Alleged $50bn Trading Fraud The Biggest Ever (The Story So Far)

Money Down the Toilet

Bernard Leon Madoff was the chairman of Bernard L. Madoff Investment Securities, which he founded in 1960. The firm was one of the top market maker firms on Wall Street, and also had an investment management business.

Madoff was arrested last week by the Federal Bureau of Investigation and charged with a single count of fraud. Federal Judge Louis L. Stanton has frozen Madoff's assets, and has appointed New York-based law firm Richards Kibbe & Orbe, as receiver. The fraud is alleged to involve $50 billion - the largest investor fraud ever blamed on a single individual.

Born in 1938 to a New York family, Madoff is married to Ruth Madoff. He has homes in Roslyn, N.Y., Montauk, Long Island, an apartment on Manhattan's Upper East Side valued at more than $5 million, and a 55-foot fishing boat, named 'Bull'. He also owns homes in Palm Beach and France and is a member of the Palm Beach Country Club.

The trader started his firm in 1960 with an initial investment of $5,000 that he said was earned from working as a lifeguard and installing sprinklers. He has been active in the National Association of Securities Dealers, a self-regulatory organization for the US securities industry. His firm was one of the five most active firms in the development of the NASDAQ, and he served as its chairman of the board of directors, and on its board of governors. He served as the Chairman of the Board of Directors of the Sy Syms School of Business at Yeshiva University, as well as Treasurer of its Board of Trustees. He resigned his position at Yeshiva University after his arrest.

Madoff also serves on the Board of New York City Center, the historic theater and member of New York City's prestigious Cultural Institutions Group. He also did charity work for the Gift of Life Bone Marrow Foundation, and ran a $19 million private foundation that donated money to hospitals and theaters. Madoff donated approximately $6 million to lymphoma research after his son Andrew was diagnosed.

Arrested by the FBI on December 11, 2008, Madoff was charged with securities fraud, after he allegedly admitted that his business was 'a giant Ponzi scheme'. The alleged behavior involves an asset management unit of his firm, rather than the better known market making unit. Madoff was released on the same day of his arrest after posting $10 million bail. He faces up to 20 years in prison and a fine of $5 million if convicted. According to US regulator the Securities and Exchange Commission (SEC), Madoff confessed to an F.B.I. agent that there was 'no innocent explanation' for his behavior, and that he 'paid investors with money that wasn't there'. His attorney stated that he 'will fight to get through this unfortunate set of events'.

Although Madoff was a pioneer of electronic trading, Madoff refused to provide his clients online access to their accounts. He sent out accounting statements by mail, whereas most hedge funds e-mail statements and allowed accounts to be downloaded via computer. Independent hedge fund research firm Aksia told its clients in December 2006 not to invest with Madoff's firm, after learning the identity of its auditor, Friehling & Horowitz, which was said to have had one partner in his late 70s (who lives in Florida), a secretary, and one active accountant, operating out of a 13-by-18 foot location in an office park in New York City's northern suburbs.

Outside analysts raised concerns with Madoff's firm for years. Amongst the suspicious signs were the fact that Madoff's company avoided filing disclosures of its holdings with the SEC; the firm said that at the end of every reporting period it sold its holdings and held only cash. Such a tactic is highly unusual because it exposes a fund to large losses by forcing it to sell assets without regard to price. Improbably steady investment returns - despite exceedingly volatile markets - was another red flag. Despite these concerns, an anonymous hedge fund executive told the New York Times that Madoff was so trusted by his investors that he was nicknamed the 'Jewish  T-bill'. A long time friend cited by the same source mentioned that 'his rate of return....was never attention-grabbing, just solid 12-13 percent year in, year out'. Robert Ivanhoe, chairman of the real estate practice of the law firm Greenberg Traurig added that Madoff increased his allure by refusing to take on some investors.

Harry Markopolos, a former Boston investment professional, was quoted saying he repeatedly tried to get the SEC to investigate Madoff, first contacting the agency's Boston office more than a decade ago. The SEC said it conducted two inquiries of Madoff in the last several years and didn't find major problems. Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff 'only had five down months since 1996', and commented on his investment performance: 'You can't go 10 or 15 years with only three or four down months. It's just impossible'. 

Madoff is thought to have run into trouble in 2008, when clients wanted to withdraw $7bn from the firm and he had to come up with the cash. He had brought a high number of relatives into his business: his brother, two sons, a daughter and son-in-law. His family were apparently unaware of the imminent insolvency of Madoff Securities, but knew of the liquidity problems, and became concerned when Madoff told them that he planned to pay bonuses early this year. The sons then confronted their father, asking him how the firm could pay bonuses if it couldn't pay investors, prompting Madoff's admission that he was 'finished', after which they reported him to the authorities.

READER COMMENT:

'You've got to feel sorry for all the charities who have lost everything and will have to close. Where's the post-Enron supervision ?'.

Sources - Wikipedia, Bloomberg, MarketWatch, Reuters, The New York Times, The Wall Street Journal.

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