BofA and the fraudster

June 11, 2009

Ken Lewis spent much of the day on Capitol Hill getting grilled about Bank of America’s acquisition of Merrill Lynch during the heat of the financial crisis. But Lewis may have bigger things to worry about down the road, as his bank’s past dealings with a hedge fund fraudster just won’t go away.

A federal appeal court, in a little-noticed ruling, reinstated an aiding-and-abetting claim filed against BofA by some former investors of Michael Lauer, who master-minded a billon dollar hedge fund fraud. A federal trial court judge in New York had dimissed the case against Bofa, which was the prime broker for Laurer’s $1 billion Lancer funds. But the appeals court, without determining the merits of the allegations, says the investors should be able to press ahead with their claim against the big bank. 

Scott Berman, the lawyer representing the investors in the lawsuit, says the bank could be liable for hundreds of million in damages, if the lawsuit is successful. Berman’s clients claim that BofA, as prime broker, should have known that Lauer was falsifying his funds’ valuations in order to inflate management fees.

Lauer managed to garner a number of prominent investors for his domestic and offshore funds, including Britney Spears, the University of Montreal Pension Plan and Morgan Stanley.

The Securities and Exchange Commisssion, last September, prevailed in a lawsuit charging Lauer with defrauding investors by falsifying valuations and manipulating several of the penny stocks his fund had invested heavily in.

It’s too early to say how this lawsuit will turn out for Bofa. But one thing is certain: no one is claiming Bofa was pressured into serving as a prime broker for Lauer.

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Hedge Funds are not regulated enterprizes. In one example a politician sold an interest in an offshore hedge fund in 2007, reflected on taxes as disclosed. The math suggests she had a $25,000,000.00 offshore gain. This could quite certainly be in a legitimate investment but wouldn’t that be made in an onshore investment vehicle?

In addition after 911 there is a great deal of intelligence work happening around the banks and investment banks with the purpose of finding terrorists, though the case of the Bear Stearns Puts just prior to the financial cataclysm has never been fully resolved.

Hedge funds as unregulated vehicles can provide trade benefit to individuals with access to such insider information as displayed in the Case of Bear Stearns Put Option Activity just priort to the collapse.

The SEC would be responsible for monitoring this but then we have Madoff, a hedge fund, so we must thereby accept that the SEC is incompetent in these matters and/or blind to internal hedge fund ownership activity.

A hedgefund can be a convenient cover or mask for Money Laundering or illicit payments. Charities, also a convient cover for illicit payments were investors in Madoff, some of them relying fully on Madoff for their survival and closed their offices ‘the day’ of the Madoff Arrest.

The US FBI has not prosecuted one political figure for activities in Hedge Funds. Yet we see public corruption in the Case of Blagojavich a governor. Could the Million Dollar Payment he was demanding be delivered as an interest in a Hedge Fund? Certainly any auditor will answer yes.

Certainly the malfeasance is in plain sight for all to see, yet taboo.

It all points to the Fact that the Hedge Fund industry needs to be Regulated, its investors need to be monitored and their taxable gains need to be fully reported to the IRS. Including those of Public Figures. The American People deserve an ‘honest system’ and Hedge Funds enable misconduct that has harmed the ‘systemic trust’ on which American Productivity is fully reliant.

There is large criminal activity in hedge funds, Madoff et al, and it needs to be cleaned up, regardless of who is implicated.