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The first installment to compensate investors victimized by jailed former financier Martin Armstrong’s massive shell game is going to be a big one. In what authorities believe will be the largest amount ever handed over in criminal restitution, Republic New York Securities Corporation will pay Japanese victims of Armstrong $606 million. Monday, before Southern District of New York Judge Richard Conway Casey, Republic pleaded guilty to securities and commodities fraud for its role as broker-dealer for Armstrong, who is accused of defrauding more than 60 Japanese corporate investors through his holding company, Princeton Global Management Ltd. Over a four-year period ending in 1999, Armstrong allegedly racked up more than $580 million in losses from trading in currencies and other high-risk investments, using money he had promised would be invested conservatively. Monday, attorney Andrew M. Lawler entered the guilty plea on behalf of Republic, admitting that some high-ranking officers in the company helped conceal Armstrong’s losses by issuing phony net asset value statements to investors. When officials from one Japanese corporation that had bought one of Armstrong’s “Princeton Notes” appeared at Republic’s Philadelphia offices and asked to look at a current balance sheet, a Republic officer showed them a computer printout for an account that seemed to satisfy the investors. But Lawler said Monday that Armstrong and the Republic officer had shifted money into the account at the last minute, and once the Japanese investors had seen the printout, the money was quickly shifted to another account. Lawler said Republic approached the government two years ago and broached the possibility of a cooperation agreement after Japanese regulators raised questions about Armstrong’s activities, and the company “came to suspect and understand that Armstrong’s Princeton Notes program had become a huge Ponzi scheme … .” Republic will pay no fines under the plea agreement reached with the government. Southern District U.S. Attorney Mary Jo White said at a press conference after the guilty plea Monday that the investigation against individual officers at the company is ongoing. White said the $606 million in restitution “far exceeds” Republic’s capital of $81 million and the $35 million in commissions that Republic earned on the accounts of Armstrong, who was by far the firm’s biggest client. The bulk of the money will be paid to investors by HSBC USA Inc. and HSBC Bank USA, which, under the terms of a December 1999 merger, are the successors in interest to Republic New York Corporation and Republic National Bank. HSBC made the deal after the fraud had been reported to prosecutors and investigators with White’s office, the Securities and Exchange Commission and the Commodity Futures Trading Commission. HSBC agreed to pay the money and cooperate with the government’s ongoing investigation pursuant to a nonprosecution agreement. Armstrong has been jailed for the last 23 months on a civil contempt order issued by Judge Richard Owen, who refuses to believe Armstrong’s claims that he has no idea where $14 million in rare coins and other valuables might be. A receiver appointed by the court in a civil case against Armstrong insists that the trader has access to the valuables. In a case that tests the boundaries of civil contempt incarceration, Armstrong will appear before the 2nd U.S. Circuit Court of Appeals in January to argue that the contempt citation has lost its coercive effect and has therefore become criminal, and not civil, in nature. While Republic’s role in the scandal covers the period between 1995 and 1999, officials said that Armstrong began raising money for his trading scheme in 1992, inducing investors to buy $3 billion in “Princeton Notes,” and paying off old investors as new money rolled in. Between 1992 and 1995, before Republic became involved, he allegedly raised $260 million from the sale of 16 notes, and deposited the funds in accounts maintained at Prudential Securities. But when Armstrong lost $29 million, and refused to answer Prudential’s questions or even identify his clients, Prudential asked Armstrong to close his accounts. The large-scale losses occurred after the entry of Republic onto the scene in 1995. In 1995 and 1996, Armstrong’s speculative trades had lost $53 million and $40 million respectively. But in 1997, he lost $220 million, followed by $195 million in 1998, and $48 million in 1999. With the collusion of top officials, and the failure of other officials to recognize what White termed “red flags,” accounts supposed to be kept discreet were consolidated, funds were commingled, false books and records were kept, and false representations were made to investors. Assistant U.S. Attorney Richard D. Owens told Judge Casey Monday that the evidence against the company consisted of voluminous documents and recorded conversations from Republic’s trading desks. In one recorded conversation in April 1999, the president of Republic’s futures division talked about Armstrong, saying “a doofus flipping a … coin every day” would have better luck making trades. Although the terms of the plea agreement are set, Judge Casey will formally sentence Republic on Dec. 28. Payments to investors will begin immediately. Standing with White at the press conference, Wayne M. Carlin, regional director of the SEC’s Northeast Regional Office, said it was “highly unusual” for investors to be compensated fully for their losses after the collapse of scheme like Armstrong’s “house of cards.” “Typically, when a huge Ponzi scheme collapses, the money is gone,” Carlin said.

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