Bernie Madoff

Bernard L. Madoff
File:Madoff Leaving Courthouse.png
Born	(1938-04-29) April 29, 1938 Queens, New York, USA
Nationality	American
Education	Hofstra University (1960)
Occupation(s)	Financial services, Investment management
Employer	Bernard L. Madoff Investment Securities
Known for	Alleged Ponzi scheme, Chairman of NASDAQ (prior)
Spouse	Ruth Madoff
Children	Mark Madoff (ca. 1964), Andrew Madoff (ca. 1966)

Bernard Lawrence "Bernie" Madoff (/ˈmeɪdɒf/) (born April 29, 1938) is an American businessman and former chairman of the NASDAQ stock exchange. He founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 and was its chairman until December 11, 2008, when he was charged with perpetrating what may be the largest investor fraud ever committed by a single person. He is under house arrest until his indictment, expected in mid-February.

On December 10, 2008 Madoff allegedly told his sons, Andrew and Mark, that the asset management arm of his firm was a giant Ponzi scheme--or "one big lie." They then passed this information to authorities. The following day, Federal Bureau of Investigation agents arrested Madoff and charged him with one count of securities fraud. Five days after his arrest, Madoff's assets and those of the firm were frozen and a receiver was appointed to handle the case. According to federal charges, Madoff said that his firm has "liabilities of approximately US$50 billion." Banks from outside the U.S. have announced that they have potentially lost billions in dollars as a result. Some investors, journalists and economists have questioned Madoff's statement that he alone is responsible for the large-scale operation, and investigators are looking to determine if there were others involved in the scheme.

Madoff's firm, which is in the process of liquidation, was one of the top market maker businesses on Wall Street (the sixth-largest in 2008), often functioning as a "third-market" provider that bypassed "specialist" firms and directly executed orders over the counter from retail brokers. The firm also encompassed an investment management and advisory division that is now the focus of the fraud investigation.

Madoff was also a prominent philanthropist who served on the boards of nonprofit institutions, many of which entrusted his firm with their endowments. The freeze of his and his firm's assets have had effects around the world on businesses and charities, some of which, including the Robert I. Lappin Charitable Foundation, the Picower Foundation, and the JEHT Foundation, have been forced to close as a consequence of the fraud.

Personal

Bernard L. Madoff was born in 1938 in New York City to a Jewish family. His parents, Ralph and Sylvia Madoff, lived in the Laurelton section of Queens, where he grew up. His mother had a brokerage firm called Gibraltar Securities registered in her name with an address in Laurelton. He graduated from Far Rockaway High School in 1956, attended University of Alabama for one year, then transferred to and graduated from Hofstra University (then Hofstra College) in 1960 with a degree in political science. The following year, he attended Brooklyn Law School, but did not continue.

Madoff is married to his high school sweetheart Ruth Alpern, who was involved with the firm in the early years and later in the Madoff Charitable Foundation. Authorities have found information that Mrs. Madoff had reconciled the firm's bank accounts. They have two sons, Mark and Andrew. Andrew, the younger son, was diagnosed with lymphoma, a form of blood cancer. In March, 2003, Andrew began serving on the Board of Directors of Lymphoma Research Foundation, and the Madoff family became major donors, contributing more than $1 million in 2007.

Madoff lived in a ranch house in Roslyn, New York through the 1970s and has owned an ocean-front residence in Montauk since 1981. His primary residence, valued at more than $5 million, is on Manhattan's Upper East Side. Madoff is listed as chairman of his Upper East Side building's co-op board. He also owns a home in France and a $9.3 million mansion in Palm Beach, Florida on the Intracoastal Waterway just north of Flagler Memorial Bridge. He is a member of the Palm Beach Country Club and owns a 55-foot (17 m) fishing boat named Bull, which is docked in the French Riviera.

Career

Madoff started his firm in 1960 with an initial investment of $5,000 (about $35,000 in 2008 dollars) that he said was earned from working as a lifeguard and installing sprinklers. At first, 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, the firm began to use information technology to disseminate its quotes and set itself apart from competitors. After a trial run, the technology the firm helped develop became the NASDAQ. At one point, Madoff Securities was the largest "market maker" at the NASDAQ, both buying and selling.

He was active in the National Association of Securities Dealers (NASD), a self-regulatory organization for the U.S. 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 brought several relatives into his business. His younger brother, Peter, was a senior managing director and chief compliance officer. Both of Madoff’s sons, Mark and Andrew, joined his firm after finishing their education and worked in the trading section of the business. Charles Weiner, Madoff’s nephew, also joined the firm, and Peter Madoff’s daughter, Shana, took a job with the company as a compliance attorney. Employees of the company were invited to Madoff's Montauk house for a weekend each year. Andrew Madoff invested his own money in his father's fund, but Mark had not done so for about eight years.

While according to sources involved in the government inquiry into Madoff, the fraud in the investment management and advisory division may have gone back to the 1970s, by the 1980s, the apparently legitimate market maker division of Madoff's firm traded up to five percent of the total trades made on the New York Stock Exchange. Madoff's firm was "the first prominent practitioner" of "paying for order flow", in other words paying a broker to execute a customer's order through Madoff, which has been called a "legal kickback". Using this method, the firm became the largest dealer in NYSE-listed stocks in the U.S., trading about 15% of transaction volume in these stocks.

Madoff 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." Academics have questioned the ethics of these payments. Madoff has argued that these payments did not alter the price that the customer received.

By the 2000 Internet boom, Madoff Securities held approximately $300 million in assets and was considered to be one of the top traders of securities in the nation. The operation was conducted out of floors 17 to 19 of the Lipstick Building, with 18 and 19 used for administration and stock-trading. The investment management division, which employees referred to as the "hedge fund", was on the 17th floor, occupied by no more than 24 employees. Since funds controlling billions as Madoff did would usually require hundreds of employees for the administrative work involved, employees from other floors say that they always assumed Madoff had an office in another location in addition to the Manhattan headquarters. Madoff did keep a London office with 28 employees which was entirely separate from Madoff Securities and only handled investments for his family; the office consisted mostly of traders and investment analysts who handled about £80 million. Madoff monitored the London office remotely through two cameras installed, from which he could watch events in the office from New York.

Methods of operation, accusations, and case

Investment strategy

Through the years, Madoff claimed his investment strategy consisted of purchasing blue-chip stocks and taking options contracts on them, although he may not have invested much at all. Sources from the investigation assert that it appears Madoff chose a trading strategy that failed, at which point he began the Ponzi scheme. According to the federal complaint, the Ponzi scheme had been underway since at least 2005. In 1992, Madoff told The Wall Street Journal about his stock strategies: in the 1970s, he had placed invested funds in "convertible arbitrage positions in large-cap stocks, with promised investment returns of 18% to 20%." Madoff said that beginning in 1982, he began using futures contracts on the stock index, and he said he was in index puts (a form of options contract) during the 1987 stock market crash.

Barron's Magazine reported in 2001 that a Madoff hedge fund document (a so-called "Offering Memorandum") described Madoff's strategy as follows: "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."

Madoff's strategy as described in Barron's is not a perfect hedge since options are purchased/sold on an index which contains a much larger basket of stocks than the 30–35 purchased to hold. A few analysts performing due diligence on Madoff did raise alarms because they were unable to replicate the fund's past returns using historic price data for US stocks and options on the indexes. There is no credible evidence that Madoff actually made all the required trades dictated by this strategy; further, purported trade volumes far exceed listed derivative open interest. Barron's raised the possibility that Madoff's returns were not due to this strategy, but rather from front running the firm's brokerage clients.

This split-strike or collar trade involves three steps: 1) buying a stock at price X — say 100, 2) selling a call option with a strike price Y — say 120 — which is above X, and 3) purchasing a put option with a strike price Z — say 80 — which is below X. If the price of the stock is 125, which is above Y at expiration, the stock will be called away and the investor receives Y (120) for the stock. If the price is 70, which is below Z at expiration, the put can be exercised and Z (80) received in cash. This effectively caps the maximum gain (until the options expire) at the Y minus X (120 − 100 = 20), and the maximum loss at the X minus Z (100 − 80 = 20). The options transactions can generate positive or negative cash-flow depending on the cost of purchasing the put (say 4% annualized), the premium received to write the call (say 3%) and dividends from the stock holdings (say 2%). To create an effective collar for a long-term stock holding, the option contracts should be rolled into contracts farther out prior to expiration.

Lawrence R. Velvel, dean of the Massachusetts School of Law and Madoff investor, explains the strategy in simple terms: Frank DiPascali, Madoff's assistant, "explains" to potential investors that Madoff was engaging in the “split-strike conversion” strategy. Madoff bought for one’s account a “basket” of stocks that were in the S&P 100. To guard against losses, he simultaneously bought options, called “puts,” that allowed him to sell the stocks -- to “put” them to someone, if they went down instead of up. To pay the cost of the "puts" that he purchased, Madoff sold other options, named “calls,” that allowed the buyer of the option to “call” the shares from Madoff after small gains. By guarding against losses via “puts”, while offsetting the price of the “puts” by selling “calls” that limited the gains from each set of transactions, and by highly active trading that repeated the process time and again during the course of a year, Madoff could make small profits on each of numerous trades when the shares rose in value, rather than dropped ("Madoff was swinging for singles, not homers", said DiPascali), while he guarded against big losses from downturns. Over the course of a year, the small profits (the singles) on numerous trades of stocks that rose in value, would mount up. This was not a strategy for big hits, but for a small profit here, a small profit there; if shares rose, say, ten percent, the strategy might garner one or one and a half percent (because the calls would require the stocks to be sold). Over the course of a year, the small profits would add up (and would exceed any small losses when stocks went down and would be “put” to buyers). This method appeared to be a "credible" way to obtain financial gains.

Rival fund managers were unable to replicate the same returns, using the strategies from Madoff's quarterly reports.

5% rule

Madoff masterminded a scheme, typical of a Ponzi in its structure, except it differed in its pace and its marketing. The true secret to Madoff's success was his lifetime involvement with non-profit charities, and the tax law knowledge he gleaned from that experience over many decades. Charitable foundations became the basis, as well as the collateral damage of his surreptitious strategy. He exploited his own social networks, and over time, received implicit entry into new venues to promote himself and his company among a largely upper-class clientele. He invested their significant funds consisting of educational foundations and social charities, as directed by them. The slow pace and ongoing cliquish "insider" word-of-mouth marketing enabled the deception to survive for several decades. It grew beyond the expectations of a common Ponzi. All was quite successful, the perfect crime, until it appears that the autumn market meltdown of 2008 and extraordinary demands for cash by other investors in early December overwhelmed his well-oiled system.

Ultimately, charities and foundations which invested with Madoff lost millions, in what has been characterized as a form of affinity fraud. Mitchell Zuckoff, professor of journalism at Boston University, author of Ponzi's Scheme: The True Story of a Financial Legend, explained "the 5% payout rule," a federal law requiring foundations to pay out 5% of their funds each year. As long as a foundation's principal earns 5% a year - not always possible in a given year, but a reasonable goal over time - a foundation endures, and so does its sponsor. Madoff knew the federal law well. Zuckoff noted, "For every $1 billion in foundation investment, Madoff was effectively on the hook for about $50 million in withdrawals a year. If he wasn't 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." Zuckoff suggests that years ago, Madoff "solved the two interlocking puzzles that usually prevent Ponzi schemes from becoming perpetual money machines: sustaining growth, while maintaining stability."

Sales methods

Rather than offer (suspiciously) high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele, produced in both up and down markets. The investment method was marketed as "too complicated for outsiders to understand". He was “cryptic” about the firm’s business. He ran a secretive business, and kept his financial statements under lock and key, not unlike the Treasury Secretary or the Chairman of Federal Reserve. The New York Post reported that Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach". The New York Times reported that Madoff courted many prominent Jewish executives and organizations among those investing in his funds: Jeffrey Katzenberg, Eliot Spitzer, Yeshiva University, the Elie Wiesel Foundation, and charities set up by the publisher Mortimer Zuckerman and Hollywood film director Steven Spielberg. 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" and called the man behind it "the most sophisticated and charming huckster of all time."

Madoff was a "master marketer", and his fund was also considered exclusive, as he was initially giving the appearance of being very selective of which investors to take on, giving the appearance of a "velvet rope". For the most part, he 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 couldn't get it back in later. One New York real estate investor said she "literally begged" Madoff to take her money, and he refused.

Fairfield Greenwich Group, based in Greenwich, Connecticut, had a Fairfield Sentry fund which was one of several dozen so-called feeder funds that gave foreign investors portals to Madoff. Fairfield, in turn, set up further feeder funds such as Lion Fairfield Capital Management in Singapore and Stellar US Absolute Return, all ultimately conduits to Madoff, having directed a total of $7 billion.

Madoff also promoted in Europe and South America, mostly indirectly through Fairfield fund founder, Walter Noel's son-in-law Andrés Piedrahita's connections. Another Noel son-in-law's territory included Asia, most recently targeting China, though by that time, Madoff was advertising to anyone with money (contrary to his initial strategy in which he handpicked investors). The Madoff sales force were well-dressed, multilingual sales representatives in the financial capitals of Europe.

Madoff's annual returns were "unusually consistent, " around 10% and were a key factor in the perpetuation of the fraud for decades. Other Ponzi schemes may have paid returns of 20% or higher, typically collapsed quickly. One Madoff hedge fund, which described its "strategy" as focusing on shares in the Standard & Poor's 100-stock index, averaged a 10.5% annual return during the 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.”

An invested 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.

Previous SEC investigations

Madoff Securities LLC was investigated at least eight times in 16 years by the SEC or other regulatory authorities. In 1992, the SEC investigated one of Madoff's feeder funds, Avellino & Bienes (principals Frank Avellino and Michael Bienes and his wife Dianne Bienes), which invested solely with Madoff. Represented by Ira Lee 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" promised yearly returns to investors of 13.5% to 20%. However, the SEC did not look any more deeply into the matter. Through Mr. Sorkin, the lawyer who once oversaw the regulator’s New York office, the men agreed to return the money to investors, shut down their firm, undergo an audit and pay a fine of $350,000. Avellino then complained to the presiding Federal Judge, John E. Sprizzo, that Price Waterhouse fees were excessive. In April, 1993, the Judge ordered him to pay the bill of $428,679 in full. However, by the end of January, 1993, Mr. Sorkin and Mr. Avellino managed to curtail the audit, even though the judge concluded that Mr. Avellino had not been a credible witness in the case.[4] Both the securities investigation and the Price Waterhouse audit were effectively over. At the time, Madoff said that he didn't realize the feeder fund was operating illegally and that his own investment returns tracked the previous 10 years of the S&P 500. Avellino & Bienes, previously an accounting firm, had turned to full-time investments in 1984 in a partnership with Madoff. At the time of the investigation, the SEC did not publicly name Madoff because he was not accused of wrongdoing. Michael Bienes later became a philanthropist donating at least $30 million in Florida and the United Kingdom, with a news report explaining that he "got lucky on the New York Stock Exchange." The 1992 incident was the first public indication that Madoff was placing orders for other funds.

The SEC looked into 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 financial investigator Harry Markopolos at the SEC's Boston office to go over Markopolos's allegations that Madoff's firm was engaged in fraudulent practices. The SEC also said it conducted two inquiries of Madoff in the last several years and did not find major problems. In 2004, after published articles appeared accusing the firm of front running, the SEC's Washington branch cleared Madoff of that accusation. An SEC statement detailed that inspectors examined Madoff's brokerage operation in 2005 after sending the 2004 inquiry to the New York office, finding three violations: the strategy he used for customer accounts, the requirement of brokers to obtain the best possible price for customer orders, and violating SEC rules by operating as an unregistered investment adviser. "The staff found no evidence of fraud," according to the SEC case memo. Mr. Madoff agreed to register his business that September, and the SEC didn't make its findings public. In 2007, SEC enforcement staff completed an investigation into whether Madoff was running a Ponzi scheme and did not find any fraud or refer the matter to the SEC commissioners for legal action.

The SEC has been accused of missing numerous red flags and ignoring tips on Madoff's alleged fraud. 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 with Madoff's firm for years. Financial analyst Harry Markopolos complained to the SEC's Boston office in May 1999, 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. In 2005, Markopolos sent a detailed 17 page memo directly to the SEC, entitled The World's Largest Hedge Fund is a Fraud.

The paper specifies 29 numbered red flags. In part, the memo concluded: "Bernie Madoff is running the world's largest unregistered hedge fund. He's organized this business as '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 isn't a regulatory dodge, I don't know what is." Markopolos concluded that Madoff was either a Ponzi scheme or front running, placing favored orders before others when placing them in the market, but concluded it was most likely a Ponzi scheme. An article in Barron's and another in MarHedge in 2001 accused Madoff of front running to achieve his gains. Hedge funds who invested with him, were not allowed to mention his name in their marketing materials. Yet as Markopolos said, if you ran the world's most successful investment operation, wouldn't you want that fact bruited far and wide in order to increase your business? The reason for Madoff's secrecy says Markopolos, was so that the SEC wouldn't learn what he was doing. And to further maintain secrecy, when huge investors were thinking of putting in money, but wanted to examine Madoff's books in order to do due diligence, which they of course could afford, Madoff would not allow the examination, claiming a desire not to have proprietary strategies disclosed to any one else.

Among the suspicious signs was the fact that Madoff's company avoided filing disclosures of its holdings with the SEC by selling its holdings for cash at the end of each period. Such a tactic is highly unusual. Madoff's use of a two-person auditing firm, Friehling & Horowitz, which has only one active accountant, is also highly unusual and was noted by hedge fund advisory fund firm Aksia LLC when it advised its clients in 2007 not to invest with Madoff. Friehling & Horowitz has reported since 1993, in writing, to the American Institute of Certified Public Accountants that it doesn't conduct audits. At the time, New York State did not require peer review of accounting firms, but soon after it broke the magnitude of the scandal resulted in the state legislature requiring peer review. David Friehling assumed control of the firm from partner Jerry Horowitz, his father-in-law, who reportedly did accounting work for Madoff for decades.

While hedge funds typically hold their portfolio at a securities firm that acts as the fund's prime broker (typically a major bank or brokerage), allowing an outside investigator to verify their holdings, Madoff's firm was its own broker-dealer and supposedly processed all its trades.

Although Madoff was a pioneer of electronic trading, he refused to provide his clients online access to their accounts. He sent out account statements by mail, whereas most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.

Improbably steady investment returns despite exceedingly volatile markets were another red flag. A longtime friend said 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 some investors.

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." A 2001 story in MARHedge interviewed traders who questioned how Madoff could have 72 gaining months in a row, saying that type of stock success had never occurred before.

Madoff also operated as a broker dealer with an asset management division. Joe Aaron, a longtime hedge fund professional, found the structure suspicious and in 2003 warned a colleague to steer clear of the fund, saying "Why would a good businessman work his magic for pennies on the dollar?"

At the same time as potential investors such as Société Générale were finding red flags from Madoff's firm, clients such as Fairfield and Union Bancaire Privée claimed that they had been given an "unusual degree of access" to look into Madoff's funds and had seen nothing wrong with his firm's investments.

Recently, it has been suggested in research conducted by RiskData, that Madoff's series of returns where analytically similar to those of other funds which had previously been found to have engaged in deception and fraud. An investor making a simple calculation of the Bias ratio (finance) of Madoff's returns, should have been able to see that the performance series showed similarities to funds (e.g. Bayou) where the reported returns were ficticious and not linked to the uncertainties inherent in security price movement.

Signs of trouble

Early indications that Madoff may have been in trouble emerged in 2007. The Madoff Family Foundation donated only $95,000 to charitable groups. This was a major drop from previous years. In 2006, the foundation had donated $1,277,600.

Craig Kugel, an employee, went to a dealership in October, 2008 to lease a Mercedes S500-4 for Mr. Madoff. Madoff refused to disclose the required "credit information" about his business. Madoff's brother, Peter instructed Kugel to sign the lease as a guarantor. Although the dealership plans to sell the Mercedes, the sale probably won't recover the estimated $58,212 still outstanding on the lease, leaving Kugel responsible for the balance.

The scheme began to unravel in late 2008, as the stock market began to plunge. Subsequently, as the general market downturn accelerated, a barrage of investors requested to withdraw money. They attempted to withdraw $7 billion from the firm, and in the days and weeks prior to his arrest, Madoff struggled to keep his business afloat. To pay off those investors, Mr. Madoff needed new money from other investors.

Mr. Madoff received $250 million around Dec.1 from Carl Shapiro, a 95-year-old Palm Beach, Fla., philanthropist and entrepreneur who is one of Mr. Madoff's oldest friends and biggest financial backers. On Dec. 5, Mr. Madoff also accepted $10 million from Martin Rosenman, president of a fuel company in the Bronx section of New York. Mr. Rosenman is suing to recover the funds. Mr. Madoff also asked others for money in the final weeks before his arrest, including Wall Street financier Kenneth Langone. His office was sent a 19-page pitch-book, allegedly created by the staff at the Fairfield Greenwich Group. Mr. Madoff said he was raising money for a new investment vehicle, between $500 million to $1 billion for exclusive clients. He said he was moving quickly on the venture and wanted an answer by the following week. Mr. Langone declined. [5]

On December 10, 2008, he suggested to his sons, Mark and Andrew, that the firm pay out several million dollars 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. Mark and Andrew then reported him to the authorities.

To date the FBI investigation has discovered no evidence implicating family members of fraud, and federal authorities report his wife Ruth is not accused of wrongdoing.

Criminal and civil charges

Madoff was arrested by the FBI on December 11, 2008 on criminal charges of securities fraud, turned in by his sons after he allegedly told them that his business was "a giant Ponzi scheme." According to the SEC, Madoff confessed to an FBI agent that there was “no innocent explanation” for his behavior, and that he "paid investors with money that wasn't there." The New York Times has reported that Madoff's lawyer, Ira Sorkin, has confirmed in a court filing that Madoff confessed.

The criminal complaint alleges 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's unclear exactly how much investors deposited into the firm." He was charged with a single count of securities fraud. He faces up to 20 years in prison and a fine of $5 million if convicted. His attorney, Ira Sorkin, stated that Madoff "will fight to get through this unfortunate set of events."

The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan) with presiding Judge Ronald L. Ellis. Apart from 'Bernard L. Madoff' and 'Bernard L. Madoff Investment Securities LLC ("BMIS")', the order to freeze all activities also forbids acting and trading from the companies Madoff Securities International Ltd. ("Madoff International") and Madoff Ltd.

Madoff was released on the same day of his arrest after posting $10 million bail. Madoff and his wife have surrendered their passports, and he at first 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 penthouse. Madoff wears an electronic ankle bracelet to ensure compliance. Madoff has reportedly received death threats 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 will monitor the apartment's doors, its communication devices will send signals to the FBI, and his wife will be required to pay for additional security.

Prosecutors asked on January 5, 2009, that his bail be revoked, after Madoff and his wife allegedly violated a 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, the Judge Ellis refused the government's request to jail Madoff, but required as a condition of bail that Madoff make an inventory of personal items and that his mail be searched.

Others involved

Investigators are looking for others involved in the scheme, despite Madoff's statement that he alone was responsible for the large-scale operation. Harry Sussman, 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.

Federal investigators have discovered apparently fraudulent documents and records in Madoff's Manhattan offices, and are looking into who prepared them. The role of Frank DiPascali, an official at the firm, is being considered. DiPascali is represented by Marc Mukasey, the son of former U.S. Attorney General Michael Mukasey, who has recused himself of any involvement in the case. Mr. DiPascali joined Mr. Madoff's operation in 1975, having been introduced by a neighbor in Howard Beach, Queens, N.Y. He researched stocks for the Madoff firm's trading desk before joining Madoff's separate investment-advisory business. He referred to himself as "director of options trading" and also as "chief financial officer". According to an SEC memo, DiPascali "responded evasively" to questioning following Madoff's arrest. In addition to his own contact with clients, Mr. DiPascali supervised a group of about six other employees involved in taking and keeping track of client orders. Investors spoke to these other employees and would fax orders if they needed to withdraw money. DiPascali's name was sometimes given as an alternate contact. Mr. DiPascali provided investors with instructions for wiring money.

Madoff's accountant was David G. Friehling, the only active accountant at Friehling & Horowitz according to the AICPA. The accounting firm has informed the AICPA in writing for 15 years that it does not conduct audits. An investigation into Friehling by Rockland County, New York district attorney Thomas Zugibe was stopped in deferral to the investigation by the US Attorney's office out of Manhattan.

J. Ezra Merkin, a prominent investment advisor and philanthropist, has been sued for his role in running a "feeder fund" for Madoff. Merkin informed investors in his $1.8 billion Ascot Partners fund on December 11 that he was among those who suffered substantial personal losses, since all of the fund's dollars were invested with Madoff. The Connecticut Attorney General Richard Blumenthal is examining the role boards of nonprofits played, in possibly not conducting due diligence with donors' contributions.On January 15, 2009, as part of a probe into Madoff and New York nonprofits which claim they were defrauded, New York State Attorney General Andrew Cuomo issued subpoenas to three investment funds run by Merkin, and 15 nonprofits which say they lost money due to Merkin and Madoff.

Regulators are looking into a brokerage firm, Cohmad Securities (taken from the names "Cohn" and "Madoff"), which is largely owned by Maurice Cohn (Maurice "Sonny" Cohn) and his daughter Marcia, President and Chief Compliance Officer, of whom Madoff shares 10-20 per cent ownership stakes, and Madoff's firm's address in New York City. Peter Madoff, brother of Bernard, owns less than one share. Cohmad employs Robert Jaffe, 64, as vice president, whose ownership was less than 5 percent. Jaffe is married to Ellen Shapiro, daughter of Boston philanthropist Carl J. Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Madoff. Jaffe reportedly convinced the elder Shapiro to invest $250 million with Madoff just 10 days before Madoff's arrest.

Jaffe, a bon vivant and philanthropist, worked the Palm Beach, Florida circuit, and attracted many Palm Beach Country Club members as investors." Jaffe said he received a commission of 1 per cent to 2 per cent from an investor's first profit after he guided their money to Madoff. Jaffe paid commissions to financial advisers who steered cash to Madoff's fund.

On January 14, 2009, William Galvin, Secretary of the Commonwealth of Massachusetts who is in charge of securities issues for Massachusetts, filed suit against Jaffe, the Cohmad broker for Madoff, who promoted Madoff's funds to wealthy investors in Massachusetts and Florida. Richard Spring, of Boca Raton, Florida, received payments from Cohmad for many years, in exchange for bringing investors and investment ideas to Madoff. Alvin J. "Sonny" Delaire Jr., whose late father, Alvin J. Delaire was a partner with Sonny Cohn in a previous venture, also recruited clients for Madoff's advisory business. Cohmad had fewer than 650 client accounts, made 99.7% of its sales from brokerage services to Madoff's larger broker-dealer. In its audited financial statements for the 12 months ending June 30, 2008, Cohmad said revenue from Madoff Securities totalled $3,736,829. Its total sales for the same period were $3,748,397.

Stanley Chais, 82, a wealthy investment advisor from Beverly Hills, California was accused of steering money to private interests, including Madoff, through Chais's Brighton Co., a limited partnership formed to manage money. He took about 3.8% of the profits as management fees. His Chais Family Foundation, which in 2007 reported assets of $178 million and charitable contributions of nearly $8.2 million, was wiped out and has shut down. He had an unpretentious home in Beverly Hills, a small apartment in New York and drove an old Toyota. Michael Chaleff, a former Justice Department lawyer, was part of a 50-member investment group called CMG that lost $75 million to $80 million it gave to Chais' Brighton Co. Chaleff has filed a $250-million class action federal lawsuit against Chais in Los Angeles, as has Academy Award-winning screenwriter Eric Roth, recently nominated for a Golden Globe award for The Curious Case of Benjamin Button. New Jersey state Senator Loretta Weinberg lost her entire life savings in Chais' "Arbitrage Partnerships" fund.

Recovery of funds

Madoff's assets have been frozen, and he has been ordered to develop a list of his clients. The victims of the alleged fraud are considering how to best recover some of their investments. The SEC filed a separate civil suit against Madoff on December 11, 2008. Separately, individual investors have filed civil suits against Madoff. The two firms leading the suits announced on December 12, 2008 that the firms have been retained by dozens of individual investors. Investors may also have access to funds from the Securities Investor Protection Corporation (SIPC), a securities-industry group formed by Congress to help customers of failed brokerages firms. SIPC has $1.7 billion in assets, $1 billion in credit available from the U.S. Treasury and another credit line from several international banks. Investors may receive a maximum of $500,000 from SIPC, but only for cash or securities that are missing from their accounts. It could take several years before investigations into the scandal are concluded and investors are able to file claims. Victims may also file suit to have taxes already paid on "fictitious income" restored to them.

On January 6, 2009, the court-appointed trustee of the Madoff firm, Irving Picard, and lawyers from his firm, Baker Hostetler LLP (a Cleveland-based firm Picard joined the week before he was appointed), who are locating assets for distribution to investors, said some investors may get cash advances from SIPC, well before March 4, 2009, the first deadline for claims to be filed. [6] U.S. District Judge Lawrence McKenna gave Picard power to seize assets and records, demand documents, summon witnesses and enter Madoff’s residences around the world, including the apartment where he’s under house arrest. As of January 27, 2009, Picard has collected $91.8 million of more than $830 million in liquid assets,, and on January 2, sent letters to 8,000 potential claimants. In papers filed in federal court, he said Madoff's leases of a 2007 Land Rover, 2008 Cadillac, 2007, 2008, and 2009 Mercedes-Benzes and a 2006 Lexus should be terminated to save money. Lee Richards of Richards Kibbe & Orbe LLP is receiver for Madoff’s foreign units. The SIPC case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The criminal case is U.S.A. v. Madoff, 1:08-mj-02735, and 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)

The use of the legal doctrine of fraudulent conveyance in bankruptcy proceedings might mean that investors who withdrew their money before the fraud was revealed might be forced to return their profits or even part of their initial investments. Returning funds would be uncontroversial for clients who knew that Madoff's business was fraudulent, but would not be so clear for clients who were unaware of Madoff's activities. For example, Hadassah may be forced by New York State law to return some portion of the $130 million it withdrew from the funds it invested with Madoff. The current statute of limitations on cases involving fraudulent conveyance is up to six years.

Madoff provided a list of his and his firm's assets to the SEC on December 31. The list was kept confidential by the SEC, on the grounds that the court did not authorize disclosure. Prof. John Coffee, of Columbia University Law School, said that much of Madoff's money may be in offshore funds, and that the SEC wanted to keep the assets secret to keep them from being seized by foreign regulators and foreign creditors.

Affected clients

Main article: List of investors in Bernard L. Madoff Securities

The 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.

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, dozens of investors have reported losses, and Madoff estimated the fraud at $50 billion. According to Bloomberg, “in all, companies, individuals and foundations have disclosed about $24 billion of investments with Madoff.” Those affected include banks, Wall Street investors, charities, as well as individuals.

The large sovereign wealth fund Abu Dhabi Investment Authority indirectly invested $400 million with Madoff.

Other notable clients included former Salomon Brothers economist Henry Kaufman, Steven Spielberg, Jeffrey Katzenberg, actors Kevin Bacon and wife Kyra Sedgwick, actor John Malkovich, and Zsa Zsa Gabor. Mortimer Zuckerman lost approximately $30 million of his charitable trust fund. At a forum at the YIVO Institute for Jewish Research in New York, Zuckerman remarked, no one since Julius Rosenberg, executed in 1953 along with his wife, Ethel, for giving atomic secrets to the Soviet Union, "has so damaged the image and self respect of American Jews."

Several charities invested all or part of their endowments with Madoff, and the revelation of the fraud forced them to shut down. Additionally, the Lappin Foundation had invested its employee 401(k) with Madoff; it is presumed that the employees' retirement accounts have been completely voided.

Largest stake-holders

According to The Wall Street Journal the investors with the largest potential losses include:

• Fairfield Greenwich Advisors, $7.50 billion
• Tremont Capital Management, $3.30 billion
• Banco Santander, $2.87 billion
• Bank Medici, $2.10 billion
• Ascot Partners, $1.80 billion
• Access International Advisors, $1.40 billion
• Fortis, $1.35 billion
• HSBC, $1.00 billion

The potential losses of these eight investors total $21.32 billion.

Other investors, with potential losses between $100 million and $1 billion include:

• Natixis SA
• Carl J. Shapiro (a 95-year-old Boston philanthropist)
• Royal Bank of Scotland Group PLC
• BNP Paribas
• BBVA
• Man Group PLC
• Reichmuth & Co.
• Nomura Holdings
• Aozora Bank
• Maxam Capital Management
• EIM SA
• AXA SA
• Union Bancaire Privée

Jerome Fisher, co-founder of Nine West Shoes has lost $150 million with Madoff, according to the Palm Beach Post.

Twenty-three investors with potential losses of $500,000 to $100 million were also listed, with total potential losses of $540 million. They included Bramdean Alternatives run by Nicola Horlick, for example. The grand total potential losses in the Wall Street Journal table is $26.9 billion.

On December 24, 2008, Bloomberg News listed financial losses related to Madoff's fraud totaling $36 billion, which may include double counting from investors in feeder funds. A partial list of Madoff's victims from the Bloomberg report includes US Senator Frank Lautenberg's charitable foundation, the Horowitz Association at $800 million, $696 million in losses to Notz, Stucki & Cie, up to $614 million to Natixis SA, BNP Paribas SA at up to $478.2 million, $400 million in losses to Fix Asset Management, and $302 million in losses to Nomura Holdings Inc..

On January 15, 2009, the website Swissinfo.ch reported that French wealth management group Oddo et Cie sued Swiss bank UBS AG on January 14, 2009 in court in Luxembourg for €30 million (US$39.5 million) over losses allegedly due to UBS exposure to Madoff's firm.

On January 20, 2009, French prosecutors opened an investigation on behalf of French citizens and institutions who claim losses due to Madoff. One part of the investigation is over the AlphaLux fund set up by UBS, which counters that the bank set up the Luxembourg-based fund at the request of investors, but that Madoff was never on UBS's list of preferred investments. French prosecutors speculate that the total exposure to Madoff by French investors might be as high as €500 million.

On January 21, 2009, Jacques Rauber, head of Auriga International Advisers, a hedge fund based in the British Virgin Islands, said in an interview in the Swiss newspaper Sonntag Zeitung that his fund lost over $350 million due to exposure to Madoff's firm.

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 alleged profits reported to the university by Madoff.

Impact and Aftermath

Suicide of Client

On December 23, 2008, one of the founders of Access International Advisors LLC, René-Thierry Magon de la Villehuchet, 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. Access International Advisors LLC had invested $1.4 billion with Madoff's firm. De la Villehuchet had also invested his personal money with Madoff. De la Villehuchet lived in New Rochelle, New York and came from a very prominent French family. Access International Advisors had connections to wealthy and powerful aristocrats from Europe. Although no suicide note was found at the scene, his brother 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.

Philanthropy

Before his arrest, Madoff's family was involved in philanthropic circles. When his nephew, Roger Madoff, died of leukemia in April 2006, paid death notices appeared in newspapers from a range of charitable organizations, including the Lower East Side Tenement Museum. Madoff donated approximately $6 million to lymphoma research after his son Andrew was diagnosed.

Madoff 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, a member of New York City's Cultural Institutions Group (CIG). He served on the executive council of the Wall Street division of the UJA Foundation of New York], a Jewish foundation which declined to invest funds with him due to the conflict of interest.

Madoff undertook charity work for the Gift of Life Bone Marrow Foundation, a charity he allegedly defrauded at the same time for $2 million according to The New York Times, and also engaged in philanthropic giving through The Madoff Family Foundation, a $19 million private foundation, which he managed along with his wife. They donated money to hospitals and theaters. The foundation has also contributed to many educational, cultural, and health charities, including those later forced to close due to Madoff's alleged malfeasance. The various organizations were mostly given charity funds backed by Madoff securities. Madoff was also a contributor to the Democratic Party, donating about $25,000 a year.

In the wake of Madoff's arrest, the assets of the Madoff Family Foundation have been frozen by a federal court.

See also

• Joseph S. Forte
• Arthur Nadel
• Raoul Weil
• Nicholas Cosmo
• Marcus Schrenker
• Ponzi scheme

External links

• Bernard L. Madoff Investment Securities The front page is now a placeholder for information on the case. (Archive)
• "The Owner's Name is on the Door". Archived from the original on 2008-12-14.
• SEC civil complaint
• SEC press release and update for investors
• Criminal complaint with the United States Department of Justice
• Jewish charities hit by Madoff scandal BBC
• Continuously updated table of Madoff's clients from The New York Times
• Madoff Scandal ongoing coverage from the Financial Times

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