Madoff investment scandal
Encyclopedia
The Madoff investment scandal broke in December 2008 when former NASDAQ
chairman Bernard Madoff
admitted that the wealth management arm of his business was an elaborate Ponzi scheme
.
He founded the Wall Street
firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest. Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. On March 12, 2009, Madoff pled guilty to 11 federal crimes and admitted to operating what has been the largest Ponzi scheme in history. On June 29, 2009, he was sentenced to 150 years in prison with restitution of $170 billion. According to the original federal charges, Madoff said that his firm had "liabilities of approximately US$
50 billion". Prosecutors estimated the size of the fraud to be $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients as of November 30, 2008. Ignoring opportunity cost
s and taxes paid on fictitious profits, half of Madoff's direct investors lost no money.
Investigators have determined others were involved in the scheme. The U.S. Securities and Exchange Commission (SEC) has also come under fire for not investigating Madoff more thoroughly; questions about his firm had been raised as early as 1999. Madoff's business, in the process of liquidation
, was one of the top market maker
s on Wall Street
and in 2008, the sixth-largest.
Madoff's personal and business asset freeze has created a chain reaction throughout the world's business and philanthropic community, forcing many organizations to at least temporarily close, including the Robert I. Lappin Charitable Foundation
, the Picower Foundation, and the JEHT Foundation
.
trader with $5,000, earned from working as a lifeguard
and sprinkler installer. His fledgling business began to grow with the assistance of his father-in-law, accountant Saul Alpern, who referred a circle of friends and their families.
Initially, the firm made markets (quoted bid and ask
prices) via the National Quotation Bureau's Pink Sheets
. In order to compete with firms that were members of the New York Stock Exchange
trading on the stock exchange's floor, his firm began using innovative computer information technology to disseminate its quotes. After a trial run, the technology that the firm helped develop became the NASDAQ
. At one point, Madoff Securities was the largest buying-and-selling "market maker
" at the NASDAQ.
He was active in the National Association of Securities Dealers (NASD), a self-regulatory securities industry organization, serving as the Chairman of the Board of Directors
and on the Board of Governors
.
In 1992, The Wall Street Journal
described him:
Several family members worked for him. His younger brother, Peter, was Senior Managing Director and Chief Compliance Officer, and Peter's daughter, Shana, was the compliance attorney. Madoff’s sons, Mark and Andrew, worked in the trading section, along with Charles Weiner, Madoff’s nephew. Andrew Madoff had invested his own money in his father's fund, but Mark stopped in about 2001.
Federal investigators believe the fraud in the investment management division and advisory division may have begun in the 1970s. However, Madoff himself stated his fraudulent activities began in the 1990s.
In the 1980s, Madoff's market-maker division traded up to 5% of the total volume made on the New York Stock Exchange
. Madoff was "the first prominent practitioner" who paid a broker to execute a customer's order through his brokerage, called a "legal kickback
", which gave Madoff the reputation of being the largest dealer in NYSE-listed stocks in the U.S., trading about 15% of transaction volume. Academics have questioned the ethics of these payments. Madoff has argued that these payments did not alter the price that the customer received. He viewed the payments as a normal business practice: "If your girlfriend goes to buy stockings at a supermarket, the racks that display those stockings are usually paid for by the company that manufactured the stockings. Order flow is an issue that attracted a lot of attention but is grossly overrated."
By 2000, Madoff Securities, one of the top traders of US securities, held approximately $300 million in assets. The business occupied three floors of the Lipstick Building
, with the investment management division, referred to as the "hedge fund
", employing a staff of approximately 24. Madoff ran a branch office in London, separate from Madoff Securities, which employed 28, handling investments for his family of approximately £
80 million. Two remote cameras installed in the London office permitted Madoff to monitor events from New York.
consisting of purchasing blue-chip stocks and taking options
contracts on them, sometimes called a split-strike conversion or a collar
. "Typically, a position will consist of the ownership of 30–35 S&P 100 stocks, most correlated to that index, the sale of out-of-the-money 'calls' on the index and the purchase of out-of-the-money 'puts' on the index. The sale of the 'calls' is designed to increase the rate of return
, while allowing upward movement of the stock portfolio to the strike price
of the 'calls'. The 'puts', funded in large part by the sales of the 'calls', limit the portfolio's downside."
In his 1992, "Avellino and Bienes" interview with The Wall Street Journal, Madoff discussed his supposed methods: In the 1970s, he had placed invested funds in "convertible arbitrage
positions in large-cap stocks, with promised investment returns of 18% to 20%", and in 1982, he began using futures contracts on the stock index, and then placed put option
s on futures during the 1987 stock market crash. A few analysts performing due diligence
had been unable to replicate the Madoff fund's past returns using historic price data for U.S. stocks and options on the indexes. Barron's raised the possibility that Madoff's returns were most likely due to front running
his firm's brokerage clients.
Mitchell Zuckoff, professor of journalism at Boston University
and author of Ponzi's Scheme: The True Story of a Financial Legend, says that "the 5% payout rule", a federal law requiring private foundations
to pay out 5% of their funds each year, allowed Madoff's Ponzi scheme to go undetected for a long period since he managed money mainly for charities. Zuckoff notes, "For every $1 billion in foundation investment, Madoff was effectively on the hook for about $50 million in withdrawals a year. If he was not making real investments, at that rate the principal would last 20 years. By targeting charities, Madoff could avoid the threat of sudden or unexpected withdrawals.
In his guilty plea, Madoff admitted that he hadn't actually traded since the mid-1990s, and all of his returns since then had been fabricated. However, David Sheehan, principal investigator for Picard, believes the wealth management arm of Madoff's business had always been fraudulent.
Madoff's operation differed from a typical Ponzi scheme. While most Ponzis are based on nonexistent businesses, Madoff's brokerage operation was very real.
s closely guarded.
The New York Post
reported that Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country club
s on Long Island
and in Palm Beach
". The New York Times
reported that Madoff courted many prominent Jewish executives and organizations; according to the Associated Press
, they "trusted [Madoff] because he is Jewish". One of the most prominent promoters was J. Ezra Merkin
, whose fund Ascot Partners steered $1.8 billion towards Madoff's firm. A scheme that targets members of a particular religious or ethnic community is a type of affinity fraud
, and a Newsweek
article identified Madoff's scheme as "an affinity Ponzi".
Madoff was a "master marketer", and his fund was considered exclusive, giving the appearance of a "velvet rope". He generally refused to meet directly with investors, which gave him an "Oz" aura and increased the allure of the investment. Some Madoff investors were wary of removing their money from his fund, in case they could not get back in later.
Madoff's annual returns were "unusually consistent", around 10%, and were a key factor in perpetuating the fraud. Ponzi schemes typically pay returns of 20% or higher, and collapse quickly. One Madoff fund, which described its "strategy" as focusing on shares in the Standard & Poor's 100-stock index, reported a 10.5% annual return during the previous 17 years. Even at the end of November 2008, amid a general market collapse, the same fund reported that it was up 5.6%, while the same year-to-date total return on the S&P 500-stock index had been negative 38%. An unnamed investor remarked, "The returns were just amazing and we trusted this guy for decades — if you wanted to take money out, you always got your check in a few days. That’s why we were all so stunned."
The Swiss bank, Union Bancaire Privée
, explained that because of Madoff's huge volume as a broker-dealer
, the bank believed he had a perceived edge on the market because his trades were timed well, suggesting they believed he was front running
.
(SIFMA), the primary securities industry organization.
Bernard Madoff sat on the Board of Directors of the Securities Industry Association, which merged with the Bond Market Association in 2006 to form SIFMA. Madoff's brother Peter then served two terms as a member of SIFMA’s Board of Directors. Peter's resignation as the scandal broke in December 2008 came amid growing criticism of the Madoff firm’s links to Washington, and how those relationships may have contributed to the Madoff fraud. Over the years 2000–08, the two Madoff brothers gave $56,000 to SIFMA, and tens of thousands of dollars more to sponsor SIFMA industry meetings.
In addition, Bernard Madoff's niece Shana Madoff was active on the Executive Committee of SIFMA's Compliance & Legal Division, but resigned her SIFMA position shortly after her uncle's arrest. She married an SEC compliance official, Eric Swanson, after an SEC investigation concluded in 2005. A spokesman for Swanson, who has left the SEC, said he "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship" with Shana Madoff.
s, Avellino & Bienes, the principals being Frank Avellino, Michael Bienes and his wife Dianne Bienes. Bienes began his career working as an accountant for Madoff's father-in-law, Saul Alpern. Then, he became a partner in the accounting firm Alpern, Avellino and Bienes. In 1962, the firm began advising its clients about investing all of their money with a mystery man, a highly successful and controversial figure on Wall Street,
but until this episode, not known as an ace money manager, Madoff. When Alpern retired at the end of 1974, the firm became Avellino and Bienes and continued to invest solely with Madoff.
Represented by Ira Sorkin
, Madoff's present attorney, Avellino & Bienes were accused of selling unregistered securities, and in its report the SEC mentioned the fund's "curiously steady" yearly returns to investors of 13.5% to 20%. However, the SEC did not look any more deeply into the matter, and never publicly disclosed Madoff. Through Sorkin, who once oversaw the SEC’s New York office, Avellino & Bienes agreed to return the money to investors, shut down their firm, undergo an audit, and pay a fine of $350,000. Avellino complained to the presiding Federal Judge, John E. Sprizzo
, that Price Waterhouse fees were excessive, but the judge ordered him to pay the bill of $428,679 in full. Madoff said that he did not realize the feeder fund was operating illegally, and that his own investment returns tracked the previous 10 years of the S&P 500
. The SEC investigation came right in the middle of Madoff's three terms as the chairman of the NASDAQ
stock market board.
The size of the pools mushroomed by word-of-mouth, and investors grew to 3,200 in nine accounts with Madoff. Regulators feared it all might be just a huge scam. "We went into this thinking it could be a major catastrophe. They took in nearly a half a billion dollars in investor money, totally outside the system that we can monitor and regulate. That's pretty frightening." said Richard Walker, at the time, the SEC's New York regional administrator.
Bienes, 72, recently discussed that he deposited $454 million of investors' money with Madoff, and until 2007, continued to invest several million dollars of his own money, saying, "Doubt Bernie Madoff? Doubt Bernie? No. You doubt God. You can doubt God, but you don't doubt Bernie. He had that aura about him."
at their Boston regional office and reviewed his allegations of Madoff's fraudulent practices. The SEC claimed it conducted two other inquiries into Madoff in the last several years, but did not find any violations or major issues of concern.
In 2004, after published articles appeared accusing the firm of front running, the SEC's Washington office cleared Madoff. The SEC detailed that inspectors had examined Madoff's brokerage operation in 2005, checking for three kinds of violations: the strategy he used for customer accounts; the requirement of brokers to obtain the best possible price for customer orders; and operating as an unregistered investment adviser. Madoff was registered as a broker-dealer
, but doing business as an asset manager
. "The staff found no evidence of fraud". In September, 2005 Madoff agreed to register his business, but the SEC kept its findings confidential. During the 2005 investigation, Meaghan Cheung, a branch head of the SEC's New York's Enforcement Division, was the person responsible for the oversight and blunder, according to Harry Markopolos
, who testified on February 4, 2009, at a hearing held by a House Financial Services Subcommittee on Capital Markets.
In 2007, SEC enforcement completed an investigation which began on January 6, 2006, into a Ponzi scheme allegation which resulted in neither a finding of fraud, nor a referral to the SEC Commissioners for legal action.
(FINRA), the industry-run watchdog for brokerage firms, reported without explanation that parts of Madoff's firm had no customers. "At this point in time we are uncertain of the basis for FINRA's conclusion in this regard," SEC staff wrote shortly after Madoff was arrested.
As a result, the SEC's chairman Christopher Cox stated that an investigation will delve into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm". A former SEC compliance officer, Eric Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney.
Harry Markopolos
complained to the SEC's Boston office in May 2000, telling the SEC staff they should investigate Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he claimed to use. Markopolos' bosses at options trader Rampart Investment Management had asked him to try to replicate Madoff's numbers. However, Markopolos concluded almost immediately that Madoff's numbers didn't add up, and the only plausible explanation for them was fraud. This was confirmed after four hours of failed attempts to reproduce Madoff's numbers. Markopolos told the SEC that in all likelihood, Madoff was either running a Ponzi scheme (by paying old clients with newer clients' money) or front running (by trading for his own account using knowledge of his clients' orders).
In 2005, Markopolos sent a detailed 17-page memo to the SEC, entitled The World's Largest Hedge Fund is a Fraud. He had also approached The Wall Street Journal about the existence of the Ponzi scheme in 2005, but its editors decided not to pursue the story. The paper specified 30 numbered red flags based on 174 months (a little over 14 years) of Madoff trades. The biggest red flag was that Madoff reported only seven losing months during this time, and those losses were almost statistically insignificant. Later, Markopolos testified before Congress that this was like a baseball player batting .966 for the season "and no one suspecting a cheat."
In part, the memo concluded: "Bernie Madoff is running the world's largest unregistered hedge fund. He's organized this business as a 'hedge fund of funds
privately labeling their own hedge funds which Bernie Madoff secretly runs for them using a split-strike conversion strategy getting paid only trading commissions which are not disclosed.' If this is not a regulatory dodge, I do not know what is." Markopolos considered if Madoff's "unsophisticated portfolio management
" was either a Ponzi scheme or front running (buying stock for his own account based on knowledge of his clients' orders), and concluded it was most likely a Ponzi scheme.
In 2001, financial journalist Erin Arvedlund
wrote an article for Barron's entitled "Don't Ask, Don't Tell," questioning Madoff's secrecy and wondering how he obtained such consistent returns. She reported that "Madoff's investors rave about his performance – even though they don't understand how he does it. 'Even knowledgeable people can't really tell you what he's doing,' one very satisfied investor told Barron's."
The Barron's article and one in MarHedge
suggested Madoff was front-running to achieve his gains. Hedge funds investing with him were not permitted to name him as money manager in their marketing prospectus. When high volume investors who were considering participation wanted to review Madoff's records for purposes of due diligence
, he refused, convincing them of his desire that proprietary strategies remain confidential.
By selling its holdings for cash at the end of each period, Madoff avoided filing disclosures of its holdings with the SEC, an unusual tactic. Madoff rejected any call for an outside audit
"for reasons of secrecy", claiming that was the exclusive responsibility of his brother, Peter, the company's chief compliance officer
".
Markopolos later testified to Congress
that to deliver 12% annual returns to the investor, Madoff needed to earn 16% gross, so as to distribute a 4% fee to the feeder fund managers, who would secure new victims, be "willfully blind, and not get too intrusive".
Concerns were also raised that Madoff's auditor of record was Friehling & Horowitz, a two-person accounting firm based in suburban Rockland County that had only one active accountant, David G. Friehling
. David Friehling was a close Madoff family friend and an investor in Madoff's fund, which is a blatant conflict of interest.In 2007, hedge fund consultant Aksia LLC advised its clients not to invest with Madoff, saying it was inconceivable that a tiny firm could adequately service such a massive operation.
Typically, hedge funds hold their portfolio at a securities firm (a major bank or brokerage) acting as the fund's prime broker, which allows an outside investigator to verify their holdings. Madoff's firm was its own broker-dealer and allegedly processed all of its trades.
Ironically, Madoff, a pioneer in electronic trading
, refused to provide his clients online access to their accounts. He sent out account statements by mail, unlike most hedge funds which email
statements to be downloaded for convenience and investor personal analysis.
Madoff operated as a broker-dealer who also ran an asset management division. In 2003, Joe Aaron, a hedge fund professional, also found the structure suspicious and warned a colleague to avoid investing in the fund, "Why would a good businessman work his magic for pennies on the dollar?" he concluded. Also in 2003, Renaissance Technologies
, "arguably the most successful hedge fund in the world", reduced its exposure to Madoff's fund first by 50 percent and eventually completely because of suspicions about the consistency of returns, the fact that Madoff charged very little compared to other hedge funds and the impossibility of the strategy Madoff claimed to use because options volume had no relation to the amount of money Madoff was said to administer. The options volume implied that Madoff's fund had $ 750 million, while he was believed to be managing $ 15 billion. And only if Madoff was assumed to be responsible for all the options traded in the most liquid strike price
.
Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff "only had five down months since 1996", and commented on Madoff's investment performance: "You can't go 10 or 15 years with only three or four down months. It's just impossible."
In 2001, Michael Ocrant, editor-in-chief of MARHedge wrote a story in which he interviewed traders who were incredulous that Madoff had 72 consecutive gaining months, an unlikely possibility.
Clients such as Fairfield Greenwich Group
and Union Bancaire Privée
claimed that they had been given an "unusual degree of access" to evaluate and analyze Madoff's funds and found nothing unusual with his investment portfolio.
. In his book, Markopolos wrote that this was a sign Madoff was running out of cash and needed to increase his promised returns to keep the scheme going.
As the market's decline accelerated, investors tried to withdraw $7 billion from the firm. To pay off those investors, Madoff needed new money from other investors. Even with a rush of new investors who believed Madoff was one of the few funds that was still doing well, it still wasn't enough to keep up with the avalanche of withdrawals.
In the weeks prior to his arrest, Madoff struggled to keep the scheme afloat. In November 2008, Madoff Securities International (MSIL) in London, made two fund transfers to Bernard Madoff Investment Securities of approximately $164 million. MSIL had neither customers nor clients, and there is no evidence that it conducted any trades on behalf of third parties.
Madoff received $250 million around December 1 from Carl J. Shapiro
, a 95-year-old Boston philanthropist
and entrepreneur who was one of Madoff's oldest friends and biggest financial backers. On December 5, he accepted $10 million from Martin Rosenman, president of Rosenman Family LLC, who wanted to recover a never-invested $10 million, deposited in a Madoff account at JPMorgan, wired six days before Madoff's arrest. Bankruptcy Judge Lifland ruled that Rosenman was "indistinguishable" from any other Madoff client, so there was no basis for giving him special treatment to recover funds. The judge separately declined to dismiss a lawsuit brought by Hadleigh Holdings, which claims it entrusted $1 million to the Madoff firm three days before his arrest.
Madoff asked others for money in the final weeks before his arrest, including Wall Street financier Kenneth Langone
, whose office was sent a 19-page pitch book, allegedly created by the staff at the Fairfield Greenwich Group. Madoff said he was raising money for a new investment vehicle, between $500 million and $1 billion for exclusive clients, was moving quickly on the venture, and wanted an answer by the following week. Langone declined.
On December 10, 2008, he suggested to his sons, Mark and Andrew, that the firm pay out over $170 million in bonuses two months ahead of schedule, from $200 million in assets that the firm still had. According to the complaint, Mark and Andrew, reportedly unaware of the firm's pending insolvency
, confronted their father, asking him how the firm could pay bonuses to employees if it could not pay investors. Madoff then admitted that he was "finished," and that the asset management arm of the firm was in fact a Ponzi scheme – as he put it, "one big lie." Mark and Andrew then reported him to the authorities.
said, “In order for him to have done this by himself, he would have had to have been at work night and day, no vacation and no time off. He would have had to nurture the Ponzi scheme daily. What happened when he was gone? Who handled it when somebody called in while he was on vacation and said, ‘I need access to money’?”
“Simply from an administrative perspective, the act of putting together the various account statements, which did show trading activity, has to involve a number of people. ... You would need office and support personnel, people who actually knew what the market price
s were for the securities that were being traded. You would need accountants so that the internal documents reconcile with the documents being sent to customers at least on a superficial basis,” said Tom Dewey, a securities lawyer.
The SEC case is Securities and Exchange Commission v. Madoff, 1:08-cv- 10791, both U.S. District Court, Southern District of New York (Manhattan). The cases against Fairfield Greenwich Group et al. are consolidated as 09-118 in U.S. District Court for the Southern District of New York (Manhattan).
While awaiting sentencing, Madoff has met with the SEC's Inspector General
, H. David Kotz
, who is conducting an investigation into how regulators failed to detect the fraud despite numerous red flags. Former SEC Chairman Harvey Pitt
estimated the actual net fraud to be between $10 and $17 billion, because it does not include the fictional returns credited to the Madoff's customer accounts.
The original criminal complaint estimated that investors lost $50 billion through the scheme, though The Wall Street Journal reports "that figure includes the alleged false profits that Mr. Madoff's firm reported to its customers for decades. It is unclear exactly how much investors deposited into the firm." He was originally charged with a single count of securities fraud and faced up to 20 years in prison, and a fine of $5 million if convicted.
Court papers indicate that Madoff's firm had about 4,800 investment client accounts as of November 30, 2008, and issued statements for that month reporting that client accounts held a total balance of about $65 billion, but actually "held only a small fraction" of that balance for clients.
Madoff was arrested by the Federal Bureau of Investigation
(FBI) on December 11, 2008, on a criminal charge
of securities fraud
. According to the criminal complaint, the previous day he had told his sons that his business was "a giant Ponzi scheme". They called a friend for advice, Martin Flumenbaum, a lawyer, who called federal prosecutors and the SEC on their behalf. FBI Agent Theodore Cacioppi made a house call. "We are here to find out if there is an innocent explanation," Cacioppi said quietly. The 70-year-old financier
paused, then said: "There is no innocent explanation." He had "paid investors with money that was not there". Madoff was released on the same day of his arrest after posting $10 million bail
. Madoff and his wife surrendered their passports, and he was subject to travel restrictions, a 7 p.m. curfew
at his co-op, and electronic monitoring as a condition of bail. Although Madoff only had two co-signers for his $10 million bail, his wife and his brother Peter, rather than the four required, a judge allowed him free on bail but ordered him confined to his apartment. Madoff has reportedly received death threat
s that have been referred to the FBI, and the SEC referred to fears of "harm or flight" in its request for Madoff to be confined to his Upper East Side apartment. Cameras monitored his apartment's doors, its communication devices sent signals to the FBI, and his wife was required to pay for additional security.
Apart from 'Bernard L. Madoff' and 'Bernard L. Madoff Investment Securities LLC ("BMIS")', the order to freeze all activities also forbade trading from the companies Madoff Securities International Ltd. ("Madoff International") and Madoff Ltd.
On January 5, 2009, prosecutors had requested that the Court revoke his bail, after Madoff and his wife allegedly violated the court-ordered asset freeze by mailing jewelry worth up to $1 million to relatives, including their sons and Madoff's brother. It was also noted that $173 million in signed checks had been found in Madoff's office desk after he had been arrested. His sons reported the mailings to prosecutors. Previously, Madoff was thought to be cooperating with prosecutors. The following week, Judge Ellis refused the government's request to revoke Madoff's bail, but required as a condition of bail that Madoff make an inventory of personal items and that his mail be searched.
On March 10, 2009, the United States Attorney for the Southern District of New York filed an 11-count criminal information, or complaint, charging Madoff with 11 federal crimes: securities fraud
, investment adviser fraud, mail fraud, wire fraud
, three counts of money laundering
, false statements
, perjury
, making false filings with the SEC, and theft from an employee benefit plan. The complaint stated that Madoff had defrauded his clients of almost $65 billion – thus spelling out the largest Ponzi scheme in history, as well as the largest investor fraud committed by a single person.
Madoff pleaded guilty to three counts of money laundering
. Prosecutors allege that he used the London Office, Madoff Securities International Ltd. to launder more than $250 million of client money by transferring client money from the investment-advisory business in New York to London and then back to the U.S. to support the U.S. trading operation of Bernard L. Madoff Investment Securities LLC. Madoff gave the appearance that he was trading in Europe for his clients.
of indictment
. The charges carried a maximum sentence of 150 years in prison, as well as mandatory restitution
and fines up to twice the gross gain or loss derived from the offenses. If the government's estimate is correct, Madoff will have to pay $7.2 billion in restitution.
In his pleading allocution
, Madoff admitted to running a Ponzi scheme and expressed regret for his "criminal acts". He stated that he had begun his scheme some time in the early 1990s. He wished to satisfy his clients' expectations of high returns he had promised, even though it was during an economic recession. He admitted that he hadn't invested any of his clients' money since the inception of his scheme. Instead, he merely deposited the money into his business account at Chase Manhattan Bank
. He admitted to false trading activities masked by foreign transfers and false SEC returns. When clients requested account withdrawals, he paid them from the Chase account, claiming the profits were the result of his own unique "split-strike conversion strategy". He said he had every intention of terminating the scheme, but it proved "difficult, and ultimately impossible" to extricate himself. He eventually reconciled himself to being exposed as a fraud.
Only two of at least 25 victims who had requested to be heard at the hearing spoke in open court
against accepting Madoff's plea of guilt.
Judge Denny Chin
accepted his guilty plea and remanded him to incarceration at the Manhattan Metropolitan Correctional Center until sentencing. Chin said that Madoff was now a substantial flight risk given his age, wealth and the possibility of spending the rest of his life in prison.
Madoff's attorney, Ira Sorkin
filed an appeal
, to return him back to his "penthouse arrest", await sentencing, and to reinstate his bail conditions, declaring he would be more amenable to cooperate with the government's investigation, and prosecutors filed a notice in opposition. On March 20, 2009, the appellate court denied his request.
On June 26, 2009, Chin ordered Madoff to forfeit $170 million in assets. His wife Ruth will relinquish her claim to $80 million worth of assets, leaving her with $2.5 million in cash. The settlement does not prevent the SEC and Picard to continue making claims against Mrs. Madoff's funds in the future. Madoff had earlier requested to shield $70 million in assets for Ruth, arguing that it was unconnected to the fraud scheme.
, bankruptcy trustee has indicated that "Mr. Madoff has not provided meaningful cooperation or assistance." The Bureau of US Prisons had recommended 50 years, while defense lawyer Ira Sorkin
had recommended 12 years, arguing that Madoff had confessed. The judge granted Madoff permission to wear his personal clothing at sentencing.
On June 29, Judge Chin sentenced Madoff to 150 years in prison, as recommended by the prosecution. Chin said he had not received any mitigating letters from friends or family testifying to Madoff's good deeds, describing that "the absence of such support is telling". Commentators noted that this was in contrast to other high-profile white collar trials such as that of Andrew Fastow
, Jeffrey Skilling
, and Bernard Ebbers
who were known for their philanthropy and/or cooperation to help victims; however Madoff's victims included several charities and foundations, and the only person that pleaded for mercy was defense lawyer Ira Sorkin. Chin called the fraud "unprecedented" and "staggering", and stated that the sentence would deter others from committing similar frauds. "Here the message must be sent that Mr. Madoff's crimes were extraordinarily evil." Many victims, some of whom had lost their life savings, applauded the sentence. Chin agreed with prosecutors' contention that the fraud began at some point in the 1980s. He also noted Madoff's crimes were "off the charts" since federal sentencing guidelines for fraud only go up to $400 million in losses, and Madoff bilked his marks of 162 times that.
Chin said "I have a sense Mr. Madoff has not done all that he could do or told all that he knows," noting that Madoff failed to identify accomplices, making it more difficult for prosecutors to build cases against others. Chin dismissed Sorkin's plea for leniency, stating that Madoff made substantial loans to family members and moved $15 million from the firm to his wife's account shortly before confessing. The court-appointed receiver of the Madoff firm, Irving Picard
, has also said that Madoff had not provided substantial assistance, complicating efforts to locate assets. A former federal prosecutor suggested Madoff would have had the possibility of a sentence with parole if he fully cooperated with investigators, but Madoff's silence implied that there were other accomplices in the fraud which led the judge to impose the maximum sentence. Chin also ordered Madoff to pay $170 billion in restitution.
Madoff apologized to his victims at the sentencing, saying, "I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This is something I will live in for the rest of my life. I'm sorry. ... I know that doesn't help you."
Madoff was incarcerated at Butner Federal Correctional Complex outside Raleigh, North Carolina
. His inmate number is #61727-054.
On July 28, 2009, he gave his first jailhouse interview to Joseph Cotchett and Nancy Fineman, attorneys from San Francisco, because they threatened to sue his wife, Ruth, on behalf of several investors who lost fortunes. During the 4 and 1/2 hour session, he was described as arrogant and cocky, and upon query, apologized to all his clients.
s, no 401(k)
, no Keogh plan, no other pension plan and no annuities
. He owned less than a combined $200,000 in securities in Lehman Brothers
, Morgan Stanley
, Fidelity
, Bear Stearns
, and M&T. No offshore or Swiss Bank accounts were listed.
On March 17, 2009, prosecutor filed a document listing more assets including $2.6 million in jewelry and about 35 sets of watches and cufflinks, more than $30 million in loans owed to the couple by their sons, and Ruth Madoff's interest in real estate funds sponsored by Sterling Equities, whose partners include Fred Wilpon
. Ruth Madoff, and Peter Madoff, invested as “passive limited partners” in real estate funds sponsored by the company, as well as other venture investments. Assets also include the Madoffs' interest in Hoboken Radiology LLC. in Hoboken, New Jersey; Delivery Concepts LLC, an online food ordering service in midtown Manhattan that operates as "delivery.com"; an interest in Madoff La Brea LLC; an interest in the restaurant, PJ Clarke’s on the Hudson LLC; and Boca Raton, Florida-based Viager II LLC.
On March 2, 2009, Judge Louis Stanton modified an existing freeze order to surrender assets Madoff owns: his securities firm, real estate, artwork, and entertainment tickets, and granted a request by prosecutors that the existing freeze remain in place for the Manhattan apartment, and vacation homes in Montauk, New York
, and Palm Beach, Florida
. He has also agreed to surrender his interest in Primex Holdings LLC, a joint venture
between Madoff Securities and several large brokerages, designed to replicate the auction process on the New York Stock Exchange
. Madoff's April 14, 2009 opening day New York Mets
tickets were sold for $7,500 on ebay
.
On April 13, 2009, a Connecticut judge dissolved the temporary asset freeze from March 30, 2009, and issued an order for Fairfield Greenwich Group executive Walter Noel to post property pledges of $10 million against his Greenwich home and $2 million against Jeffrey Tucker's. Noel agreed to the attachment on his house "with no findings, including no finding of liability or wrongdoing". Andres Piedrahita's assets continue to remain temporarily frozen because he was never served with the complaint. The principals are all involved in a lawsuit filed by the town of Fairfield
, Connecticut
, pension funds, which lost $42 million. The pension fund case is Retirement Program for Employees of the Town of Fairfield v. Madoff, FBT-CV-09-5023735-S, Superior Court of Connecticut (Bridgeport). Maxam Capital and other firms that allegedly fed Madoff's fund, which could allow Fairfield to recover up to $75 million were also part of the dissolution and terms.
Professor John Coffee
, of Columbia University Law School, said that much of Madoff's money may be in offshore fund
s. The SEC believed keeping the assets secret would prevent them from being seized by foreign regulators and foreign creditors.
The Montreal Gazette reported on January 12, 2010 that there are unrecovered Madoff assets in Canada.
In December 2010 Barbara Picower
and others reached an agreement with Irving Picard
to return 7.2 billion dollars from the estate of her deceased husband Jeffrey Picower to other investors in the fraud.
Clients included banks, hedge funds, charities, universities, and wealthy individuals who have disclosed about $41 billion invested with Bernard L. Madoff Investment Securities LLC, according to a Bloomberg News tally, which may include double counting of investors in feeder funds.
Although Madoff filed a report with the SEC in 2008 stating that his advisory business had only 11–25 clients and about $17.1 billion in assets, thousands of investors have reported losses, and Madoff estimated the fund's assets at $50 billion.
Other notable clients included former Salomon Brothers
economist Henry Kaufman
, Steven Spielberg
, Jeffrey Katzenberg
, actors Kevin Bacon
, Kyra Sedgwick
, John Malkovich
, and Zsa Zsa Gabor
, Mortimer Zuckerman
, Baseball Hall of Fame pitcher Sandy Koufax
, the Wilpon family (owners of the New York Mets
), broadcaster Larry King
and World Trade Center
developer Larry Silverstein
. The Elie Wiesel
Foundation for Humanity lost $15.2 million, and Wiesel and his wife, Marion, lost their life savings.
The potential losses of these eight investors total $21.32 billion.
Eleven investors had potential losses between $100 million and $1 billion:
Twenty-three investors with potential losses of $500,000 to $100 million were also listed, with a total potential loss of $540 million. The grand total potential loss in The Wall Street Journal table is $26.9 billion.
Some investors have amended their initial estimates of losses to include only their original investment, since the profits Madoff reported to them which they were including were most likely fraudulent. Yeshiva University
, for instance, said its actual incurred loss was its invested $14.5 million, not the $110 million initially estimated, which included falsified profits reported to the university by Madoff.
Although foundations are exempt from federal income taxes, they are subject to an excise tax, for failing to vet Madoff's proposed investments properly, to heed red flags, or to diversify prudently. Penalties may range from 10% of the amount invested during a tax year, to 25% if they fail to try to recover the funds. The foundation’s officers, directors, and trustees face up to a 15% penalty, with up to $20,000 fines for individual managers, per investment.
who invested with Madoff through the Spanish bank Grupo Santander
, filed a class action against Santander in Miami. Santander proposed a settlement that would give the clients $2 billion worth of preferred stock
in Santander based on each client's original investment. The shares pay a 2% dividend. Seventy percent of the Madoff/Santander investors accepted the offer.
, invested less than $1.08 billion (of its $124.5 billion in assets) in Madoff funds.
In March 2009, Geneva-based wealth manager, Union Bancaire Privée
, offered to partially compensate investors 50% of the money they initially invested with Madoff if they agree to stay with the bank for the next five years and promise not to sue.
On May 8, 2009, a lawsuit was filed against the bank on behalf of New York investor Andrea Barron in the United States District Court for the Southern District of New York
. The lawsuit is seeking class-action status for investors in UBP Funds as of December 11, 2008, and damages, including the return of management fees.
-based wealth manager, Notz Stucki's Plaza Fund, will compensate up to $103.2 million to those clients who did not specifically request access to Madoff. Compensation would be with an issue of a note payable over five years, which would be held by a separate legal entity.
is an Austria
n bank founded by Sonja Kohn
, who met Madoff in 1985 while living in New York. Ninety percent of the bank's income was generated from Madoff investments. In December 2008, Medici reported that two of its funds—Herald USA Fund and Herald Luxemburg Fund—were exposed to Madoff losses. On January 2, 2009, FMA, the Austria banking regulator, took control of Bank Medici and appointed a supervisor to control the bank. Bank Medici, and its Austrian banking license is now for sale and has been sued by its customers both in the United States and in Austria. The Vienna State Prosecutor has launched a criminal investigation of Bank Medici and Kohn, who had invested an estimated $2.1 billion with Madoff. On May 28, 2009, Bank Medici lost its Austrian banking license. Kohn and the Bank are under investigation.
was partly funded by the JEHT Foundation, a private charity backed by a wealthy couple, Ken and Jeanne Levy-Church, financed with Madoff's mythical money. Jeanne Levy-Church's losses forced her to shut down both her foundation, and that of her parents, the Betty and Norman F. Levy Foundation, lost $244 million. JEH helped the less fortunate, especially ex-convicts. (See Participants in the Madoff investment scandal
: Norman F. Levy) Madoff's corruption has deprived it of necessary funds to secure the release of others. The organization uses the latest DNA
techniques to prove the innocence of the wrongfully imprisoned. On November 25, 2008, Steven Barnes was set free from jail with the evidence gained from the DNA tests, after serving 20 years for crimes he did not commit (rape and murder).
sued the Westport National Bank and Robert L. Silverman for "effectively aiding and abetting" Madoff's fraud. The suit seeks recovery of $16.2 million, including the fees that the bank collected as custodian of customers' holding in Madoff investments. Silverman's 240 clients invested about $10 million with Madoff using the Bank as the custodian. The Bank denies any wrongdoing.
, was found dead in his company office on Madison Avenue in New York City. His left wrist was slit and de la Villehuchet had taken sleeping pills, in what appeared to be suicide
.
He lived in New Rochelle, New York
and came from a very prominent French
family. Although no suicide note
was found at the scene, his brother Bertrand in France received a note shortly after his death in which he expressed remorse and a feeling of responsibility. The FBI
and SEC do not believe de la Villehuchet was involved in the fraud.
Harry Markopolos
said he met de La Villehuchet several years before, and warned him that Madoff might be breaking the law. In 2002, Access invested about 45% of its $1.2 billion under management with Madoff. By 2008, it managed $3 billion and raised the proportion of funds with Madoff to about 75%. De la Villehuchet had also invested all of his wealth and 20% of his brother, Bertrand's, with Madoff. Bertrand said that René-Thierry did not know Madoff but the connection was through René-Thierry's partner in AIA, French banker, Patrick Littaye.
s for Madoff from Bank Medici
in Austria.
Mark had unsuccessfully sought a Wall Street trading job after the scandal broke, and it was reported that he was distraught over the possibility of criminal charges, as federal prosecutors were making criminal tax-fraud probes. Among the many Madoff family members being sued by the court-appointed trustee Irving Picard were Mark's two children.
In his lawsuit, Picard stated that Mark and other Madoff family members improperly earned tens of millions of dollars, through "fictitious and backdated transactions" investment transactions, and falsely documented loans to buy real estate that weren't repaid. Picard also argued that Mark certainly was in a position to recognize the fraud of his father's firm, as Mark was a co-director of trading, was the designated head of the firm in his father's absence, and he held several securities licenses—series 7, 24 and 55 with the Financial Industry Regulatory Authority.
June 3 2011
Letter to Gene L. Dodaro Comptroller General of the United States Government Accountability Office from Congress requesting probe http://www.scribd.com/doc/57140364/Investigation-of-SIPC-Trustee-SEC
June 3 2011
Madoff Trustee, SEC Should be Probed -US Reps http://www.reuters.com/article/2011/06/03/madoff-probe-idUSN0318200920110603
July 27 2011
Madoff Trustee’s Actions to Be Probed by GAO, Representative Garrett Says
http://www.bloomberg.com/news/2011-07-27/madoff-trustee-s-actions-to-be-probed-by-gao-representative-garrett-says.html
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
chairman Bernard Madoff
Bernard Madoff
Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
admitted that the wealth management arm of his business was an elaborate Ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
.
He founded the Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest. Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. On March 12, 2009, Madoff pled guilty to 11 federal crimes and admitted to operating what has been the largest Ponzi scheme in history. On June 29, 2009, he was sentenced to 150 years in prison with restitution of $170 billion. According to the original federal charges, Madoff said that his firm had "liabilities of approximately US$
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
50 billion". Prosecutors estimated the size of the fraud to be $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients as of November 30, 2008. Ignoring opportunity cost
Opportunity cost
Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
s and taxes paid on fictitious profits, half of Madoff's direct investors lost no money.
Investigators have determined others were involved in the scheme. The U.S. Securities and Exchange Commission (SEC) has also come under fire for not investigating Madoff more thoroughly; questions about his firm had been raised as early as 1999. Madoff's business, in the process of liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
, was one of the top market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
s on Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
and in 2008, the sixth-largest.
Madoff's personal and business asset freeze has created a chain reaction throughout the world's business and philanthropic community, forcing many organizations to at least temporarily close, including the Robert I. Lappin Charitable Foundation
Robert I. Lappin Charitable Foundation
The Robert I. Lappin Charitable Foundation is a Jewish non-profit organization that operates programs for Jewish youth. Its activities reflects the group's mission of "helping to keep our Jewish children Jewish, thus reversing the trend of assimilation and intermarriage." It is based in Salem,...
, the Picower Foundation, and the JEHT Foundation
JEHT Foundation
The JEHT Foundation was a grant-making nonprofit foundation based in New York City. The Foundation’s name was an acronym that stood for the core values that underlay the Foundation's mission: "Justice, Equality, Human dignity and Tolerance." The Foundation's programs reflected these interests and...
.
Background
Madoff started his firm in 1960 as a penny stockPenny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...
trader with $5,000, earned from working as a lifeguard
Lifeguard
A lifeguard supervises the safety and rescue of swimmers, surfers, and other water sports participants such as in a swimming pool, water park, or beach. Lifeguards are strong swimmers and trained in first aid, certified in water rescue using a variety of aids and equipment depending on...
and sprinkler installer. His fledgling business began to grow with the assistance of his father-in-law, accountant Saul Alpern, who referred a circle of friends and their families.
Initially, the firm made markets (quoted bid and ask
Bid and ask
Price mechanism is an economic term that refers to the buyers and sellers who negotiate prices of goods or services depending on demand and supply. A price mechanism or market-based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing.An example of a...
prices) via the National Quotation Bureau's Pink Sheets
Pink Sheets
OTC Markets Group, Inc., informally known as "Pink Sheets", is a private company that provides services to the U.S. over-the-counter securities market including electronic quotations, trading, messaging, and information platforms. According to the U.S. Securities and Exchange Commission, OTC...
. In order to compete with firms that were members of the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
trading on the stock exchange's floor, his firm began using innovative computer information technology to disseminate its quotes. After a trial run, the technology that the firm helped develop became the NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
. At one point, Madoff Securities was the largest buying-and-selling "market maker
Market maker
A market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
" at the NASDAQ.
He was active in the National Association of Securities Dealers (NASD), a self-regulatory securities industry organization, serving as the Chairman of the Board of Directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
and on the Board of Governors
Board of governors
Board of governors is a term sometimes applied to the board of directors of a public entity or non-profit organization.Many public institutions, such as public universities, are government-owned corporations. The British Broadcasting Corporation was managed by a board of governors, though this role...
.
In 1992, The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
described him:
..."one of the masters of the off-exchange "third market"
and the bane of the New York Stock Exchange. He has built a highly
profitable securities firm, Bernard L. Madoff Investment Securities,
which siphons a huge volume of stock trades away from the Big Board.
The $740 million average daily volume of trades executed
electronically by the Madoff firm off the exchange equals 9% of the
New York exchange's. Mr. Madoff's firm can execute trades so quickly and cheaply that it
actually pays other brokerage firms a penny a share to execute their
customers' orders, profiting from the spread between bid and asked
prices that most stocks trade for."
Several family members worked for him. His younger brother, Peter, was Senior Managing Director and Chief Compliance Officer, and Peter's daughter, Shana, was the compliance attorney. Madoff’s sons, Mark and Andrew, worked in the trading section, along with Charles Weiner, Madoff’s nephew. Andrew Madoff had invested his own money in his father's fund, but Mark stopped in about 2001.
Federal investigators believe the fraud in the investment management division and advisory division may have begun in the 1970s. However, Madoff himself stated his fraudulent activities began in the 1990s.
In the 1980s, Madoff's market-maker division traded up to 5% of the total volume made on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. Madoff was "the first prominent practitioner" who paid a broker to execute a customer's order through his brokerage, called a "legal kickback
Bribery
Bribery, a form of corruption, is an act implying money or gift giving that alters the behavior of the recipient. Bribery constitutes a crime and is defined by Black's Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or...
", which gave Madoff the reputation of being the largest dealer in NYSE-listed stocks in the U.S., trading about 15% of transaction volume. Academics have questioned the ethics of these payments. Madoff has argued that these payments did not alter the price that the customer received. He viewed the payments as a normal business practice: "If your girlfriend goes to buy stockings at a supermarket, the racks that display those stockings are usually paid for by the company that manufactured the stockings. Order flow is an issue that attracted a lot of attention but is grossly overrated."
By 2000, Madoff Securities, one of the top traders of US securities, held approximately $300 million in assets. The business occupied three floors of the Lipstick Building
Lipstick Building
The Lipstick Building is a 453 foot tall skyscraper located at 885 Third Avenue, between East 53rd Street and 54th Street, across from the Citigroup Center in Manhattan, New York City, United States. It was completed in 1986 and has 34 floors. The building was designed by John Burgee Architects...
, with the investment management division, referred to as the "hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
", employing a staff of approximately 24. Madoff ran a branch office in London, separate from Madoff Securities, which employed 28, handling investments for his family of approximately £
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
80 million. Two remote cameras installed in the London office permitted Madoff to monitor events from New York.
Modus operandi
In 1992, Bernard Madoff explained his purported strategy to The Wall Street Journal. He said the returns were really nothing special, given that the Standard & Poors 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992. "I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding." The majority of money managers actually trailed the S&P 500 during the 1980s. The Journal concluded Madoff's use of futures and options helped cushion the returns against the market's ups and downs. Madoff said he made up for the cost of the hedges, which could have caused him to trail the stock market's returns, with stock-picking and market timing.Purported strategy
Madoff's sales pitch was an investment strategyInvestment strategy
In finance, an investment strategy is a set of rules, behaviors or procedures, designed to guide an investor's selection of an investment portfolio...
consisting of purchasing blue-chip stocks and taking options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
contracts on them, sometimes called a split-strike conversion or a collar
Collar (finance)
In finance, a collar is an option strategy that limits the range of possible positive or negative returns on an underlying to a specific range.-Structure:A collar is created by an investor being:* Long the underlying...
. "Typically, a position will consist of the ownership of 30–35 S&P 100 stocks, most correlated to that index, the sale of out-of-the-money 'calls' on the index and the purchase of out-of-the-money 'puts' on the index. The sale of the 'calls' is designed to increase the rate of return
Rate of return
In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or...
, while allowing upward movement of the stock portfolio to the strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
of the 'calls'. The 'puts', funded in large part by the sales of the 'calls', limit the portfolio's downside."
In his 1992, "Avellino and Bienes" interview with The Wall Street Journal, Madoff discussed his supposed methods: In the 1970s, he had placed invested funds in "convertible arbitrage
Arbitrage
In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
positions in large-cap stocks, with promised investment returns of 18% to 20%", and in 1982, he began using futures contracts on the stock index, and then placed put option
Put option
A put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity...
s on futures during the 1987 stock market crash. A few analysts performing due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
had been unable to replicate the Madoff fund's past returns using historic price data for U.S. stocks and options on the indexes. Barron's raised the possibility that Madoff's returns were most likely due to front running
Front running
Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers...
his firm's brokerage clients.
Mitchell Zuckoff, professor of journalism at Boston University
Boston University
Boston University is a private research university located in Boston, Massachusetts. With more than 4,000 faculty members and more than 31,000 students, Boston University is one of the largest private universities in the United States and one of Boston's largest employers...
and author of Ponzi's Scheme: The True Story of a Financial Legend, says that "the 5% payout rule", a federal law requiring private foundations
Private foundation (United States)
A private foundation is a charitable organization recognized by the US Tax Code at and section 501. It is defined by a negative definition, in other words, it is defined by what it is not...
to pay out 5% of their funds each year, allowed Madoff's Ponzi scheme to go undetected for a long period since he managed money mainly for charities. Zuckoff notes, "For every $1 billion in foundation investment, Madoff was effectively on the hook for about $50 million in withdrawals a year. If he was not making real investments, at that rate the principal would last 20 years. By targeting charities, Madoff could avoid the threat of sudden or unexpected withdrawals.
In his guilty plea, Madoff admitted that he hadn't actually traded since the mid-1990s, and all of his returns since then had been fabricated. However, David Sheehan, principal investigator for Picard, believes the wealth management arm of Madoff's business had always been fraudulent.
Madoff's operation differed from a typical Ponzi scheme. While most Ponzis are based on nonexistent businesses, Madoff's brokerage operation was very real.
Sales methods
Rather than offer high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele. The investment method was marketed as "too complicated for outsiders to understand". He was secretive about the firm’s business, and kept his financial statementFinancial statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
s closely guarded.
The New York Post
New York Post
The New York Post is the 13th-oldest newspaper published in the United States and is generally acknowledged as the oldest to have been published continuously as a daily, although – as is the case with most other papers – its publication has been periodically interrupted by labor actions...
reported that Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country club
Country club
A country club is a private club, often with a closed membership, that typically offers a variety of recreational sports facilities and is located in city outskirts or rural areas. Activities may include, for example, any of golf, tennis, swimming or polo...
s on Long Island
Long Island
Long Island is an island located in the southeast part of the U.S. state of New York, just east of Manhattan. Stretching northeast into the Atlantic Ocean, Long Island contains four counties, two of which are boroughs of New York City , and two of which are mainly suburban...
and in Palm Beach
Palm Beach, Florida
The Town of Palm Beach is an incorporated town in Palm Beach County, Florida, United States. The Intracoastal Waterway separates it from the neighboring cities of West Palm Beach and Lake Worth...
". The New York Times
The New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
reported that Madoff courted many prominent Jewish executives and organizations; according to the Associated Press
Associated Press
The Associated Press is an American news agency. The AP is a cooperative owned by its contributing newspapers, radio and television stations in the United States, which both contribute stories to the AP and use material written by its staff journalists...
, they "trusted [Madoff] because he is Jewish". One of the most prominent promoters was J. Ezra Merkin
J. Ezra Merkin
Jacob Ezra Merkin is a former money manager and financier. He was a close business associate of Bernard Madoff, and is alleged to have played a significant part in the Madoff fraud. He served as the Non-executive Chairman of GMAC until his resignation on January 9, 2009, at the insistence of the...
, whose fund Ascot Partners steered $1.8 billion towards Madoff's firm. A scheme that targets members of a particular religious or ethnic community is a type of affinity fraud
Affinity fraud
Affinity fraud includes investment frauds that prey upon members of identifiable groups, such as religious or ethnic communities, language minorities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are – or pretend to be – members of the group...
, and a Newsweek
Newsweek
Newsweek is an American weekly news magazine published in New York City. It is distributed throughout the United States and internationally. It is the second-largest news weekly magazine in the U.S., having trailed Time in circulation and advertising revenue for most of its existence...
article identified Madoff's scheme as "an affinity Ponzi".
Madoff was a "master marketer", and his fund was considered exclusive, giving the appearance of a "velvet rope". He generally refused to meet directly with investors, which gave him an "Oz" aura and increased the allure of the investment. Some Madoff investors were wary of removing their money from his fund, in case they could not get back in later.
Madoff's annual returns were "unusually consistent", around 10%, and were a key factor in perpetuating the fraud. Ponzi schemes typically pay returns of 20% or higher, and collapse quickly. One Madoff fund, which described its "strategy" as focusing on shares in the Standard & Poor's 100-stock index, reported a 10.5% annual return during the previous 17 years. Even at the end of November 2008, amid a general market collapse, the same fund reported that it was up 5.6%, while the same year-to-date total return on the S&P 500-stock index had been negative 38%. An unnamed investor remarked, "The returns were just amazing and we trusted this guy for decades — if you wanted to take money out, you always got your check in a few days. That’s why we were all so stunned."
The Swiss bank, Union Bancaire Privée
Union Bancaire Privée
Union Bancaire Privée was founded in 1969 by Edgar de Picciotto. UBP, one of the most highly capitalized private banks, is a major player in the field of asset management in Switzerland with over $75 billion of assets under management....
, explained that because of Madoff's huge volume as a broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
, the bank believed he had a perceived edge on the market because his trades were timed well, suggesting they believed he was front running
Front running
Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers...
.
Access to Washington
The Madoff family gained unusual access to Washington's lawmakers and regulators through the industry's top trade group. The Madoff family has long-standing, high-level ties to the Securities Industry and Financial Markets AssociationSecurities Industry and Financial Markets Association
The Securities Industry and Financial Markets Association is a leading securities industry trade group representing securities firms, banks, and asset management companies in the U.S. and Hong Kong. SIFMA was formed on November 1, 2006, from the merger of The Bond Market Association and the...
(SIFMA), the primary securities industry organization.
Bernard Madoff sat on the Board of Directors of the Securities Industry Association, which merged with the Bond Market Association in 2006 to form SIFMA. Madoff's brother Peter then served two terms as a member of SIFMA’s Board of Directors. Peter's resignation as the scandal broke in December 2008 came amid growing criticism of the Madoff firm’s links to Washington, and how those relationships may have contributed to the Madoff fraud. Over the years 2000–08, the two Madoff brothers gave $56,000 to SIFMA, and tens of thousands of dollars more to sponsor SIFMA industry meetings.
In addition, Bernard Madoff's niece Shana Madoff was active on the Executive Committee of SIFMA's Compliance & Legal Division, but resigned her SIFMA position shortly after her uncle's arrest. She married an SEC compliance official, Eric Swanson, after an SEC investigation concluded in 2005. A spokesman for Swanson, who has left the SEC, said he "did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship" with Shana Madoff.
Previous investigations
Madoff Securities LLC was investigated at least eight times over a 16-year period by the U.S. Securities and Exchange Commission (SEC) and other regulatory authorities.Avellino and Bienes
In 1992, the SEC investigated one of Madoff's feeder fundFeeder fund
A feeder fund is an investment fund which does almost all of its investments through a master fund via a master-feeder relationship.It is a situation similar to a fund of funds, except that the master fund performs all the investments....
s, Avellino & Bienes, the principals being Frank Avellino, Michael Bienes and his wife Dianne Bienes. Bienes began his career working as an accountant for Madoff's father-in-law, Saul Alpern. Then, he became a partner in the accounting firm Alpern, Avellino and Bienes. In 1962, the firm began advising its clients about investing all of their money with a mystery man, a highly successful and controversial figure on Wall Street,
but until this episode, not known as an ace money manager, Madoff. When Alpern retired at the end of 1974, the firm became Avellino and Bienes and continued to invest solely with Madoff.
Represented by Ira Sorkin
Ira Sorkin
Ira Lee Sorkin is an American attorney. He is best known for representing Bernard Madoff, the American businessman who has pleaded guilty to perpetrating the largest investor fraud ever committed by a single person.-Education and career:...
, Madoff's present attorney, Avellino & Bienes were accused of selling unregistered securities, and in its report the SEC mentioned the fund's "curiously steady" yearly returns to investors of 13.5% to 20%. However, the SEC did not look any more deeply into the matter, and never publicly disclosed Madoff. Through Sorkin, who once oversaw the SEC’s New York office, Avellino & Bienes agreed to return the money to investors, shut down their firm, undergo an audit, and pay a fine of $350,000. Avellino complained to the presiding Federal Judge, John E. Sprizzo
John E. Sprizzo
John Emilio Sprizzo was a federal judge for the United States District Court for the Southern District of New York.-Early life:...
, that Price Waterhouse fees were excessive, but the judge ordered him to pay the bill of $428,679 in full. Madoff said that he did not realize the feeder fund was operating illegally, and that his own investment returns tracked the previous 10 years of the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
. The SEC investigation came right in the middle of Madoff's three terms as the chairman of the NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
stock market board.
The size of the pools mushroomed by word-of-mouth, and investors grew to 3,200 in nine accounts with Madoff. Regulators feared it all might be just a huge scam. "We went into this thinking it could be a major catastrophe. They took in nearly a half a billion dollars in investor money, totally outside the system that we can monitor and regulate. That's pretty frightening." said Richard Walker, at the time, the SEC's New York regional administrator.
Bienes, 72, recently discussed that he deposited $454 million of investors' money with Madoff, and until 2007, continued to invest several million dollars of his own money, saying, "Doubt Bernie Madoff? Doubt Bernie? No. You doubt God. You can doubt God, but you don't doubt Bernie. He had that aura about him."
Bernard L. Madoff Securities LLC: 1999, 2000, 2004, 2005, and 2006
The SEC investigated Madoff in 1999 and 2000 about concerns that the firm was hiding its customers' orders from other traders, for which Madoff then took corrective measures. In 2001, an SEC official met with Harry MarkopolosHarry Markopolos
Harry M. Markopolos is a former securities industry executive and independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff's wealth...
at their Boston regional office and reviewed his allegations of Madoff's fraudulent practices. The SEC claimed it conducted two other inquiries into Madoff in the last several years, but did not find any violations or major issues of concern.
In 2004, after published articles appeared accusing the firm of front running, the SEC's Washington office cleared Madoff. The SEC detailed that inspectors had examined Madoff's brokerage operation in 2005, checking for three kinds of violations: the strategy he used for customer accounts; the requirement of brokers to obtain the best possible price for customer orders; and operating as an unregistered investment adviser. Madoff was registered as a broker-dealer
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
, but doing business as an asset manager
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
. "The staff found no evidence of fraud". In September, 2005 Madoff agreed to register his business, but the SEC kept its findings confidential. During the 2005 investigation, Meaghan Cheung, a branch head of the SEC's New York's Enforcement Division, was the person responsible for the oversight and blunder, according to Harry Markopolos
Harry Markopolos
Harry M. Markopolos is a former securities industry executive and independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff's wealth...
, who testified on February 4, 2009, at a hearing held by a House Financial Services Subcommittee on Capital Markets.
In 2007, SEC enforcement completed an investigation which began on January 6, 2006, into a Ponzi scheme allegation which resulted in neither a finding of fraud, nor a referral to the SEC Commissioners for legal action.
FINRA
In 2007, the Financial Industry Regulatory AuthorityFinancial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA), the industry-run watchdog for brokerage firms, reported without explanation that parts of Madoff's firm had no customers. "At this point in time we are uncertain of the basis for FINRA's conclusion in this regard," SEC staff wrote shortly after Madoff was arrested.
As a result, the SEC's chairman Christopher Cox stated that an investigation will delve into "all staff contact and relationships with the Madoff family and firm, and their impact, if any, on decisions by staff regarding the firm". A former SEC compliance officer, Eric Swanson, married Madoff's niece Shana, a Madoff firm compliance attorney.
Red flags
Outside analysts raised concerns about Madoff's firm for years. Financial analyst and whistleblowerWhistleblower
A whistleblower is a person who tells the public or someone in authority about alleged dishonest or illegal activities occurring in a government department, a public or private organization, or a company...
Harry Markopolos
Harry Markopolos
Harry M. Markopolos is a former securities industry executive and independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff's wealth...
complained to the SEC's Boston office in May 2000, telling the SEC staff they should investigate Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he claimed to use. Markopolos' bosses at options trader Rampart Investment Management had asked him to try to replicate Madoff's numbers. However, Markopolos concluded almost immediately that Madoff's numbers didn't add up, and the only plausible explanation for them was fraud. This was confirmed after four hours of failed attempts to reproduce Madoff's numbers. Markopolos told the SEC that in all likelihood, Madoff was either running a Ponzi scheme (by paying old clients with newer clients' money) or front running (by trading for his own account using knowledge of his clients' orders).
In 2005, Markopolos sent a detailed 17-page memo to the SEC, entitled The World's Largest Hedge Fund is a Fraud. He had also approached The Wall Street Journal about the existence of the Ponzi scheme in 2005, but its editors decided not to pursue the story. The paper specified 30 numbered red flags based on 174 months (a little over 14 years) of Madoff trades. The biggest red flag was that Madoff reported only seven losing months during this time, and those losses were almost statistically insignificant. Later, Markopolos testified before Congress that this was like a baseball player batting .966 for the season "and no one suspecting a cheat."
In part, the memo concluded: "Bernie Madoff is running the world's largest unregistered hedge fund. He's organized this business as a 'hedge fund of funds
Fund of funds
A "fund of funds" is an investment strategy of holding a portfolio of other investment funds rather than investing directly in shares, bonds or other securities. This type of investing is often referred to as multi-manager investment...
privately labeling their own hedge funds which Bernie Madoff secretly runs for them using a split-strike conversion strategy getting paid only trading commissions which are not disclosed.' If this is not a regulatory dodge, I do not know what is." Markopolos considered if Madoff's "unsophisticated portfolio management
Investment management
Investment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
" was either a Ponzi scheme or front running (buying stock for his own account based on knowledge of his clients' orders), and concluded it was most likely a Ponzi scheme.
In 2001, financial journalist Erin Arvedlund
Erin Arvedlund
Erin E. Arvedlund is a financial journalist who has written for Barron's, The Wall Street Journal, the Moscow Times, The New York Times, TheStreet.com, and Portfolio.com. On Feb. 1, 2011, her "Your Money" column debuted in The Philadelphia Inquirer...
wrote an article for Barron's entitled "Don't Ask, Don't Tell," questioning Madoff's secrecy and wondering how he obtained such consistent returns. She reported that "Madoff's investors rave about his performance – even though they don't understand how he does it. 'Even knowledgeable people can't really tell you what he's doing,' one very satisfied investor told Barron's."
The Barron's article and one in MarHedge
MarHedge
MARHEDGE is a semi-monthly financial newsletter. It was first circulated in 1994, originally under the name HEDGE. The journal has also gone by the name Managed Account Reports LLC....
suggested Madoff was front-running to achieve his gains. Hedge funds investing with him were not permitted to name him as money manager in their marketing prospectus. When high volume investors who were considering participation wanted to review Madoff's records for purposes of due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
, he refused, convincing them of his desire that proprietary strategies remain confidential.
By selling its holdings for cash at the end of each period, Madoff avoided filing disclosures of its holdings with the SEC, an unusual tactic. Madoff rejected any call for an outside audit
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
"for reasons of secrecy", claiming that was the exclusive responsibility of his brother, Peter, the company's chief compliance officer
Chief compliance officer
The chief compliance officer of a company is the officer primarily responsible for overseeing and managing compliance issues within an organization...
".
Markopolos later testified to Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
that to deliver 12% annual returns to the investor, Madoff needed to earn 16% gross, so as to distribute a 4% fee to the feeder fund managers, who would secure new victims, be "willfully blind, and not get too intrusive".
Concerns were also raised that Madoff's auditor of record was Friehling & Horowitz, a two-person accounting firm based in suburban Rockland County that had only one active accountant, David G. Friehling
David G. Friehling
David G. Friehling is an American accountant who was arrested and charged in March 2009 for his role in the Madoff investment scandal. He later plead guilty to these charges.-Early life:...
. David Friehling was a close Madoff family friend and an investor in Madoff's fund, which is a blatant conflict of interest.In 2007, hedge fund consultant Aksia LLC advised its clients not to invest with Madoff, saying it was inconceivable that a tiny firm could adequately service such a massive operation.
Typically, hedge funds hold their portfolio at a securities firm (a major bank or brokerage) acting as the fund's prime broker, which allows an outside investigator to verify their holdings. Madoff's firm was its own broker-dealer and allegedly processed all of its trades.
Ironically, Madoff, a pioneer in electronic trading
Electronic trading
Electronic trading, sometimes called etrading, is a method of trading securities , foreign exchange or financial derivatives electronically...
, refused to provide his clients online access to their accounts. He sent out account statements by mail, unlike most hedge funds which email
Email
Electronic mail, commonly known as email or e-mail, is a method of exchanging digital messages from an author to one or more recipients. Modern email operates across the Internet or other computer networks. Some early email systems required that the author and the recipient both be online at the...
statements to be downloaded for convenience and investor personal analysis.
Madoff operated as a broker-dealer who also ran an asset management division. In 2003, Joe Aaron, a hedge fund professional, also found the structure suspicious and warned a colleague to avoid investing in the fund, "Why would a good businessman work his magic for pennies on the dollar?" he concluded. Also in 2003, Renaissance Technologies
Renaissance Technologies
Renaissance Technologies is a hedge fund management company of about 275 employees and more than $ billion in assets under management in three funds...
, "arguably the most successful hedge fund in the world", reduced its exposure to Madoff's fund first by 50 percent and eventually completely because of suspicions about the consistency of returns, the fact that Madoff charged very little compared to other hedge funds and the impossibility of the strategy Madoff claimed to use because options volume had no relation to the amount of money Madoff was said to administer. The options volume implied that Madoff's fund had $ 750 million, while he was believed to be managing $ 15 billion. And only if Madoff was assumed to be responsible for all the options traded in the most liquid strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
.
Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff "only had five down months since 1996", and commented on Madoff's investment performance: "You can't go 10 or 15 years with only three or four down months. It's just impossible."
In 2001, Michael Ocrant, editor-in-chief of MARHedge wrote a story in which he interviewed traders who were incredulous that Madoff had 72 consecutive gaining months, an unlikely possibility.
Clients such as Fairfield Greenwich Group
Fairfield Greenwich Group
Fairfield Greenwich Group is an investment firm founded in 1983 in New York City. The firm had among the largest exposures to the Bernard Madoff fraud.-History of the Firm:...
and Union Bancaire Privée
Union Bancaire Privée
Union Bancaire Privée was founded in 1969 by Edgar de Picciotto. UBP, one of the most highly capitalized private banks, is a major player in the field of asset management in Switzerland with over $75 billion of assets under management....
claimed that they had been given an "unusual degree of access" to evaluate and analyze Madoff's funds and found nothing unusual with his investment portfolio.
Final weeks
The scheme began to unravel in December 2008, when the general market downturn accelerated. However, Markopolos' team first discovered signs of impending collapse earlier in 2008, when they uncovered evidence that Madoff was accepting leveraged moneyLeverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
. In his book, Markopolos wrote that this was a sign Madoff was running out of cash and needed to increase his promised returns to keep the scheme going.
As the market's decline accelerated, investors tried to withdraw $7 billion from the firm. To pay off those investors, Madoff needed new money from other investors. Even with a rush of new investors who believed Madoff was one of the few funds that was still doing well, it still wasn't enough to keep up with the avalanche of withdrawals.
In the weeks prior to his arrest, Madoff struggled to keep the scheme afloat. In November 2008, Madoff Securities International (MSIL) in London, made two fund transfers to Bernard Madoff Investment Securities of approximately $164 million. MSIL had neither customers nor clients, and there is no evidence that it conducted any trades on behalf of third parties.
Madoff received $250 million around December 1 from Carl J. Shapiro
Carl J. Shapiro
Carl J. Shapiro is a Boston philanthropist and entrepreneur. He and his wife, Ruth live in Boston and Palm Beach. In 1939, he founded Kay Windsor, Inc., in New Bedford, Massachusetts, and built it into one of the largest women's apparel companies in the country...
, a 95-year-old Boston philanthropist
Philanthropist
A philanthropist is someone who engages in philanthropy; that is, someone who donates his or her time, money, and/or reputation to charitable causes...
and entrepreneur who was one of Madoff's oldest friends and biggest financial backers. On December 5, he accepted $10 million from Martin Rosenman, president of Rosenman Family LLC, who wanted to recover a never-invested $10 million, deposited in a Madoff account at JPMorgan, wired six days before Madoff's arrest. Bankruptcy Judge Lifland ruled that Rosenman was "indistinguishable" from any other Madoff client, so there was no basis for giving him special treatment to recover funds. The judge separately declined to dismiss a lawsuit brought by Hadleigh Holdings, which claims it entrusted $1 million to the Madoff firm three days before his arrest.
Madoff asked others for money in the final weeks before his arrest, including Wall Street financier Kenneth Langone
Kenneth Langone
Kenneth Langone, is a venture capitalist, investment banker and financial backer of The Home Depot, and a former director of the New York Stock Exchange. He was elected as director of Yum! Brands effective October 7, 1997, and is a member of the Audit Committee. Langone is also a trustee of New...
, whose office was sent a 19-page pitch book, allegedly created by the staff at the Fairfield Greenwich Group. Madoff said he was raising money for a new investment vehicle, between $500 million and $1 billion for exclusive clients, was moving quickly on the venture, and wanted an answer by the following week. Langone declined.
On December 10, 2008, he suggested to his sons, Mark and Andrew, that the firm pay out over $170 million in bonuses two months ahead of schedule, from $200 million in assets that the firm still had. According to the complaint, Mark and Andrew, reportedly unaware of the firm's pending insolvency
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
, confronted their father, asking him how the firm could pay bonuses to employees if it could not pay investors. Madoff then admitted that he was "finished," and that the asset management arm of the firm was in fact a Ponzi scheme – as he put it, "one big lie." Mark and Andrew then reported him to the authorities.
Investigation into involvement of others
Investigators are looking for others involved in the scheme, despite Madoff's assertion that he alone was responsible for the large-scale operation. Harry Susman, an attorney representing several clients of the firm, stated that "someone had to create the appearance that there were returns", and further suggested that there must have been a team buying and selling stocks, forging books, and filing reports. James Ratley, president of the Association of Certified Fraud ExaminersAssociation of Certified Fraud Examiners
Established in 1988 the Association of Certified Fraud Examiners is the professional organization that governs professional fraud examiners. Its activities include producing fraud information, tools and training. It also governs the professional designation of Certified Fraud Examiner...
said, “In order for him to have done this by himself, he would have had to have been at work night and day, no vacation and no time off. He would have had to nurture the Ponzi scheme daily. What happened when he was gone? Who handled it when somebody called in while he was on vacation and said, ‘I need access to money’?”
“Simply from an administrative perspective, the act of putting together the various account statements, which did show trading activity, has to involve a number of people. ... You would need office and support personnel, people who actually knew what the market price
Market price
In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics...
s were for the securities that were being traded. You would need accountants so that the internal documents reconcile with the documents being sent to customers at least on a superficial basis,” said Tom Dewey, a securities lawyer.
- Cohmad SecuritiesCohmad SecuritiesCohmad Securities, whose name combines “Cohn” and “Madoff,” founded in 1985 by Bernard Madoff and Maurice Cohn, Madoff’s friend and former neighbor. It is in the Business Services, N.E.C. industry in NEW YORK, NY...
Corp. of which Madoff shares 10–20% ownership stakes. The brokerage firm lists its address as Madoff's firm's address in New York City. Its chairman, Maurice J. Cohn, his daughter and COO Marcia Beth Cohn, and Robert M. JaffeRobert Jaffe (stockbroker)Robert M. Jaffe , an American stockbroker, and long-time associate of Bernard Madoff, promoted Madoff's fund to wealthy investors in Massachusetts and Florida. Jaffe has homes in Weston, Massachusetts and in Palm Beach, Florida, Cohmad Securities Corporation employs Robert Jaffe, as...
, a broker at the firm, are accused by the SEC of 4 counts of civil fraudFraudIn criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
, "knowingly or recklessly disregarding facts indicating that Madoff was operating a fraud". Another lawsuit filed by bankruptcy trustee Irving PicardIrving PicardIrving H. Picard is a partner in the law firm Baker Hostetler. He graduated from the Wharton School, University of Pennsylvania, with a B.S. degree , from Boston University School of Law with a J.D. degree , and from the New York University School of Law with an LL.M. degree in 1967, and was...
is seeking funds for Madoff victims. Jaffe has requested the Court dismiss the charges in both cases. - Stanley ChaisStanley ChaisStanley Chais , was a Beverly Hills, California investment advisor who operated "feeder funds" which collected money for funds related to the Madoff investment scandal. He was born in Bronx, New York....
, of the Brighton Company. On May 1, 2009, Picard filed a lawsuit against Stanley Chais, 82. The complaint alleges he "knew or should have known" he was involved in a Ponzi scheme when his family investments with Madoff averaged 40% return. It also claims Chais was a primary beneficiary of the scheme for at least 30 years, allowing his family to withdraw more than $1 billion from their accounts since 1995. The SEC filed a similar civil suit mirroring these claims. On September 22, 2009 Chais was sued by CaliforniaCaliforniaCalifornia is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
Attorney GeneralAttorney GeneralIn most common law jurisdictions, the attorney general, or attorney-general, is the main legal advisor to the government, and in some jurisdictions he or she may also have executive responsibility for law enforcement or responsibility for public prosecutions.The term is used to refer to any person...
Jerry BrownJerry BrownEdmund Gerald "Jerry" Brown, Jr. is an American politician. Brown served as the 34th Governor of California , and is currently serving as the 39th California Governor...
seeking $25 million in penalties as well as restitution for victims, saying the Beverly Hills investment manager was a 'middleman' in Madoff's Ponzi scheme. - Madoff Securities International Ltd. in London.
- Carl J. ShapiroCarl J. ShapiroCarl J. Shapiro is a Boston philanthropist and entrepreneur. He and his wife, Ruth live in Boston and Palm Beach. In 1939, he founded Kay Windsor, Inc., in New Bedford, Massachusetts, and built it into one of the largest women's apparel companies in the country...
, women's clothing entrepreneur, self-made millionaire and philanthropist, and one of Madoff's oldest friends and biggest financial backers, who helped him start his investment firm in 1960. He was never in the finance business. In 1971, Mr. Shapiro sold his business, Kay Windsor, Inc. for $20 million. Investing most with Madoff, that sum grew to hundreds of millions of dollars and possibly to more than $1 billion. Shapiro personally lost about $400 million, $250 million of which he gave to Madoff 10 days before his arrest. His foundation lost more than $100 million. - David G. FriehlingDavid G. FriehlingDavid G. Friehling is an American accountant who was arrested and charged in March 2009 for his role in the Madoff investment scandal. He later plead guilty to these charges.-Early life:...
, 49, the sole practitioner at Friehling & Horowitz CPAs, waived indictment and pleaded not guilty to criminal charges on July 10, 2009. He agreed to proceed without having the evidence in the criminal case against him reviewed by a grand jury at a hearing before U.S. District Judge Alvin Hellerstein in Manhattan. Friehling was charged on March 18, 2009, with securities fraudSecurities fraudSecurities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the Securities and Exchange Commission. On November 3, 2009 Friehling plead guilty to the charges. - Peter B. Madoff, 63, Chief Compliance Officer, worked with his brother Bernie for more than 40 years, and ran the daily operations for the past 20 years. He helped create the computerized trading system.
- Ruth Madoff, Bernard's wife, agreed as part of Bernie's sentencing issues, to keep $2.5 million of her claim of more than $80 million in assets and to give up all of her possessions. The money is not protected from civil legal actions pursued by a court-appointed trustee liquidating Madoff's assets or by investor lawsuits. On July 29, 2009, she was sued by trustee Picard for $45 million, which supported her "life of splendor". According to court filings, she received more than $3 million from the business over the last six years to pay personal expenses charged to her American ExpressAmerican ExpressAmerican Express Company or AmEx, is an American multinational financial services corporation headquartered in Three World Financial Center, Manhattan, New York City, New York, United States. Founded in 1850, it is one of the 30 components of the Dow Jones Industrial Average. The company is best...
card, and $2 million in payments to a business called PetCare RX. “Ruth Madoff was never an employee of BLMIS yet millions of dollars belonging to BLMIS and its customers found their way into her personal accounts and investments without any legitimate business purpose or any value to BLMIS, simply because of her relationship with Bernard Madoff.” She is also required to itemize any expenditures over $100. The case is Picard v. Madoff, 1:09-ap-1391, U.S. Bankruptcy Court, Southern District of New York (Manhattan). On November 25, 2008, she withdrew $5.5 million and $10 million on December 10, 2008, from her brokerage account at Cohmad, a feeder fund which had an office in Madoff’s headquarters and was part-owned by him. In November, she also received $2 million from her husband's London office, Madoff Securities International Ltd. She has not been charged with any crime, and has not been questioned by prosecutors. She has been seen riding the N.Y. subway and did not attend her husband's sentencing. - Madoff's sons – Mark, 45, and Andrew, 42, worked in the trading arm in the New York office, but also raised money marketing the Madoff funds. Their assets were frozen on March 31, 2009. The two have been estranged from their father, since December 10, 2008, and haven't spoken with their mother in the wake of the fraud, but some contend that was a charade in order to protect their assets from litigation. On October 2, 2009 a civil lawsuit was filed against them by trustee Picard for a judgment in the aggregate amount of at least $198,743,299. Peter Madoff and daughter, Shana are also defendants. On March 15, 2010, they filed a motion to dismiss. On December 11, 2010, the second anniversary of Madoff's arrest, Mark Madoff was found hanging from a ceiling pipe in the living room of his SoHo loft apartment.
- Frank DiPascaliFrank DiPascaliFrank DiPascali, Jr. worked for Bernard L. Madoff Investment Securities LLC for 33 years and was a key lieutenant of Bernard Madoff. He referred to himself as "director of options trading" and as "chief financial officer". On August 11, 2009, he pled guilty to ten counts related to the Madoff...
, 52, who referred to himself as "director of optionOption (finance)In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
s trading" and as "chief financial officerChief financial officerThe chief financial officer or Chief financial and operating officer is a corporate officer primarily responsible for managing the financial risks of the corporation. This officer is also responsible for financial planning and record-keeping, as well as financial reporting to higher management...
" at Madoff Securities pled guilty on August 11, 2009, to 10 counts: conspiracyConspiracy (crime)In the criminal law, a conspiracy is an agreement between two or more persons to break the law at some time in the future, and, in some cases, with at least one overt act in furtherance of that agreement...
, securities fraudSecurities fraudSecurities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
, investment advisor fraudFraudIn criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
, mail fraud, wire fraudWire fraudMail and wire fraud is a federal crime in the United States. Together, 18 U.S.C. §§ 1341, 1343, and 1346 reach any fraudulent scheme or artifice to intentionally deprive another of property or honest services with a nexus to mail or wire communication....
, perjuryPerjuryPerjury, also known as forswearing, is the willful act of swearing a false oath or affirmation to tell the truth, whether spoken or in writing, concerning matters material to a judicial proceeding. That is, the witness falsely promises to tell the truth about matters which affect the outcome of the...
, income tax evasion, international money launderingMoney launderingMoney laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
, falsifying books and records of a broker-dealer, and an investment advisor. He has agreed to connect the dots and to name names, with sentencing in May, 2010. He is awaiting bail. Prosecutors are seeking more than $170 billion in forfeiture, the same amount sought from Madoff, which represents funds deposited by investors and later disbursed to other investors. The same day, a Securities and Exchange Commission civil complaint was filed against DiPascali. - Enrica Cotellessa-Pitz, controllerComptrollerA comptroller is a management level position responsible for supervising the quality of accounting and financial reporting of an organization.In British government, the Comptroller General or Comptroller and Auditor General is in most countries the external auditor of the budget execution of the...
Bernard L. Madoff Investment Securities LLC, but not a licensed certified public accountantCertified Public AccountantCertified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
. Her signature is on checks from BMIS to Cohmad SecuritiesCohmad SecuritiesCohmad Securities, whose name combines “Cohn” and “Madoff,” founded in 1985 by Bernard Madoff and Maurice Cohn, Madoff’s friend and former neighbor. It is in the Business Services, N.E.C. industry in NEW YORK, NY...
Corp. representing commission payments. She was the liaison between the SEC and BLMIS regarding the firm's financial statements. The SEC has removed the statements off its website. - Fairfield Greenwich GroupFairfield Greenwich GroupFairfield Greenwich Group is an investment firm founded in 1983 in New York City. The firm had among the largest exposures to the Bernard Madoff fraud.-History of the Firm:...
, based in Greenwich, ConnecticutGreenwich, ConnecticutGreenwich is a town in Fairfield County, Connecticut, United States. As of the 2010 census, the town had a total population of 61,171. It is home to many hedge funds and other financial service companies. Greenwich is the southernmost and westernmost municipality in Connecticut and is 38+ minutes ...
, had a "Fairfield Sentry" fund which was one of many feeder funds that gave investors portals to Madoff. On April 1, 2009, the Commonwealth of Massachusetts filed a civil action charging Fairfield Greenwich with fraud, breaching its fiduciary duty to clients by failing to provide promised due diligence on its investments. The complaint seeks a fine and restitution to Massachusetts investors for losses and disgorgement of performance fees paid to Fairfield by those investors. It alleges that in 2005 Mr. Madoff coached Fairfield staff about ways to answer questions from SEC attorneys who were looking into Harry MarkopolosHarry MarkopolosHarry M. Markopolos is a former securities industry executive and independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff's wealth...
' complaint about Madoff's operations. The Secretary of State has no plans to settle the lawsuit in spite of the fact that Fairfield Greenwich has offered to repay all Massachusetts investors, and is expected to force Fairfield to explain e-mails and other evidence he has uncovered that appear to show company officials knew about potential problems with Madoff but failed to disclose them to clients. On May 18, 2009, the hedge fund was sued by trustee Picard, seeking a return of $3.2 billion during the period from 2002 – Madoff's arrest in December, 2008. However, the money may already be in the hands of Fairfield’s own clients, who are likely off-limits to Picard, since they weren’t direct investors with Madoff. - J. Ezra MerkinJ. Ezra MerkinJacob Ezra Merkin is a former money manager and financier. He was a close business associate of Bernard Madoff, and is alleged to have played a significant part in the Madoff fraud. He served as the Non-executive Chairman of GMAC until his resignation on January 9, 2009, at the insistence of the...
, a prominent investment advisorInvestment AdvisorThe term Investment Advisor is an individual or firm who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities...
and philanthropist, has been sued for his role in running a "feeder fund" for Madoff. On April 6, 2009, New York Attorney GeneralAttorney GeneralIn most common law jurisdictions, the attorney general, or attorney-general, is the main legal advisor to the government, and in some jurisdictions he or she may also have executive responsibility for law enforcement or responsibility for public prosecutions.The term is used to refer to any person...
Andrew CuomoAndrew CuomoAndrew Mark Cuomo is the 56th and current Governor of New York, having assumed office on January 1, 2011. A member of the Democratic Party, he was the 64th New York State Attorney General, and was the 11th United States Secretary of Housing and Urban Development...
filed civil fraudFraudIn criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation...
charges against J. Ezra Merkin alleging he "betrayed hundreds of investors" by moving $2.4 billion of clients' money to Bernard Madoff without their knowledge. The complaint states, he lied about putting the money with Madoff, failed to disclose conflicts of interest, and collected over $470 million in fees for his three hedge funds, Ascot Partners LP with Ascot Fund Ltd., Gabriel Capital Corp. and Ariel Fund Ltd. He promised he would actively manage the money, but instead, he misguided investors about his Madoff investments in quarterly reports, in investor presentations, and in conversations with investors. "Merkin held himself out to investors as an investing guru...In reality, Merkin was but a master marketer." - Jeffry PicowerJeffry PicowerJeffry M. Picower was an American investor and noted philanthropist involved in the Madoff investment scandal...
and his wife, Barbara, of Palm Beach, Florida, and Manhattan, had two dozen accounts. He was a lawyer, accountant, and investor who led buyouts of health-care and technology companies. Mr. Picower's foundation stated its investment portfolio with Madoff was valued at nearly $1 billion at one time. On October 25, 2009, Picower, 67 was found dead of a massive heart attack at the bottom of his Palm Beach swimming pool. He was buried three days later in Mount Ararat Cemetery in Farmingdale, New YorkFarmingdale, New YorkThe Village of Farmingdale is an incorporated village on Long Island within the Town of Oyster Bay in Nassau County, New York in the United States...
, Section 60, Range C, Lot 15. - Tremont Group Holdings started its first Madoff-only fund in 1997. That group managed several funds marketed under the Re Select Broad Market Fund.
- The Maxam fund invested through Tremont. Sandra L. Manzke, founder of Maxam Capital, had her assets temporarily frozen by the same Connecticut court.
- Daniel BonventreDaniel BonventreDaniel Bonventre is one of five former Madoff employees charged in the Madoff investment scandal.He had worked as one-time company director of operations and as an accountant for Madoff since the 1960s...
, former operations director for Bernard Madoff Investment Securities. - Joann Crupi (Westfield, NJ) and Annette Bongiorno (Boca Raton, FL) were arrested in November 2010. Both were back office employees and according to the Associated Press "authorities previously said Bongiorno was a staff supervisor and was responsible for answering questions from Madoff's clients about their purported investments. They allege she oversaw the fabrication of documents."
Charges and sentencing
The criminal case is U.S.A. v. Madoff, 1:08-mJ-02735.The SEC case is Securities and Exchange Commission v. Madoff, 1:08-cv- 10791, both U.S. District Court, Southern District of New York (Manhattan). The cases against Fairfield Greenwich Group et al. are consolidated as 09-118 in U.S. District Court for the Southern District of New York (Manhattan).
While awaiting sentencing, Madoff has met with the SEC's Inspector General
Inspector General
An Inspector General is an investigative official in a civil or military organization. The plural of the term is Inspectors General.-Bangladesh:...
, H. David Kotz
H. David Kotz
H. David Kotz is the Inspector General of the U.S. Securities and Exchange Commission since his appointment on December 5, 2007...
, who is conducting an investigation into how regulators failed to detect the fraud despite numerous red flags. Former SEC Chairman Harvey Pitt
Harvey Pitt
Harvey Pitt was the 26th chairman of the U.S. Securities and Exchange Commission , serving from 2001-2003. He led the SEC in restoring the U.S...
estimated the actual net fraud to be between $10 and $17 billion, because it does not include the fictional returns credited to the Madoff's customer accounts.
Criminal complaint
U.S. v. Madoff, 08-MAG-02735.The original criminal complaint estimated that investors lost $50 billion through the scheme, though The Wall Street Journal reports "that figure includes the alleged false profits that Mr. Madoff's firm reported to its customers for decades. It is unclear exactly how much investors deposited into the firm." He was originally charged with a single count of securities fraud and faced up to 20 years in prison, and a fine of $5 million if convicted.
Court papers indicate that Madoff's firm had about 4,800 investment client accounts as of November 30, 2008, and issued statements for that month reporting that client accounts held a total balance of about $65 billion, but actually "held only a small fraction" of that balance for clients.
Madoff was arrested by the Federal Bureau of Investigation
Federal Bureau of Investigation
The Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...
(FBI) on December 11, 2008, on a criminal charge
Criminal charge
A criminal charge is a formal accusation made by a governmental authority asserting that somebody has committed a crime. A charging document, which contains one or more criminal charges or counts, can take several forms, including:* complaint...
of securities fraud
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
. According to the criminal complaint, the previous day he had told his sons that his business was "a giant Ponzi scheme". They called a friend for advice, Martin Flumenbaum, a lawyer, who called federal prosecutors and the SEC on their behalf. FBI Agent Theodore Cacioppi made a house call. "We are here to find out if there is an innocent explanation," Cacioppi said quietly. The 70-year-old financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...
paused, then said: "There is no innocent explanation." He had "paid investors with money that was not there". Madoff was released on the same day of his arrest after posting $10 million bail
Bail
Traditionally, bail is some form of property deposited or pledged to a court to persuade it to release a suspect from jail, on the understanding that the suspect will return for trial or forfeit the bail...
. Madoff and his wife surrendered their passports, and he was subject to travel restrictions, a 7 p.m. curfew
Curfew
A curfew is an order specifying a time after which certain regulations apply. Examples:# An order by a government for certain persons to return home daily before a certain time...
at his co-op, and electronic monitoring as a condition of bail. Although Madoff only had two co-signers for his $10 million bail, his wife and his brother Peter, rather than the four required, a judge allowed him free on bail but ordered him confined to his apartment. Madoff has reportedly received death threat
Death threat
A death threat is a threat of death, often made anonymously, by one person or a group of people to kill another person or groups of people. These threats are usually designed to intimidate victims in order to manipulate their behavior, thus a death threat is a form of coercion...
s that have been referred to the FBI, and the SEC referred to fears of "harm or flight" in its request for Madoff to be confined to his Upper East Side apartment. Cameras monitored his apartment's doors, its communication devices sent signals to the FBI, and his wife was required to pay for additional security.
Apart from 'Bernard L. Madoff' and 'Bernard L. Madoff Investment Securities LLC ("BMIS")', the order to freeze all activities also forbade trading from the companies Madoff Securities International Ltd. ("Madoff International") and Madoff Ltd.
On January 5, 2009, prosecutors had requested that the Court revoke his bail, after Madoff and his wife allegedly violated the court-ordered asset freeze by mailing jewelry worth up to $1 million to relatives, including their sons and Madoff's brother. It was also noted that $173 million in signed checks had been found in Madoff's office desk after he had been arrested. His sons reported the mailings to prosecutors. Previously, Madoff was thought to be cooperating with prosecutors. The following week, Judge Ellis refused the government's request to revoke Madoff's bail, but required as a condition of bail that Madoff make an inventory of personal items and that his mail be searched.
On March 10, 2009, the United States Attorney for the Southern District of New York filed an 11-count criminal information, or complaint, charging Madoff with 11 federal crimes: securities fraud
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
, investment adviser fraud, mail fraud, wire fraud
Wire fraud
Mail and wire fraud is a federal crime in the United States. Together, 18 U.S.C. §§ 1341, 1343, and 1346 reach any fraudulent scheme or artifice to intentionally deprive another of property or honest services with a nexus to mail or wire communication....
, three counts of money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
, false statements
False statements
False statements generally refers to the United States federal false statements statute, contained in 18 U.S.C. Section 1001. This statute is used in many contexts. Most commonly, prosecutors use this statute to reach cover-up crimes such as perjury, false declarations, and obstruction of...
, perjury
Perjury
Perjury, also known as forswearing, is the willful act of swearing a false oath or affirmation to tell the truth, whether spoken or in writing, concerning matters material to a judicial proceeding. That is, the witness falsely promises to tell the truth about matters which affect the outcome of the...
, making false filings with the SEC, and theft from an employee benefit plan. The complaint stated that Madoff had defrauded his clients of almost $65 billion – thus spelling out the largest Ponzi scheme in history, as well as the largest investor fraud committed by a single person.
Madoff pleaded guilty to three counts of money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
. Prosecutors allege that he used the London Office, Madoff Securities International Ltd. to launder more than $250 million of client money by transferring client money from the investment-advisory business in New York to London and then back to the U.S. to support the U.S. trading operation of Bernard L. Madoff Investment Securities LLC. Madoff gave the appearance that he was trading in Europe for his clients.
Plea proceeding
On March 12, 2009, Madoff appeared in court in a plea proceeding, and pleaded guilty to all charges. There was no plea agreement between the government and Madoff; he simply pleaded guilty and signed a waiverWaiver
A waiver is the voluntary relinquishment or surrender of some known right or privilege.While a waiver is often in writing, sometimes a person's actions can act as a waiver. An example of a written waiver is a disclaimer, which becomes a waiver when accepted...
of indictment
Indictment
An indictment , in the common-law legal system, is a formal accusation that a person has committed a crime. In jurisdictions that maintain the concept of felonies, the serious criminal offence is a felony; jurisdictions that lack the concept of felonies often use that of an indictable offence—an...
. The charges carried a maximum sentence of 150 years in prison, as well as mandatory restitution
Restitution
The law of restitution is the law of gains-based recovery. It is to be contrasted with the law of compensation, which is the law of loss-based recovery. Obligations to make restitution and obligations to pay compensation are each a type of legal response to events in the real world. When a court...
and fines up to twice the gross gain or loss derived from the offenses. If the government's estimate is correct, Madoff will have to pay $7.2 billion in restitution.
In his pleading allocution
Allocution
Generally, to allocute in law means "to speak out formally." In the field of apologetics, allocution is generally done in defense of a belief. In politics, one may allocute before a legislative body in an effort to influence their position on an issue...
, Madoff admitted to running a Ponzi scheme and expressed regret for his "criminal acts". He stated that he had begun his scheme some time in the early 1990s. He wished to satisfy his clients' expectations of high returns he had promised, even though it was during an economic recession. He admitted that he hadn't invested any of his clients' money since the inception of his scheme. Instead, he merely deposited the money into his business account at Chase Manhattan Bank
Chase Manhattan Bank
JPMorgan Chase Bank, N.A., doing business as Chase, is a national bank that constitutes the consumer and commercial banking subsidiary of financial services firm JPMorgan Chase. The bank was known as Chase Manhattan Bank until it merged with J.P. Morgan & Co. in 2000...
. He admitted to false trading activities masked by foreign transfers and false SEC returns. When clients requested account withdrawals, he paid them from the Chase account, claiming the profits were the result of his own unique "split-strike conversion strategy". He said he had every intention of terminating the scheme, but it proved "difficult, and ultimately impossible" to extricate himself. He eventually reconciled himself to being exposed as a fraud.
Only two of at least 25 victims who had requested to be heard at the hearing spoke in open court
In open court
In open court is a legal term in the United States defined by the appearance by a party or their attorney in a public court session such as during a trial...
against accepting Madoff's plea of guilt.
Judge Denny Chin
Denny Chin
Denny Chin is a judge on the United States Court of Appeals for the Second Circuit. He was a judge on the United States district court for the Southern District of New York before joining the federal appeals bench. President Clinton nominated Chin to the district court on March 24, 1994, and...
accepted his guilty plea and remanded him to incarceration at the Manhattan Metropolitan Correctional Center until sentencing. Chin said that Madoff was now a substantial flight risk given his age, wealth and the possibility of spending the rest of his life in prison.
Madoff's attorney, Ira Sorkin
Ira Sorkin
Ira Lee Sorkin is an American attorney. He is best known for representing Bernard Madoff, the American businessman who has pleaded guilty to perpetrating the largest investor fraud ever committed by a single person.-Education and career:...
filed an appeal
Appeal
An appeal is a petition for review of a case that has been decided by a court of law. The petition is made to a higher court for the purpose of overturning the lower court's decision....
, to return him back to his "penthouse arrest", await sentencing, and to reinstate his bail conditions, declaring he would be more amenable to cooperate with the government's investigation, and prosecutors filed a notice in opposition. On March 20, 2009, the appellate court denied his request.
On June 26, 2009, Chin ordered Madoff to forfeit $170 million in assets. His wife Ruth will relinquish her claim to $80 million worth of assets, leaving her with $2.5 million in cash. The settlement does not prevent the SEC and Picard to continue making claims against Mrs. Madoff's funds in the future. Madoff had earlier requested to shield $70 million in assets for Ruth, arguing that it was unconnected to the fraud scheme.
Sentencing and prison life
Prosecutors recommended a maximum prison sentence of 150 years, and informed Chin that Irving PicardIrving Picard
Irving H. Picard is a partner in the law firm Baker Hostetler. He graduated from the Wharton School, University of Pennsylvania, with a B.S. degree , from Boston University School of Law with a J.D. degree , and from the New York University School of Law with an LL.M. degree in 1967, and was...
, bankruptcy trustee has indicated that "Mr. Madoff has not provided meaningful cooperation or assistance." The Bureau of US Prisons had recommended 50 years, while defense lawyer Ira Sorkin
Ira Sorkin
Ira Lee Sorkin is an American attorney. He is best known for representing Bernard Madoff, the American businessman who has pleaded guilty to perpetrating the largest investor fraud ever committed by a single person.-Education and career:...
had recommended 12 years, arguing that Madoff had confessed. The judge granted Madoff permission to wear his personal clothing at sentencing.
On June 29, Judge Chin sentenced Madoff to 150 years in prison, as recommended by the prosecution. Chin said he had not received any mitigating letters from friends or family testifying to Madoff's good deeds, describing that "the absence of such support is telling". Commentators noted that this was in contrast to other high-profile white collar trials such as that of Andrew Fastow
Andrew Fastow
Andrew Stuart Fastow was the chief financial officer of Enron Corporation that was based in Houston, Texas until the U.S. Securities and Exchange Commission opened an investigation into his and the company's conduct in 2001...
, Jeffrey Skilling
Jeffrey Skilling
Jeffrey Keith "Jeff" Skilling is the former president of Enron Corporation, headquartered in Houston, Texas. In 2006 he was convicted of multiple federal felony charges relating to Enron's financial collapse, and is currently serving a 24-year, four-month prison sentence at the Federal...
, and Bernard Ebbers
Bernard Ebbers
Bernard John "Bernie" Ebbers is a Canadian-born businessman. He co-founded the telecommunications company WorldCom and is a former chief executive officer of that company....
who were known for their philanthropy and/or cooperation to help victims; however Madoff's victims included several charities and foundations, and the only person that pleaded for mercy was defense lawyer Ira Sorkin. Chin called the fraud "unprecedented" and "staggering", and stated that the sentence would deter others from committing similar frauds. "Here the message must be sent that Mr. Madoff's crimes were extraordinarily evil." Many victims, some of whom had lost their life savings, applauded the sentence. Chin agreed with prosecutors' contention that the fraud began at some point in the 1980s. He also noted Madoff's crimes were "off the charts" since federal sentencing guidelines for fraud only go up to $400 million in losses, and Madoff bilked his marks of 162 times that.
Chin said "I have a sense Mr. Madoff has not done all that he could do or told all that he knows," noting that Madoff failed to identify accomplices, making it more difficult for prosecutors to build cases against others. Chin dismissed Sorkin's plea for leniency, stating that Madoff made substantial loans to family members and moved $15 million from the firm to his wife's account shortly before confessing. The court-appointed receiver of the Madoff firm, Irving Picard
Irving Picard
Irving H. Picard is a partner in the law firm Baker Hostetler. He graduated from the Wharton School, University of Pennsylvania, with a B.S. degree , from Boston University School of Law with a J.D. degree , and from the New York University School of Law with an LL.M. degree in 1967, and was...
, has also said that Madoff had not provided substantial assistance, complicating efforts to locate assets. A former federal prosecutor suggested Madoff would have had the possibility of a sentence with parole if he fully cooperated with investigators, but Madoff's silence implied that there were other accomplices in the fraud which led the judge to impose the maximum sentence. Chin also ordered Madoff to pay $170 billion in restitution.
Madoff apologized to his victims at the sentencing, saying, "I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This is something I will live in for the rest of my life. I'm sorry. ... I know that doesn't help you."
Madoff was incarcerated at Butner Federal Correctional Complex outside Raleigh, North Carolina
Raleigh, North Carolina
Raleigh is the capital and the second largest city in the state of North Carolina as well as the seat of Wake County. Raleigh is known as the "City of Oaks" for its many oak trees. According to the U.S. Census Bureau, the city's 2010 population was 403,892, over an area of , making Raleigh...
. His inmate number is #61727-054.
On July 28, 2009, he gave his first jailhouse interview to Joseph Cotchett and Nancy Fineman, attorneys from San Francisco, because they threatened to sue his wife, Ruth, on behalf of several investors who lost fortunes. During the 4 and 1/2 hour session, he was described as arrogant and cocky, and upon query, apologized to all his clients.
Recovery of funds
Madoff's combined assets are about $826 million and have been frozen. Madoff provided a confidential list of his and his firm's assets to the SEC on December 31, which was subsequently disclosed on March 13, 2009 in a court filing. Madoff had no IRAIndividual Retirement Account
An individual retirement arrangement is the blanket term for a form of retirement plan that provides tax advantages for retirement savings in the United States...
s, no 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
, no Keogh plan, no other pension plan and no annuities
Annuity (finance theory)
The term annuity is used in finance theory to refer to any terminating stream of fixed payments over a specified period of time. This usage is most commonly seen in discussions of finance, usually in connection with the valuation of the stream of payments, taking into account time value of money...
. He owned less than a combined $200,000 in securities in Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
, Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
, Fidelity
Fidelity
"Fidelity" is the quality of being faithful or loyal. Its original meaning regarded duty to a lord or a king, in a broader sense than the related concept of fealty. Both derive from the Latin word fidēlis, meaning "faithful or loyal"....
, Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
, and M&T. No offshore or Swiss Bank accounts were listed.
On March 17, 2009, prosecutor filed a document listing more assets including $2.6 million in jewelry and about 35 sets of watches and cufflinks, more than $30 million in loans owed to the couple by their sons, and Ruth Madoff's interest in real estate funds sponsored by Sterling Equities, whose partners include Fred Wilpon
Fred Wilpon
Fred Wilpon is a real estate developer, baseball executive and the majority owner of the New York Mets.-Biography:...
. Ruth Madoff, and Peter Madoff, invested as “passive limited partners” in real estate funds sponsored by the company, as well as other venture investments. Assets also include the Madoffs' interest in Hoboken Radiology LLC. in Hoboken, New Jersey; Delivery Concepts LLC, an online food ordering service in midtown Manhattan that operates as "delivery.com"; an interest in Madoff La Brea LLC; an interest in the restaurant, PJ Clarke’s on the Hudson LLC; and Boca Raton, Florida-based Viager II LLC.
On March 2, 2009, Judge Louis Stanton modified an existing freeze order to surrender assets Madoff owns: his securities firm, real estate, artwork, and entertainment tickets, and granted a request by prosecutors that the existing freeze remain in place for the Manhattan apartment, and vacation homes in Montauk, New York
Montauk, New York
Montauk [ˈmɒntɒk] is a census-designated place that roughly corresponds to the hamlet with the same name located in the town of East Hampton in Suffolk County, New York, United States on the South Shore of Long Island. As of the United States 2000 Census, the CDP population was 3,851 as of 2000...
, and Palm Beach, Florida
Palm Beach, Florida
The Town of Palm Beach is an incorporated town in Palm Beach County, Florida, United States. The Intracoastal Waterway separates it from the neighboring cities of West Palm Beach and Lake Worth...
. He has also agreed to surrender his interest in Primex Holdings LLC, a joint venture
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...
between Madoff Securities and several large brokerages, designed to replicate the auction process on the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
. Madoff's April 14, 2009 opening day New York Mets
New York Mets
The New York Mets are a professional baseball team based in the borough of Queens in New York City, New York. They belong to Major League Baseball's National League East Division. One of baseball's first expansion teams, the Mets were founded in 1962 to replace New York's departed National League...
tickets were sold for $7,500 on ebay
EBay
eBay Inc. is an American internet consumer-to-consumer corporation that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide...
.
On April 13, 2009, a Connecticut judge dissolved the temporary asset freeze from March 30, 2009, and issued an order for Fairfield Greenwich Group executive Walter Noel to post property pledges of $10 million against his Greenwich home and $2 million against Jeffrey Tucker's. Noel agreed to the attachment on his house "with no findings, including no finding of liability or wrongdoing". Andres Piedrahita's assets continue to remain temporarily frozen because he was never served with the complaint. The principals are all involved in a lawsuit filed by the town of Fairfield
Fairfield, Connecticut
Fairfield is a town located in Fairfield County, Connecticut, United States. It is bordered by the towns of Bridgeport, Trumbull, Easton, Redding and Westport along the Gold Coast of Connecticut. As of the 2010 census, the town had a population of 59,404...
, Connecticut
Connecticut
Connecticut is a state in the New England region of the northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, and the state of New York to the west and the south .Connecticut is named for the Connecticut River, the major U.S. river that approximately...
, pension funds, which lost $42 million. The pension fund case is Retirement Program for Employees of the Town of Fairfield v. Madoff, FBT-CV-09-5023735-S, Superior Court of Connecticut (Bridgeport). Maxam Capital and other firms that allegedly fed Madoff's fund, which could allow Fairfield to recover up to $75 million were also part of the dissolution and terms.
Professor John Coffee
John C. Coffee
John C. "Jack" Coffee, Jr. is the Adolf A. Berle Professor of Law at Columbia Law School and director of the Center on Corporate Governance at Columbia University Law School.-Education:...
, of Columbia University Law School, said that much of Madoff's money may be in offshore fund
Offshore fund
An offshore fund is a collective investment scheme domiciled in an Offshore Financial Centre such as the British Virgin Islands, Luxembourg, or the Cayman Islands; it is typically sold exclusively to 'foreign' investors...
s. The SEC believed keeping the assets secret would prevent them from being seized by foreign regulators and foreign creditors.
The Montreal Gazette reported on January 12, 2010 that there are unrecovered Madoff assets in Canada.
In December 2010 Barbara Picower
Barbara Picower
Barbara Picower is Jeffry Picower's widow. She and her daughters were willed some $250 million from Jeffry's estate. The Picowers were family friends, early investors and massive beneficiaries of Bernard Madoff's criminal Ponzi scheme over 35 years, as was revealed in 2008...
and others reached an agreement with Irving Picard
Irving Picard
Irving H. Picard is a partner in the law firm Baker Hostetler. He graduated from the Wharton School, University of Pennsylvania, with a B.S. degree , from Boston University School of Law with a J.D. degree , and from the New York University School of Law with an LL.M. degree in 1967, and was...
to return 7.2 billion dollars from the estate of her deceased husband Jeffrey Picower to other investors in the fraud.
Affected clients
On February 4, 2009, the U.S. Bankruptcy Court in Manhattan released a 162-page client list with at least 13,500 different accounts, but without listing the amounts invested. Individual investors who invested through Fairfield Greenwich Group, Ascot Partners, and Chais Investments were not included on the list.Clients included banks, hedge funds, charities, universities, and wealthy individuals who have disclosed about $41 billion invested with Bernard L. Madoff Investment Securities LLC, according to a Bloomberg News tally, which may include double counting of investors in feeder funds.
Although Madoff filed a report with the SEC in 2008 stating that his advisory business had only 11–25 clients and about $17.1 billion in assets, thousands of investors have reported losses, and Madoff estimated the fund's assets at $50 billion.
Other notable clients included former Salomon Brothers
Salomon Brothers
Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually...
economist Henry Kaufman
Henry Kaufman
Henry Kaufman is a Jewish American economist and financial consultant.Born in a small village named Wenings in Germany as son of a butscher...
, Steven Spielberg
Steven Spielberg
Steven Allan Spielberg KBE is an American film director, screenwriter, producer, video game designer, and studio entrepreneur. In a career of more than four decades, Spielberg's films have covered many themes and genres. Spielberg's early science-fiction and adventure films were seen as an...
, Jeffrey Katzenberg
Jeffrey Katzenberg
Jeffrey Katzenberg is an American film producer and CEO of DreamWorks Animation. He is perhaps most famous for his period as chairman of The Walt Disney Company's film division, and for producing DreamWorks animated films such as Shrek, Antz, The Prince of Egypt, The Road to El Dorado, Chicken...
, actors Kevin Bacon
Kevin Bacon
Kevin Norwood Bacon is an American film and theater actor whose notable roles include Animal House, Diner, Footloose, Flatliners, Wild Things, A Few Good Men, JFK, Apollo 13, Mystic River, The Woodsman, Trapped, Friday the 13th, Hollow Man, Tremors, Death Sentence, Frost/Nixon, Crazy, Stupid, Love....
, Kyra Sedgwick
Kyra Sedgwick
Kyra Minturn Sedgwick is an American actress.Sedgwick is best known for her starring role as Deputy Chief Brenda Leigh Johnson on the TNT crime drama The Closer. Sedgwick's role in the series won her a Golden Globe Award in 2007 and an Emmy Award in 2010...
, John Malkovich
John Malkovich
John Gavin Malkovich is an American actor, producer, director and fashion designer with his label Technobohemian. Over the last 25 years of his career, Malkovich has appeared in more than 70 motion pictures. For his roles in Places in the Heart and In the Line of Fire, he received Academy Award...
, and Zsa Zsa Gabor
Zsa Zsa Gabor
Zsa Zsa Gabor is a Hungarian-born American stage, film and television actress.She acted on stage in Vienna, Austria, in 1932, and was crowned Miss Hungary in 1936. She emigrated to the United States in 1941 and became a sought-after actress with "European flair and style", with a personality that...
, Mortimer Zuckerman
Mortimer Zuckerman
Mortimer Benjamin "Mort" Zuckerman is a Canadian-born American business magnate with interests primarily in magazines, publishing, and real estate. He is now a naturalized citizen of the United States....
, Baseball Hall of Fame pitcher Sandy Koufax
Sandy Koufax
Sanford "Sandy" Koufax is a former left-handed baseball pitcher who played his entire 12-year Major League Baseball career for the Brooklyn/Los Angeles Dodgers...
, the Wilpon family (owners of the New York Mets
New York Mets
The New York Mets are a professional baseball team based in the borough of Queens in New York City, New York. They belong to Major League Baseball's National League East Division. One of baseball's first expansion teams, the Mets were founded in 1962 to replace New York's departed National League...
), broadcaster Larry King
Larry King
Lawrence Harvey "Larry" King is an American television and radio host whose work has been recognized with awards including two Peabodys and ten Cable ACE Awards....
and World Trade Center
World Trade Center
The original World Trade Center was a complex with seven buildings featuring landmark twin towers in Lower Manhattan, New York City, United States. The complex opened on April 4, 1973, and was destroyed in 2001 during the September 11 attacks. The site is currently being rebuilt with five new...
developer Larry Silverstein
Larry Silverstein
Larry A. Silverstein is an American businessman, and real estate investor and developer in New York City.Silverstein was born in Brooklyn, and became involved in real estate, together with his father, establishing Silverstein Properties...
. The Elie Wiesel
Elie Wiesel
Sir Eliezer "Elie" Wiesel KBE; born September 30, 1928) is a Hungarian-born Jewish-American writer, professor, political activist, Nobel Laureate, and Holocaust survivor. He is the author of 57 books, including Night, a work based on his experiences as a prisoner in the Auschwitz, Buna, and...
Foundation for Humanity lost $15.2 million, and Wiesel and his wife, Marion, lost their life savings.
Largest stake-holders
According to The Wall Street Journal the investors with the largest potential losses, including feeder funds, are:- Fairfield Greenwich GroupFairfield Greenwich GroupFairfield Greenwich Group is an investment firm founded in 1983 in New York City. The firm had among the largest exposures to the Bernard Madoff fraud.-History of the Firm:...
, $7.50 billion - Tremont Capital Management, $3.30 billion
- Banco Santander, $2.87 billion
- Bank MediciBank MediciBank Medici AG was a bank based in Vienna, Austria. It was founded in 1994 by banker Sonja Kohn and incorporated as a bank in 2003.Bank Medici's president and majority stakeholder is Sonja Kohn. Its main institutional shareholder is Bank Austria Creditanstalt, Austria's largest banking group...
, $2.10 billion - Ascot Partners, $1.80 billion
- Access International Advisors, $1.40 billion
- Fortis, $1.35 billion
- HSBCHSBCHSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
, $1 billion
The potential losses of these eight investors total $21.32 billion.
Eleven investors had potential losses between $100 million and $1 billion:
- NatixisNatixisNatixis is a French corporate and investment bank created in November 2006 from the merger of the asset management and investment banking operations of Natexis Banque Populaire and IXIS ....
SA - Carl J. ShapiroCarl J. ShapiroCarl J. Shapiro is a Boston philanthropist and entrepreneur. He and his wife, Ruth live in Boston and Palm Beach. In 1939, he founded Kay Windsor, Inc., in New Bedford, Massachusetts, and built it into one of the largest women's apparel companies in the country...
(a 95-year-old Boston philanthropist) - Royal Bank of Scotland Group PLC
- BNP ParibasBNP ParibasBNP Paribas S.A. is a global banking group, headquartered in Paris, with its second global headquarters in London. In October 2010 BNP Paribas was ranked by Bloomberg and Forbes as the largest bank and largest company in the world by assets with over $3.1 trillion. It was formed through the merger...
- BBVA
- Man GroupMan GroupMan Group plc is a British alternative investment management business. It provides a range of funds for institutional and private investors globally. The company manages about US$68 billion and employs around 1,700 people in 15 locations worldwide.Man’s headquarters are at Riverbank House...
PLC - Reichmuth & Co.
- Nomura HoldingsNomura HoldingsNomura Holdings, Inc. is a Japanese financial holding company, and a principal member of the Nomura Group.In October 2008 the company acquired Lehman Brothers Holdings's investment banking and equities unit in Asia and Europe and kept on most of its employees. Nomura paid $225 million for the...
- Maxam Capital Management
- EIM SA
- Union Bancaire PrivéeUnion Bancaire PrivéeUnion Bancaire Privée was founded in 1969 by Edgar de Picciotto. UBP, one of the most highly capitalized private banks, is a major player in the field of asset management in Switzerland with over $75 billion of assets under management....
Twenty-three investors with potential losses of $500,000 to $100 million were also listed, with a total potential loss of $540 million. The grand total potential loss in The Wall Street Journal table is $26.9 billion.
Some investors have amended their initial estimates of losses to include only their original investment, since the profits Madoff reported to them which they were including were most likely fraudulent. Yeshiva University
Yeshiva University
Yeshiva University is a private university in New York City, with six campuses in New York and one in Israel. Founded in 1886, it is a research university ranked as 45th in the US among national universities by U.S. News & World Report in 2012...
, for instance, said its actual incurred loss was its invested $14.5 million, not the $110 million initially estimated, which included falsified profits reported to the university by Madoff.
IRS penalties
It is estimated the potential tax penalties for foundations invested with Madoff are $1 billion.Although foundations are exempt from federal income taxes, they are subject to an excise tax, for failing to vet Madoff's proposed investments properly, to heed red flags, or to diversify prudently. Penalties may range from 10% of the amount invested during a tax year, to 25% if they fail to try to recover the funds. The foundation’s officers, directors, and trustees face up to a 15% penalty, with up to $20,000 fines for individual managers, per investment.
Criminal charges against Aurelia Finance
Criminal charges against five directors will proceed against Swiss wealth manager Aurelia Finance, which lost an alleged $800 million of client money. The directors' assets have been frozen.Grupo Santander
Clients primarily located in South AmericaSouth America
South America is a continent situated in the Western Hemisphere, mostly in the Southern Hemisphere, with a relatively small portion in the Northern Hemisphere. The continent is also considered a subcontinent of the Americas. It is bordered on the west by the Pacific Ocean and on the north and east...
who invested with Madoff through the Spanish bank Grupo Santander
Grupo Santander
The Santander Group is a banking group centered on Banco Santander, S.A., the largest bank in the Eurozone and one of the largest banks in the world in terms of market capitalisation. According to Forbes Magazine Global 2000, it is the 13th largest public company in the world...
, filed a class action against Santander in Miami. Santander proposed a settlement that would give the clients $2 billion worth of preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
in Santander based on each client's original investment. The shares pay a 2% dividend. Seventy percent of the Madoff/Santander investors accepted the offer.
Union Bancaire Privee
Union Bancaire PrivéeUnion Bancaire Privée
Union Bancaire Privée was founded in 1969 by Edgar de Picciotto. UBP, one of the most highly capitalized private banks, is a major player in the field of asset management in Switzerland with over $75 billion of assets under management....
, invested less than $1.08 billion (of its $124.5 billion in assets) in Madoff funds.
In March 2009, Geneva-based wealth manager, Union Bancaire Privée
Union Bancaire Privée
Union Bancaire Privée was founded in 1969 by Edgar de Picciotto. UBP, one of the most highly capitalized private banks, is a major player in the field of asset management in Switzerland with over $75 billion of assets under management....
, offered to partially compensate investors 50% of the money they initially invested with Madoff if they agree to stay with the bank for the next five years and promise not to sue.
On May 8, 2009, a lawsuit was filed against the bank on behalf of New York investor Andrea Barron in the United States District Court for the Southern District of New York
United States District Court for the Southern District of New York
The United States District Court for the Southern District of New York is a federal district court. Appeals from the Southern District of New York are taken to the United States Court of Appeals for the Second Circuit The United States District Court for the Southern District of New York (in case...
. The lawsuit is seeking class-action status for investors in UBP Funds as of December 11, 2008, and damages, including the return of management fees.
Notz Stucki
GenevaGeneva
Geneva In the national languages of Switzerland the city is known as Genf , Ginevra and Genevra is the second-most-populous city in Switzerland and is the most populous city of Romandie, the French-speaking part of Switzerland...
-based wealth manager, Notz Stucki's Plaza Fund, will compensate up to $103.2 million to those clients who did not specifically request access to Madoff. Compensation would be with an issue of a note payable over five years, which would be held by a separate legal entity.
Bank Medici
Bank MediciBank Medici
Bank Medici AG was a bank based in Vienna, Austria. It was founded in 1994 by banker Sonja Kohn and incorporated as a bank in 2003.Bank Medici's president and majority stakeholder is Sonja Kohn. Its main institutional shareholder is Bank Austria Creditanstalt, Austria's largest banking group...
is an Austria
Austria
Austria , officially the Republic of Austria , is a landlocked country of roughly 8.4 million people in Central Europe. It is bordered by the Czech Republic and Germany to the north, Slovakia and Hungary to the east, Slovenia and Italy to the south, and Switzerland and Liechtenstein to the...
n bank founded by Sonja Kohn
Sonja Kohn
Sonja Kohn is an Austrian banker.-Biography:Sonja Kohn was born to Jewish refugees from Eastern Europe. She grew up in Vienna in a small Jewish community....
, who met Madoff in 1985 while living in New York. Ninety percent of the bank's income was generated from Madoff investments. In December 2008, Medici reported that two of its funds—Herald USA Fund and Herald Luxemburg Fund—were exposed to Madoff losses. On January 2, 2009, FMA, the Austria banking regulator, took control of Bank Medici and appointed a supervisor to control the bank. Bank Medici, and its Austrian banking license is now for sale and has been sued by its customers both in the United States and in Austria. The Vienna State Prosecutor has launched a criminal investigation of Bank Medici and Kohn, who had invested an estimated $2.1 billion with Madoff. On May 28, 2009, Bank Medici lost its Austrian banking license. Kohn and the Bank are under investigation.
The Innocence Project
The Innocence ProjectInnocence Project
An Innocence Project is one of a number of non-profit legal organizations in the United States, Canada, the United Kingdom, Australia and New Zealand dedicated to proving the innocence of wrongly convicted people through the use of DNA testing, and to reforming the criminal justice systems to...
was partly funded by the JEHT Foundation, a private charity backed by a wealthy couple, Ken and Jeanne Levy-Church, financed with Madoff's mythical money. Jeanne Levy-Church's losses forced her to shut down both her foundation, and that of her parents, the Betty and Norman F. Levy Foundation, lost $244 million. JEH helped the less fortunate, especially ex-convicts. (See Participants in the Madoff investment scandal
Participants in the Madoff investment scandal
Investigators are looking for other participants in the Madoff investment scandal besides Bernard Madoff who were involved in the Madoff investment scheme, despite Madoff's assertion that he alone was responsible for the large-scale operation...
: Norman F. Levy) Madoff's corruption has deprived it of necessary funds to secure the release of others. The organization uses the latest DNA
DNA
Deoxyribonucleic acid is a nucleic acid that contains the genetic instructions used in the development and functioning of all known living organisms . The DNA segments that carry this genetic information are called genes, but other DNA sequences have structural purposes, or are involved in...
techniques to prove the innocence of the wrongfully imprisoned. On November 25, 2008, Steven Barnes was set free from jail with the evidence gained from the DNA tests, after serving 20 years for crimes he did not commit (rape and murder).
Westport National Bank
In April 2010, Connecticut Attorney General Richard BlumenthalRichard Blumenthal
Richard Blumenthal is the junior United States Senator from Connecticut and a member of the Democratic Party. Previously, he served as Attorney General of Connecticut....
sued the Westport National Bank and Robert L. Silverman for "effectively aiding and abetting" Madoff's fraud. The suit seeks recovery of $16.2 million, including the fees that the bank collected as custodian of customers' holding in Madoff investments. Silverman's 240 clients invested about $10 million with Madoff using the Bank as the custodian. The Bank denies any wrongdoing.
The Picower Foundation
The Picower Foundation, created in 2002, was one of the nation's leading philanthropies that supported groups such as the Picower Institute for Learning and Memory at the Massachusetts Institute of Technology, Human Rights First, the New York Public Library and the Children's Health Fund. It is listed as the 71st-largest in the nation by the Council on Foundations. The foundation reportedly invested $1 billion with Madoff. Jeffry Picower has been a friend of Bernard Madoff for 30 years. The Picower Foundation, along with other smaller charities who invested with Madoff, announced in December 2008 that they would be closing.René-Thierry Magon de la Villehuchet
On December 23, 2008, one of the founders of Access International Advisors LLC, René-Thierry Magon de la VillehuchetRené-Thierry Magon de la Villehuchet
René-Thierry Magon de la Villehuchet, also known as Thierry de la Villehuchet for short was a French aristocrat, money manager, and businessman, and one of the founders of Access International Advisors .The AIA Group is a research analyst investment agency that specializes in managing hedged and...
, was found dead in his company office on Madison Avenue in New York City. His left wrist was slit and de la Villehuchet had taken sleeping pills, in what appeared to be suicide
Suicide
Suicide is the act of intentionally causing one's own death. Suicide is often committed out of despair or attributed to some underlying mental disorder, such as depression, bipolar disorder, schizophrenia, alcoholism, or drug abuse...
.
He lived in New Rochelle, New York
New Rochelle, New York
New Rochelle is a city in Westchester County, New York, United States, in the southeastern portion of the state.The town was settled by refugee Huguenots in 1688 who were fleeing persecution in France...
and came from a very prominent French
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
family. Although no suicide note
Suicide note
A suicide note or death note is a message that states the author has died by suicide, and left to be discovered and read in anticipation of suicide....
was found at the scene, his brother Bertrand in France received a note shortly after his death in which he expressed remorse and a feeling of responsibility. The FBI
Federal Bureau of Investigation
The Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...
and SEC do not believe de la Villehuchet was involved in the fraud.
Harry Markopolos
Harry Markopolos
Harry M. Markopolos is a former securities industry executive and independent financial fraud investigator for institutional investors and others seeking forensic accounting expertise. He has received public acclaim for uncovering evidence over a period of nine years that Bernard Madoff's wealth...
said he met de La Villehuchet several years before, and warned him that Madoff might be breaking the law. In 2002, Access invested about 45% of its $1.2 billion under management with Madoff. By 2008, it managed $3 billion and raised the proportion of funds with Madoff to about 75%. De la Villehuchet had also invested all of his wealth and 20% of his brother, Bertrand's, with Madoff. Bertrand said that René-Thierry did not know Madoff but the connection was through René-Thierry's partner in AIA, French banker, Patrick Littaye.
William Foxton
On February 10, 2009, highly-decorated British soldier William Foxton, OBE, 65, shot himself in a park in Southampton, England, having lost all of his family's savings. He had invested in the Herald USA Fund and Herald Luxembourg Fund, feeder fundFeeder fund
A feeder fund is an investment fund which does almost all of its investments through a master fund via a master-feeder relationship.It is a situation similar to a fund of funds, except that the master fund performs all the investments....
s for Madoff from Bank Medici
Bank Medici
Bank Medici AG was a bank based in Vienna, Austria. It was founded in 1994 by banker Sonja Kohn and incorporated as a bank in 2003.Bank Medici's president and majority stakeholder is Sonja Kohn. Its main institutional shareholder is Bank Austria Creditanstalt, Austria's largest banking group...
in Austria.
Mark Madoff
Madoff's eldest son, Mark Madoff, was found dead on December 11, 2010, two years to the day after his father turned himself in. He was found hanged inside his New York apartment in an apparent suicide, but authorities said he left no suicide note.Mark had unsuccessfully sought a Wall Street trading job after the scandal broke, and it was reported that he was distraught over the possibility of criminal charges, as federal prosecutors were making criminal tax-fraud probes. Among the many Madoff family members being sued by the court-appointed trustee Irving Picard were Mark's two children.
In his lawsuit, Picard stated that Mark and other Madoff family members improperly earned tens of millions of dollars, through "fictitious and backdated transactions" investment transactions, and falsely documented loans to buy real estate that weren't repaid. Picard also argued that Mark certainly was in a position to recognize the fraud of his father's firm, as Mark was a co-director of trading, was the designated head of the firm in his father's absence, and he held several securities licenses—series 7, 24 and 55 with the Financial Industry Regulatory Authority.
U.S. Securities and Exchange Commission
Following the Madoff investment scandal, the U.S. Securities and Exchange Commission's inspector general conducted an internal investigation into the agency's failures to uncover the scheme despite a series of red flags and tips. In September 2009, the SEC released a 477-page report on how the SEC missed these red flags and identifies repeated opportunities for SEC examiners to find the fraud and how ineffective their efforts were.See also
- Earl Jones (investment advisor)Earl Jones (investment advisor)Bertram Earl Jones, commonly known as Earl Jones, is a Canadian non-practicing investment adviser who pleaded guilty to running a Ponzi scheme which CBC News has reported cost his victims "a conservative estimate of about C$51.3 million taken between 1982 and 2009"...
- Federal Reserve BankFederal Reserve BankThe twelve Federal Reserve Banks form a major part of the Federal Reserve System, the central banking system of the United States. The twelve federal reserve banks together divide the nation into twelve Federal Reserve Districts, the twelve banking districts created by the Federal Reserve Act of...
- Financial crisis of 2007-2010
- Marc Stuart DreierMarc Stuart DreierMarc Stuart Dreier , formerly an American lawyer from New York City, was sentenced to 20 years in federal prison on July 13, 2009. He is scheduled for release on October 26, 2026. He is housed at FCI Sandstone, Minnesota. He had pleaded guilty on May 11, 2009 to eight charges in the United States...
- Petters Group WorldwidePetters Group WorldwidePetters Group Worldwide was a diversified company based in Minnetonka, Minnesota that was turned into a $3.65 billion Ponzi scheme by its founder and CEO, Tom Petters. It currently has 3,200 employees and investments or full ownership in 60 companies, of which it actively managed 20, with offices...
- Ponzi schemePonzi schemeA Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
- Pyramid schemePyramid schemeA pyramid scheme is a non-sustainable business model that involves promising participants payment or services, primarily for enrolling other people into the scheme, rather than supplying any real investment or sale of products or services to the public...
- Scott Rothstein
- Stanford Financial GroupStanford Financial GroupThe Stanford Financial Group was a privately held international group of financial services companies controlled by Allen Stanford, until it was seized by United States authorities in early 2009....
External links
- http://www.usdoj.gov/usao/nys/madoff.htmlCriminal complaint, transcripts of hearings and other documents from the United States Department of JusticeUnited States Department of JusticeThe United States Department of Justice , is the United States federal executive department responsible for the enforcement of the law and administration of justice, equivalent to the justice or interior ministries of other countries.The Department is led by the Attorney General, who is nominated...
] - 113 Victim Impact Statements: Letters urging Justice June 12, 2009
- Defense Attorney pre-sentencing request for leniency letter, June 22, 2009
- Madoff Client List February 4, 2009
- Bernard Madoff Victim Support and Advocacy Group
- SEC civil complaint
- SEC press release and update for investors
- Bernard L. Madoff Investment Securities The front page is now a placeholder for information on the case. (Archive)
- Jewish charities hit by Madoff scandal BBC
- Madoff Scandal ongoing coverage from the Financial TimesFinancial TimesThe Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
- Ruth Madoff Biography and photos
- Serious Fraud Office broadens investigation to Madoff feeders The GuardianThe GuardianThe Guardian, formerly known as The Manchester Guardian , is a British national daily newspaper in the Berliner format...
, March 27, 2009, British government's investigation into the London activities of certain feeder funds that channeled investments to Madoff - Deposition of J. Ezra Merkin: Madoff Charities Investigation, State of New York (January 30, 2009)
- Merkin Civil Fraud Complaint State of New York (April 6, 2009)
- Merkin Exhibits, Civil Fraud Complaint
- continued Merkin Exhibits, Civil Fraud Complaint State of New York, (April 6, 2009)
- Complaint against J P Morgan Chase (April 23, 2009)
- Complaint against J. Ezra Merkin (May 7, 2009)
- Complaint against Harley International (Cayman) Limited (May 12, 2009)
- Commonwealth of Massachusett Secretary of State Complaint (January 14, 2009)
- Picard v. Cohmad Securities Corp. 09-AP-1305 (June 22, 2009)
- SEC v. Cohmad Securities Corp., 09 Civ. 5680 (June 22, 2009)
- Picard v. Chais et al. 08-01789 (May 1, 2009)
- SEC v. Stanley Chais, 09 CIV 5681 (June 22, 2009)
- Picard v. Ruth Madoff, 1:09-ap-1391 (July 29, 2009)
- Example of a Madoff Investment Securities LLC monthly statement
- Bernard Madoff
June 3 2011
Letter to Gene L. Dodaro Comptroller General of the United States Government Accountability Office from Congress requesting probe http://www.scribd.com/doc/57140364/Investigation-of-SIPC-Trustee-SEC
June 3 2011
Madoff Trustee, SEC Should be Probed -US Reps http://www.reuters.com/article/2011/06/03/madoff-probe-idUSN0318200920110603
July 27 2011
Madoff Trustee’s Actions to Be Probed by GAO, Representative Garrett Says
http://www.bloomberg.com/news/2011-07-27/madoff-trustee-s-actions-to-be-probed-by-gao-representative-garrett-says.html