Still cleaning up after Pandora and Bernie…

We know that Pandora was a mythological woman, and that her notorious box really started out as a jar.* But the premise of her myth – that evil has been unleashed on Earth – made us think about federal prisoner number 61727-054… otherwise known as Bernie Madoff.

Madoff didn’t invent the Ponzi scheme; that dubious honor goes to Carlo “Charles” Ponzi, who swindled people out of millions nearly a century ago. But in the wake of Madoff’s multi-billion dollar scams, more investors are stepping forward to claim that they lost money through Madoffesque con games that professionals should have detected, but didn’t. The latest: separate cases filed against MF Global Holdings Ltd. (MF) and a demand for payment sent to Towers Watson (TW).

In the 10-Q that MF Global filed Feb. 3, the company discloses that it has been slapped with a couple of new lawsuits. The first was filed by the receiver of a partnership that allegedly operated a Ponzi scheme; the petition alleges that subsidiary MF Global, Inc. (MFGI) negligently violated its duties by failing to detect discrepancies or recognize that the partnership wasn’t properly registered. It also claims that MFGI’s conduct “…enabled the Partnership to operate a Ponzi scheme and cause damage to the investors.” MF Global hadn’t been served with the pleading as of Feb. 3.

In the second lawsuit, a New York bankruptcy trustee sued to recover allegedly fraudulent transfers made by Agape World, Inc., its principal, Nicholas Cosmo, and related entities. (A different lawsuit in federal court put the losses from those allegedly fraudulent transfers at “millions of dollars.”) The trustee claims

“…that MFGI failed to conduct sufficient diligence when opening the account, failed to respond to red flags about how account principal Nicholas Cosmo was using Agape’s funds and failed to provide proper oversight and monitoring which, if conducted, would have caused termination of the accounts and trading, and prevented losses to the investors.”

MF Global was sued in May 2009, along with Bank of America, over allegedly aiding and abetting Cosmo, but that case was dismissed with prejudice, meaning the plaintiffs couldn’t simply re-file. But this case is in bankruptcy court, where the rules – as well as possibly some of the underlying facts – are different. The trustee is seeking to recover $27.1 million, plus fees earned from the trades. MF Global says it hasn’t recorded a provision for losses, noting that the suit is in its early stages.

The demand for payment to Towers Watson was sent by privately-held Acument Global Technologies, Inc. and its pension plan, according to the 10-Q Towers Watson filed Feb. 8. Acument alleges that Towers Watson (at a time when it was known as Watson Wyatt Investment Consulting, Inc.) breached its fiduciary duty when it recommended that Acument invest in Westridge Capital Management Enhancements Funds.

A colorful press release issued by the SEC in February 2009 (available here), alleged that Westridge’s principals “essentially treated their clients’ investments as their personal piggy bank to purchase multi-million dollar homes, a horse farm and horses, luxury cars, and rare collectibles such as Steiff teddy bears…”. The Towers Watson filing adds another allegation by the SEC, that

“…Westridge had become a fraudulent investment scheme by which its principals purportedly misappropriated approximately $553 million from a number of highly sophisticated institutional investors, including public pension and retirement plans and educational institutions, some of which were investing in Westridge as late as February 6, 2009.”

Acument has recovered about $9.5 million of its $56.5 million investment in the Westridge Funds, but it is demanding that Towers Watson repay the rest of the pension plan’s losses. Towers Watson responds that it “plans to decline Acument’s demand for compensation and plans to defend vigorously against any legal proceedings that may ensue.”

The justice system will determine in due time whether the firms really breached their fiduciary duties to the plaintiffs, or whether these are just cases of disgruntled investors complaining about financial losses after the fact. But as a general rule, we applaud oversight and doing whatever it takes to put (and keep) the Baby Bernies – and their own boxes of evil – behind bars.

*A sloppy translation resulted in “jar” being written as a “box.”

Image source: John William Waterhouse, 1896


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