of Suspicious Activity Reports throughout BNY; the introduction of new policies and procedures for, among otherthings, the auditing of retail branches; identifying, investigating and reporting illegal, suspicious or unusual activity; and usingand signing forms for customers; the training of BNY employees to identify and report suspicious activities, including the dissemination of false statements to financial institutions; the investigation of counter parties to the largest retail account holders and other suspect account holders to check whether the counter party is a real entity; and the adoption of procedures to ensure that information concerning possible criminal activity is shared with BNY departments responsible for filing SARs as required under the Bank SecrecyAct.

• BNY has agreed to the appointment of an independent examiner to serve for three years to monitor and report to the government, the Federal Reserve Bank of New York, the New York State Banking Department and BNY on BNY’s suspicious activity reporting practices, its anti-money laundering procedures relating to those practices, and its compliance with the agreement reached with the government. In light of BNY’s acceptance of responsibility, continued cooperation, remedial measures, and agreement to compensate the victims of its unlawful conduct, the United States Attorneys’ Offices for the Eastern and Southern Districts of New York have agreed not to prosecute BNY for the unlawful practices engaged in by its executives and employees, provided that BNY complies for three years with all the terms of the agreement executed today. Should BNY violate the terms of the agreement, or commit any other crimes, it shall be subject to prosecution, including prosecution for the criminal conduct described in the agreement.

In addition to recognizing the outstanding investigative work conducted by the Special Agents of the Federal Bureau of Investigation and Internal Revenue Service, United States Attorneys GARCIA and MAUSKOPF thanked the Federal Reserve Bank of New York and the New York State Banking Department for their assistance.The Eastern District of New York case was prosecuted by Assistant United States Attorneys Geoffrey Kaiser and Richard Lunger.The Southern District of New York case was prosecuted by Assistant UnitedStates Attorneys Celeste L. Koeleveld, Barbara A. Ward, and Michael G. McGovern.

end