Bank Under Scrutiny in Giacchetto Case
Unlike those of his celebrity clients, Dana Giacchetto’s autograph was worthless . . . except, apparently, when it was on the back of a check made out to one of his clients.
The money manager to the stars allegedly cashed 58 checks totaling $11 million that were made out to celebrity investors such as Matt Damon, Ben Stiller and the rock group Phish. To Giacchetto’s investors, the shock of his brazenness is matched only by the astonishment that nobody ever raised an eyebrow.
“If I misspelled my name on a check, my bank would bounce it,” says David Comarow, a lawyer who is representing two Giacchetto investors, artists Robert Ginder and Cara Wood Ginder. Cara is Comarow’s stepdaughter.
Apparently, Comarow doesn’t bank at Boston-based U.S. Trust, where a critical breakdown in normal banking protocol seems to have taken place in the Giacchetto case. Cassandra Group, Giacchetto’s company, had an account there and the bank cashed his clients’ checks for him, no questions asked.
Two weeks after Giacchetto was charged with stealing more than $6 million from his clients, an internal bank investigation as well as Securities and Exchange Commission and federal criminal investigations, are searching for answers. Was it incompetence at following normal banking procedures? Did Giacchetto’s stature as a money manager cause the bankers to look the other way? Or did he have an operative inside the bank?
How Giacchetto managed these transactions will go a long way toward identifying who will be left holding the bag for Giacchetto’s alleged scams, who will be liable for money lost by investors. Already, lawyers are organizing investors for potential lawsuits, with Giacchetto’s banking relationships at the heart of their efforts.
“You’ve got to follow the bouncing ball, which means you have to follow the banking transactions,” said Howard Meyers, a former SEC lawyer in New York who is lining up Giacchetto investors for a possible class-action lawsuit.
Court records suggest that Giacchetto, 37, who could face up to 20 years in prison on three federal criminal counts, never even had to deal with the kind of routine banking procedures that are supposed to prevent such abuses.
“Should this have happened? Absolutely not. He did not have, and should not have had, the ability to withdraw money for the benefit of Dana Giacchetto,” said Steven Cohen, a court-appointed receiver who now oversees the assets of Giacchetto’s operation.
Authorities still do not know whether to attribute Giacchetto’s success at pulling off the alleged scam to the same charm that enabled him to cozy up to Hollywood stars such as Leonardo DiCaprio, Cameron Diaz and major entertainment figures such as Michael Ovitz. Or whether it was the kind of influence that came as a manager of some $100 million in funds for the rich and famous. And there’s that question of whether he might have had an arrangement of some kind with a bank insider.
“What happened is at least in part the result of a system that didn’t have the usual checks and balances. Whether it was designed to be that way intentionally, or happened inadvertently, isn’t clear to me,” Cohen said.
Keeping Tabs on Clients
According to court papers and tape-recorded phone messages on file with the SEC, Giacchetto over a period of more than two years would call up Chase Manhattan Bank’s discount brokerage unit, Brown & Co., where his client investment accounts were held, often fishing around to find out what balances were available. He was familiar to Brown’s employees. On one tape, a Brown employee tells another that Giacchetto is “a money manager . . . a pretty big account.”
On at least 58 occasions, he allegedly ordered checks without the permission of his clients and had them delivered to his SoHo loft office via Federal Express. This despite promises in promotional literature given to clients that, “for maximum safety,” he did not take possession of clients’ money, which “assures the client security of his or her account.”
Chase would not comment, but sources there have insisted that the brokerage followed “procedures.” People close to the case suggest that Brown will argue that it also was duped, and that it did nothing wrong because it wrote the checks to the clients, not to Giacchetto. Brown also is expected to argue that it was following the instructions of an authorized representative in Giacchetto, and had no way of knowing Giacchetto would be the one cashing the checks.
Once in hand, records show, Giacchetto deposited the checks into the accounts of his Cassandra Group at U.S. Trust. Authorities allege that he used the money to fund his lifestyle and to keep his elaborate juggling act from unraveling.
Even though the checks were made out to clients, many of them famous, Giacchetto endorsed them in his own name. Although at least $6 million is unaccounted for, authorities allege he misused some $20 million in unauthorized transactions by shifting the money in and out of client accounts to reimburse clients he had taken money from earlier.
Wealthy people, including some movie stars, who are too busy or unsophisticated financially to handle their own money, often give business managers and advisors wide discretion over their funds, allowing them to cash checks, pay bills and make investments. The key difference is that the money is supposed to be deposited in a client’s account, not find its way into an account of someone who oversees the money, as it allegedly did with Giacchetto.
While U.S. Trust was the bank that allowed Giacchetto to cash the checks, another institution, Citizens Bank in Boston, may ultimately be on the hook. Citizens bought Boston’s U.S. Trust three months ago, after the majority of Giacchetto’s questionable transactions took place and before federal authorities pieced them together.
A spokeswoman for Citizens would say only that the bank is investigating the relationship with Giacchetto. Giacchetto’s lawyer, Andrew Levander, has declined to comment on the case.
Banking lawyer Gene R. Eldering, a partner at Manatt, Phelps & Phillips and former assistant general counsel at First Interstate Bank, says that banks should be able to quickly spot such abuses.
“When they see checks payable to a third part in the hands of a fiduciary going into the fiduciary’s own account, a red flag goes up,” said Eldering, who is not involved in the Giacchetto case. “Banks take it on the chin when they allow it to happen. Ultimately, assuming a bad guy does have the funds, the bank that took the check is responsible for it.”
In this case, that would be U.S. Trust of Boston, or now Citizens Bank in Boston.
