Bernard Madoff in 1993, appearing
before the House subcommittee on
Telecommunications and Finance.

Madoff: Some Saw It Coming. What Happens Now?

December 15, 2008 07:24 AM
by Anne Szustek
Bernard L. Madoff is facing a fraud charge for an alleged $50 billion Ponzi scheme at his investment firm. Skeptics are unfazed and investors are showing restrained panic.

Billions in Madoff Investments Vanished

Bernard L. Madoff Investment Securities, the private equity firm founded by the broker-dealer of the same name—who was also instrumental in getting the NASDAQ exchange up and running—turned out to be one $50 billion fraud.

According to the criminal complaint signed by FBI Agency Theodore Cacioppi, Bernard Madoff told at least three high-level employees at his New York apartment Wednesday night that the business was “basically, a giant Ponzi scheme.”

Madoff, who apparently said during the same meeting that he had “absolutely nothing,” mentioned that he intended to leave $200 million to $300 million for particular employees of the company and some friends and family.

On the surface, Madoff seemed to be flourishing. In 2001, according to statistics provided by Barron’s and cited by the Associated Press, Madoff Investment Securities was “one of the top three market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange.

It turned out, however, that the very funds put up by investors were the source of payment for returns on investment. Clients’ recent requests for some $7 billion in return payments were bleeding Madoff dry, leading the company founder to admit to one employee that he was flailing.

Filings from the Securities and Exchange Commission showed that Madoff Investment Securities had more than $17 billion in assets at the beginning of 2008. That has all but vanished, but as Forbes magazine points out, “on the bright side, investors would’ve lost about half of that in the stock market this year anyway.”

In any event, as Madoff Investment Securities’ Web site now plainly states, the U.S. federal court in Manhattan has put an asset freeze on Madoff Investment Securities and named a secured creditor to control its holdings.

“We are moving quickly and decisively to stop the fraud and protect the remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable,” Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, was quoted as saying by Forbes.

However, an article in Condé Nast Portfolio contends that over the past decade, the SEC has let numerous opportunities to pounce on Madoff’s opaque deals slip by.

Opinion & Analysis: The decline and fallout of Madoff Investment Securities

Megan Barnett, news editor at Portfolio, asks where the SEC was “in 1999, when the agency was told about Madoff’s dubious returns?”

Harry Markopolos, a securities executive, notified the SEC that year of his suspicions over Madoff’s operations, continuing to do so through the years. He wrote the SEC in 2005 “Bernie Madoff’s returns aren’t real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities.”

Barron’s made the same argument in May 2001, Portfolio writes. The buzz about alleged front-running was that it was something clearly illegal; however investors—or fraud victims—were content to look the other way.

Madoff’s returns on investment were the financial equivalent of news reports in countries with severe press restrictions: nothing bad happens here, just fair weather. He said his investments had gained 5.6 percent in value through November this year, an impressive feat considering that the Standard & Poor’s 500 dropped 38 percent in value during that same period. Generally Madoff reported annual growth of 10 percent a year, without really any major drops.
A 2001 paper by MAR/Hedge also raised its proverbial eyebrows at Madoff’s eerily calm performance.

“What is striking to most observers is not so much the annual returns—which, though considered somewhat high for the strategy, could be attributed to the firm’s market making and trade execution capabilities—but the ability to provide such smooth returns with so little volatility,” reads the paper. “The best known entity using a similar strategy, a publicly traded mutual fund dating from 1978 called Gateway, has experienced far greater volatility and lower returns during the same period.”

Today, some seven and a half years after the paper was published, hedge funds, individuals with old-line wealth and banks around the world are out billions. Among the European firms who have lost out as a result of the Madoff bust are Union Bancaire Privee, Bramdean Alternatives and Pioneer Alternative Investments.

The latter had put “substantially all” of the $280 million portfolio of its Primeo Select Fund into Madoff. A spokeswoman for the fund, a unit of Italian bank UniCredit, declined to comment for Bloomberg. Bramdean released a statement saying, “At the current time, the financial status of the holdings in Madoff-managed vehicles is uncertain.”

Stateside, New York’s Fairfield Greenwich Group may be the biggest loser in the deal, with $7.3 billion invested in Madoff. Sterling Equities, the investment that among other sports companies, owns the New York Mets, also had investment accounts with the company. Sterling Equities owner Fred Wilpon also had tens of millions of his own money invested with Madoff, who was a longtime friend.

Attorney Ross Intelisano told Reuters that he has fielded calls from three different Madoff investors across the country who were “freaking out wanting to know if their money was gone. … I don’t think they are going to get answers for some time.”

In the meantime, philanthropy in the United States may stand to take a hit. Many individual investors who had Madoff accounts were from old-money families with a tradition of donating to educational institutions, cultural organizations and charitable foundations.

Charitable foundations had hundreds of millions invested with Madoff as well, and one has already shut down because of its losses. Reuters reports that the Massachusetts-based Robert I. Lappin Charitable Foundation, which bankrolled youth trips to Israel, has laid off its entire staff. “The money needed to fund the programs of the Lappin Foundation is gone,” the foundation’s Web site announced.

Related Topic: Grenada offshore bank turns out to be Ponzi scheme

Former Oregonian Gilbert Ziegler masterminded a Ponzi scheme, creating the First International Bank of Grenada (FIBG) in 1997, the same year that the country authorized its first offshore bank. Ziegler held a passport from the fabricated Dominion of Melchizedek and backed-up his bank with a 10,000-carat ruby he falsely claimed ownership of and about $14 billion in securities.

Ziegler’s Ponzi scheme lured investors with the promise of 300 percent annual interest. The bank took in $170 million and Ziegler fled to Uganda. Although many individuals have been imprisoned, and Ziegler died in 2005 awaiting trial, there is no money left to pay back defrauded investors.

Reference: Ponzi schemes


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