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January 13, 2009

Wikipedia: Bernard Madoff

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Bernard L. Madoff
Born April 29, 1938 (1938-04-29) (age 70)
Queens, New York, USA
Residence Manhattan, New York, United States
Nationality American
Education Hofstra University (1960)
Occupation Financial services, Investment management
Employer Bernard L. Madoff Investment Securities
Known for Alleged Ponzi scheme, Chairman of NASDAQ (prior)
Spouse(s) Ruth Madoff
Children Mark Madoff (ca. 1964), Andrew Madoff (ca. 1966)

Bernard Lawrence Madoff (IPA: /ˈmeɪdɒf/) (born April 29, 1938) is an American businessman and former chairman of the NASDAQ stock exchange. He started 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.[1]

At 8.30 a.m. on that day, Federal Bureau of Investigation agents arrested Madoff and charged him with one count of securities fraud. On the day prior to his arrest, Madoff told senior executives at the firm, which included his sons, that the management and advisory segment of the business was, “basically, a giant Ponzi scheme.”[2][3] Madoff was then arrested based on a tip-off from his sons, Andrew and Mark.[4] Five days after his arrest, Madoff’s assets and those of the firm were frozen and a receiver was appointed to handle the case.[5] According to federal charges, Madoff himself admitted that his firm has “liabilities of approximately US$50 billion.”[2][6][7] Banks from outside the U.S. have announced that they have potentially lost billions in U.S. dollars as a result.[8][9] 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.[10]

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),[11] often functioning as a “third-market” provider that bypassed “specialist” firms and directly executed orders over the counter from retail brokers.[12] The firm also encompassed an investment management and advisory division that is now the focus of the fraud investigation.[6]

Madoff was also a prominent philanthropist who served on the boards of nonprofit institutions, many of which entrusted his firm with their endowments.[13][14] The freeze of his and his firm’s assets significantly affected businesses around the world and a number of 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.[13][15][16][17]

Contents

Personal

Bernard L. Madoff was born in the New York City borough of Queens to a Jewish family,[18] and graduated from Far Rockaway High School, where he was a member of the swim team.[19] He is married to his high school sweetheart Ruth Madoff,[20] and has two sons, Mark and Andrew.[21] He graduated from Hofstra University (then Hofstra College) in 1960 with a degree in political science.[22]

Madoff lived in a ranch house in Roslyn, New York through the 1970s[22] and has owned an ocean-front residence in Montauk since 1981.[23] His primary residence, valued at more than $5 million, is on Manhattan’s Upper East Side.[24] Madoff is listed as chairman of his Upper East Side building’s co-op board.[25] He also owns a home in France[26] and a $9.3 million mansion in Palm Beach, Florida on the Intercoastal Waterway just north of Flagler Memorial Bridge.[27] He is a member of the Palm Beach Country Club and owns a 55-foot (17 m) fishing boat named Bull.[25]

Career

Madoff started his firm in 1960 with an initial investment of $5,000 ($35,000 in today’s dollars) that he said was earned from working as a lifeguard and installing sprinklers.[28] 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.[29] After a trial run, the technology the firm helped develop became the NASDAQ.[30] At one point, Madoff Securities was the largest “market maker” at the NASDAQ, both buying and selling.[29]

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.[31]

He brought several relatives into his business. His younger brother, Peter, was a senior managing director and chief compliance officer.[29] Both of Madoff’s sons, Mark and Andrew, joined his firm after finishing their education and worked in the trading section of the business.[29] 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.[14] Employees of the company were invited to Madoff’s Montauk house for a weekend each year.[11] Andrew Madoff invested his own money in his father’s fund, but Mark had not done so for about eight years.[32]

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,[33] 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.[29] Madoff’s firm was “the first prominent practitioner”[34] 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”.[35] 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.[36]

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.”[37] Academics have questioned the ethics of these payments.[38][39] Madoff has argued that these payments did not alter the price that the customer received.[37]

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.[29] 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.[40] 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.[40] Madoff did keep a London office with 28 employees which was entirely separate from Madoff Securities and only handled investments for his family; mostly traders and investment analysts who handled about £80 million.[41]

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.[42] Sources from the investigation assert that it appears Madoff chose a trading strategy that failed, at which point he began the Ponzi scheme.[32] According to the federal complaint, the Ponzi scheme had been underway since at least 2005.[43] 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%.”[42] 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.[42]

Barron’s Magazine reported in 2001[44] 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 sale of the calls, limit the portfolio’s downside.”

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.

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.[45][46] 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.[47] 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.

Rival fund managers were unable to replicate the same returns, using the strategies from Madoff’s quarterly reports.[48]

Sales methods

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”.[49] 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 Jewish promoters was J. Ezra Merkin, whose fund Ascot Partners steered $1.8 billion towards Madoff’s firm.[48] 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.”[50]

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.[48]

The Wall Street Journal reported that “Several investors say Mr. Madoff’s main go-between in Palm Beach was Robert Jaffe. Mr. Jaffe is the son-in-law of Carl Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Madoff. Jaffe, a philanthropist in Palm Beach, Florida, attracted many investors from the Palm Beach Country Club.”[25]

Madoff also promoted in Europe and South America, mostly indirectly through Fairfield fund founder Walter Noel’s son-in-law Andrés Piedrahita’s connections.[51] 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).[48] The Madoff sales force were well-dressed, multilingual sales representatives in the financial capitals of Europe.[48]

Madoff was a “master marketer”,[22] 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”.[48][22] Some Madoff investors were wary of removing their money from his fund, in case they couldn’t get it back in later.[11] One New York real estate investor said she “literally begged” Madoff to take her money, and he refused.[41]

Madoff had a very successful track record year after year, with returns that were “unusually consistent.”[51] As well, his returns around 10% were a key factor in the perpetuation of Madoff’s fraud for decades; other Ponzi schemes that paid out higher returns of 20% or higher typically collapsed much more quickly. A hedge fund run by Madoff, which described its strategy as focused on shares in the Standard & Poor’s 100-stock index, averaged a 10.5% annual return over the past 17 years. Through November 2008, amid a general market collapse, the fund reported that it was up 5.6% year-to-date, while the year-to-date total return on the S&P 500-stock index had been negative 38%.[13] One investor who declined to be named said “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.”[46][52]

A Swiss bank that invested explained that because of Madoff’s huge volume as a broker-dealer, the bank felt he had a “perceived edge” on the market and was able to time his trades well.[53]

Previous SEC investigations

Madoff Securities LLC was investigated at least eight times in 16 years by the SEC or other regulatory authorities.[54] In 1992, the SEC investigated one of Madoff’s feeder funds, Avellino & Bienes, which invested solely with Madoff.[42] Avellino & Bienes was 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.[42] Avellino shut down in 1993, with investors receiving their money back.[42] 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.[42] Avellino & Bienes, previously an accounting firm, had turned to full-time investments in 1984 in a partnership with Madoff.[42] At the time of the investigation, the SEC did not publicly name Madoff because he was not accused of wrongdoing.[55] 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.”[56] The 1992 incident was the first public indication that Madoff was placing orders for other funds.[54]

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.[54] 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.[54] The SEC also said it conducted two inquiries of Madoff in the last several years and did not find major problems.[57] In 2004, after published articles appeared accusing the firm of front running, the SEC’s Washington branch cleared Madoff of that accusation.[54] An SEC statement detailed that inspectors examined Madoff’s brokerage operation in 2005 after sending the 2004 inquiry to the New York office,[54] finding three violations of rules requiring brokers to obtain the best possible price for customer orders, while 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.[58]

The SEC has been accused of missing numerous red flags and ignoring tips on Madoff’s alleged fraud.[59] 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.”[60] A former SEC compliance officer, Eric Swanson, married Madoff’s niece Shana, a Madoff firm compliance attorney.[60]

Red flags

Outside analysts raised concerns with Madoff’s firm for years.[13] 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.[61]

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.[54] An article in Barron’s and another in MarHedge in 2001 accused Madoff of front running to achieve his gains.[54]

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.[13] 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.[62][63] 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.[64] David Friehling assumed control of the firm from partner Jerry Horowitz, his father-in-law, who reportedly did accounting work for Madoff for decades.[32][63]

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.[46]

Although Madoff was a pioneer of electronic trading, he refused to provide his clients online access to their accounts.[13] He sent out account statements by mail,[65] whereas most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.[26]

Improbably steady investment returns despite exceedingly volatile markets were another red flag.[66] A longtime friend said that “his rate of return […] was never attention-grabbing, just solid 12–13 percent year in, year out”.[14] Robert Ivanhoe, chairman of the real estate practice of the law firm Greenberg Traurig, added that Madoff increased his allure by refusing some investors.[14]

Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff “only had five down months since 1996”,[67] 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.”[66] 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.[11]

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?”[68]

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.[51]

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.[69]

The scheme began to unravel when, in 2008, the general market downturn motivated a larger than usual number of investors to cash out their positions. They attempted to withdraw $7 billion from the firm, but Madoff struggled to raise this sum. 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.[11] According to the complaint the sons, Mark and Andrew, reportedly unaware of the firm’s pending insolvency, confronted their father, asking him how the firm could pay bonuses 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.[13]

To date the FBI investigation has discovered no evidence implicating family members of fraud,[70] and federal authorities report his wife Ruth is not accused of wrongdoing.[71]

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.”[72][73] According to the SEC, Madoff confessed to an FBI agent that there was “no innocent explanation” for his behavior,[74] and that he “paid investors with money that wasn’t there.”[43] The alleged behavior involves an asset management unit of his firm, rather than the better known market making unit.

The criminal complaint alleges that investors lost $50 billion through the scheme,[74] 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.”[75] 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.[72] 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.[28] Apart from ‘Bernard L. Madoff’ and ‘Bernard L. Madoff Investment Securities LLC (“BMIS”)’, the order to freeze all activities[76] 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.[72] 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.[77] Madoff wears an electronic ankle bracelet to ensure compliance.[77] 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.[77][78] 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.[78]

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.[79][80] His sons reported the mailings to prosecutors. Previously, Madoff was thought to be cooperating with prosecutors.[80] 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.[81]

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.[10] 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.[10]

The role of Frank DiPascali, an official at the firm, is being considered. DiPascali is represented by Marc Mukasey, the son of U.S. Attorney General Michael Mukasey, who has recused himself of any involvement in the case. According to an SEC memo, DiPascali “responded evasively” to questioning following Madoff’s arrest.[75]

Federal investigators have discovered apparently fraudulent documents and records in Madoff’s Manhattan offices, and are looking into who prepared them.[10]

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.[82] 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.[63]

J. Ezra Merkin, a prominent investment advisor and philanthropist, has been sued for his role in running a “feeder fund” for Madoff.[83] 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.[84] The Connecticut Attorney General Richard Blumenthal is examining the role boards of nonprofits played, in possibly not conducting due diligence with donors’ contributions.[85]

Regulators are looking into Cohmad Securities (taken from the names “Cohn” and “Madoff”), which is part-owned by Maurice Cohn, shares an address with Madoff’s firm in New York City, and employs Robert Jaffe.[86]

Recovery of funds

Madoff’s assets have been frozen, and he has been ordered to develop a list of his clients.[78] The victims of the alleged fraud are considering how to best recover some of their investments.[87] The SEC filed a separate civil suit against Madoff on December 11, 2008.[28][88] 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.[89]

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.[90][91] The current statute of limitations on cases involving fraudulent conveyance is up to six years.

Investors may also have access to funds from the Securities Investor Protection Corporation (SIPC), which offers assistance to investors of failed brokerage firms. Investors may receive a maximum of $500,000, 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.[92][93] Victims may also file suit to have taxes already paid on “fictitious income” restored to them.[94]

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.[95][96]

Affected clients

The Securities Investor Protection Corporation (SIPC) is liquidating Madoff’s brokerage and attempting to sell it before its 120 employees find other jobs, with Irving Picard acting as trustee.[29] The SIPC provides up to $500,000 in insurance for missing money or securities in individual brokerage accounts, but does not protect against bad investments.[97]

Stephen Harbeck, president of the SIPC, stated that the investment management department’s financial records, which according to other sources are in “disarray,”[29] will take six months to sort out. Assets are frozen, but employee salaries are still being paid.[29] “There are some assets, but I have no idea what the relationships of the assets available are to the claims against them. The records are utterly unreliable on this case.”[98]

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,[99] 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.”[97] Those affected include banks, Wall Street investors, charities, as well as individuals.

Many European banks invested in Madoff; the largest was the private Swiss bank Union Bancaire Privée, with $700 million of clients’ funds invested.[51] The large sovereign wealth fund Abu Dhabi Investment Authority also indirectly invested $400 million with Madoff.

Other notable clients included former Salomon Brothers economist Henry Kaufman, actor Kevin Bacon and his wife, actress Kyra Sedgwick, as well as actor John Malkovich.

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[100] 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
  • Union Bancaire Privée, $1.00 billion
  • HSBC, $1.00 billion

The potential losses of these nine investors total $22.32 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[101]
  • Maxam Capital Management
  • EIM SA
  • AXA SA

The potential losses of these investors total $4.02 billion.

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.

Bloomberg News on December 24, 2008, listed financial losses related to Madoff’s fraud totaling $36 billion, which may include double counting from investors in feeder funds.[102][103] 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, $302 million in losses to Nomura Holdings Inc., and $110 million to Yeshiva University.[102]

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.[104]

Suicide of client

On December 23, 2008, one of the founders of Access international Advisors, 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[105] and de la Villehuchet had taken sleeping pills, in what appeared to be suicide.[106][107] 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.[106][107] 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.[105] The FBI and SEC do not believe de la Villehuchet was involved in the fraud.[107]

Philanthropy

Before his arrest, Madoff’s family was involved in philanthropic circles.[14] 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.[14] Madoff donated approximately $6 million to lymphoma research after his son Andrew was diagnosed.[69]

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.[14][15] He resigned his position at Yeshiva University after his arrest.[15] Madoff also serves on the Board of New York City Center, a member of New York City’s Cultural Institutions Group (CIG).[108] 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.[109]

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.[13] They donated money to hospitals and theaters.[14] The foundation has also contributed to many Jewish 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.[15][18] Madoff was also a major contributor to the Democratic Party, donating about $25,000 a year.[11][110]

In the wake of Madoff’s arrest, the assets of the Madoff Family Foundation have been frozen by a federal court.[13][15]

See also

  • Joseph S. Forte

References

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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
  • Continuously updated table of Madoff’s clients from The New York Times
Persondata
NAME Madoff, Bernard L.
ALTERNATIVE NAMES Bernie Madoff
SHORT DESCRIPTION The former chairman of NASDAQ, he is charged with perpetrating the largest investor fraud ever committed by a single individual.
DATE OF BIRTH April 29, 1938
PLACE OF BIRTH Queens, New York
DATE OF DEATH
PLACE OF DEATH
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