Irving H. Picard v. Saul B. Katz et al

Filing 23

DECLARATION of DANA M. SESHENS in Support re: 20 MOTION to Dismiss THE AMENDED COMPLAINT OR, IN THE ALTERNATIVE, FOR SUMMARY JUDGMENT.. Document filed by Charles 15 Associates, Charles 15 LLC, Charles Sterling LLC, Charles Sterling Sub LLC, College Place Enterprises LLC, Coney Island Baseball Holding Company LLC, Estate of Leonard Schreier, FFB Aviation LLC, FS Company LLC, Fred Wilpon Family Trust, Arthur Friedman, Ruth Friedman, Iris J. Katz and Saul B. Katz Family Foundation, Inc., Judy and Fred Wilpon Family Foundation, Inc., Amy Beth Katz, David Katz, Dayle Katz, Gregory Katz, Howard Katz, Iris Katz, 157 J.E.S. LLC, Air Sterling LLC, BAS Aircraft LLC, Jason Bacher, Bon Mick Family Partners LP, Bon-Mick, Inc., Brooklyn Baseball Company LLC, C.D.S. Corp., Michael Katz, Saul B. Katz, Todd Katz, Katz 2002 Descendants' Trust, Heather Katz Knopf, Natalie Katz O'Brien, Mets II LLC, Mets Limited Partnership, Mets One LLC, Mets Partners, Inc., Minor 1 (REDACTED), Minor 2 (REDACTED), L. Thomas Osterman, Phyllis Rebell Osterman, Realty Associates Madoff II, Red Valley Partners, Robbinsville Park LLC, Ruskin Garden Apartments LLC, Saul B. Katz Family Trust, Michael Schreier, Deyva Schreier Arthur, See Holdco LLC, See Holdings I, See Holdings II, Sterling 10 LLC, Sterling 15C LLC, Sterling 20 LLC, Sterling Acquisitions LLC, Sterling American Advisors II LP, Sterling American Property III LP, Sterling American Property IV LP, Sterling American Property V LP, Sterling Brunswick Corporation, Sterling Brunswick Seven LLC, Sterling Dist Properties LLC, Sterling Equities, Sterling Equities Associates, Sterling Equities Investors, Sterling Heritage LLC, Sterling Internal V LLC, Sterling Jet II Ltd., Sterling Jet Ltd., Sterling Mets Associates, Sterling Mets Associates II, Sterling Mets LP, Sterling Pathogenesis Company, Sterling Third Associates, Sterling Thirty Venture LLC, Sterling Tracing LLC, Sterling Twenty Five LLC, Sterling VC IV LLC, Sterling VC V LLC, Edward M. Tepper, Elise C. Tepper, Jacqueline G. Tepper, Marvin B. Tepper, Valley Harbor Associates, Kimberly Wachtler, Philip Wachtler, Bruce N. Wilpon, Daniel Wilpon, Debra Wilpon, Fred Wilpon, Jeffrey Wilpon, Jessica Wilpon, Judith Wilpon, Richard Wilpon, Scott Wilpon, Valerie Wilpon, Wilpon 2002 Descendants' Trust, Robin Wilpon Wachtler. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E, # 6 Exhibit F, # 7 Exhibit G, # 8 Exhibit H, # 9 Exhibit I, # 10 Exhibit J, # 11 Exhibit K, # 12 Exhibit L, # 13 Exhibit M, # 14 Exhibit N, # 15 Exhibit O, # 16 Exhibit P, # 17 Exhibit Q, # 18 Exhibit R, # 19 Exhibit S)(Wagner, Karen)

EXHIBIT M

Wall Street Mystery Features a Big Board Rival - WSJ.com

Page 1 of 4

DECEMBER 16, 1992

Wall Street Mystery Features a Big Board Rival
By

This article was published in the Dec. 16, 1992,
edition of The Wall Street Journal.
Here's a tantalizing Wall Street mystery:
The Securities and Exchange Commission recently
cracked down on one of the largest-ever sales of
unregistered securities. Investors had poured $440
million into investment pools raised by two
Florida accountants, who for more than a decade
took in money without telling the SEC or making
required financial disclosures to investors.
The pair had promised investors hard-to-believe
annual returns of 13.5% to 20% -- to be obtained
by turning the money over to be managed by an
unnamed broker.
Regulators feared it all might be just a huge scam.
"We went into this thinking it could be a major
catastrophe," says Richard Walker, the SEC's New
York regional administrator.
But when a court-appointed trustee went in, the
money was all there. Indeed, the mystery money
manager was beating the promised returns by
such a wide margin that the two accountants
ditched their accounting business in 1984 to
concentrate on their more lucrative investing
sideline.
Who was the broker with the Midas touch? The
SEC, which last month went to court to shut down

the operation, won't say. Neither will the lawyer
for the two accountants, Frank J. Avellino and
Michael S. Bienes of Fort Lauderdale.
But the mystery broker turns out to be none other
than Bernard L. Madoff -- a highly successful and
controversial figure on Wall Street, but until now
not known as an ace money manager.
Mr. Madoff is one of the masters of the offexchange "third market" and the bane of the New
York Stock Exchange. He has built a highly
profitable securities firm, Bernard L. Madoff
Investment Securities, which siphons a huge
volume of stock trades away from the Big Board.
The $740 million average daily volume of trades
executed electronically by the Madoff firm off the
exchange equals 9% of the New York exchange's.
Mr. Madoff's firm can execute trades so quickly
and cheaply that it actually pays other brokerage
firms a penny a share to execute their customers'
orders, profiting from the spread between bid and
asked prices that most stocks trade for.
In an interview, the 54-year-old Mr. Madoff says
he didn't know the money he was managing had
been raised illegally. And he insists the returns
were really nothing special, given that the
Standard & Poor's 500-stock index generated an
average annual return of 16.3% between November
1982 and November 1992. "I would be surprised if
anybody thought that matching the S&P over 10

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Wall Street Mystery Features a Big Board Rival - WSJ.com

years was anything outstanding," he says.
In fact, most investors would have been delighted
to be promised such returns in advance, as the
accountants' investors were. That's especially true
since the majority of money managers actually
trailed the S&P 500 during the 1980s.
The best evidence that the returns were very
attractive: the size of the pools mushroomed by
word-of-mouth, without any big marketing effort
by the Avellino & Bienes partnership. The number
of investors eventually grew to 3,200 in nine
accounts with the Madoff firm. "They took in
nearly a half a billion dollars in customer money
totally outside the system that we can monitor
and regulate," says the SEC's Mr. Walker. "That's
pretty frightening."
An SEC civil complaint filed in New York federal
court Nov. 17 charged that Messrs. Avellino and
Bienes "have operated A&B as an unregistered
investment company and have engaged in the
unlawful sale of unregistered securities," and
ordered the money returned to investors by a
court-appointed trustee, New York attorney Lee
Richards.
The two 56-year-old accountants declined to
comment. Their attorney, Ira Lee Sorkin, says they
didn't know that the notes they had issued to their
clients should have been registered with the SEC,
and he says that investors got their money back
and haven't complained.
If the notes had been registered, they would have
had to include a description of how the money
was being invested, and by whom. In addition,
Avellino & Bienes would have had to send
investors annual reports and financial statements.
But how did Mr. Madoff rack up his big
investment returns? Early investors in the late
1970s were told -- and Mr. Madoff confirms -that their money was being used to engage in socalled convertible arbitrage in securities of such
companies as Occidental Petroleum Corp., Limited
Stores Inc. and Continental Corp. Promised annual
returns in this period, one investor said, were 18%
to 20%

Page 2 of 4

In such a strategy, an investor buys a company's
preferred stock or bonds that pay high dividends
and are convertible into the company's common
stock; the investor simultaneously sells borrowed
common stock of the same company in a "short
sale" to hedge against a stock-price decline.
The investor earns the spread between the higher
dividend paid on the convertible securities and the
lower dividend on the common stock, plus interest
from investing the proceeds of the stock short
sale. Using borrowed money, or leverage, to
magnify returns, an investor can reap double-digit
returns. But the strategy carries big risks if
interest rates rise and stock prices go down.
Mr. Madoff said his investment strategy changed
around 1982, when his firm began using a greater
variety of strategies tied to the stock market,
including the use of stock-index futures and
"market-neutral" arbitrage, which can involve
buying and selling different stocks in an industry
group.
Mr. Madoff said, "The basic strategy was to be
long a broad-based portfolio of S&P securities and
hedged with derivatives," such as futures and
options. Such a strategy, he said, allowed the
investors "to participate in an upward market
move while having limited downside risk." For
example, he said, the Madoff firm made money
when the stock market crashed in 1987 by owning
stock-market index puts, which rose in value as
the market declined.
In the mid-1980s, one investor says, the limited
reports that Avellino & Bienes sent to investors
changed, and investors stopped being told in
which securities their money was invested. The
interest rate on some new notes sold by the
accountants was also lowered to 16% or less. One
investor who complained about the vaguer reports
and lower returns was told that if he didn't like
them, he could withdraw his investment. He chose
to remain.
Perhaps the biggest question is how the
investment pools could promise to pay high
interest rates on a steady annual basis, even
though annual returns on stocks fluctuate
drastically. In 1984 and 1991, for example, the

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Wall Street Mystery Features a Big Board Rival - WSJ.com

stock market delivered a negative return, even
after counting dividends. Yet Avellino & Bienes -and Mr. Madoff -- maintained their double-digit
returns.
The answer could be that Mr. Madoff's use of
futures and options helped cushion the returns
against the market's ups and downs. Mr. Madoff
says he made up for the cost of the hedges -which could have caused him to trail the stock
market's returns -- with stock-picking and
market timing.

Page 3 of 4

what he described as standard brokerage
commissions. He termed turnover in the accounts
"not very active," almost nil in some years.
Write to Randall Smith at [e-mail]

Certainly, the investment pools' returns were less
astounding by the standards of the early 1980s,
when short-term interest rates briefly topped
20%. But the annual returns on Treasury bills hit a
peak of 14.7% in 1981, and remained under 12% in
the three other years that bills had double-digit
returns, 1979-82, before falling later in the '80s.
One person familiar with the Avellino & Bienes
case speculated that having the assets of the
investment pools under management may have
helped Mr. Madoff's firm by giving him an
inventory of securities that could help him to
execute other trades for his firm. Not true, said
Mr. Madoff: "One thing has nothing to do with
another."
As the investment pools swelled, two other
accountants, Steven Mendelow of New York City
and Edward Glantz of Lake Worth, Fla., started
their own pool, Telfran Ltd., to invest in Avellino
& Bienes notes. Telfran by itself sold $89.6 million
in unregistered notes, a separate SEC civil lawsuit
charges. The two men, also represented by Mr.
Sorkin, declined to comment. The SEC said Telfran
made money by investing in Avellino & Bienes
notes paying 15% to 19% annually, while paying
Telfran investors lower rates.
All the while, Mr. Madoff was scoring investment
returns that comfortably exceeded the hefty
returns Avellino & Bienes was promising its
noteholders. That excess return generated big
profits for the two accountants, the SEC suit
indicates. The SEC has asked that those profits be
returned as "unjust enrichment," a demand Mr.
Sorkin calls "totally unwarranted." For his part, Mr.
Madoff says he charged the investment pools only

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3/12/2011