NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion "Ponzi scheme" in what may rank among the biggest fraud cases ever.
The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.
Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.
A Ponzi scheme is a swindle offering unusually high returns, with early investors paid off with money from later investors.
On Thursday, two agents for the U.S. Federal Bureau of Investigation entered Madoff's New York apartment.
"There is no innocent explanation," Madoff said, according to the criminal complaint. He told the agents that it was all his fault, and that he "paid investors with money that wasn't there," according to the complaint.
The $50 billion allegedly lost would make the hedge fund one of the biggest frauds in history. When former energy trading giant Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.
U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million.
The Securities and Exchange Commission filed separate civil charges against Madoff.
"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."
Dan Horwitz, Madoff's lawyer, told reporters outside a downtown Manhattan courtroom where he was charged, "Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events."
A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.
Authorities, citing a document filed by Madoff with the U.S. Securities and Exchange Commission on January 7, 2008, said Madoff's investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors.
The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.
CONSISTENT RETURNS
An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.
The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.
Jon Najarian, an acquaintance of Madoff who has traded options for decades, said "Many of us questioned how that strategy could generate those kinds of returns so consistently."
Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.
"He always seemed to be a straight shooter. I was shocked by this news," Najarian said.
'LOCK AND KEY'
Madoff had long kept the financial statements for his hedge fund business under "lock and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was located on a separate floor from the market-making business.
Madoff has been conducting a Ponzi scheme since at least 2005, the U.S. said. Around the first week of December, Madoff told a senior employee that hedge fund clients had requested about $7 billion of their money back, and that he was struggling to pay them.
Investors have been pulling money out of hedge funds, even those performing well, in an effort to reduce risk in their portfolios as the global economy weakens.
The fraud alleged here could further encourage investors to pull money from hedge funds.
"This is a major blow to confidence that is already shattered -- anyone on the fence will probably try to take their money out," said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass noted that investors that put in requests to withdraw their money can subsequently decide to leave it in the fund if they wish.
Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website.
Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.
The website also states that Madoff himself has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
The company's website may be found here: http://www.madoff.com/
(Additional reporting by Christian Plumb, Phil Wahba, Michelle Nichols and Jennifer Ablan in New York and Rachelle Younglai in Washington; Editing by Andre Grenon, Bernard Orr and Alex Richardson) By KAJA WHITEHOUSE
Suicide hotlines in Greenwich, Conn., could be lit up today as investors in the posh suburb begin to realize how much they've lost in the rip-off scheme perpetrated by Wall Street legend Bernard Madoff.
While the extent of Madoff's madness will take a while to suss out, it is known that Madoff managed money for a wide range of investors, including prominent New Yorkers, university endowments and charities.
But Madoff's scam - which Madoff himself estimates is as large as $50 billion - could extend beyond those directly affected, as the ripples of his ruse spread.
"There are a number of ramifications," said Doug Kass, founder of hedge fund Seabreeze Partners. "For one, it will serve to cripple an already-skeptical community of individual and institutional investors that have held our money managers in high regard only to be disappointed time and again."
Added a Wall Street trader, "It's yet another big straw on the camel's back at a time when everyone's screaming for liquidity." He predicted redemptions, or requests to pull out money from hedge funds, could surge as a result of Madoff's misdeeds.
Given that Madoff's investment-advisory arm, which is at the center of the alleged Ponzi scheme, managed just $17 billion in assets, observers suspect the only way his scam could have reached $50 billion was through massive borrowing.
A number of respectable institutions, from banks to firms that manage funds of hedge funds, will likely be damaged by yesterday's stunning revelations.
Groups known to have worked with Madoff in the past include alternative-asset manager Fairfield Greenwich Group, the Nomura Bank of Japan, and Swiss asset-management firm NPB New Private Bank.
Sources tell The Post that Madoff managed money for Fairfield Greenwich through a $7 billion hedge fund called Fairfield Sentry, which Nomura and NPB offered to clients.
According to a document obtained by The Post, the fund reported earnings of 4.5 percent at the end of October. Another document says the fund has a 15-year track record of producing 11 percent returns.
Fairfield Greenwich officials declined to comment.
Madoff's trading strategy, known as "split-strike conversion," has raised eyebrows in the past, sources said. The complex strategy involves trading in and out of large-cap stocks and buying put options on baskets of stocks.
"I think a lot of people already were very suspicious," said one hedge-fund executive. "If you look at the performance, it looks too good to be true. And if it looks too good to be true, chances are it is."
With Mark DeCambre
kaja.whitehouse@nypost.com
SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
FOR IMMEDIATE RELEASE
2008-293
Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.
The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.
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Additional Materials
SEC Complaint
Order freezing assets and granting emergency relief (Dec. 12, 2008)
Information for customers of Bernard L. Madoff Investment Securities LLC
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"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."
Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."
According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.
Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.
The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.
In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.
The SEC's investigation is continuing.
The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York.
# # #
For more information, contact:
Andrew M. Calamari
Associate Director, Enforcement
SEC's New York Regional Office
(212) 336-0042
Alexander Vasilescu
Chief, Trial Unit
SEC's New York Regional Office
(212) 336-0178
http://www.sec.gov/news/press/2008/2008-293.htm
Prominent Trader Accused of Defrauding Clients
By DIANA B. HENRIQUES and ZACHERY KOUWE
Published: December 11, 2008
On Wall Street, his name is legendary. With money he had made as a lifeguard on the beaches of Long Island, he built a trading powerhouse that had prospered for more than four decades. At age 70, he had become an influential spokesman for the traders who are the hidden gears of the marketplace.
Related
Letter from the research firm Aksia to its clients on Madoff Securities
Letter from the asset management firm, UBP, to its clients
S.E.C. News Release
S.E.C. Complaint
U.S. Attorney's Office Statement
But on Thursday morning, this consummate trader, Bernard L. Madoff, was arrested at his Manhattan home by federal agents who accused him of running a multibillion-dollar fraud scheme — perhaps the largest in Wall Street’s history.
Regulators have not yet verified the scale of the fraud. But the criminal complaint filed against Mr. Madoff on Thursday in federal court in Manhattan reports that he estimated the losses at $50 billion. “We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the enforcement division at the Securities and Exchange Commission. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors.”
Andrew M. Calamari, an associate director for enforcement in the S.E.C.’s regional office in New York, said the case involved “a stunning fraud that appears to be of epic proportions.”
According to his lawyers, Mr. Madoff was released on a $10 million bond. “Bernie Madoff is a longstanding leader in the financial services industry,” said Daniel Horwitz, one of his lawyers. “He will fight to get through this unfortunate set of events.”
Mr. Madoff’s brother and business colleague, Peter Madoff, declined to comment on the case or discuss its implications for the Madoff firm, which at one point was the largest market maker on the electronic Nasdaq market, regularly operating as both a buyer and seller of a host of widely traded securities. The firm employed hundreds of traders.
There was some worry on Wall Street that Mr. Madoff’s fall would shake more foundations than his own.
According to the most recent federal filings, Bernard L. Madoff Investment Securities, the firm he founded in 1960, operated more than two dozen funds overseeing $17 billion.
These funds have been widely marketed to wealthy investors, hedge funds and other institutional customers for more than a decade, although an S.E.C. filing in the case said the firm reported having 11 to 23 clients at the beginning of this year.
At the request of the Securities and Exchange Commission, a federal judge appointed a receiver on Thursday evening to secure the Madoff firm’s overseas accounts and warned the firm not to move any assets until he had ruled on whether to freeze the assets.
A hearing on that request is scheduled for Friday.
Regulators said they hoped to have a clearer picture of the losses facing investors by that court hearing.
“We have 16 examiners on site all day and through the night poring over the records,” said Mr. Calamari of the S.E.C.
The Madoff funds attracted investors with the promise of high returns and low fees. One of Mr. Madoff’s more prominent funds, the Fairfield Sentry fund, reported having $7.3 billion in assets in October and claimed to have paid more than 11 percent interest each year through its 15-year track record.
Competing hedge fund managers have wondered privately for years how Mr. Madoff generated such high returns, in bull markets and bear, given the generally low-yielding investment strategies he described to his clients.
“The numbers were too good to be true, for too long,” said Girish Reddy, a managing director at Prisma Partners, an investment firm that invests in hedge funds. “And the supporting infrastructure was weak.” Mr. Reddy said his firm had looked at the Madoff funds but decided against investing in them because their performance was too consistently positive, even in times when the market was incredibly volatile.
But the essential drama is a personal one — one laid out in the dry language of a criminal complaint by Lev L. Dassin, the acting United States attorney in Manhattan, and a regulatory lawsuit filed by the S.E.C. According to those documents, the first alarm bells rang at the firm on Tuesday, when Mr. Madoff told a senior executive he wanted to pay his employees their annual bonuses in December, two months early. Where Was the S.E.C.? by Megan Barnett Dec 12 2008
Failure to uncover Bernard Madoff's alleged massive fraud should be the nail in the S.E.C.'s coffin. It's time to start over.
Here's what we know: The Securities and Exchange Commission was alerted to Bernard Madoff's suspicious returns several times during the past decade.
Here's what else we know: The S.E.C. failed to uncover what's being alleged as a massive Ponzi scheme at Madoff's firm.
Do we really need any more evidence that the agency charged with protecting investors needs massive overhaul and more oversight of hedge funds?
It's astonishing, really. Madoff was reporting consistent returns from an investment strategy that involved trading stock and options of S&P 100 companies. The returns weren't wildly huge, but they were reliably steady: up a little every month, up 10 percent per year. Madoff claimed to be up 5.6 percent this year through November, according to the Wall Street Journal. Meanwhile, the S&P 500 lost 38 percent during the same time frame.
In May 2001, Barron's ran a story that called Madoff's returns into question. Some wondered if Madoff was using information from his market-making business, which trades stocks for financial institutions, to front-run trades in his funds. It would be illegal if true, but investors seemed happier not to know. "Even knowledgeable people can't really tell you what he's doing," one "very satisfied" investor told Barron's.
Indeed, Henry Blodget at Clusterstock has heard from investors who knew Madoff had to have been doing something illegal in order to produce those returns, but that only gave them more reason to invest with him. That he was running a simple, old-fashioned Ponzi scheme never seemed to cross their minds.
A securities executive by the name of Harry Markopolos first started alerting the S.E.C. to Madoff's suspicious operations in 1999, and continued to press them for years. "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," Markopolos wrote to the S.E.C. in November 2005.
One very adept hedge fund investigator advised his clients not to invest with Madoff after he discovered his auditors operated out of a 13-by-18-foot office in Rockland County, according to Bloomberg. This was where books on the $17 billion under management by Madoff were "audited."
Anyone arguing against more regulation of hedge funds is going to have a hard time working around this story. It is impossible to see how the S.E.C. isn't culpable for allowing Madoff's scheme to go on as long as it did. The only reason we even know about it now is that he finally broke down and 'fessed up to his sons.
"We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable," said S.E.C. enforcement director Linda Chatman Thomsen in a statement.
"We have 16 examiners on site all day and through the night poring over the records," S.E.C. associate director Andrew Calamari told the New York Times.
For Madoff's investors, it's a little late for the S.E.C.'s grandstanding.
Where was the "poring over records" in 1999, when the agency was told about Madoff's dubious returns? And in 2001, when Barron's raised more questions? What about in 2005, when the agency received even more inquiries about his mysterious trades?
The S.E.C. won't likely be forthcoming with these answers, but that shouldn't stop Madoff's investors from demanding them. It's a Mad, Mad, Mad, Madoff World
The WSJ fills in more details regarding the Madoff case, and it's actually more gobsmackingly unbelievable than it was last night.
For one thing, Madoff didn't invest simply on behalf of a couple of dozen multibillionaires; he had many common-or-garden millionaire clients, many of whom were introduced to him -- I'm not making this up -- through the Boca Rio Golf Club in Boca Raton and the Palm Beach Country Club in Palm Beach. Apparently the ability to invest with Madoff was sold as a side benefit of joining the clubs -- as ever, if you make something seem exclusive, people will clamor to get it.
It gets worse: a chap called Harry Markopolos has been saying that Madoff was a fraud in May 1999 -- almost a decade ago. Obviously, nothing happened, but Markopolos didn't give up: he wrote the SEC in 2005, saying that "Bernie Madoff's returns aren't real". But until Bernie Madoff himself admitted that fact, the SEC was nowhere to be seen. Others saw it too: Cassandra did, and, according to Henry Blodget, many of Madoff's investors reckoned that he must be a crook and that this was a legal way of profiting from fraud.
There was every reason to believe that Madoff was cooking the books. He posted regular small monthly returns, adding up to 10% per year, year in and year out -- essentially the Holy Grail of high returns with almost zero volatility. Even in recent months Madoff perpetuated the fiction:
Mr. Madoff's Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor's 500-stock index was down 37.65%. In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%.
Now those kind of returns are very attractive to country-club millionaires: you can see where that part of the fraud came from. But it turns out that Madoff's largest investors were fund-of-funds managers, including huge names like Tremont Capital Management.
Such managers do one thing, first and foremost: they exist as an extra pair of eyes to oversee the actual fund managers; they're a risk control, and they're sophisticated enough to smell impossible returns like Madoff's. I simply can't believe that they funneled billions of dollars of client money to Madoff without ever talking to his chief risk officer (there wasn't one).
There's also the question of the $50 billion number, given that Madoff "only" had $17 billion in assets under management, according to his SEC filings. I see three possibilities which might explain the difference:
Madoff, falling apart, can't add up, even after including all the fees he extracted from the funds.
The amount of funds that Madoff reported to the SEC was a fraction of the amount of funds that Madoff reported to his investors.
Madoff borrowed the extra $33 billion, as Kaja Whitehouse suspects.
I think the second option is the most likely, but insofar as banks lent Madoff anything unsecured, they're feeling really stupid right now.
The one thing I'm sure of is that Tremont and Fairfield Greenwich are going to face some massive lawsuits over this -- and will suffer enormous redemptions. (Does Fairfield Greenwich run non-Madoff money? It's unclear, but it's probably moot; if they did yesterday, they won't tomorrow.) If they're idiotic enough to place billions with Madoff, they have no business running anybody's money.
Bernard Madoff arrested over alleged $50 billion fraud
An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.
The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.
Jon Najarian, an acquaintance of Madoff who has traded options for decades, said
"Many of us questioned how that strategy could generate those kinds of returns so consistently."
Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.
"He always seemed to be a straight shooter. I was shocked by this news," Najarian said.
'LOCK AND KEY'
Madoff had long kept the financial statements for his hedge fund business under
"lock and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was located on a separate floor from the market-making business.
Madoff has been conducting a Ponzi scheme since at least 2005, the U.S. said. Around the first week of December, Madoff told a senior employee that hedge fund clients had requested about $7 billion of their money back, and that he was struggling to pay them.
Investors have been pulling money out of hedge funds, even those performing well, in an effort to reduce risk in their portfolios as the global economy weakens.
The fraud alleged here could further encourage investors to pull money from hedge funds.
"This is a major blow to confidence that is already shattered -- anyone on the fence will probably try to take their money out," said Doug Kass, president of hedge fund Seabreeze Partners Management. Kass noted that investors that put in requests to withdraw their money can subsequently decide to leave it in the fund if they wish.
Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website.
Madoff remains a member of Nasdaq OMX Group Inc's nominating committee, and his firm is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.
The website also states that Madoff himself has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
The company's website may be found here: www.madoff.com/
(Additional reporting by Christian Plumb, Phil Wahba, Michelle Nichols and Jennifer Ablan in New York and Rachelle Younglai in Washington; Editing by Andre Grenon, Bernard Orr and Alex Richardson)