Mr. Ponzi, Meet Ms. Divorce

They say there is a sucker born every minute and I have to agree. The number of Ponzi schemes that have unravelled in the last several years is remarkable. The wave began with the outrageous scandal that Bernie Madoff created when it was discovered he had defrauded $160 billion from his closest friends, his family, and the public for several decades, while he became a fat-cat at the expense of everyone he encountered, including his son, who later committed suicide.

Since then there has been a parade of white-collar con artists whose greed has also done them in, including Earl Jones from Canada and Lou Perlman and R. Allen Stanford from the United States, to name a few.

It was inevitable that in the world of high-stakes investments the collapse of financial empires would impact the milieu of high net worth divorce. Two such cases have wound their way through the New York divorce courts.

One case involves commodities trader Stephen Walsh who defrauded investors of more than $550 million in a thirteen-year Ponzi scheme. While hundreds of innocent investors lost everything, Mr. Walsh’s wife, Janet Schaberg, cashed in during her divorce from Walsh, which predated the demise of his phony financial firm.

While admitting that Ms. Schaberg was innocent, the U.S. Securities Exchange Commission went after her money alleging that her net worth was largely as a result of the fraud her husband had perpetrated during their marriage. As a result almost $8 million in cash was frozen pending the outcome of the SEC’s lawsuit.

Ms. Schaberg won the lawsuit which enabled her to retain the assets she acquired in her 2009 divorce. The New York Court weighed the competing interests of an innocent spouse of a scam artist against the rightful owners of the funds, who had been taken in by a sophisticated fraud.

In ruling in her favour, the Court compared her with an architect who was paid to build a home for a thief. The architect would not be forced to disgorge the funds he had received from the thief and neither should Ms. Schaberg.

In another New York courtroom this week, the final chapter in the Steve Simkin/Bernie Madoff case was written.

Steve Simkin is a prominent real estate lawyer in New York City with blue-chip law firm Paul, Weiss. He and his wife Laura Blank separated in 2002 after 30 years of marriage and entered into a separation agreement in 2006 that divided equally their significant assets including a home in Scarsdale, an apartment in Manhattan and a stock portfolio managed by Bernard L. Madoff Investment Securities. Simkin’s Madoff account statement showed a value of $5.4 million and he paid his wife about $2.7 million as her fifty percent share of the asset.

To fund the payment to her, he liquidated a portion of his Madoff account, retained the balance and continued to operate this account with Madoff.

In 2008 Mr. Simkin learned he was a victim of Maddof’s criminal scheme and there was no account with Madoff’s company. The statements Simkin relied on were fraudulent. Simkin filed a lawsuit seeking to recover the funds he paid his wife for her share of the portfolio. His lawyer argued that Ms. Blank had received a “windfall” and on the basis of a “mutual mistake” the agreement should be varied and Mr. Simkin should receive reimbursement from his ex-wife.

A Manhattan trial judge disagreed and tossed out Simkin’s lawsuit. She ruled there had been no mistake, as at the date of the separation agreement the account held funds, a portion of which were used to payout Ms. Blank.

On appeal the Court revived Mr. Simkin’s suit ordering a new trial, but this week Judge Victoria Graffeo ruled in Ms. Blank’s favour, unwilling to upset the agreement both parties had entered into in good faith.

The rationale is sound for several reasons, not the least of which is the righteous preclusion of a former spouse with investment or real estate losses from looking to his or her ex to regain assets already divided between them, because of changes in the marketplace.

There is a reason why family lawyers remind their clients that “a deal is a deal”.

Lawdiva aka Georgialee Lang

7 thoughts on “Mr. Ponzi, Meet Ms. Divorce

  1. The next twist is a couple that will use this scheme to protect assets from being touched by the Court, through the guise of a divorce. People can be amazing and enduring actors when a lot of money is involved. After a phony achromous divorce, the couple will lay low, but then go through a lot of “counseling” and five years later eventually reconcile somewhat, at least enough to mutually live well from the share of the big fraudulent profits they partake of together in later years.

  2. Sorry..I completely disagree with the New York court’s decision, I am an acknowledged “expert” in proceeds of crime matters (for whatever that means, I prefer the term that I may, perhaps, know what I am talking about), having been instrumental in drafting and shepherding legislation through Parliament, and having given presentations concerning proceeds of crime matters in about 40 countries, and as well, developed the national RCMP Proceeds of Crime program..

    Proceeds of crime is contraband; it cannot be legally possessed…it is no different than a couple of hundred kilos of cocaine. It is all contraband and, in accordance with existing laws, subject to seizure. In Canada; once seizure has been effected, the law states that third party interest are preserved…in short, victims of crime are able to be recompensed once the fruits of the crime have been suitably identified.

    The “ownership” of the property in this case is not material…the source of the property is. The defrauded parties clearly have a prior claim on the assets.

    Although I don’t need the business, because I certainly don’t need more hassles in my life, I am inclined to contact the fraud victims, because even in US law, they have remedies that will negate the court’s decision.

  3. Bruce There is no doubt that you know what you’re talking about! Perhaps the SEC will appeal the decision in the Walsh/Schaberg case.

    As far as the conclusion to the Simkin case, I predicted in a blog I wrote about a year ago that Mr. Simkin wouldn’t get any money back from his ex-wife.

    Thanks again for your comments.

  4. I think at the end of the day the Court may have simply determined that the whole Madoff and fraud twist was a red herring; irrelevant to the main issue(s) between these parties; and sadly for Mr. Simkin, the result of an improvident decision by Mr. Simkin in having invested, and moreover in having retained ex post facto, his investment, with Madoff. The fact remains that as at the appropriate v-day or redemption date; for all intents and purposes, the account contained $5.4 million. As I understand it, the Judge indicated the account clearly had some money in it, as Simkim was able to redeem, and did in fact redeem, $2.7 million of it. Without speculating as to what might have happened had he opted to redeem the account in full (and I suspect he may now regret not having done so, to the extent of perhaps settling a larger portion of the overall settlement to Ms. Blank – whatever that amount might have been, if at all) it was certainly open for Mr. Simkin to redeem all of his account at that time. I would think that whether or not some of those funds comprising the total value of the portfolio were somehow subject to fraudulent activity by others would be irrelevant to the issue of asset division in this particular litigation between these particular parties. While it’s probably just semantics, and with all respect to Georgialee – regarding Simkin’s discovery of the fraud, I think saying “there was no account with Madoff’s company” would perhaps have been more aptly characterized as “there was no more account with Madoff’s company”. Also, as I infer from the blog, that the Madoff account, presumably named in and chosen by, Mr. Simkin; was Mr. Simkin’s alone, and that he had control over that account, family asset or not. It is also worth pointing out that to the extent that the account was a “stock portfolio” and not, say some type of guaranteed fixed income investment account, the account was always speculative in the sense that it would have been subject to market force changes, at least up to the v-day/redemption day and in any event and by virtue of that speculative element, would have always affected the parties’ ultimate share in that account. What if the value of Mr. Simkin’s remaining share in the portfolio simply crashed due to changed market conditions – what’s it got to do with Ms. Blank?

    Ray Mayer
    Special Situation Funding

  5. Ray:

    You made a well-reasoned argument as to property division. But all of the points you made could be equally applied to circumstances wherein a secret stash of 1000 kilos of cocaine had been discovered. As we all know, no such “division of property” would ever have been made.

    Reason: The cocaine is contraband. No-one can legally possess it. Just as proceeds of crime is contraband.

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