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Two Ex-Madoff Employees Arrested As Part of Scheme Airlines,
Bernie Madoff, Bankruptcy, Ponzi, Bdg Aircharter, Reuters Two computer programmers provided technical support to falsify documents and trading records for swindler Bernard Madoff and took hush money to help keep the massive fraud going, U.S. authorities said. The FBI arrested Jerome O'Hara, 46, and George Perez, 43, at their homes on Friday morning on criminal charges of conspiracy for falsifying books and records at both the broker-dealer and investment arms of Bernard L. Madoff Investment Securities in New York. "The computer codes and random algorithms they allegedly designed served to deceive investors and regulators and concealed Madoff's crimes," said federal prosecutor Preet Bharara. "They have been charged for their roles in Madoff's epic fraud, and the investigation remains ongoing." Madoff was sentenced to 150 years in prison on June 29. The next day, law enforcement sources said the FBI expected as many as 10 people could be criminally charged for their roles in the decades-long fraud of as much as $65 billion. Thousands of investors around the world were bilked in Wall Street's biggest investment fraud, a Ponzi scheme in which early investors were paid with the money of new clients. O'Hara starting working for Madoff in 1990 and Perez in 1991. They were still working for him when the once-respected financier was arrested on Dec. 11, 2008. Lawyers for O'Hara and Perez could not immediately be reached for comment. 'House 17' Server The criminal complaint said that in April 2006, O'Hara and Perez attempted to delete 218 of 225 special computer programs run on an IBM server known in the Madoff firm as "House 17." In August or September 2006, they met with Madoff and told him they would no longer lie for him, a statement by the FBI and the prosecutor said. The FBI found handwritten notes in O'Hara's desk. "I won't lie any longer. Next time, I say 'ask Frank"' said one note, according to the FBI, a reference to Madoff's long-time deputy, Frank DiPascali. Madoff told DiPascali to pay the programmers "whatever they wanted in order to keep them happy," the investigators said, and the programmers received pay increases of about 25 percent and net bonuses of about $60,000. Madoff, DiPascali and the firm's outside accountant, David Friehling, have all pleaded guilty to criminal charges. O'Hara was arrested at his home in Malverne, New York, and Perez was arrested at home in East Brunswick, New Jersey. Their arrests bring to five the number of people who have been criminally charged in the case. The charges against the pair carry maximum prison sentences of 30 years and millions of dollars in fines. The two men were also served with civil charges by the Securities and Exchange Commission. O'Hara and Perez were accused of knowing that the computer programs they developed in 2003 and 2004 contained fraudulent information used in U.S. and European regulatory reviews. The SEC and a European accounting firm reviewed Madoff's operations at least five times between 2004 and 2008, the government said. The SEC has been criticized by legislators and investors for not catching Madoff. The news of the fraud shook investor confidence in regulators and the market. A Madoff Bankruptcy The action comes as a company created by Madoff that owns one-half of a $25 million corporate jet has filed for bankruptcy protection. Irving Picard, the court-appointed trustee liquidating Madoff's investment firm, made the Chapter 11 filing for BLM Air Charter on Thursday in Manhattan bankruptcy court. BLM's assets include a 50 percent stake in an Embraer Legacy 600 jet and a $770,000 bank account. BDG Aircharter, a unit of Syosset, New York, real estate company Blumenfeld Development Group, owns the other 50 percent stake in the jet, the filing shows. According to published reports, Blumenfeld principal Ed Blumenfeld lost a significant sum investing with Madoff. Picard said he filed the bankruptcy petition because Rolls-Royce threatened to terminate a warranty agreement with BLM and BDG today, Nov. 13, unless it received $181,000 due.
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Bernie Madoff Property Auction Madoff
Victims File Suit Against SEC By Andrew Longstreth After the relentless pounding the Securities and Exchange Commission has received for failing to expose Bernard Madoff's fraud, it was probably only a matter of time before the agency was sued for negligence. That time came Wednesday, when attorneys at Herrick Feinstein filed a complaint against the government in Manhattan federal district court. Herrick represents two of Madoff's victims - disabled retiree Phyllis Molchatsky and Dr. Steven Schneider - who lost more than $2.4 million between them. The lawsuit said the SEC had "countless opportunities to stop the Ponzi scheme Madoff operated over 16 years, and botched all of them." Howard Elisofon, the lead attorney on the matter, said Molchatsky quit working when she was diagnosed with Parkinson's disease and decided that her $1.7 million in savings would be safest with the steady income Madoff promised his customers. "Now, she may lose her house," Elisofon said. The lawyer said Schneider invested $750,000, nearly all of his retirement money, with Madoff. "He had planned to slow down and retire, but now he cannot." "Instead of watching the backs of Ms. Molchatsky and Dr. Schneider and the backs of the other investors, the SEC - through its negligence - was effectively watching Bernie Madoff's back," Elisofon said in a statement. "Now it is time for the SEC to be held accountable and for the federal government to do what the law says it must do: compensate the victims for its negligence." Elisofon told us that to his knowledge, this is the first-ever suit seeking to hold the government liable for the SEC's alleged negligence. The complaint, which is brought under the Federal Tort Claims Act, relies heavily on a report issued by the Office of Inspector General for the SEC, which was critical of the agency's handling of warnings about Madoff. "We believe the issue of negligence has been tried and [the SEC was] convicted," said Elisofon, himself a former SEC official. What will be harder is overcoming the defense of sovereign immunity that the government will no doubt raise. Elisofon admitted it would be a "formidable impediment" to the suit, but said he will argue that this case fits within the exception to that doctrine. When we asked the SEC for comment, spokesperson John Heine said, "Based on our initial understanding of the matter, we believe there is no merit to the complaint." The SEC has faced heavy criticism for not discovering Madoff's multibillion-dollar fraud since it was revealed last December, when the financier was arrested after confessing to his sons. He is serving a 150-year prison sentence after pleading guilty to fraud charges. Information from The Associated Press contributed to this report. NY Partner, Firm Cash In for $15 Million in Madoff Scandal By Noeleen G. Walder A bankruptcy judge has approved a request by the trustee liquidating Bernard L. Madoff's investment firm and his team of lawyers for roughly $15 million in interim counsel fees. At a hearing yesterday, David J. Sheehan of Baker & Hostetler, who is counsel for trustee Irving H. Picard, told Southern District Bankruptcy Judge Burton R. Lifland that tracing the trail of money in the complex fraud required a full-service team of attorneys. Moreover, Mr. Sheehan said, the case has generated a "vast array of international litigation," an onion that "has yet to be peeled to its core." An attorney for the Securities Investor Protection Corporation, which appointed Mr. Picard of Baker & Hostetler, as trustee, told Judge Lifland the agency supported the fee applications. But Helen Davis Chaitman of Phllips Nizer, on behalf of three Pennsylvania residents who invested with Bernard L. Madoff Investment Securities LLC, urged the judge to reject the fee requests. Ms. Chaitman, whose clients have filed claims against the trustee, accused Mr. Picard of violating his mandate under the Securities Investor Protection Act by failing to look at customers' most recent statements when evaluating requests for SIPC funds. Ms. Chaitman also said Baker & Hostetler labored under a conflict of interest. However, Judge Lifland quickly dispensed with Ms. Chaitman's objections, standing by his earlier finding that Baker & Hostetler had no conflict. As for "what comes down to a disagreement in approach" concerning the evaluation of claims, the judge said Ms. Chaitman's clients had already raised these arguments in a separate adversary proceeding against the trustee, which he would rule on at a later date. Mrs. Bernie Madoff Sued Over Her "Life of Splendor" By Noeleen G. Walder Even if Ruth Madoff did not know about her husband's massive Ponzi scheme, she "lived a life of splendor" and received tens of millions of dollars as a result of the fraud, alleges a suit filed yesterday by the trustee charged with liquidating Bernard L. Madoff Investment Securities LLC. The action brought by Irving H. Picard, a partner at Baker & Hostetler, in Southern District Bankruptcy Court seeks to recover nearly $45 million in funds transferred to Ms. Madoff by Mr. Madoff's firm in the six years proceeding its liquidation. While the Madoffs forfeited their assets in the wake of Mr. Madoff's arrest last year, a forfeiture order entered last month, shortly before Mr. Madoff was sentenced to 150 years in prison, left Ms. Madoff with $2.5 million. But the order permits Mr. Picard to recover funds, according to the complaint. While Mr. Madoff's crimes left many investors impoverished and some charities decimated, Ms. Madoff remains a person of substantial means, the complaint states. The inequity between her financial advantages and the economic distress of victims "compels the Trustee to bring this action," it adds. Meanwhile, Mr. Madoff, 71, is incarcerated at a North Carolina federal prison. Lawyers Chasing Madoff Money Ask for $15 Million in Fees By Noeleen G. Walder In the nearly seven months since Irving H. Picard was appointed trustee by the Securities Investor Protection Corp., he and his counsel have made significant progress in investigating Mr. Madoff's massive Ponzi scheme, according to Baker & Hostetler's initial application for attorney's fees and expenses incurred from Dec. 15, 2008, through April 30, 2009. The $14.7 million that the team of lawyers, paralegals and non-legal staff is requesting amounts to a 10 percent discount off their customary rates. A second fee application filed Friday requested $759,000 for Mr. Picard, "of which 20 percent is to be deferred through the conclusion of the liquidation period," and a mere $45 for his expenses. Mr. Picard and his team have recovered close to $1.1 billion in assets in connection with the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS). The team has also filed eight avoidance actions seeking to recoup more than $13.7 billion from feeder funds and related parties, according to a separate interim report filed on July 9 to Southern District Bankruptcy Judge Burton R. Lifland. All told, between Dec. 11 and June 30, Securities Investor Protection Corp. (SIPC) has spent roughly $214 million in connection with the liquidation of Mr. Madoff's firm. The 45-page report in In re Bernard L. Madoff, 08-1789, comes less than two weeks after Southern District Judge Denny Chin sentenced Mr. Madoff, 71, to 150 years in prison for his "extraordinarily evil" crimes. Mr. Picard's report stresses that as of June 30, SIPC has advanced $214.4 million "to pay all administrative costs associated with the liquidation of the estate," including $45.9 million for administrative expenses. The $169.4 million balance has been used to pay customer claims. In recent months, Mr. Picard has come under fire by some victims of Mr. Madoff's fraud, who claim they have been shortchanged because the trustee is looking at their entire account history, rather than relying on their most recent account statements to calculate "net equity." But in the interim report, Mr. Picard detailed his progress in marshalling estate assets and attending to thousands of claims filed by Madoff victims. "Given the task of liquidating BLMIS and coordinating efforts with federal and state authorities investigating the criminal matter, the Trustee has also dealt with issues spanning a broad spectrum of legal and administrative specialities and disciplines," and received "material assistance" from his counsel in areas ranging from real estate to banking. And in spite of "the monumental and unprecedented task faced by the Trustee," he has "made substantial progress in reviewing and determining customer claims," the report states. As of the July 2 deadline for filing claims, Mr. Picard has received 15,400 in customer claims, 395 claims from general creditors and 16 claims from broker-dealers. Mr. Picard has set aside $231 million in SIPC funds to satisfy 543 claims from victims of the Ponzi scheme who contend they lost more than $2.97 billion. The $231 million is the "largest commitment" of SIPC funds in the history of the Securities Investor Protection Act of 1970. The trustee has also set up a Web site and a toll-free hotline. The trustee has "extensively investigated the Debtor's financial affairs" in the United States and abroad, and has "unearthed a labyrinth of interrelated international funds, institutions, and entities of almost unparalleled complexity and breadth," the report states. It also chronicles the steps Mr. Picard has taken to generate $1.08 billion for the estate, including: • settling four class action suits against Mr. Madoff's firm for $55,000; • selling New York Mets season tickets as well as single game Minnesota Wild and NASCAR tickets for $92,000; • and collecting $145,000 from political donations made by Mr. Madoff or his firm. Meanwhile, Mr. Picard has had to defend himself against two motions to intervene in the liquidation proceeding, one launched by a federal prison inmate who has "taken to assuming the name of the Trustee when filing various baseless pleadings" and an unsuccessful bid in May by Ade O. Ogunjobi, who has made numerous outrageous bids to purchase major companies, to buy Mr. Madoff's securities firm for $100 trillion in stock. Madoff Settles With SEC, Doesn't Admit Wrongdoing By Reuters "I am rather surprised that they would agree to a resolution or settlement where he doesn't admit guilt in light of the enormity of the fraud, especially in light of the SEC being under so much criticism for being asleep at the switch," said Bradley Simon, a criminal defense lawyer in New York not connected to the Madoff case. Madoff, who has pleaded guilty to a $65 billion investment scam, is set to be sentenced on June 29. He could spend the rest of his life in prison. Calls to the SEC were not immediately returned. The SEC said the former money manager is also barred from association with any broker, dealer or investment advisers. Madoff, 71, has been jailed since pleading guilty to criminal charges in March to a worldwide Ponzi scheme that investigators say bilked clients over 20 years. The SEC's internal watchdog is currently investigating how the agency handled the case amid accusations that it missed warning signs and failed to uncover the scandal until Madoff's sons went to authorities and told them he had confessed to the fraud. Michael Shapiro, a partner at law firm Carter Ledyard and Millburn LLP, said the SEC announcement was a standard settlement when there is no trial."It is sort of silly in as much as he has admitted his guilt in a criminal proceeding," Shapiro said. Miami
Suit Aims to Get Back Fees By Patrick Danner A Mexican couple on Friday sued London's Standard Chartered bank, claiming the fees they paid the bank to invest in the Madoff feeder fund Fairfield Sentry were based on ''phantom or fraudulent valuations'' of the fund's assets. The suit claims the damages of the plaintiffs and the proposed class are more than $5 million. Standard Chartered placed about $300 million of investors' money in the Sentry fund, the suit alleges. ''The crux of the suit is what's lost is lost, unfortunately, but at the very least you have to give back the fees you did not earn,'' said David Rothstein, a Miami lawyer who filed the lawsuit in U.S. District Court in Miami. Plaintiffs Jose Antonio Pujals and his wife, Rosa Julieta A. de Pujals, invested about $600,000 in the Sentry fund and paid about a half percent a year in management and administrative fees, or about $3,000, Rothstein said. The suit seeks to recover the fees investors paid from June 2004 until December 2008, when Madoff's Ponzi scheme became known. Prosecutors have said Madoff told clients they had about $65 billion in accounts with him. Any claims to fees paid before June 2004 are barred by a five-year statute of limitations, Rothstein said. Standard Chartered and its private bank unit have Miami offices, according to the suit. Standard Chartered acquired American Express' international banking unit for $823 million last year. A Standard Chartered spokesman in London had no immediate comment on the suit, but said as a matter of policy it doesn't comment on litigation. ''We are not suggesting Standard Chartered was part of Madoff's fraud,'' Rothstein said. ``In this suit, we are not seeking to recover all of client's losses. Rather, we are seeking to recover the fees charged that were not really earned. Our theory is, they shouldn't be allowed to benefit.'' Fairfield Greenwich Group, Sentry fund's manager, had about $7 billion invested with Madoff. It reportedly was the largest investor swindled. Fairfield Greenwich and the fund are not being sued in the case against Standard Chartered. Madoff is scheduled to be sentenced June 29. Victims
Blast NY Lawyer in By Noeleen G. Walder For the second time in a
week, investors who fell prey to Bernard L. Madoff's massive Ponzi
scheme are claiming they have been victimized not once, but twice:
this time by the trustee charged with overseeing the liquidation of
Mr. Madoff's investment securities firm. "insurance." litigation. Crabby
Over Clawbacks: Madoff Trustee By The Associated Press The trustee trying to unravel Bernard Madoff's massive Ponzi scheme is threatening legal action to recover $735 million from investors who unwittingly made money off the swindle. In recent days, court-appointed trustee Irving Picard has sent letters to 223 investors, ordering them to return money they withdrew from their accounts at Bernard L. Madoff Investment Securities in the six years before the scheme collapsed. "These amounts were paid to you at the expense of other customers while BLMIS was insolvent," said one letter, sent to an investor who gradually withdrew $975,000 between 2003 and 2008. "The Trustee demands that you immediately return such amounts to the Trustee for the benefit of all defrauded creditors." Investors who do not return the money could face legal action, the letters said. Madoff victims have been fearing these so-called clawbacks since the scandal broke, in part because some people who withdrew significant amounts have long since spent the money, then lost the rest of their savings in the fraud. Lawyers representing some of those investors expressed dismay with the letters and said they would challenge the legality of the demand. "The effect of these letters is to scare the living daylights out of people who have already been victimized once by Bernard Madoff," said Jonathan Landers of Milberg LLP, a lawyer representing a large group of victims. Suit Claims JPMorgan Aided Madoff’s Fraud By Diana B. Henriques Victims of Bernard L. Madoff’s Ponzi scheme have accused his banker, JPMorgan Chase, of aiding his crime by maintaining his checking accounts and trading with his brokerage firm long after the bank itself realized that its prized customer was running a vast fraud. The accusation was made in a lawsuit filed late Thursday in federal court in Manhattan by lawyers representing one of the latecomers to Mr. Madoff’s scheme, a Florida partnership that deposited $12.8 million with him between October and early December. A spokesman for the bank denied the accusation. "The allegations in this lawsuit are false and misguided and we look forward to swift vindication in court," said Brian Marchiony, after the bank’s legal staff reviewed the complaint. Mr. Madoff was arrested on Dec. 11 and pleaded guilty on March 12 to securities fraud, perjury and money laundering. He is in jail awaiting sentencing, currently scheduled for mid-June. In admitting his crime, Mr. Madoff acknowledged in court that he had moved hundreds of millions of dollars through his checking accounts to give the illusion of active investing, when in fact he purchased no securities at all for his thousands of clients. But according to the new lawsuit, the average balance in his checking accounts at JPMorgan Chase ran into the billions of dollars between 2006 and the middle of 2008, as nervous customers moved money from seemingly riskier investments into Mr. Madoff’s hands. Those enormous account balances, coming in from investors from all over the world, should have attracted the bank’s attention, the complaint said. "Chase Bank permitted all funds from putative investors to be commingled in a single account and permitted Madoff to withdraw the funds as he saw fit, without limitation," it continued. Then, in September 2008, the cash balance "began to drop precipitously," sometimes hovering near zero until Mr. Madoff could transfer fresh funds in from his London affiliate, according to the lawsuit. "In November 2008, the balance dropped close to zero several times," the complaint said, as "$300 million was deposited by victims to the Chase account and Madoff withdrew $320 million." That violent ebb and flow of cash "did not comport with the banking patterns Madoff had demonstrated in the prior decade" and should have raised alarms at the bank, said Howard Kleinhendler of Wachtel & Masyr, the law firm representing the plaintiffs, a partnership called MLSMK Investments Company, based in Palm Beach, Fla. In January, the bank acknowledged that it began withdrawing $250 million of its own money from one of Mr. Madoff’s largest feeder funds, the Sentry funds operated by the Fairfield Greenwich Group, last September. In response to questions, it said only that the action followed a review of the funds by the bank’s due diligence staff. Besides doing that due diligence and observing Mr. Madoff’s checking accounts, the bank had another window into Mr. Madoff’s business last fall, the new lawsuit asserts. That was the equity trading operation at Bear Stearns, which the bank acquired when it took over the investment bank in March 2008. Bear Stearns had been steering a significant amount of stock transactions through his firm for years, Mr. Kleinhendler said. His complaint claims that the continuation of this prestigious trading relationship helped Mr. Madoff to deceive prospective investors to the very end of his scheme. But that relationship also should have allowed the bank to see that the cash moving through Mr. Madoff’s bank accounts far exceeded the amounts that could have been invested through his trading operations, Mr. Kleinhendler said. If the bank had acted on its widening knowledge about Mr. Madoff’s operation and pulled the plug on his bank accounts in September, when it pulled its own money out of the Sentry feeder funds, the plaintiffs would not have lost the $12.8 million they deposited in the final weeks of the fraud, the complaint concludes. Bilked by
Madoff, Former Fried Frank Partner Nate Raymond Among the former clients of Bernard Madoff now trying to push the Ponzi scheme king into personal bankruptcy is a retired Fried, Frank, Harris, Shriver & Jacobson litigator whose career included some of the biggest hostile takeover battles of the 1980s. Marc Cherno, 72, lost nearly $1.12 million in the con, according to papers filed in the Madoff bankruptcy proceedings Monday. Now the corporate defense lawyer is joining forces with plaintiffs firm Milberg in an effort to recoup investors' money. Back in the day, Cherno was a prominent litigator in the halls of Fried Frank. The Harvard Law School graduate joined the firm in 1962 and made partner eight years later. In the 1980s, Cherno was a presence in the biggest takeover battles of the decade and frequently found himself across the table from Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom. "Marc was, in his day, if not the best takeover litigator in the country damn close to it," says Matthew Gluck, a former Fried Frank partner himself who is now at Milberg. At Fried Frank, Cherno played a role in the high-profile takeover battle between Bendix Corp. and Martin Marietta Corp. in 1982. He presented oral arguments to the Supreme Court when Fried Frank client Burlington Northern Inc.'s hostile bid for El Paso Gas made it to the High Court in 1984. Cherno also represented Forstmann Little when Ronald Perelman made his ultimately successful hostile bid for the private equity firm's leveraged buyout target Revlon, Inc. in 1985. Cherno, who retired from Fried Frank in 1998 and now is of counsel to the firm, says he first invested with Madoff around 2001. He's never met Madoff. But his ex-wife's family invested for years with Madoff, he says, and when he had enough money, Cherno invested, too. "It seemed like a safe investment at the time, and the returns were steady but they weren't astronomical," he says. "They weren't different from what other hedge funds were getting at the time. So I thought of it as sort of a hedge fund, a hedge fund that's doing well. But I'm not particularly sophisticated financially." For seven years, Cherno says he left his money with Madoff, never withdrawing and instead letting interest accrue. Of course, it turned out that was phantom income, a fact Cherno only learned on December 11 from CNN after Madoff was arrested. Including phantom income, Cherno lost almost $1.12 million to Madoff. Gradually, Cherno let close friends and colleagues know, including Gluck who, as it happened, was recruiting former Madoff investors for actions related to the fraud. Gluck, who joined Milberg in 2006, says he's been friends with Cherno for 40-odd years. From time to time, the two will attend a performance at New York's Metropolitan Opera together. "I guess I was a little bit surprised just because it's never nice to hear from somebody who lost money," Gluck says. Initially, Cherno says he was just consulting Gluck about how receiverships and trustees work. "I was very interested in his views as to what was going to happen, how it was going to take place, how it was going to unfold," he says. "So even though I didn't retain the firm and he wasn't representing me, we would talk now and then about Madoff." In one of those talks, Gluck suggested that Cherno could help in the effort to recover money for Madoff investors. Cherno agreed to serve on the committee Milberg established to advise on the actions the firm would take on behalf of the roughly 80 Madoff investors it represents. Since then, Cherno has been an active participant in the process, including the bankruptcy, Gluck says. "He asked lots of good questions about filing an involuntary petition," he says. How much in assets Milberg and its co-counsel at Seeger Weiss will be able to recover for former Madoff clients through the bankruptcy process is anyone's guess. Meanwhile, Cherno has filed a claim with Securities Investor Protection Corporation -- through that, the maximum an investor can expect to recoup is $500,000. "I'm not in dire straights," Cherno says. "It was a substantial loss, and it puts a crink in your lifestyle. But I'm OK. I'm not selling stuff. I cut back on a few things, but I haven't had to sell my apartment or anything like that." For now, the Manhattan resident says he's moving on in retirement, taking some arts classes at Columbia University to keep himself occupied. And what does he think of Madoff? Cherno still doesn't understand why. "All these people speculate if he was a sociopath or a psychopath or if something got out of hand," he says. "But it's beyond me. It's absolutely beyond me." Madoff Pleads and Is Led Off to Jail By Mark Hamblett
He said the fraud began in
the early 1990s, during a recession that was tough for the
securities markets. But his clients, which included hedge funds,
pension funds and charitable organizations, "like all professional
investors, expected to see their investments outperform the market."
List of Charges
Against Madoff
Source: The Associated
Press
Playing "Six Degrees of Kevin Bacon"? You Can Get to Bernard Madoff in One, Sandy Koufax in Two By Larry Neumeister All three have at least one thing in common: Their names appear on a list of several thousand clients who lost money investing with Bernard Madoff that have been made public in a court filing in U.S. Bankruptcy Court in Manhattan. The list emerged late Wednesday, shortly after a whistleblower in the case, Harry Markopolos, told House lawmakers at a hearing that he had discovered that additional funds had relayed investments to Madoff in Europe — and that the managers of these "feeder" funds may have ignored signs of the massive fraud scheme. He plans to present his findings to the Securities and Exchange Commission's inspector general Thursday. If proven, they would substantiate the assertions of many analysts that the alleged fraud was far too large for Madoff to have conducted alone. House lawmakers on Wednesday also sparred with SEC officials, accusing them of impeding their probe into how the agency failed to uncover the alleged fraud. Prosecutors say Madoff admits he lost more than $50 billion belonging to investors. Defense lawyers say he has cooperated with authorities to help identify assets. The list of client names, including those of Madoff's relatives, numerous celebrities, dead people and charitable institutions, are listed on a 162-page document. Each page carries 84 single-spaced lines. Some customers are listed multiple times, presumably because they had multiple accounts. The customers include prominent people and institutions that already had been publicly revealed, such as the Wilpon family, owner of the New York Mets. Also listed were more than two dozen accounts involving the Mets and companies affiliated with their owners were listed, many with addresses at Shea Stadium. The amount each person or institution invested with Madoff isn't listed. One client is Ira Sorkin, the attorney who's defending Madoff against charges he perpetrated the biggest financial fraud in history. Others include Madoff's wife, sons, brother and other relatives. The list was compiled by AlixPartners LLP, a Dallas company hired as claims agent by the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC. Madoff hasn't been indicted. He's being held under house arrest at his multimillion-dollar penthouse. The Talented Mr. Madoff By Julie Creswell and
Landon Thomas Jr. TO some, Bernard L. Madoff was an affable, charismatic man who moved comfortably among power brokers on Wall Street and in Washington, a winning financier who had all the toys: the penthouse apartment in Manhattan, the shares in two private jets, the yacht moored off the French Riviera. Although hardly a household name, he secured a longstanding role as an elder statesman on Wall Street, allowing him to land on important boards and commissions where his opinions helped shape securities regulations. Along the way, he snared a coveted spot as the chairman of a major stock exchange, Nasdaq. And his employees say he treated them like family. There was, of course, another side to Mr. Madoff, who is 70. Reclusive, at times standoffish and aloof, this Bernie rarely rubbed elbows in Manhattan’s cocktail circuit or at Palm Beach balls. This Bernie was quiet, controlled and closely attuned to his image, down to the most minute details. He was, for instance, an avid collector of vintage watches and took time each morning to match his wedding ring — he owned at least two — to the platinum or gold watch band he was wearing that day. Per his directives, the décor in his firm’s New York and London offices was stark. Black, white and gray — or "icily cold modern," as one frequent visitor to the New York operation described it. Despite nurturing a familial atmosphere in his offices, he installed two cameras on the small trading floor of the firm’s London operations so he could monitor the unit remotely from New York. This Bernie also ran a money management business on the side for decades that he kept hidden far from colleagues, competitors and regulators. While he managed billions of dollars for individuals and foundations, he shunned one-on-one meetings with most of his investors, wrapping himself in an Oz-like aura, making him even more desirable to those seeking access. So who was the real Bernie Madoff? And what could have driven him to choreograph a $50 billion Ponzi scheme, to which he is said to have confessed? An easy answer is that Mr. Madoff was a charlatan of epic proportions, a greedy manipulator so hungry to accumulate wealth that he did not care whom he hurt to get what he wanted. But some analysts say that a more complex and layered observation of his actions involves linking the world of white-collar finance to the world of serial criminals. They wonder whether good old Bernie Madoff might have stolen simply for the fun of it, exploiting every relationship in his life for decades while studiously manipulating financial regulators. "Some of the characteristics you see in psychopaths are lying, manipulation, the ability to deceive, feelings of grandiosity and callousness toward their victims," says Gregg O. McCrary, a former special agent with the F.B.I. who spent years constructing criminal behavioral profiles. Mr. McCrary cautions that he has never met Mr. Madoff, so he can’t make a diagnosis, but he says Mr. Madoff appears to share many of the destructive traits typically seen in a psychopath. That is why, he says, so many who came into contact with Mr. Madoff have been left reeling and in confusion about his motives. "People like him become sort of like chameleons. They are very good at impression management," Mr. McCrary says. "They manage the impression you receive of them. They know what people want, and they give it to them." As investigators plow through decades of documents, trying to decipher whether Mr. Madoff was engaged in anything other than an elaborate financial ruse, his friends remain dumbfounded — and feel deeply violated. "He was a hero to us. The head of Nasdaq. We were proud of everything he had accomplished," says Diana Goldberg, who once shared the 27-minute train ride with Mr. Madoff from their homes in Laurelton, Queens, to classes at Far Rockaway High School. "Now, the hero has vanished." If, in the end, Mr. Madoff is found to have been engaging in fraud for most of his career, then the hero never really existed. Authorities say Mr. Madoff himself has confessed that he was the author of a longstanding and wide-ranging financial charade. His lawyer, Ira Lee Sorkin, declined to comment. During the decades that Mr. Madoff built his business, he cast himself as a crusader, protecting the interests of smaller investors and bent on changing the way securities trading was done on Wall Street. To that end, like a burglar who knows the patrol routes of the police and can listen in on their radio scanners, he also actively wooed regulators who monitored his business. "He once mentioned to me that he spent one-third of his time in Washington in the early 1990s, late 1980s," says a person who has known Mr. Madoff for years but requested not to be identified because he does not want to be drawn into continuing litigation. "He was very involved with regulators. I think they used him as a sounding board and he looked to them like a white knight." "He was smart in understanding very early on that the more involved you were with regulators, you could shape regulation," this individual adds. "But, if we find out that the Ponzi scheme goes back that far, then he was doing something much smarter. If you’re very close with regulators, they’re not going be looking over your shoulders that much. Very smart." MR. MADOFF spent his early years in Laurelton, a close-knit, Jewish enclave where he and his friends ate ice cream at the local five-and-ten and attended activities at the community center. "It was an idyllic place to grow up in," recalls Vera Gitten, who attended elementary school with him. She remembers him as "very thin," a good student and extremely outgoing. She recalls a musical skit that he and his best friend wrote, rehearsed and performed for the class when they were in fifth or sixth grade. "It was a broad company, sort of a ‘Sheik of Araby’ kind of thing where they wore costumes, which were their parents’ bedsheets, that made them look like they were desert sheiks," Ms. Gitten says. "They would have us rolling." None of Mr. Madoff’s former elementary school friends could recall what his parents, Ralph and Sylvia, did for a living. According to Securities and Exchange Commission documents from the 1960s, it appears that his mother had a brokerage firm called Gibraltar Securities registered in her name with an address in Laurelton. In 1963, the S.E.C. began investigating whether a number of firms, including Ms. Madoff’s, had failed to file financial reports and whether that required revoking their registrations. Early the next year, Ms. Madoff withdrew her registration and the S.E.C. dropped its proceedings against her. While Mr. Madoff’s friends remember little about his parents, they all clearly recall his childhood sweetheart, and future wife, Ruth Alpern, a pretty, bubbly blonde who was voted "Josie College" by her Far Rockaway High School class. Mr. Madoff, after graduating from high school in 1956, spent a year at the University of Alabama, where he joined Sigma Alpha Mu, a Jewish fraternity. A year later, he transferred to Hofstra University, where he graduated in 1960 with a degree in political science. He later became a Hofstra trustee, but the university never invested with him. Mr. Madoff spent the next year at Brooklyn Law School, attending classes in the morning and running his side business — installing and fixing sprinkler systems — in the afternoon and evening, recalled Joseph Kavanau, who attended law school with Mr. Madoff. When Mr. Kavanau married his wife, Jane, who was Mrs. Madoff’s best friend from Queens, Mr. Madoff was the best man. "Bernie was very industrious," Mr. Kavanau explains. "He was going to school and working at the same time." Mr. Madoff was never interested in practicing law, Mr. Kavanau says. Instead, Mr. Madoff left law school and, using $5,000 saved from being a lifeguard and from his sprinkler business, joined the ranks of Wall Street in the 1960s. "For many years when we were first married, my wife and I would go to their house or we would all go out to dinner, maybe a couple of nights a month," said Mr. Kavanau, who says that the first home Mr. Madoff shared with his bride was a modest, one-bedroom apartment in Bayside, Queens. Over the years, however, the two couples drifted apart. From time to time, Mr. Kavanau said he turned on the television and caught a glimpse of Mr. Madoff — now a successful financier — being interviewed, realizing that he had made his mark on Wall Street. "The last time I saw him, we had run into him and Ruth on Worth Avenue in Palm Beach," Mr. Kavanau recalls. "We were definitely aware of how well he was living." When asked if he can understand what happened, what may have motivated or prompted Mr. Madoff to eventually take such risks after building up a seemingly successful business, Mr. Kavanau paused. "There is no way to. I can’t make it add up. It doesn’t make sense," he says, growing increasingly frustrated. "I cannot take the Bernie I knew and turn him into the Bernie we’re hearing about 24/7. It doesn’t compute." WHEN Mr. Madoff arrived on Wall Street in the 1960s, he was an outsider. His small firm, Bernard L. Madoff Investment Securities, got its start by matching buyers of inexpensive "penny stocks" with sellers in the growing over-the-counter market. This hardscrabble market was made up of stocks that were not listed on the tonier New York Stock Exchange or American Stock Exchange. In the O.T.C. market, it was common practice — and completely legal — for firms like Mr. Madoff’s to try to attract big trades to their shop by offering to pay clients a penny or two for every share they traded. His firm would make money by pocketing the difference in the "spread," or the gap between the offering and selling price for the stocks. During the mid-1970s, when changes in the rules allowed his firm and others like it to trade more expensive and more prestigious blue-chip stocks, Mr. Madoff began gaining market share from the Big Board. "He was a man with a good idea who was also a terrific salesman," says Charles V. Doherty, the former president of the Midwest Stock Exchange. "He was ahead of everyone." While completely legitimate, the practice of paying for trading orders was entirely distasteful to blue bloods on the established exchanges who saw the actions, ultimately, as a threat to their livelihood. Around this time, Mr. Madoff began cultivating key relationships with regulators. "He was the darling of the regulators, without question. He was doing everything the regulators wanted him to do," says Nicholas A. Giordano, the former president of the Philadelphia Stock Exchange. "They wanted him to be a fierce competitor to the New York Stock Exchange, and he was doing it." Current and former S.E.C. regulators have come under fire, accused of failing to adequately supervise Mr. Madoff and being too cozy with him. Arthur Levitt Jr., who served as S.E.C. chairman from 1993 to early 2001, has acknowledged that he occasionally turned to Mr. Madoff for advice about how the market functioned. But Mr. Levitt strongly denies that Mr. Madoff had undue influence at the S.E.C. or that the agency’s enforcement staff deferred to him. Mr. Levitt said that he was unaware that Mr. Madoff even ran an investment management business, and that Mr. Madoff never had special access to him or other S.E.C. officials. He also noted that he and Mr. Madoff opposed one another on several key industry issues. "The notion that Madoff came to my office many times is a fiction," Mr. Levitt says. "And the notion that he did my bidding is so fantastic that it defies belief." Mr. Madoff’s firm was an early adopter of new trading technologies. And, during the early 1990s, he served three one-year stints as head of the Nasdaq, an electronic exchange that has competed vigorously and won market share from brick-and-mortar exchanges like the Big Board. Despite this flair for the experimental, Mr. Madoff routinely told his employees to adopt the mantra "KISS," or "keep it simple, stupid." He was, after all, a man of precise and controlled habits. He smoked Davidoff cigars and, in London, tailored his suits at Kilgour on Savile Row and bought many of his watches at Somlo Antiques. Associates and others acquainted with him said his punctilious ways sometimes veered into obsessive-compulsive behavior. His office, for example, always had to be immaculate. According to a former employee, who requested anonymity because of continuing litigation and because, he said, regulators have told Madoff employees not to speak to the media, Mr. Madoff scouted the office for potential filth. Once, when he spotted an employee eating a pear at his desk in New York, this person said, Mr. Madoff spied some juice dripping onto the gray carpet. "What do you think you are doing?" this person recalls Mr. Madoff demanding. Eating a pear, the employee replied. Mr. Madoff ripped the soiled carpet tile from the floor, then rushed to a closet to retrieve a similar swatch to replace it. Julia Fenwick, who was the office manager for Mr. Madoff’s London operation from 2001 until the unit was shuttered in December, said that "everything had to be perfect" and that "you never left paper on your desk — ever." Although he visited the London office only a couple of times a year, usually on the way to his vacation home in France, Mr. Madoff still reveled in micromanaging everything there, including the office décor. The London unit recently finished spending about $700,000 for a refurbishment that recreated the black and gray palette of Mr. Madoff’s New York office and his private jet, Ms. Fenwick says. The result was office furniture made from black ash, black trimming on gray walls, black computers, black mouse pads and even a black refrigerator on the trading floor. But former employees and friends say Mr. Madoff’s obsession with order and control of his environment never led them to believe that deeper problems were afoot. "He appeared to believe in family, loyalty and honesty," said one former Madoff employee, who asked to remain anonymous because of the continuing litigation and investigations. "Never in your wildest imagination would you think he was a fraudster." Despite all of the easy money that rolled into Mr. Madoff’s firm for much of its existence, financial pressures began to emerge there during the last several years after Wall Street changed the way securities were priced and as new competition emerged. In his asset management business, however, Mr. Madoff continued to haul in fresh rounds of money from unsuspecting investors hungry for the predictable and handsome returns he booked year after year, without missing a beat. Employees who were veterans in the New York and London offices were even allowed to invest with Mr. Madoff, according to people who worked at the firm. Some employees are said to have given Mr. Madoff a large portion of their life savings — all of which now appears to be gone. Like so many others who invested with him, his employees weren’t lured to his funds simply by a promise of outsize returns. Rather, they say, they sought the security of investing with a man they knew and trusted. The Bernie they thought they knew. Mr. Madoff’s confidence reminds J. Reid Meloy, a forensic psychologist, of criminals he has studied. "Typically, people with psychopathic personalities don’t fear getting caught," explains Dr. Meloy, author of a 1988 textbook, "The Psychopathic Mind." "They tend to be very narcissistic with a strong sense of entitlement." All of which has led some forensic psychologists to see some similarities between him and serial killers like Ted Bundy. They say that whereas Mr. Bundy murdered people, Mr. Madoff murdered wallets, bank accounts and people’s sense of financial trust and security. Like Mr. Bundy, Mr. Madoff used a sharp mind and an affable demeanor to create a persona that didn’t exist, according to this view, and lulled his victims into a false sense of security. And when publicly accused, he seemed to show no remorse. Television footage of Mr. Madoff entering his Park Avenue apartment building after federal authorities charged him with fraud in December doesn’t seem to show a man exhibiting any sorrow or regret. With a battery of reporters asking him whether he felt remorse, he declined to respond and pushed his way into his building. (Thus far, his only public apology has apparently been in letters left in his lobby for fellow tenants who suffered through the media circus outside their building.) To some extent, analysts of criminal behavior say, defining Mr. Madoff is complicated by the wide variety of possible explanations for his scheme: a desire to accumulate vast wealth, a need to dominate others and a need to prove that he was smarter than everyone else. That was shown, they say, in an ability to dupe investors and regulators for years. Like the former F.B.I. agent Mr. McCrary, Dr. Meloy cautions that he has not met Mr. Madoff and can’t make a clinical diagnosis. Nevertheless, he says individuals with psychopathic personalities tend to strongly believe that they’re special. "They believe ‘I’m above the law,’ and they believe they cannot be caught," Mr. Meloy says. "But the Achilles’ heel of the psychopath is his sense of impunity. That is, eventually, what will bring him down." He says it makes complete sense that Mr. Madoff would have courted regulators, even if he ran the risk of exposing his own actions by doing so. "In a scheme like this, it’s very important to keep those who could threaten you very close to you," Dr. Meloy explains. "You want to develop them as allies and shape how they go about their business and their attitudes toward you." INDEED, if it is shown that Mr. Madoff fooled regulators for decades, that would have been a "heady, intoxicating" experience and would have fueled a sense of entitlement and grandiosity, Mr. McCrary says. And by reeling in people from the Jewish community, from charities, from public institutions and from prominent and relatively sophisticated investor networks worldwide, Mr. Madoff wreaked havoc on many lives. That’s why Mr. McCrary says it’s not too far-fetched to compare Mr. Madoff to serial killers. "With serial killers, they
have control over the life or death of people," Mr. McCrary
explains. "They’re playing God. That’s the grandiosity coming
through. The sense of being superior. Madoff is getting the same
thing. He’s playing financial god, ruining these people and taking
their money." Victim: Madoff Took 'All My Money' - Goes After SEC By Catherine Holahan Phyllis Molchatsky lost millions investing with Bernard Madoff and, like many other victims, has few options for getting that money back. But her attorney sees hope in a 1955 court case. For Phyllis Molchatsky, investing with Bernard Madoff wasn't a way to get rich. It was a plan to keep Parkinson's disease from stealing her life. In 2001, Molchatsky was diagnosed with the degenerative nerve disorder. Doctors told her she needed to quit her job as an office manager, she says. Molchatsky was not yet 55. Though she had saved nearly $2 million, she wanted assurance that she would have enough to care for herself and have a family. She turned to her broker for help. He showed her a fund that was invested with Madoff. "I wanted someone who was a little bit more conservative, someone who could let me sleep at night," Molchatsky said. Victim: 'Everything . . . is upside down' Molchatsky's investment, which eventually soared to $3.8 million, according to reports from her broker, is now gone. She worries she will someday become a financial burden to her adopted son and her partner, and expects to have to sell her suburban New York home. "It was all my money," Molchatsky said. "I wanted my son to have a better life than I had." Molchatsky, like many Madoff victims, is desperately trying to recover her losses. But with Madoff insolvent, victims are finding few avenues for restitution. Bankruptcy courts and other entities, some of which provide relief to investors in bankrupt brokerages, will likely have insufficient funds to cover what the Securities and Exchange Commission said could be more than $50 billion in losses. As a result, many victims are turning against those believed to have willingly, or unwittingly, perpetuated Madoff's alleged fraud by endorsing his business. That includes the investment firms that entrusted Madoff with clients' money, their auditors, even the federal government. Is the SEC to blame? Taking on Wall Street's top cop On Dec. 23, Molchatsky filed an administrative claim against the SEC, a preliminary step for any lawsuit against a government entity. The claim alleges the SEC was negligent in failing to uncover what may prove to have been the largest Ponzi scheme in history. "We feel that this was a classic case of negligence by the SEC," said Howard Elisofon, a New York attorney who is suing the SEC on Molchatsky's behalf. The SEC declined to comment for this story. Fighting the government will be no easy task. But Molchatsky, like most Madoff investors and financial fraud victims, has few places to turn. Investors can't go after Madoff. The government has seized his few remaining assets in hopes of dividing them among his investors -- in the event he is convicted. If Madoff is found guilty, it could take years for the government to secure and sell his assets, then determine how to distribute the proceeds, let alone cut checks. Even then, Madoff's remaining millions would likely be little consolation to investors who, collectively, are believed to have lost tens of billions. The FBI classifies Ponzi schemes -- in which investors are paid "dividends" from money provided by new investors rather than from a business's profits -- as among the most common investment scams. Since Madoff's December arrest, the U.S. Department of Justice has charged at least half a dozen more people with operating multimillion-dollar Ponzi schemes. Graphic: How Ponzi schemes work In most cases, there's little left for investors once a scheme crumbles. "The reality is that many, many times the person who has defrauded you has squandered your money," said one federal law enforcement official who asked not to be identified. "They have spent it on things that we cannot recoup, things such as expensive meals, fancy vacations, things that have no value whatsoever." Tip: How to deduct Madoff losses 'Very little recourse' Another avenue for restitution is the Securities Investor Protection Corp., or SIPC. The nonprofit, which is funded by its broker-dealer members, provides some relief for investors in failed brokerage firms that still owe their customers cash, stocks or bonds. The SIPC promises to reimburse individual investors in bankrupt member brokerages up to $500,000. "Although not every investor is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back from SIPC," it boasts on its Web site. Though investors can seek up to $500,000, the amount typically received varies. Investors can seek only their principals -- not believed profits or the interest they would have earned had they, instead, kept their money in a savings account. In cases in which an investor had withdrawn more in "dividends" than the amount initially invested, an SIPC claim could result in a "clawback," through which investors who lost money would seek funds from those who, unwittingly, had profited from the scam. The scale of Madoff's case would make it difficult for the SIPC to pay out much to victims. Though the SIPC has mailed out claim forms to more than 8,000 Madoff investors, it doesn't have enough to pay them all. According to the SIPC's Web site, the nonprofit has about $1 billion in assets and could borrow $1 billion more from the SEC. That's barely enough to cover the reported losses of a dozen or so prominent funds that had invested with Madoff. The SIPC is also offering reimbursements only to those who invested directly with Madoff's broker-dealer arm. An investor such as Molchatsky, who put her money in a fund that ultimately invested in Madoff's brokerage, is not eligible. And though intermediaries can apply and then redistribute any funds received to all affected clients, the amount eventually received by individuals is unlikely to provide much relief. "The people who have invested in Madoff have very little recourse other than to turn to people who helped him carry out his scheme," said Reed Kathrein, a partner in Seattle law firm Hagens Berman Sobol Shapiro. Kathrein's firm has filed a class-action suit against several so-called feeder funds or funds of funds that had placed money on behalf of their investors with Madoff. The suit includes Tremont Group and its owner, Oppenheimer Funds.Unlike Madoff's bankrupt firm, many of the funds that invested in him still have significant assets. But proving that investors are entitled to that money is no simple task. Many investment firms are set up as limited-liability corporations, which prevents investors who lose money in one fund from seeking compensation from other funds controlled by the same firm. A paucity of scrutiny? Investors also face hurdles in proving that such firms are liable. Under U.S. securities laws, plaintiffs must show that the brokers, hedge funds or money managers actively urged investors to do something that was not in their best interest, Kathrein said. "Congress has made it difficult in the past few years to get people who are aiders and abettors," he said. Kathrein and other lawyers hope they will have a strong argument under state fiduciary-duty laws. They plan to argue that executives of the funds that invested in Madoff, and their auditors, violated those laws by failing to provide sufficient care in vetting Madoff before investing client funds. "Our view is that this was a total breakdown in the due-diligence process," said Gregory M. Nespole, a New York attorney who is pursuing a class-action suit against Andover and Beacon funds, which lost money in Madoff's alleged Ponzi scheme. "When I entrusted my money to a money manager, it is my understanding that money was going to be carefully invested and that the places where it was going were going to be investigated." The funds are not admitting any mistakes. Their lawyers will argue that Madoff simply hid his fraud too well. They will likely point to the sheer number of investment professionals and savvy, high-net-worth individuals allegedly defrauded as evidence that standard checks could not uncover fraud. Even the SEC, after all, didn't figure it out until someone from Madoff's firm, reportedly one of his sons, came forward.
"Like the tens of thousands of investors swindled by Bernard Madoff, the Andover and Beacon funds are shocked by the circumstances and unprecedented scope of the Madoff situation," the funds' managers said in a statement e-mailed by a spokesman. "The funds are exploring their legal remedies in an effort to recover the losses caused by Madoff's conduct." Tremont issued a similar statement. "Tremont believes these claims are wholly without merit and will vigorously defend itself while continuing to maintain a focus on efforts to pursue avenues for recovery that may be available to its funds and investors," spokesman Montieth Illingworth said. The SEC's dimmed lighthouse Unlike the funds, the government has admitted missteps. In a Dec. 16 statement, then-SEC Chairman Christopher Cox expressed regret that the agency had not looked more deeply into Madoff's activities. He said that "credible and specific allegations regarding Mr. Madoff's financial wrongdoing, going back to at least 1999, were repeatedly brought to the attention of the SEC staff." However, the SEC never requested a formal investigation. "A consequence of the failure . . . is that subpoena power was not used to obtain information, but rather the staff relied upon information voluntarily produced by Mr. Madoff and his firm," Cox said. That's one reason Molchatsky and her lawyer are taking on the government. "It is quite admirable for Chairman Cox to stand up to the plate and actually make public statements that there was credible evidence. . . . It's very admirable, but it is also very telling," said Elisofon, Molchatsky's attorney. "That will go a long way to proving liability." Molchatsky knew Elisofon through a mutual friend. After learning about Madoff's alleged scheme, she reached out in hopes of finding some way to get back her money. She was still in shock. She wanted to know how Madoff could have perpetrated such a large fraud without a long history of violations and fines. Madoff's record appeared unassailable. Though Molchatsky didn't know that Madoff was a former head of the Nasdaq or considered an electronic trading guru, the past performance of the American Masters Broad Market Fund, which invested in Madoff's brokerage, was impeccable. It never rose as high as competing funds during market rallies, but it never lost significantly when the market was down, said Molchatsky. "I would not have given a penny . . . if there was the slightest blip on the radar," Molchatsky said. She blamed the SEC. Elisofon's initial reaction was to push another option, he said. He didn't believe he could sue "king and country." Though Molchatsky could ultimately receive some restitution from a successful class-action suit against the third parties that invested in Madoff -- since she invested through an intermediary -- she and her law firm opted not to sue those who gave money to Madoff. Even if one of these lawsuits by another firm is successful, the sheer number of investors eligible for restitution makes it unlikely that Molchatsky would receive much of her investment back. Eventually, Elisofon decided that Molchatsky's best option was to sue the government under the Federal Tort Claims Act. After all, while feeder funds could try to claim they were blameless victims, the government had admitted mistakes, Elisofon said. Elisofon likened the case to a 1955 court decision in which the government was successfully sued for failing to maintain a lighthouse. In the case, Indian Towing Co. v. the United States, the company was awarded damages after its barge ran aground on an island where the Coast Guard had a lighthouse. The light, at the time, was broken. "They (the SEC) left the light out in the lighthouse," Elisofon said. "We feel ultimately that we can prevail on that." The government has six months to respond to the administrative claim. If it denies Molchatsky's claim for restitution or ignores it, Elisofon can proceed with a lawsuit. He expects that could take years. In the meantime, Molchatsky will likely have to sell her home and uproot her family. And, though Elisofon is hopeful the government could take other steps, such as creating a fund for the victims or giving the SIPC more money and a broader mandate for compensation, Molchatsky knows she faces a long struggle to get her life back. "My future," she said, voice breaking, "the only thing that remains the same for my future is the love I have for my son. . . . Everything else is upside down."
Madoff: Layers and Layers of Players How a Far-flung Cadres of Unregulated Securities Firms, Investment Managers-even Doctors and Lawyers—helped Pull Unwitting Investors into the Disgraced Money Manager's Orbit By Matthew Goldstein and
Peter Burrows The alleged fraud of Bernard Madoff has put the heat on so-called feeders, the giant hedge funds that funneled more than $20 billion to the now-disgraced money manager. But it turns out those players depended on another group of smaller funds and individuals to gather money in what looks like the Wall Street equivalent of a Russian nesting doll. The largely unregulated crowd, including accountants, lawyers, investment managers, even doctors, opened the exclusive world of hedge funds to more investors—and charged exorbitant fees for the privilege. The sprawling network of individuals and tiny funds, which operates across the entire hedge fund industry, presents a challenge for securities regulators as they consider crafting new rules for this huge slice of the investment world. It's not merely a matter of keeping tabs on 10,000 hedge funds but also on the myriad players on the margins—a far more costly and onerous task. "Sometimes there's no better place to hide than in plain sight," says Bill Singer, a lawyer and former regulator. The supporting cast in Madoff's alleged scheme is an extreme example of the industry's excess. Everyone wanted a piece of the action. A caddie in the Jupiter (Fla.) area purportedly referred golfers for a fee to firms that invested with Madoff. Donna McBride, a Boca Raton (Fla.) retiree, sank $700,000 into a fund managed by two practicing lawyers in White Plains, N.Y., Joel Danziger and Harris Markhoff. Many investors had no idea what they were buying since marketing documents rarely mentioned Madoff by name. A spokesman for the lawyers says the fund operated independently of their firm. The system allowed investors to gain entrée to Madoff with far fewer dollars, thereby expanding his clientele beyond big institutions and billionaires to wealthy individuals of more modest means. Consider the $175 million FutureSelect Prime Advisors II, which plowed its assets into Tremont Group's Rye family of funds, which channeled money to Madoff. Investors in FutureSelect needed to pony up only $250,000, compared with the $500,000 required by Rye and most large feeder funds. Over the years, some firms lowered that bar to as little as $50,000. "A lot of small investors got exposure to Madoff through subfeeders," says Reed R. Kathrein, a lawyer who's representing alleged victims of Madoff. FutureSelect didn't return calls for comment. Fees were collected at every level. Here's one feeding chain: Commonwealth Financial Network, a group of independent brokers, charged a commission for individuals to buy into Spectrum Select, a subfeeder fund. Commonwealth President Peter Wheeler invested in the fund. Spectrum, which owned stakes only in the Rye funds, then levied a 1% management fee and collected 4% of profits. Rye gave assets to Madoff, charging investors a flat 1.5% fee. Madoff purportedly made trading commissions off the assets. Says Ron Pearson, a Spectrum manager: "It's the nightmare of the entire world." A Commonwealth spokesman says the firm had "limited involvement with Spectrum." Rye declined to comment. Investors paid layer upon layer of fees with seemingly little regard for how they ate into gains. Those at the bottom paid the biggest tab and realized the smallest returns. Says New York lawyer Ross Intelisano, who represents Madoff investors: "The most fascinating part is the multiple layers of people glomming off Madoff." Goldstein is a senior writer at BusinessWeek. Burrows is a senior writer for BusinessWeek, based in Silicon Valley .
DealBook Column In Madoff, a Court Trusts By Andrew Ross Sorkin "Is Madoff here yet?" "Where’s Bernie?" "Do you think he’s going to jail today?" A scrum of 20 photographers gathered in the January chill on Monday morning outside the courthouse on Pearl Street in downtown Manhattan, waiting to know if Bernard L. Madoff, accused in a Ponzi scheme extraordinaire, would have his bail revoked and be sent to jail. They had come to catch a glimpse of the supervillain of the financial crisis, each hoping to get "the last shot of him before he gets hauled away," as one photographer put it. Another team of photographers was camped outside of Mr. Madoff’s apartment building on East 64th to catch him as he left for the courthouse. By now, you probably know what happened: Mr. Madoff never left home. And he did not go to jail, either. He is probably lounging around his living room watching repeats of "SportsCenter" on his flat-panel television. Ronald L. Ellis, the federal magistrate judge, had promised to make his ruling by noon, and a few minutes after 12 o’clock, the news arrived that Mr. Madoff would not be remanded. Despite Mr. Madoff’s sending 16 watches — including diamond-encrusted timepieces from Tiffany and Cartier — 4 diamond brooches and an emerald ring to family and friends, and having 100 signed checks worth $173 million in his desk ready to be sent, Judge Ellis decided that Mr. Madoff could remain under house arrest. Mr. Madoff’s investors are fuming. The authorities say that he admitted to stealing as much as $50 billion, which, if true, would place him at the top of financial scoundreldom. Mr. Madoff also may have sought to obstruct justice by trying to get rid of whatever valuables remain — which ostensibly should go to the estate and its victims. Someone without Mr. Madoff’s bank account surely would be locked up by now. Of course, this has always been the way of the white-collar world — though Martha Stewart never tried to smuggle jewelry through the mail. Kenneth L. Lay, L. Dennis Kozlowski and Bernard J. Ebbers all remained out on bail until and during their trials by posting millions of dollars in bail. Phillip R. Bennett, the former chief executive of Refco and a British national, was required to post a whopping $50 million to stay out of jail. Welcome to the two-tiered system of justice: one for the super-rich, the other for the rest of us. Judge Ellis’s explanation is not very satisfying. He says that to be remanded to jail, a defendant must pose a flight risk or be at risk of obstructing justice. Fair enough. But he goes on to justify his decision by essentially saying that Mr. Madoff can afford to buy his way out of the pokey. Indeed, as part of Mr. Madoff’s house arrest, his wife has agreed to pay for personal security to "monitor" him by video 24 hours a day at a cost of tens of thousands of dollars. By doing so, the chances are low that Mr. Madoff will hop a flight to Namibia. (His passport has also been confiscated.) And the judge added a new condition (with another expense) to keep him from trying to obstruct justice: Mr. Madoff will no longer be able to try to transfer assets because all of his valuables will be taken by a security firm and locked in a vault; the items that remain portable and in his apartment will be monitored by another security firm, which is supposed to take an inventory every two weeks. All of those services will be paid for by Mrs. Madoff. (Oddly enough, Judge Ellis instructed Mr. Madoff to conduct the initial inventory of assets, which puts the entire idea of monitoring them into question.) Judge Ellis clearly understands that people who lost money with Mr. Madoff are outraged. "The issue at this stage of the criminal proceedings is not whether Madoff has been charged in perhaps the largest Ponzi scheme ever, nor whether Madoff’s alleged actions should result in his widespread disapprobation by the public, nor even what is appropriate punishment after conviction," he wrote in his opinion. "The legal issue before the court," he continued, "is whether the government has carried its burden of demonstrating that no condition or combination of conditions can be set that will reasonably assure Madoff’s appearance and protect the community from danger." At this point, it appears Mr. Madoff and his lawyer are playing for time. Ira Lee Sorkin, Mr. Madoff’s lawyer (and no relation to me), seems to know his client is going to jail; the real question is how long he can prevent it. So far, he’s done a good job a convincing the judge that Mr. Madoff can finance his own incarceration — in a penthouse apartment. What is less clear is whether Mr. Madoff is cooperating with the authorities. Mr. Sorkin has waffled on this, at one moment saying that his client was cooperating and at another saying that he, Mr. Sorkin, was cooperating. Mr. Madoff hasn’t been indicted in the Ponzi scheme as the investigation continues, and he probably won’t for at least another month, if not longer. Whatever the case, Mr. Madoff will probably find himself in his living room on the couch for as long as an entire year before he gets officially "hauled away." And the photographers will still be waiting to get the shot. Madoff Still Free on Bail; Signs Seen of Plea Deal By Diana B. Henriques A federal magistrate refused to revoke bail on Monday for Bernard L. Madoff, the financier accused of operating a $50 billion Ponzi scheme, while signs emerged that his lawyer was actively negotiating a plea agreement that could conclude the baffling fraud case without a trial. Federal prosecutors acknowledged in a court order released Monday that Mr. Madoff’s lawyer, Ira Lee Sorkin, is "engaging in discussions concerning a possible disposition of this case." While Mr. Sorkin would not comment, several former prosecutors said that language clearly indicated that the discussions were about a deal in which Mr. Madoff would agree to plead guilty in exchange for some type of leniency. "He’s trying to cut a deal," said Marvin G. Pickholz, a former securities regulator and specialist in white-collar crime. "The only other possible ‘disposition’ that could be negotiated would be for the government to drop the whole case — and that’s not going to happen." The information was contained in an order, signed by the United States Magistrate Judge Ronald L. Ellis, that approved a 30-day delay in a hearing on Mr. Madoff’s case that otherwise would have been held on Monday. The judge also denied a government request that Mr. Madoff be jailed until he can be tried, saying that the government had not proved that he was a flight risk or a security risk. Lev L. Dassin, the acting United States attorney in Manhattan, notified the judge late Monday that he planned to appeal the ruling, which has been stayed for 48 hours to permit that appeal. The judge’s ruling allows Mr. Madoff to remain in his Manhattan apartment, wearing an electronic monitoring device and being watched around the clock by a security team paid for by his wife. Prosecutors had asked the court to revoke Mr. Madoff’s $10 million bail, secured by various family homes held in his wife’s name, after he violated a court-ordered asset freeze by mailing about $1 million in expensive watches and jewelry to family and friends on Christmas Eve. In addition to the jewelry that was sent out, prosecutors said, Mr. Madoff had plans to transfer $200 million to $300 million of investors’ money to family members and friends. When authorities searched Mr. Madoff’s office desk, they found $173 million in signed checks ready to be sent. "The decision speaks for itself, and we intend to comply with all the conditions of his bail," Mr. Sorkin said after the ruling was released. "But we have no comment with respect to its impact on his day-to-day life." The judge did place additional restrictions on the bail requirements, many of which had already been imposed by Judge Louis L. Stanton of United States District Court, who is handling the civil suit. In denying the request, Judge Ellis wrote that he was not satisfied that the government had proved "by clear and convincing evidence" that jailing Mr. Madoff before trial was the only way to ensure that he did not flee or obstruct justice. Included in the restrictions is one that bars Mr. Madoff from transferring any assets. Mr. Madoff’s wife, Ruth, must also comply with restrictions on the transfer of assets. In addition, the ruling said, Mr. Madoff shall compile an inventory of all "valuable portable items" in his Manhattan apartment and supply it to the government. Casale Associates or another security company approved by the government must check the inventory every two weeks, the judge said. Mr. Madoff and the government must agree on a threshold value of the items within a week. The security firm will also be required to examine all outgoing mail to assure no property has been transferred. Meanwhile, a federal bankruptcy judge overseeing the liquidation of Mr. Madoff’s brokerage firm granted a request from the trustee in the case, Irving Picard, for broad power to subpoena witnesses and gather documents as part of Mr. Picard’s investigation of the alleged fraud scheme. The trustee was appointed at the request of the Securities Investor Protection Corporation, which provides limited insurance coverage for the brokerage customers affected by the firm’s collapse. Mr. Madoff was charged last month with securities fraud but has remained free since posting bail. So far, Mr. Madoff has not been indicted. Under federal court rules designed to assure a defendant a speedy trial, Monday would have been the deadline for a hearing at which the prosecution would have had to show "probable cause" for bringing Mr. Madoff to court. Typically, the prosecution fulfills that requirement by issuing an indictment. It was known on Friday that an agreement had been reached to postpone the hearing. But Judge Ellis’s order on Monday showed the reason: so that further discussions could be held with Mr. Madoff’s lawyer. "Obviously, both sides had to agree to delay the hearing, so there must be some discussions under way that the defendant believes are in his best interest," said Robert A. Mintz, a lawyer at McCarter & English in Newark and a former federal prosecutor in New Jersey. Mr. Sorkin and Daniel J. Horwitz, who represent Mr. Madoff, have argued that jailing him would be unfair and wrong. Moreover, Mr. Madoff is too widely known at this point, they said, and too disliked to get very far. Mr. Madoff’s lawyers characterized the jewelry he sent to family and friends as "a few sentimental personal items." Mr. and Mrs. Madoff’s decision to mail it, they said, was an honest mistake. Prosecutors said the gifts included 13 watches, 4 diamond brooches, a jade necklace and 2 sets of cufflinks. Most of the items were recovered. Mr. Madoff told F.B.I. agents last month that he had overseen a financial fraud and estimated that it had cost investors as much as $50 billion, according to the criminal complaint filed in federal court in Manhattan. The fraud was continuing just days before Mr. Madoff confessed it to the F.B.I., according to a lawsuit filed by a New York company that asserts Mr. Madoff took in $10 million from it on Dec. 5. Along with the court-appointed trustee, agents from the Securities and Exchange Commission and F.B.I. are investigating whether other people aided Mr. Madoff. Benjamin Weiser contributed reporting.
Bernard Madoff 'Fraud'Investor A French Executive Whose Firm Invested More than $1bn with Alleged Fraudster Bernard Madoff Has Been Found Dead in New York. By Amanda Andrews News of the death comes as it emerged that the disgraced New York hedge fund king, accused of defrauding clients across the world of $50 billion, will spend Christmas under nightly house arrest. He will have an electronic tag fitted to his ankle, after failing to find the four people needed to guarantee his $10 million bail. Mr De la Villehuchet was a founding partner and chief executive officer of Access International Advisors. Access had reportedly invested $1.4bn with Mr Madoff, who was arrested on December 11. Access raised funds on the European markets to plough into Mr Madoff's investment fund. According to the French report, Mr De la Villehuchet was believed to have been desperately trying to recover some of the funds lost to Mr Madoff. Mr De la Villehuchet "could not cope with the pressure following the outbreak of the scandal," the website of La Tribune daily quoted an associate as saying. The website said that Mr De la Villehuchet had spent the past week trying "day and night to find a way to recoup his investors' money" and that he had begun legal action in the United States against US authorities. News of the latest revelation in the Madoff saga come as the FBI has moved agents from anti-terrorism investigations in order to look into financial fraud because it poses "the greatest threat" to Americans. Special Agent David Cardona, head of the FBI’s criminal division, told Bloomberg News that the bureau was engaging in "triage" - dealing with the most important cases first - by responding to the slew of financial frauds exposed by the ailing economy. Firm Built on Madoff Ties Faces Tough Questions By Alex Berenson and Eric
Konigsberg Since Bernard L. Madoff was arrested 11 days ago in connection with a $50 billion Ponzi scheme, the Fairfield Greenwich Group has portrayed itself as an unwitting victim of the fraud, the biggest of Mr. Madoff’s many losers. Clients of Fairfield, a secretive hedge fund advisory company based in Connecticut, lost $7.3 billion to Mr. Madoff’s fund. But for Fairfield, working with Mr. Madoff was hugely profitable. Internal documents from Fairfield show that the firm has taken more than $500 million in fees since 2003 alone from the money it placed with Mr. Madoff. Nearly all those fees went to a handful of Fairfield executives, including Walter M. Noel, Fairfield’s founder, who used the money to build a glamorous life, splitting his time between homes in New York, Connecticut, Florida and the Caribbean. As it raised money all over the world, Fairfield also made detailed pledges about how it would monitor and track Mr. Madoff’s investments, the documents show. Now, investors and regulators are sure to ask whether Fairfield made good on those promises — or whether it was a facilitator of the Madoff scandal as well as a victim. Similar questions may arise for the dozens of banks and hedge funds around the world that reaped extraordinary fees for steering investments to Mr. Madoff over the last decade. None of them, however, earned more from their Madoff business than Fairfield did during the firms’ 20-year relationship. Fairfield promised its investors that money could not be moved from its accounts with Bernard L. Madoff Investment Securities without two signatures. It said that it would independently calculate the value of the funds it invested at Mr. Madoff’s firm at least once a week. It promised to reconcile statements from individual trades with Mr. Madoff’s custodial records. It is not clear what Fairfield did to make good on those pledges. A spokesman for Fairfield, Thomas Mulligan, offered only a statement characterizing the firm as a victim of Mr. Madoff. "Fairfield Greenwich Group is in the process of gathering and reviewing all of the factual information relevant to its having been defrauded by Bernard Madoff," Mr. Mulligan said in a written statement. "It made efforts to verify the information it received from Madoff. Following its review, Fairfield Greenwich expects to be in a position to provide more specifics." Mr. Mulligan also said that Fairfield Greenwich, and its partners, had about $60 million invested with Mr. Madoff. That sum, while significant, is less than 1 percent of the overall amount that the firm placed with Mr. Madoff, and barely 10 percent of the fees that Fairfield reaped since 2003 from its client investments with Mr. Madoff. Fairfield raised money for Mr. Madoff mainly through a fund called Fairfield Sentry, which supposedly had $7 billion in assets by 2007. As it sought new investors for Fairfield Sentry, Fairfield highlighted its close control over the fund and the protections it would provide investors. In a "due diligence questionnaire" made available to potential investors in Sentry, Fairfield promised that it calculated the value of Sentry’s assets weekly and monthly. It also said Citco Fund Services, an independent hedge fund administrator based in the Netherlands, separately calculated the value of Sentry’s assets each month. Further, Fairfield promised that both it and Citco double-checked the monthly statements from Mr. Madoff’s firm it received against records of the assets held in the fund. To prevent unauthorized stock trades or the unauthorized removal of cash from Sentry’s accounts, "the movement of cash among the Fund’s accounts requires two signatures," Sentry said. Mr. Mulligan did not respond to questions about whether Mr. Madoff could have moved money or securities out of Fairfield Sentry’s accounts without its approval. Reached Friday afternoon, a manager at Citco Fund Services in Amsterdam asked for questions via e-mail, then did not respond to them. Another document, this one prepared in 2007 as Fairfield Greenwich considered selling itself in what at the time was a very rich market for hedge-fund advisory companies, shows just how much money it made from its relationship with Mr. Madoff. According to the document, Fairfield generated $250 million in revenue and $200 million in profit for the year that ended Sep. 30, 2007. Nearly 65 percent of that money came from fees on Sentry, and nearly all the profits were distributed among the firm’s 21 partners. Fairfield’s employees were also lavishly compensated, with at least four receiving more than $5 million in pay. In early 2008, several private equity and investment firms were approached by Fairfield about purchasing a share of the company. A partner of one that considered buying a stake that he estimated was between one-third and one-half of Fairfield — the firm was valuing itself somewhere between $1 billion and $1.5 billion — said that he was scared off about 20 minutes into his initial meeting with a team of Fairfield managers. "They were just incredibly squishy and vague even during the warm-up," said the prospective buyer, who spoke on condition of anonymity because of a non-disclosure agreement with Fairfield. "I asked them to tell me about the manager of the fund Sentry feeds into, and I was told, ‘We don’t really talk about him.’ " Like Mr. Madoff’s firm, Fairfield was at least in part a family business. Four of Mr. Noel’s sons-in-law worked at Fairfield. But unlike Mr. Madoff, Fairfield’s partners, led by Mr. Noel, were not shy about spending their money and taking a high profile in wealthy New York society circles. "The last few years, they really made a play to be a part of that New York-Southampton social axis," David Patrick Columbia, the editor of NewYorkSocialDiary.com, said of Mr. Noel and his family. "It happened so fast that you really noticed them." Mr. Noel, whose primary
residence and office remain in Greenwich, has at least five luxury
homes. Along with his Greenwich house, whose value has been
estimated at $4.2 million, he has homes in Southampton and Palm
Beach. And since 2000, the Noels have also maintained a pied-B-terre
at 812 Park Avenue. The combined value of those homes is more than
$20 million. Madoff Had Perceived Edge in the Markets ByHenny Sender in New York
A Swiss bank that helped channel funds to Bernard Madoff says the New York money manager had a "perceived edge" in the financial markets because he handled so many trades through his broker-dealer arm. Union Bancaire Privée, which advised 11 hedge funds that placed money with Mr Madoff, included the characterisation in a letter that it sent to clients on December 17 to explain why it felt comfortable with Mr Madoff. Mr Madoff’s clients believed that he employed a "split-strike options strategy" that would make money in both up and down markets through trades in stocks and options. "We were assured that he had some visibility as to the momentum of the markets...due to his significant volume size as a broker/dealer," the UBP letter said. "The perceived edge was Madoff’s ability to gather and process market-order flow information and use this information to time the implementation of the split-strike options strategy." UBP was one of many banks that channelled money to Mr Madoff through funds such as Ascot, Kingate, the Fairfield Greenwich Group, and its own M-Invest. UBP said half of the 22 hedge funds it advised allocated money to Mr Madoff. About $700m of its clients’ money was invested with Mr Madoff. In its letter, UBP links its confidence in Mr Madoff to the number of regulators who supervised different parts of his operations. This could fuel the debate already raging over whether the fragmented state of US financial regulation might have made it easier for fraud to occur. "Various companies within the Madoff structure are regulated by the SEC, CFTC, FINRA, as well as the FSA in the UK. "These regulators performed regular audits with no material findings, which was essential to approving the fund," the letter said. "The long track record, audits and regulatory oversight showed a compelling investment opportunity with stable returns, limited volatility and good liquidity appropriate to reduce overall volatility." UBP’s assertions about the low volatility of the investments underscores one of the great ironies of the case. Mr Madoff targeted risk-adverse investors seeking steady returns – the "1 per cent-a-month crowd". In retrospect, it was precisely that stability and low-volatility that should have served as a red flag. "For years, I felt like the people at ATT Wireless who were competing with WorldCom," says the chief investment officer of one fund of hedge funds in New York, which did not invest in Madoff funds, citing the wireless company whose results ultimately proved fraudulent. He added: "Clients demanded to get into Madoff funds. They would say I can do better than what you can get me. He was the benchmark for investors seeking stable returns. He perverted all the numbers." UBP said it received monthly statements and net asset value calculations on the Madoff investments from respected fund administrators and added that Mr Madoff’s auditors were accredited by the SEC. Some lawyers are already arguing that litigation on behalf of investors in the Madoff operation will target the deep pockets of auditors and administrators.
Even Winners May Lose Out With Madoff By Alex Berenson They made money. One client said he invested
more than $1 million with Mr. Madoff over a decade ago. As his
portfolio rose in value, he took out How many clients of Bernard L. Madoff Investment Securities profited unwittingly on what Mr. Madoff described as a big Ponzi scheme isn’t known. But given the structure of Ponzi schemes, which use money from later investors to pay early investors, many longtime clients may actually have wound up ahead. "In a Ponzi scheme, not all investors lose," said Tamar Frankel, a law professor at Boston University who has written on Ponzi schemes. "Those who manage to get out in time retain their investments and some of their gains." But previous court rulings regarding financial frauds suggest the winners could be forced to give up some of their gains to losers. One of the unanswered questions so far is precisely how much investors lost over all. When Mr. Madoff confessed and was arrested last week, he told F.B.I. agents that the losses might be $50 billion, according to court filings. Various institutions and individuals so far have reported losses totaling more than $20 billion, but it is unclear how much of that is cash they actually invested and how much represents paper profits based on the falsified returns Mr. Madoff said investors were earning. Mr. Madoff regularly delivered returns of 10 to 17 percent to investors, a very good year-in, year-out return but on the low end of the 10 to 100 percent a year typically dangled by promoters of Ponzi schemes. But assets that can guarantee those returns year after year without risk simply do not exist. Instead of profitable investments, Ponzi schemes repay initial investors by raising more money from new investors. The schemes typically collapse when the promoter cannot bring in enough money to pay existing investors seeking redemptions. Joel M. Cohen, the deputy head of litigation for the Clifford Chance law firm and a former federal prosecutor who specialized in business and securities fraud, said that payments to early investors were an integral part of any Ponzi scheme. "You need to deliver returns in the range that you promised to attract investors," Mr. Cohen said. Yet even Mr. Madoff’s most fortunate clients may wind up having to give back some of their gains, as investors might have to do in another recent financial fraud, the collapse of the hedge fund Bayou Group in 2005. In the Bayou case, in which investors lost $400 million, a bankruptcy judge ruled that investors who withdrew money even before Bayou collapsed might have to return their profits, and possibly some of the initial investments, to the bankruptcy trustee overseeing the unwinding of Bayou. The returned money is to be distributed among all investors, who are expected to receive only about 20 to 40 percent of their original investments. Mr. Madoff’s winning clients are likely to face similar legal challenges. In fact, the Madoff client who profited from his investment spoke on the condition that he not be identified, out of concern that he might be sought out to repay some of his gains to the receiver or bankruptcy trustee for Mr. Madoff. Jay B. Gould, a former lawyer at the Securities and Exchange Commission who now runs the hedge funds practice at Pillsbury Winthrop Shaw Pittman, said the client was correct to be concerned. New York State law may allow the receiver or bankruptcy trustee to demand that Mr. Madoff’s investors return money they received from the scheme any time in the last six years, Mr. Gould said. Such so-called clawbacks may occur even if the client had no idea that the gains were fraudulent, he said. "The idea is that the whole thing was a fraudulent undertaking, so nobody should profit from it, and everybody should be put on equitable footing," Mr. Gould said. But in a sign of the complexity of securities law, Mr. Cohen said he did not agree with Mr. Gould’s interpretation. "I don’t think it’s that easy to claw back money from something that happened six years ago," Mr. Cohen said. "There’s no level of fiduciary duty between investors. If someone put in a million dollars five years ago, and made 11 percent, and took their money out after one year, are they required to give back the 11 percent? I think that’s inaccurate." Even determining which investors made money will be enormously complicated. Mr. Madoff’s practices appear to have gone on for many years and entangled thousands, perhaps tens of thousands, of clients, who invested both directly with him and through third-party hedge funds. Some of those investors never took out a cent, while others took out only a fraction of what they invested and a few took out more than they put in. Jesse Gottlieb, a life insurance broker in New York, said his account statements show that he had about $17 million at the Madoff firm when it collapsed. Mr. Gottlieb declined to say how much cash he had invested, but he said he had taken out only a small amount of money from his investments with Mr. Madoff, which were held in trusts for his sons. Mr. Gottlieb said he knew of other investors who regularly cashed out portions of their accounts. In most cases, they were retirees who left their principal with Mr. Madoff, but lived off the annual 10 to 17 percent returns he provided, Mr. Gottlieb said. The complexity of situations like the one that Mr. Gottlieb described means that investors may wind up suing each other, as well as the hedge funds and banks that brought them into Mr. Madoff’s funds and the auditors who worked for those hedge funds. "This is so big, and there are so many people situated differently," Mr. Gould said. "Everybody is potentially averse to everybody else." Tax Deductions for Theft Losses Could Help Some Investors By Lynnley Browning For the legions of investors who appear to have been swindled by Bernard L. Madoff, there could be some relief. Tax rules allow investors who fall prey to criminal theft perpetrated by their investment advisers or brokers to claim a tax deduction stemming from their losses. The rules, which are intended to aid investors cheated through embezzlement, pyramid schemes, extortion or robbery, could potentially put hundreds of millions or even billions of dollars back into the pockets of Mr. Madoff’s stunned investors. They include the publishing magnate Mort Zuckerman; the owner of the New York Mets, Fred Wilpon; a foundation run by the filmmaker Steven Spielberg; and wealthy clients and banks from Palm Beach to Switzerland. But it is unclear whether the Internal Revenue Service will see things that way. "We are aware of the situation, but beyond that, we have no comment," Bruce Friedland, an I.R.S. spokesman, said on Thursday. Gary A. Zwick, a tax lawyer at Walter & Haverfield in Cleveland, said, "It’s fair to say that many people will take the position that the theft loss rules will apply, but the government may not take that approach." Investors who can prove they were cheated may also be able to claim a refund for federal taxes paid over the last two years on "phantom" interest income from their investments with Mr. Madoff. But they cannot claim a refund for taxes paid on any capital paid back to them. Mr. Madoff, who was arrested last Thursday, ran what prosecutors contend is history’s largest Ponzi scheme. On the tax front, a formal declaration that Mr. Madoff’s investment funds are bankrupt would help investors. "Embezzlement followed by bankruptcy is a pretty good indication that you’re not going to get your money back and will have a theft-loss claim," said D. Matthew Richardson, a tax lawyer at Sheppard Mullin Richter & Hampton in Los Angeles. Mr. Madoff’s firm, Bernard L. Madoff Investment Securities, is currently being liquidated by a court-appointed trustee. But before investors can claim the deduction, they have to clear a tall hurdle: they have to be reasonably certain that they will not recover their money. Proving that could take years, as investigators and regulators pore over Mr. Madoff’s books and a wave of lawsuits emerges. It is unknown whether Mr. Madoff used investors’ money not just to pay early investors but also to stash in his personal bank accounts overseas or to underwrite a lavish lifestyle. Any such assets, as well as insurance, could be a source of recovery for investors — and could dilute any tax write-offs. The charities that fell victim to Mr. Madoff would not be eligible for any relief because they are exempt from taxes. "I think it’s 100 percent certain that investors will get the theft-loss deduction, but nobody’s going to get it right away, and it may take five years," said Alvin Brown, a tax lawyer and former manager in the I.R.S.’s chief of legal department. Under theft-loss rules, investors can generally deduct 90 percent of their losses against their adjusted gross income, according to Robert Willens, a tax and accounting authority. Investors who argue that the loss arose from a for-profit transaction — the point of investing — may be able to deduct 100 percent. "Investors in programs sponsored by Mr. Bernard Madoff may find that their losses will be mitigated by certain ameliorative provisions of the tax code," Mr. Willens said. The rules permit losses stemming from theft to be deducted in the year in which the loss is discovered by the investor, even if it took place earlier. They also allow investors to carry back theft-losses for three years — one more year than under the rules for capital losses — and to carry losses forward for 20 years. Investors compute losses according to the adjusted basis in their investment, not the current fair-market value. The theft-loss deduction is not the same as the more commonly used capital loss deduction, which applies to securities that decline in value. In 2006, the I.R.S. processed more than 206,000 claims for theft-loss and casualty deductions — the I.R.S. groups the two — worth more than $5.1 billion. Claims filed under the Madoff scheme would most likely dwarf that dollar figure.
Madoff's
Rise Fueled by Leverage, Controversial Fees By Alistair Barr SAN FRANCISCO (MarketWatch) -- Bernard Madoff, the alleged perpetrator of what could be the largest Ponzi scheme in history, relied on a network of leverage providers and controversial fee arrangements built up over more than a decade to feed his operation. The scandal, which may trigger at least $17 billion in losses, shows how much the hedge-fund business relied on trust and personal relationships rather than the rigorous due diligence typically demanded by institutional investors and lenders that have come to dominate the industry in recent years. "It's gone from being an old boy's network to a real business. If you knew the right people, or if the right people could vouch for you, you were in," said Sol Waksman, president of BarclayHedge, which tracks the performance of managers in the $1.5 trillion hedge-fund industry. "That's what due diligence was -- checking the references." "It's human, but that's what con men are all about," he added. "They prey on trust." Madoff, founder of Manhattan-based Bernard L. Madoff Investment Securities, was arrested and charged with securities fraud last week in what federal prosecutors called a Ponzi scheme that could involve losses of more than $50 billion. Ira Lee Sorkin, a lawyer representing Madoff, didn't return calls and emails seeking comment. Tremont Group Holdings and Fairfield Greenwich Group, two of the oldest hedge-fund investment firms, said they had $10.8 billion with Madoff this week -- more than half of the total assets managed by the firms. Other firms that put clients' money with Madoff include Union Bancaire Privee, the largest fund-of-hedge-funds business in the world with roughly $1 billion of exposure, and Banco eported to have about $3 billion at risk via its Optimal fund-of-funds unit. Ascot Partners, a hedge-fund firm run by former GMAC chairman Ezra Merkin, had $1.8 billion with Madoff, while Fix Asset Management, run by Charles Fix, a member of a Greek brewing family, had roughly $400 million. Allure and Cachet Madoff founded the firm that bears his name in 1960 and with brother Peter, he built one of the largest market-makers in the United States, with many of the world's top financial institutions as clients. But he also began an investment business just as the modern hedge-fund industry was starting to grow in the late 1980s and early 1990s. As a former chairman of the board of the Nasdaq Stock Market and member of the board of the Securities Industry Association, Madoff had the right reputation in a business that still mostly relied on personal connections to wealthy people to raise money. As early as 1990, the Kingate Global Fund, partly overseen by Tremont, was up and running with Madoff as the portfolio manager. At that time, the hedge-fund industry had less than $40 billion in assets, according to Hedge Fund Research. Investing with Madoff's firm was counted as a privilege when it was one of just a few dominant big names in the industry. Investors rarely saw details of the funds' strategies or checked trading positions -- what's known as due diligence in the industry today. That was part of the hedge-fund industry's allure, and Madoff basked in its glow. He was known as a top manager who didn't let just anyone invest with him and who had a way of making money that he didn't want to disclose because it was so valuable. Investors were grateful for access on any terms. And the only way to get it was through gatekeepers like Fairfield, run by Walter Noel and Jeffrey Tucker, and Tremont, then headed by Sandra Manzke and Robert Schulman. By January 2008, Madoff had $17 billion in assets under management, according to a regulatory filing. The hedge-fund industry had nearly $2 trillion after several years when institutional investors like pension funds and endowments poured money in. Cautionary Tale Madoff's investing empire may have unraveled a decade ago, in the wake of the collapse of hedge-fund firm Long-Term Capital Management in 1998. By that time, banks had begun lending to investors in hedge funds to help increase returns. This was mostly done with funds of hedge funds, which allocate client money to a group of underlying managers. That way, if one or two managers blew up, the banks would still get their loans repaid. But Madoff had such a strong reputation and had already reported such steady returns that banks were willing to lend to vehicles that invested just with him. Fairfield Sentry Ltd., the main Fairfield Greenwich fund that invested with Madoff, reported annual returns of at least 10% from 1991 through 1998, with only seven down months. In the late 1990s, Comerica Inc.CMA) , a Detroit bank now based in Dallas, lent roughly $150 million to a Tremont fund called the Broad Market Prime Fund, which invested in Madoff, according to two people familiar with the situation. But when Long-Term Capital Management collapsed in 1998, Comerica decided to get out of the hedge-fund lending business, putting the loan to the Tremont vehicle in danger. A spokeswoman for the bank said it doesn't invest with Madoff and declined to comment further. If Tremont couldn't find another lender, it may have had to redeem more than $100 million from Madoff. Redemptions on a much larger scale this year were probably the catalyst that uncovered his alleged fraud. Zurich Capital Markets But Tremont's problem was solved in 1998 when Zurich Capital Markets, a unit of Swiss insurer Zurich Financial Services, took over the Comerica loan, according to these two people who spoke on condition of anonymity. The Zurich unit was building a hedge-fund lending business at the time, becoming in the years that followed one of the largest players in the field. By the end of 2001, it controlled structured products backed by $10.2 billion of investments in more than 600 hedge funds. This was very profitable. In 2001, Zurich Capital Markets made $117 million in profit, up 95% from a year earlier. Most of that came from lending to hedge funds, according to the insurer's annual report for that year. A Zurich spokesman didn't immediately respond to a request for comment Thursday. While Zurich Capital Markets and some rivals continued to lend to Madoff, others -- such as RBC Capital Markets and Societe Generale's Lyxor unit -- wouldn't. That's because, even in the 1990s, there were doubts about his investing operation. With hindsight, these now look like more obvious red flags. The funds were marketed as using a "split-strike conversion" investment strategy. This is relatively simple, but other fund managers using similar strategies couldn't match Madoff's stellar returns. Other concerns focused on Madoff's family, which seemed to control all of the important positions at the firm. By 2003, Zurich Financial
was struggling in the wake of the bust in dot-com stocks and decided
to sell businesses that weren't part of its main insurance
operations. Tremont charged an annual management fee of 1% to 1.5%, according to a person familiar with the firm. Kingate Global charges a 1.5% annual management fee, according to a marketing document for the fund that was obtained by Madoff
Investors Race to the Courthouse By Roger Parloff NEW YORK (Fortune) -- Victims of Bernard Madoff's alleged Ponzi scheme sued three big names over their role in the estimated $50 billion fraud: a high-profile investment firm, its managing partner and its auditor. Investors filed a federal lawsuit in Manhattan on Tuesday against Ascot Partners, a New York City money-management firm that acted as a middleman between Madoff and investors; the firm's managing partner, J. Ezra Merkel, who is also chairman of automotive and real-estate financing firm GMAC; and its auditor, BDO Seidman. Ascot Partners disclosed in a letter to investors last Thursday that "substantially all of its assets" - reportedly about $1.8 billion - had been invested with Bernard L. Madoff Investment Securities and was presumed lost in the shocking scheme for which Madoff had been arrested earlier that day. In a Ponzi scheme, money from new investors is used to pay off early investors - giving the appearance of returns - until no more recruits can be found and the scheme collapses. Madoff has said that his subterfuge, which lasted for decades, cost investors as much as $50 billion. Though Ascot obviously feels like a victim - and its attorneys at Schulte Roth & Zabel have pledged to bring legal claims against Madoff in an attempt to protect Ascot investors' rights - one of Ascot's investors, New York Law School, believes otherwise. The school filed the lawsuit, arguing that Ascot, Merkel and BDO Seidman are also responsible. The suit, filed as a class action, claims that the defendants failed to conduct due diligence before sinking all the money in Madoff, citing as proof the published reports of money managers at Acorn Partners and the Aksia fund, who have said they refused to invest with Madoff due to obvious red flags. In addition, they claim that Ascot, by simply turning over all of its money to a single investment manager, violated the terms of its offering memorandum. The allegations are said to amount to securities fraud, negligence, and breach of fiduciary duty. A tough case to win The complaint, written by attorneys at New York's Abbey Spanier Rodd & Abrams, is likely to serve as a template for many lawsuits to come, since neither Madoff nor his firm appears able to reimburse more than a tiny fraction of the losses they caused. (A judge ordered Madoff's firm into liquidation proceedings in bankruptcy court on Tuesday.) The lawsuit against Ascot illustrates both the key arguments that will be made in such suits against middlemen and the serious difficulties they will likely encounter. A spokesperson for Ascot was not immediately available for comment. Merkin's counsel, Andrew Levander at the Dechert law firm, was traveling, according to his secretary, and not immediately available for comment. In a statement, BDO Seidman said that its audits of Ascot "conformed to all professional standards, and we will vigorously defend ourselves against these unfounded allegations." Ascot also got blasted Tuesday by investor Mort Zuckerman, chairman and publisher of the New York Daily News, on both Fox's "Your World with Neil Cavuto," and, later, on PBS's Lehrer News Hour. Zuckerman's charitable trust lost $30 million it had invested with Ascot. Zuckerman said on the air that he had never heard of Madoff until Dec. 11, and that an unnamed Ascot representative had repeatedly misled him about the nature of the Ascot fund. Ascot has also been named in an AmLaw Daily story as a likely target of litigation by Harry Susman, of Houston's Susman Godfrey. Similarly, another prominent fund that invested clients' money with Madoff, Fairfield Greenwich Group's Fairfield Sentry Fund, also appears to have a litigation bulls-eye painted on its back, according to the Wall Street Journal and New York Times on Wednesday. Even without any comment from Ascot, it's not hard to see the significant hurdles that each claim that has been lodged against it will likely face. As for the due diligence claim, Ascot was hardly alone in failing to realize that Madoff, a former NASDAQ chairman with a 40-year track record, was running a Ponzi scheme. Among others who failed to catch the red flags were the U.S. Securities and Exchange Commission, Spain's Banco Santander (STD), France's BNP Paribas, and the Tremont Group, a unit of Oppenheimer Funds, which is owned by MassMutual. As for the alleged misrepresentations in the offering circular, the complaint mainly points to the assertions that Ascot would invest in a "diverse portfolio of securities," that it would engage in "index arbitrage," and that the general partner (Merkin) "intends to adopt a selective approach in evaluating potential investment situations, generally following fewer transactions so that he can follow more closely." The potential problem is that the Ascot circular does disclose that Merkin will be managing the fund "through third party managers using managed accounts." Since Merkin presumably believed that Madoff, a third-party manager, was doing what Madoff claimed to be doing - using index arbitrage and investing in a diverse portfolio of securities - it's not obvious that the representations in the Ascot circular were knowingly false, unless the fraud consists in the fact that Merkin was using only one third-party manager, instead of the plural "managers" referred to in the offering memo. The claim against Ascot's accountant, BDO Seidman, is more tenuous still. BDO Seidman is said to have been "grossly negligent" for failing to catch the fact that the fund in which Ascot was investing (but which Seidman was not auditing) was a fraud, or, alternatively, that Ascot was not complying with the terms of its own offering memorandum (which, as I've noted is not at all clear and, in any case, sounds more like a legal question than an auditing question). These suits look like they will eventually tee up difficult issues for summary judgment motions - i.e., requests to the judge by the defendants asking him to dismiss the case without letting it ever even get to a jury. On the other hand, should the judge - U.S. District Judge Deborah Batts is presiding in the case against Ascot - allow these issues to proceed to a jury, it's hard to imagine a jury, looking back with 20/20 hindsight and, on top of that, facing the heart-wrenching losses suffered by plaintiffs, not ruling for the plaintiffs. Madoff Scandal Shaking Real Estate Industry By Christine Haughney Almost no segment of New York City’s real estate industry was spared in the Madoff scandal, which may be history’s largest Ponzi scheme: commercial brokers large and small, little-known developers and prominent families like the Wilpons and Rechlers all lost money to Bernard L. Madoff, industry executives say. The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust. "You have a lot of wealthy people who made a lot of money on handshakes," said Mark S. Weiss, a commercial real estate broker at Newmark Knight Frank, where several brokers had invested heavily with Mr. Madoff. There was "something about this person, pedigree and reputation that inspired trust," he said. Across the city, industry executives said deals had been scuttled or jeopardized because of the scandal. Residential brokers are taking calls from Madoff investors who have had to put their apartments on the market. Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans. "The level of devastation, both financial and on a human level, is astounding," said Robert J. Ivanhoe, a lawyer who is representing 10 developers and investors who lost $5 million to $50 million each with Mr. Madoff. Indeed, at an industry fund-raiser at the Grand Hyatt hotel in Manhattan last weekend, much of the chatter over sushi and crudités was about money feared lost with Mr. Madoff, according to people who attended. And a Manhattan psychotherapist who counsels real estate leaders and bankers said most of the patients he has seen this week have close friends and relatives who lost money with Mr. Madoff. The victims include executives at the global commercial brokerage CB Richard Ellis, most prominently Stephen Siegel, a major Bronx landlord who is chairman of worldwide operations at the brokerage and whose wife, Wendy, helped organize Saturday’s fund-raising dinner. Brian S. Waterman, a principal at Newmark, also invested with Mr. Madoff. So did the Rechler family, which has been a major owner of office buildings in the region. Scott Rechler, the head of RexCorp, one of the family’s largest firms, called the family’s exposure "limited." Jerry Reisman, a lawyer based in Garden City, N.Y., said he was representing six commercial real estate investors and developers in the area who lost a total of $150 million to Mr. Madoff. They met Mr. Madoff through contacts at country clubs in the tristate area, he said. "They knew him from golfing in the Hamptons. They knew him from the locker rooms," Mr. Reisman said. "He was considered a wizard." Mr. Reisman said his clients were especially concerned because they counted on Madoff investments to complete some of their real estate projects, pledging their investments as collateral for projects. Those developers fear that when their banks realize that their investments with Mr. Madoff have disappeared, they will demand new collateral from other sources, Mr. Reisman said. Finding those alternative lenders will be difficult given the financial crisis — and given that many other real estate investors have been hurt by the Madoff case. "Many of these developers, their resources are all with Madoff," Mr. Reisman said. There are widespread concerns that some developers will have trouble completing projects currently under construction. Edward Blumenfeld, who runs Blumenfeld Development Group, had invested heavily with Mr. Madoff and considered him a friend. Gary Lewi, a spokesman for Mr. Blumenfeld, said he still planned to complete a shopping complex in East Harlem that is to include a Target and a Costco, as well as several other projects where construction is "in the ground." Beyond that, though, Mr. Blumenfeld is uncertain of what his development plans hold. His friendship with Mr. Madoff is even more uncertain, Mr. Lewi said. "Any long-term plans are being reviewed as we conduct a far larger analysis of this scandal and the impact it could have on us and the development community as a whole," Mr. Lewi said. "Mr. Blumenfeld was friend to a man who apparently didn’t exist." The Wilpon family, the major owners of the Mets, has acknowledged investing millions with Mr. Madoff. The family controls a real estate firm, Sterling Equities, whose Web site says it owns 3,000 residential units and 600,000 square feet of office space. It is unclear whether the firm’s real estate holdings are affected by the Madoff investments. "We are shocked by recent events and, like all investors, will continue to monitor the situation," said Richard Auletta, a spokesman for Sterling. Other real estate developers are finding that their charitable giving has been wiped out by Mr. Madoff. Leonard Litwin, one of the city’s largest apartment landlords and head of Glenwood Management, had nearly all of his charitable foundation’s investments managed by Mr. Madoff. Gary Jacob, executive vice president of Glenwood, said Mr. Litwin had never met Mr. Madoff but had invested with him on the advice of a friend. The Litwin Foundation had donated money to research for cancer and Alzheimer’s disease and charities, many of them supported by the real estate industry. "It would have no impact to us as a real estate company," Mr. Jacob said. "But it affects the charitable giving." Some members of the real estate industry are receiving the news with a mix of schadenfreude and sadness for their peers. Jeffrey R. Gural, chairman of Newmark Knight Frank, the brokerage firm, said Mr. Madoff had turned his family down as investors about eight years ago because they would not invest at least $20 million. For years, he said, colleagues introduced to Mr. Madoff through relatives or country club friends had sung his praises. "People used to brag how they were getting these great returns when everybody else was struggling," he said. "They thought Bernie Madoff was a genius, and anybody who didn’t give them their money was a fool." The impact is already spreading to the residential real estate business. Brad Friedman, a lawyer representing about 100 investors primarily in New York and Florida, said several clients have already said they plan to put their apartments on the market. They depended on their Madoff investments to pay their mortgages and co-op fees. "With that source of money frozen, they’ve got no cash," Mr. Friedman said. "They can’t pay the electric bill. They can’t pay the mortgage." Other buyers have already backed out of deals because they had invested with Mr. Madoff and can no longer finance their purchases. Michele Kleier, a prominent Upper East Side broker, had buyers pull out of purchases on two $2 million apartments because they had lost money to Mr. Madoff. The first buyer put in an offer at 3 p.m. last Thursday, the day of Mr. Madoff’s arrest, only to withdraw it by 5:30 p.m. The second set of buyers had visited an apartment three times, requested the financial information about the co-op and had the broker notify Ms. Kleier that they would be making an offer on Monday morning. On Monday, she learned that the buyers had backed out because their money was tied up with Madoff funds. "It’s now two deals in the last four days," Ms. Kleier said. "It’s amazing." Kenneth Mueller, a Manhattan psychotherapist who counsels many real estate and financial executives, said those who lost money to Mr. Madoff called his indictment "the nail in the coffin for the commercial real estate industry," which had already been hurt by the recession. Dr. Mueller said many patients were re-evaluating whether they can trust their business partners after Mr. Madoff’s betrayal. "Madoff was considered a member of the family," he said. Accounting Firms Drawn Into Madoff Scandal By James Mackintosh PwC, KPMG and Ernst & Young, three of the "big four" accountants, and an arm of BDO International, the fifth largest, were all auditors of the feeder funds which channelled money into accounts at Mr Madoff’s New York brokerage. Mr Madoff, who has been charged with fraud and electronically tagged, told investigators his business was "one big lie", according to prosecutors. The head of the US brokerage industry’s compensation scheme said records at Bernard L Madoff Investment Securities were "certainly falsified". Several investors have said they took comfort from the presence of big, recognised accountants as auditors of the feeder funds, as well as from the registration of Madoff Securities with the Securities and Exchange Commission, the US market regulator. The SEC is now reviewing its own failure to investigate warnings alleging "financial wrongdoing" by Madoff. The New York Law School became the first Madoff victim to target an accountant this week when it named BDO Seidman in a lawsuit alongside Ezra Merkin and his Ascot Partners fund, which invested almost all its money with Madoff and was audited by BDO. Auditors of funds typically confirm with custodians that assets exist as stated, but Mr Madoff insisted clients make Madoff Securities custodian for assets, according to several people familiar with his terms. Other banks listed by feeder funds as custodian – including HSBC, which acted for several, and Bank of New York – appear to have been responsible only for moving assets between jurisdictions. Bernard
Madoff: Rbs and Man Latest to Royal Bank of Scotland, the High Street Bank, and Man Group, the Uk Listed Hedge Fund, Have Become the Latest to Reveal Exposure to Bernard Madoff's Alleged $50bn Fraud By Jamie Dunkley RBS said in a stock exchange announcement that should the value of Madoff's funds fall to zero, its potential loss will amount to about £400m. It follows the revelation last week that the former chairman of the Nasdaq stock market had been arrested and charged with the alleged fraud. It could become the biggest-ever case of its kind. Mr Madoff ran a hedge fund which allegedly racked up $50bn (£33.5bn) of fraudulent losses. Man Group said it had invested about $360m through its RMF institutional fund of funds business, representing 0.5pc of its total funds. Among the other's institutions affected is Spain's largest bank, Santander, which owns UK banks Abbey, Alliance & Leicester and Bradford & Bingley. The bank said one of its funds had $3.1bn invested in the firm run by Bernard Madoff. City "superwoman", Nicola Horlick, whose Bramdean Alternatives portfolio had nearly £21m – or 9.5pc of its assets – invested with Mr Madoff, has launched a scathing attack on US financial regulators following the emergence of the alleged investment scam. Ms Horlick said a "systemic failure" of American regulators seems to have allowed Mr Madoff to preside over the alleged swindle for years. "It is astonishing that this apparent fraud seems to have been continuing for so long, possibly for decades, while investors have continued to invest more money into the Madoff funds in good faith. The allegations appear to point to a systemic failure of the regulatory and securities markets regime in the US," she said. Opinion: GMAC's Merkin Must Go Gavin Magor GMAC Financial Services can ill afford to be distracted by the Bernard Madoff scandal now that it touches its chairman -- J. Ezra Merkin. The timing couldn't be worse, as the financing arm of General Motors (GM Quote - Cramer on GM - Stock Picks) is finding it impossible to drum up investor interest in its $38 billion bond swap and is rapidly running out of cash. Merkin must step down to avoid the inevitable conflicts of prioritizing his time when GMAC needs everyone solely focused on its survival. This has is not been a great week for GMAC to say the least. On Tuesday, the New York Law School announced it was suing Merkin and his investment partnership Ascot Partners LP for investing with Madoff, a Wall Street money manager last week charged with running a giant Ponzi scheme and allegedly losing some $50 billion of investor money. Merkin, in a personal and fund management capacity at Ascot, invested and lost heavily in the Madoff funds. This news followed Monday's announcement from GM that it was agreeing to postpone payment by GMAC for up to $1.5 billion in vehicles due to be delivered to dealers by year-end. The move highlights the lack of cash at GMAC. To top it off, GMAC announced late last night said it was "extending the early delivery time of the GMAC and ResCap offers in response to requests received from investors and their securities custodians." Incredibly, this is the fifth such extension GMAC has made in its bid to raise $38 billion in additional capital by swapping bonds for preferred shares and cash. It is not unusual for GM to pump up the volume at a year-end in order to realize as much profit as possible from its production. (GM records a sale of an auto at the point of invoice to GMAC.) However, what is unusual is that GMAC -- widely considered the stronger company financially -- has had GM postpone the required payment date. This is not the normal GM interest-free support that allows the dealers to maintain inventory at no cost for a period of time, this is cash that's not being received by GM. It's cash that GM, according to the submissions to Congress, simply does not have. Does this indicate that GM is actually in a better financial state than GMAC? Could it be that some institutional bond holders believe this and would prefer to take their chances in a potential bankruptcy holding the bonds rather than swapping into preferred shares that have a much lower chance of receiving payment? Potentially, this is indicative of GM's confidence in a bailout from President Bush resolving its immediate cash problems. Clearly, with the fifth extension of the deadline to bondholders, and the tone of the press release from GMAC, it is desperate to give as much time as it possibly can for commitments to exchange to come through. GMAC cannot survive without cash. Cerberus and its partners are unable or unwilling to commit more cash to GMAC without a guarantee of survival in the form of funds from the Troubled Asset Relief Program (TARP), which will not be provided unless GMAC can meet the Fed capital requirements t become a bank holding company. The GMAC statement says "significant additional participation will be necessary to attain the estimated overall participation -- required to satisfy the condition for a minimum amount of regulatory capital in connection with GMAC's application to become a bank holding company." That "significant additional participation" means around $4.9 billion. Andrew Levander, a lawyer for Merkin, according to a report on JewKey.com, said: "Mr. Merkin and his family are personally among the largest victims of the massive crime confessed by Bernard L. Madoff. Like the other victims and the entire financial community, Mr. Merkin is shocked by these events. He intends to defend this lawsuit vigorously while seeking redress for himself and his investors from whomever perpetrated this fraud." For Merkin to "vigorously" defend himself and his fund against the lawsuits he now faces personally and professionally in the form of Ascot, he clearly cannot continue in his current position as chairman of the struggling GMAC. It is not fair to him, his investors, or to GM and GMAC as the corporations struggle to survive. Calls to GMAC requesting comment were not returned. Wall Street Insiders and Fools’ Gold By John Gapper
With hindsight, the whole affair seems deeply implausible. We know that nobody produces rock-steady returns of 15 per cent or more, year in and year out, unless he or she is either a genius or a crook. Yet people lined up to entrust their savings to Mr Madoff. Many of them got a tip from a friend or adviser about a Wall Street operator with a great record. The Madoff broker network also included many funds of funds and private banks that oozed financial sophistication. Why did they fall for it? It is an old story: the allure of the Wall Street insider. No one thought that Mr Madoff was operating a Ponzi scheme but plenty of people thought he had an unfair advantage. He was a former Nasdaq chairman and one of Wall Street’s biggest marketmakers. Enough said. "We all hoped, but we knew deep down it was too good to be true, right? I mean, why wasn’t everyone in on this game if it was so strong and steady?" wrote Robert Chew, one Madoff investor whose wife’s family has lost $30m, on Time.com. "The way it was described to us was that the ‘New York people’ had a system." The New York people always do, particularly at the height of a bull market, when it looks as if Wall Street insiders are positioned to make more money than everyone else. Given the opportunity, who would not try to invest alongside them? Henry Blodget, a former analyst who was charged with issuing fraudulent research by the Securities and Exchange Commission in 2003 and settled the case by paying $4m, argued on his Clusterstock blog that many Wall Street veterans thought Mr Madoff was up to something. They did not think he was recycling client funds, according to Mr Blodget; they suspected that he was using inside information from his big marketmaking operation to "front-run" trades for his clients. That would have explained his oddly consistent high returns. Even if Wall Street did not think so, some of Mr Madoff’s millionaire clients probably did. Mr Madoff made this point himself at a debate last year at the Philoctetes Centre in New York. He first brazenly asserted that it was "impossible for an [insider trading] violation to go undetected, certainly not for a considerable period of time" because of regulatory safeguards. He added, however, that this was "something that the public really doesn’t understand. If you read things in the newspaper, and you see somebody violate a rule, you say: ‘Well, they’re always doing this.’" Indeed so, and if you are in a country club in Palm Beach or on the shore of Lake Geneva, half of you thinks this is a disgrace and the other half may wonder: "How do I get a piece of the action?" Mr Madoff’s pitch fitted perfectly into the long and ignoble tradition of Wall Street fund managers luring ordinary folk with the promise of hot investments during booms. Charles Mitchell did so in the 1920s by selling securities through National City Bank’s investment banking arm, before foundering in the 1929 crash. The scandal brought on the separation of banks and securities houses in the Glass-Steagall Act of 1933. The last time it happened on this scale was in the 1960s. That was the era when aggressive mutual funds flourished and hedge funds became well-known investment vehicles. "The hedge funds of 1965 ... were Wall Street’s last bastions of secrecy, mystery, exclusivity and privilege. They were the parlour cars of the new gravy train," wrote John Brooks in The Go-Go Years, his book about the 1960s stock market mania that culminated in the 1970 crash. The 1960s had a Bernie, too: Bernie Cornfield, whose Investors Overseas Services mutual fund group was the biggest in the world before, at the end, it tipped into a Ponzi scheme. "Do you sincerely want to be rich?" was this Bernie’s question to those who wanted a job. Mr Madoff was more subtle than Cornfield, since he was selling to those who were already rich (or fairly rich) and wanted comfortable security more than dazzling but volatile returns. They sought the privileges of hedge fund investment combined with the safety of annuities. In the real world, you do not get that – or not for long, anyway – but they were offered nirvana. We now wonder at their gullibility but two things made him plausible. First, this was an age of credulity. People had become used to double-digit increases in the value of houses and Wall Street was full of people leaving investment banks to become hedge fund managers. And Mr Madoff presented himself as offering something comparatively modest and reassuring. He would not shoot for the moon but he would give people secure prosperity. Second, he had a network of financial advisers, many of whom had invested their own cash, who portrayed investing with Mr Madoff as a privilege. It was a Main Street version of the access that institutional investors and foundations had to private equity and hedge funds. On the face of it, funds of funds, private banks and investment advisers were simply offering Mr Madoff’s services as a skilled veteran of financial markets who had such old-school values that he did not charge hedge fund-style fees. Behind that, some detected the unspoken promise that Bernie would use his Wall Street connections to make sure his clients came out well from his trades. The fact that they believed Wall Street was "always doing this" was not a deterrent; it was a recommendation. In Fraud Case, Middlemen in Spotlight By Eric Konigsberg As a go-between who shepherded clients and their money to Bernard L. Madoff, Walter M. Noel became so prosperous that he was only too happy to show off his good fortune to the world. In 2002, Vanity Fair dispatched the photographer Bruce Weber to shoot a lavish spread of Mr. Noel’s wife and their five grown daughters at his home in Connecticut ("Golden in Greenwich," read the headline). That was followed, in 2005, by a Town and Country story on the Noel family’s tropical retreat in Mustique. These houses — joining Mr. Noel’s addresses in Palm Beach and Southampton and on Park Avenue — were visible evidence of his investment empire, the Fairfield Greenwich Group, which had $14.1 billion in February. Mr. Noel’s firm, including four sons-in-law as partners, now has the distinction of being the biggest known loser in the Madoff scandal, to the tune of $7.5 billion. For Fairfield Greenwich and a handful of other big feeder funds that were essentially pouring billions of dollars each into Bernard L. Madoff Investment Securities, a lucrative business evaporated last week when federal prosecutors said Mr. Madoff had been operating what may have been the biggest Ponzi scheme in history. Mr. Madoff puts his own fraud at $50 billion and discussed details of it with federal prosecutors in New York on Tuesday, according to people briefed on the meeting. The Fairfield Greenwich Group charged clients an annual fee of 1 percent of assets invested for providing access to exclusive hedge funds and performing due diligence on them, in addition to a fee of 20 percent on investment gains each year, according to people close to the fund’s operations. At that rate, an investment of $7 billion would have paid Mr. Noel’s company $70 million annually, and then $140 million more in a year in which Mr. Madoff reported a 10 percent gain (he steadily reported returns of 10 to 12 percent). Other middlemen for Mr. Madoff’s vehicles — like J. Ezra Merkin and his Ascot Partners fund and Gerald Breslauer, a financial adviser in Los Angeles who invested with Mr. Madoff on behalf of Steven Spielberg and Jeffrey Katzenberg — also collected millions in fees, though they may have had different arrangements. Mr. Merkin and his Ascot fund took 1.5 percent of assets. On Friday, New York Law School filed a lawsuit in Federal Court in Manhattan against Mr. Merkin and Ascot. The suit claims he abdicated his fiduciary responsibilities and issued false and misleading documents. Mr. Merkin’s lawyer said he intended to defend the lawsuit vigorously. The Tremont Group, a unit of Oppenheimer that is in turn owned by MassMutual, had $3.3 billion with Mr. Madoff, while Optimal Investment Services of Geneva, a unit of Santander of Spain, puts its exposure at $3.1 billion. Other big investors include Kingate Management at $3.5 billion, Union Bancaire Prive of Geneva at $1 billion and Bank Medici of Vienna at $2.1 billion, demonstrating the worldwide reach. Mr. Noel’s largest fund, the $7.3 billion Fairfield Sentry fund, invested exclusively with Mr. Madoff. Mr. Noel has not disclosed how much of that was his own or belonged to family members and how much was his investors’. One of his daughters said, through a spokeswoman at Rubenstein Public Relations, that "a very substantial part of each family member’s personal assets was invested with Bernard Madoff alongside those of our investors." Fairfield Greenwich is based on East 52nd Street, though Mr. Noel worked frequently from Fairfield with his partners, Jeffrey Tucker, formerly of the Securities and Exchange Commission, and Andres Piedrahita. The 78-year-old Mr. Noel had a master’s degree in economics and a law degree — both from Harvard — and had worked for decades in banking before he founded Fairfield Greenwich, which established itself primarily as a marketing entity. "As it grew beyond, you know, an informal, personal concern where Walter and a couple of people were investing money for his friends, they developed as a marketing force to put Madoff and investors together," said George L. Ball, a former executive at E. F. Hutton and Prudential-Bache Securities who became friends with the Noels decades ago when both lived in Greenwich. Mr. Noel met Mr. Madoff in the early 1980s and the businesses of both men grew symbiotically. Mr. Noel was as good a salesman as Mr. Madoff could have wished for. Mr. Noel is routinely described as affable, assured, graceful and nonaggressive. "He’s a terribly good person, almost in the sense of Jimmy Stewart in ‘It’s a Wonderful Life’ combined with an overtone of Gregory Peck in ‘To Kill a Mockingbird,’ " Mr. Ball said. Mr. Noel grew up in Nashville and met his future wife just after law school, when mutual friends set them up on a blind date. They built a modestly prosperous life in Greenwich, and were perhaps best known among associates for their Christmas cards— "the people with five stunning girls," in the words of a family friend. "As we know, Walter’s success came after several thin years," wrote John J. McCloy, a banker from Greenwich who described himself and his wife, Laura, as the Noels’ "best friends for more than 30 years," in May in a letter recommending the Noels to membership in a private club. In an interview, Mr. McCloy declined to name the club and said that he and his family had not invested with Mr. Madoff. Mrs. McCloy went on to praise the Noels for their "personal charity." "Monica is a person, when friends have been down on their luck, who will quietly send a check in the mail, or airline tickets," she said. The Noel sisters went to prestigious colleges in the United States — Harvard, Yale, Brown, and two at Georgetown — but their spouses are largely from abroad, which helped the company extend its global reach. Mr. Piedrahita, who is married to Corina Noel, grew up in Bogotá, Colombia, went to Boston University, and made a career in the marketing of hedge fund products before becoming a partner in the firm in 1997. Lisina Noel’s husband, Yanko Della Schiava, worked for two textile firms in Italy and "markets F.G.G.’s offshore funds throughout Southern Europe from his base in F.G.G.’s Lugano representative office," according to the company’s Web site. Alix Noel’s husband, Philip Jamchid Toub, is from Lausanne, Switzerland, and is also involved in marketing the firm’s offshore funds in New York. Marisa Noel’s husband, Matthew Brown, went to St. Mary’s College in San Francisco and also has a marketing position at the firm. A fifth Noel daughter, Ariane, lives in London and is married to Marco Sodi, an Italian financier. David Patrick Columbia, the editor of NewYorkSocialDiary .com, said they had burst on the New York-Southampton social scene in the last few years. "They bought a Stanford White house near Lake Agawam a couple of years back," he said. The house has been valued at $9.4 million. People in the industry continue to question Fairfield’s due diligence. Michael Markov, a hedge fund consultant, said that he was hired by a fund two years ago to look into Fairfield Sentry’s returns and found that it was "statistically impossible to replicate them," he said. Mr. Markov said that he found only one hedge fund whose returns correlated to Mr. Madoff’s. That was the Bayou fund, which was prosecuted by the government for fraud in 2006. Reporting was contributed by Alison Leigh Cowan, Alex Berenson, Michael J. de la Merced, Zachery Kouwe and Margot Williams. Limited Options for Investors Burned by Madoff By Aaron Task Even as revelations about the Bernie Madoff scandal continue to emerge, there seem to be many more questions than answers so far. Chief among them: Do Madoff's investors have any hope of getting any money back? John Singer, partner at the New York law firm Singer Deutsch, says there is some hope for some Madoff investors, but it largely depends on which part of Madoff's firm you invested in, and whether you invested directly with Madoff or via a third party. Investors who had money with Bernard L. Madoff Investments Securities LLC, the infamous money manager's registered investment arm, are covered up to $500,000 by the Securities Investor Protection Corp. (SIPC). Those who invested money in Madoff's unregistered hedge fund are, unfortunately, not covered by SIPC — which is the FDIC of the securities industry — and unlikely to get anything back. The only hope for those investors, and the best hope for anyone who invested with Madoff, is if you invested with him via a third party, either a bank or a fund of funds. "You have a chance to go after a potentially solvent entity other than [Madoff]," Singer says. Fund of funds, "whose sole responsibility is to do due diligence on other fund mangers" are particularly a good source for investors to recoup something, he says. "If a fund of funds put all of your money with Madoff, where red flags had been raised, that is so egregious - the potential culpability is there." But such is the nature of this scandal that even the silver linings have clouds. Investors who had taken money out of Madoff's firm as long as six years ago may be subject to claw-back penalties due to what's called "fraudulent conveyance," as detailed in the accompanying video. AG Recuses Himself from Madoff Fraud Probe By Pete Yost House subcommittee chairman plans congressional inquiry on Madoff; AG out of criminal probe WASHINGTON (AP) -- Congress will investigate the alleged $50 billion Ponzi scheme run by Wall Street money manager Bernard L. Madoff, a leading House lawmaker said Wednesday. Separately, the U.S. attorney general took himself out of any involvement because his son is representing an officer at Madoff's investment firm. The Madoff scandal has further weakened already-battered investor confidence in securities markets and has raised more troubling questions about the effectiveness of the regulatory system," said Democratic Rep. Paul Kanjorski, chairman of the House Financial Services subcommittee on capital markets. Kanjorski said he'll convene a congressional inquiry early next month to examine the alleged Madoff fraud and to determine why the Securities and Exchange Commission and other regulators "failed to detect these substantial evasions."The planned congressional inquiry follows a stunning rebuke that SEC Chairman Christopher Cox leveled against his agency's career regulators, blaming them for a decade-long failure to investigate Madoff and for failing to detect one of the largest Ponzi schemes ever. At the Justice Department, a spokesman said that Attorney General Michael Mukasey had recused himself from the investigation into Madoff. Mukasey's son, Marc Mukasey, is representing Frank DiPascali, a top financial officer at Madoff's investment firm. In New York, the judge in the Madoff fraud case has set new conditions for his bail, including a curfew and ankle-monitoring bracelet for the disgraced investor. Madoff (MAY-doff) remains free on bail, with his wife and brother serving as co-signers for his bail package. A hearing had been scheduled for Wednesday in which Madoff was required to find two additional co-signers to vouch for him. But with the scandal swirling around Madoff, he was unable to find co-signers. So the judge modified the bail package, and gave lawyers until next Monday to come up with additional paperwork. DiPascali was the Madoff employee who had the most day-to-day contact with his investors. Several described him as being the man they got on the phone when they had questions about the firm's investment strategy, or wanted to add or subtract money from their accounts. Authorities have not said publicly whether DiPascali is suspected of any wrongdoing. "We are trying to learn the facts like everybody else," Marc Mukasey said in a phone interview with The Associated Press on Tuesday. Cox ordered an internal investigation of what went wrong and offered a scathing critique of the conduct of his staff attorneys. He said they never bothered to seek a formal commission-approved investigation that would have forced Madoff to surrender vital information under subpoena. Instead, the staff relied on information voluntarily produced by Madoff and his firm. Credible and specific allegations regarding Madoff's financial wrongdoing going back to at least 1999 were repeatedly brought to the attention of SEC staff, said Cox. A former SEC attorney, Eric Swanson, married Madoff's niece, Shana, last year, The Wall Street Journal reported. The SEC's compliance office issued a statement Wednesday saying that Swanson was part of a team that looked into Madoff's securities brokerage operation in 1999 and 2004. The SEC cited its "strict rules" prohibiting employees from participating in cases involving firms where they have a personal interest. The SEC's inspector general, David Kotz, said Wednesday that as one part of his investigation, he intends to examine the relationship between Madoff's niece and Swanson. "There are a lot of different issues" as outlined in Cox's statement, Kotz said. "We obviously will move as soon as possible." Shock waves from the Madoff affair have radiated around the globe as a growing number of prestigious charitable foundations, big international banks and individual investors acknowledge falling victim to an unprecedented fraud. "I am gravely concerned by the apparent multiple failures over at least a decade to thoroughly investigate these allegations or at any point to seek formal authority to pursue them," Cox said in a written statement. The SEC chairman said that Madoff kept several sets of books and false documents, and provided false information involving his investment advisory activities to investors and to regulators. Separately, Stephen Harbeck, chief executive of the Securities Investor Protection Corporation, said one set of Madoff's books kept track of the losses at his investment advisory arm, while the other is what investors were shown. SIPC, created by Congress and funded by the securities industry, can give customers up to $500,000 if it is determined their money was stolen. SIPC has about $1.6 billion to make payouts, which means that amount could quickly be depleted in the Madoff case where losses could reach $50 billion. That figure comes from the SEC's court complaint, which quotes Madoff admitting to losses in that amount to two senior employees of his firm before his arrest last Thursday. Cox's harsh assessment may have the effect of shifting questions away from the politically appointed five-member commission and placing blame squarely -- if not solely -- on the agency's staff for failing to aggressively pursue a massive fraud. Cox's statement is sure to foster new criticism of the SEC, an agency increasingly seen in Congress and elsewhere as incapable of carrying out its basic mission: to ensure a basic level of honesty on Wall Street. Cox spelled out the taint produced by the previous failure to aggressively pursue Madoff: The SEC commission chairman ordered removal from the Madoff criminal investigation of any SEC staff members who have had contact with the prominent Wall Street figure or his family. Cox's strong statement came as at least two senators signaled they have lost patience with the SEC. "They were asleep at the switch," Sen. Charles Grassley, R-Iowa, said of the SEC's failure to uncover Madoff's alleged fraud. As Grassley had urged, Cox ordered the SEC's inspector general to conduct the internal probe of his agency's inaction. Sen. Jack Reed, D-R.I., said the problems go much deeper. The Madoff affair "illustrates the lack of credible enforcement over several years by the SEC," said Reed, who chairs the Senate banking panel that oversees the agency. He criticized the SEC's "lack of a strong commitment to be vigilant." Shortly before Cox denounced his own staff, a widely respected former SEC chief accountant, Lynn Turner, aired his own skepticism. "I can't comprehend how a well-run investigation would have missed a fraud of this magnitude," Turner said. The Madoff scandal is just the latest instance in which SEC regulators have overlooked clear warning signs of possible fraud. An earlier review by the SEC inspector general determined that the agency's monitoring of the five biggest Wall Street firms, which included Bear Stearns, was lacking. In regard to the congressional inquiry, Kanjorski's plan to look into the Madoff scandal could be politically problematic for Rep. Barney Frank, D-Mass., who received at least $2,250 in campaign donations from Madoff lobbyists between 2005 and 2008. Frank chairs the House Financial Services Committee, of which Kanjorski is a member. Associated Press Writer David B. Caruso contributed to this report from New York Merkin Gets Questions on Madoff By Peter Lattman As investors burned by the alleged scandal surrounding Bernard Madoff look for answers, some are questioning whether the disclosure practices of a money manager who invested with him were adequate. J. Ezra Merkin, the chairman of lender GMAC, also is head of Gabriel Partners, a $5 billion money-management firm whose clients include wealthy families and university endowments. One of Mr. Merkin's funds, the $1.8 billion Ascot Partners LP, had substantially all of its assets invested with Mr. Madoff, according to a letter from Mr. Merkin sent to clients. As one of the firm's largest investors, Mr. Merkin said he had personally "suffered major losses from this catastrophe." Several Ascot clients say they had no idea that Mr. Merkin had most of the fund's money invested with Mr. Madoff. Mr. Merkin didn't return calls seeking comment. A spokeswoman for Ascot's legal counsel could not be reached for comment. One Ascot investor was a charitable trust established by real-estate magnate Mortimer Zuckerman, the chairman of real-estate firm Boston Properties and owner of the New York Daily News and U.S. News & World Report. In an interview Monday on Fox News Channel, Mr. Zuckerman said he had no idea that such a large amount of money was invested with Mr. Madoff through one fund. An Ascot offering document reviewed by The Wall Street Journal mentions Mr. Madoff once, explaining that Bernard L. Madoff Investment Securities LLC currently serves as a principal custodian for the partnership's assets and as clearing agent. The Ascot fund charged a 1.5% management fee on clients' assets. Harry Susman of Houston law firm Susman Godfrey LLP says he has talked to at least 10 investors in the Ascot fund. "A clear pattern has emerged," said Mr. Susman, who described the clients as well-to-do New York Jewish families. "They didn't know he was giving the money to Bernie." Ascot lays out its strategy in the offering memorandum. The memorandum says the strategy involves buying a basket of stocks resembling an S&P index while simultaneously selling options that pay off for the buyer if these stocks soar, while also buying options that pay off if the index tumbles. Yeshiva University, a New York school that combines Torah and secular studies, had deep connections to Messrs. Madoff and Merkin. Mr. Merkin headed up the school's investment committee; Mr. Madoff served as treasurer of the board of trustees. On Friday, the school said it had exposure to Mr. Madoff's funds. "Our lawyers and accountants are investigating all aspects of his relationship to Yeshiva University," said a Yeshiva spokeswoman. The Merkin family is prominent in New York philanthropic circles. Mr. Merkin is the son of the late Hermann Merkin, a New York businessman and prominent Jewish philanthropist Fund
Manager in Scandal Once Boasted about Profits; Associated Press WASHINGTON (AP) -- The money manager accused of duping investors in one of Wall Street's biggest Ponzi schemes once boasted to the Securities and Exchange Commission about how much money he earned and formally advised the U.S. government on ways to protect investors from scam artists. Now Bernard Madoff stands accused of being one. The 70-year-old Madoff (MAY-doff), well respected in the investment community after serving as chairman of the Nasdaq Stock Market, was arrested last week in what prosecutors say was a $50 billion scheme to defraud investors, including the world's big banks, the rich and the famous. Alleged victims include the family charitable foundation for Sen. Frank Lautenberg, D-N.J.; a trust tied to real estate magnate Mortimer Zuckerman; and a charity of movie director Steven Spielberg. The Wall Street Journal reported DreamWorks Animation SKG Inc. Chief Executive Jeffrey Katzenberg and the foundation of Nobel laureate Elie Wiesel also took hits. As the scale of the alleged scheme was realized, attention turned quickly to Madoff's connections to Washington regulators responsible for monitoring investment funds like the one Madoff operated. He knew everyone, former SEC chairman Arthur Levitt said in an interview with The Associated Press. Levitt said he did not invest any money with Madoff. The director for enforcement at the SEC, Linda Thomsen, said the government was working with federal prosecutors and the FBI to understand the case, "to pursue the case we've got, to preserve assets to the extent we were able and to bring everyone who was responsible for the conduct at the Madoff firm. It's justice," she said Monday. At one SEC hearing in April 2004 -- during the period when Madoff is accused of carrying out his $50 billion fraud -- Madoff joked with then-commission chairman William Donaldson about Madoff's own extraordinary profits and teased that he wasn't inclined to provide any advice that might help his business rivals. "Our firm has made a fairly decent living as a fast market competing with a slow market," Madoff said, "so I'm not sure it's in our own best interest for everyone to become a fast market." Commissioners laughed openly as Madoff agreed "to take off our selfish hats here and speak for the public good." As a former Nasdaq chairman, Madoff was an expert sought by Washington regulators who asked for advice on any number of regulatory issues over the years. In 2000, Madoff served on the government's Advisory Committee on Market Information, established to protect investors by ensuring accurate and full public disclosure of information to them. Financial analysts raised concerns about Madoff's practices repeatedly over the past decade, including one letter to the SEC as early as 1999 that accused Madoff of running a Ponzi scheme, but the agency did not conduct even a routine examination of the investment business until last week, The Washington Post reported on its Web site Monday night. Questions have been raised in two earlier cases about the SEC's handling of investigations involving influential figures on Wall Street or powerful investment firms. The agency's inspector general, in a report issued this fall, said there were "serious questions" about the impartiality and fairness of the SEC's insider-trading investigation in 2004 and 2005 of hedge fund Pequot Capital Management. A former SEC attorney who worked on the probe and was fired by the agency told Congress he was blocked by agency superiors when he tried to question John Mack, now chairman of the Morgan Stanley investment house. The SEC took no enforcement action in the Pequot case. The hedge fund and Mack have denied any wrongdoing. In another report, the inspector general, H. David Kotz, determined the head of the SEC's Miami office failed to properly enforce securities laws in the investigation of now-defunct Bear Stearns' pricing of complex investments it sold, and found that he shouldn't have closed the inquiry in the summer of 2007 without enforcement action. Bear Stearns nearly collapsed into bankruptcy in March and was purchased by rival JPMorgan Chase with a $29 billion federal backstop. Last month, an
administrative law judge at the SEC rejected Kotz's conclusions and
his recommendation for disciplinary action against Thomsen, the
agency's enforcement director, and two other officials in the
matters. The judge, Brenda Murray, wasn't acting in her capacity as
an administrative law judge but rather as an SEC official asked by
the agency's executive director to assess the inspector general's
findings.
By Jenny Strasburg No matter how big Bernard Madoff's investment firm got or how far-flung its network of wealthy investors grew, Mr. Madoff always stressed that it was just a "family business." Mr. Madoff's younger brother, two sons and a niece were among several relatives of the longtime Wall Street trading force to hold key positions at Bernard L. Madoff Investment Securities LLC. That gave the New York company a reputation as a tight-knit place where business relationships felt personal and personal relationships were woven into the firm's trading, technology and ethical standards. The Madoff family also encouraged that view in other ways, joining together as supporters of charitable causes. For example, several family members participated in an October fund-raising walk supporting leukemia research. They raised more money than any other family at the Manhattan event. The clubby feel rubbed off on investors, many of whom have said they felt that handing money to Mr. Madoff, 70 years old, also gave them access to a small, exclusive circle. None of the family members who worked with Mr. Madoff has been accused of wrongdoing in the apparent collapse of the firm's investment-advisory business, which managed money for rich or "high net worth" individuals, hedge funds and other institutions.But the strong familial connections helped foster comfort and trust among investors now reeling from last week's revelation that Mr. Madoff's sons turned him in for running what they said their father called "a giant Ponzi scheme." "Trusting somebody because he's a member of your club is like the opposite of due diligence," says James Mintz, whose New York firm vets hedge-fund managers and corporate executives for investors and corporate boards, and which also investigates managers who are suspected of fraud. "So often we see smart people turn off their radar for members of their country club or university alumni club." In 1960, Mr. Madoff founded the securities firm that bears his name. In 1970, his brother Peter joined the firm after finishing law school, later becoming senior managing director. Now 63, he is director of trading and chief compliance officer, according to a Securities and Exchange Commission filing. The brothers sprouted a family tree, as relatives were hired to run parts of the business ranging from trading to legal, according to public records and published reports. "In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door," the company's Web site said. The site was taken down after the fraud allegations emerged. Bernard and Peter Madoff both have children who joined the firm. Andrew and Mark Madoff, sons of Bernard, work on the trading side of the business. Andrew, 42, a director of proprietary trading, started at the firm in 1988 after graduating from the University of Pennsylvania's Wharton School. Mark, 44, also a director of proprietary trading, joined in 1986 after attending the University of Michigan. Andrew Madoff also is chief executive of Madoff Energy, a spinoff of the securities firm, according to an SEC filing. Andrew and Mark Madoff started Madoff Energy LLC together in recent years, and it is separate from the securities firm, according to people familiar with the matter. Neither Andrew nor Mark was involved in the asset-management side of the business, according to their lawyers. Efforts to reach Madoff family members Monday were unsuccessful.Peter's daughter Shana is a compliance lawyer for Madoff Securities. A nephew of Bernard Madoff, Charles Weiner, has worked at the firm in a human-resource and operational position, according to people familiar with the firm. Away from the firm, the Madoff family supported a range of Jewish, educational, health and other charities, sometimes as a family. "They have very many connections, and as a charity we're always interested in engaging people who are personally connected to our mission," said Michael Osso, executive director of the Leukemia & Lymphoma Society's Manhattan chapter. Shana, Andrew and Marion Madoff, who is Peter's wife, raised more than $200,000 for the society's Light the Night event in October, helping make the Madoffs the organization's top "friends and family" team nationally. "The family has a personal connection to these diseases," Mr. Osso said. Andrew Madoff is a lymphoma survivor and chairman of the Lymphoma Research Foundation. His cousin Roger Madoff, son of Peter and Marion, died of leukemia in 2006 at the age of 32, according to an obituary and a Web site for a memoir written by Roger Madoff. Peter and Marion Madoff are both active supporters of the Lower East Side Tenement Museum in Manhattan, where Peter was a trustee last year. Peter's grandparents were Lower East Side merchants, according to the museum's Web site. "He was generous with his time and donations," said David Eng, a museum official. "Obviously, we feel badly for him and his family." Neither the Leukemia & Lymphoma Society nor the Tenement Museum invested money with Bernard Madoff, according to Messrs. Osso and Eng. Ruth Madoff, Bernard's wife, kept an office at the securities firm but was rarely there, though she worked frequently with the Madoff Family Foundation, according to a person familiar with the family. Europe's
Banks Reveal $8bn of Exposure to Alleged Fraud By Sean Farrell, Financial
Editor European banks including Royal Bank of Scotland and HSBC have so far revealed more than $8bn (£5.2bn) of exposures to Wall Street trader Bernard Madoff's alleged $0bn investment fraud. RBS said it could lose up to £400m from loans to hedge funds of money secured against shares in which the hedge funds had invested through Madoff Investment Securities. The money is said to have been invested in blue-chip shares in the S&P 500 and FTSE 100 but if the assets are worthless, then the cost to RBS would be £400m.HSBC also revealed that it was exposed to about $1bn in losses from a "small number" of institutional clients who had invested with Mr Madoff. Barclays declined to comment but a source close to the bank said its exposure to Mr Madoff was small in relative and absolute terms and that there were no plans to issue a statement. Also in the UK, Man Group, the London-listed hedge fund manager said it had $360m of exposures to Madoff through its institutional fund of funds business, RMF. Man Group said the investment represented about 1.5 per cent of RMF's funds under management and 0.5 per cent of funds for Man Group as a whole. Santander, the Spanish bank that owns Abbey and Alliance & Leicester, said clients of its Optimal fund of funds faced losses of up to €2.3bn (£2.1bn). Just over €2bn came from institutional and international private banking clients and €320m from wealthy customers in Spain through structured products partly linked to the Optimal subfund's performance. Santander's direct exposure is €17m. The bank said the clients exposed to Madoff were "qualifying investors". Santander is said to have no plans to compensate them for losses of what was an alleged fraud though it will take legal action to defend their interests. Santander pointed out that HSBC was the custodian of Optimal and its subsidiary funds. HSBC said it did not believe its custody clients who had invested with Madoff would be a source of exposures to the bank. But analysts at KBW said European institutions might not be able to escape the consequences of their indirect involvement with Madoff. "Reputational and litigation risks will likely haunt those banks that appear to have failed to carry out due diligence," the analysts said. "With minimal assets left in the fund, it is hard to see how investors will recover their assets. We see a risk of clients suing asset managers and custodians for failing to carry out due diligence and failing in their fiduciary duties although it is far from certain if the legal basis for such claims exists." BBVA, Spain's second biggest bank, said it had no direct exposure but its clients faced a loss of up to €300m and its international operations were facing a €30m loss. Other European institutions caught out by the world's biggest alleged Ponzi scheme include the French investment bank Natixis, which revealed up to €450m of exposures. The Swiss private bank Union Bancaire Privée said its potential losses were less than $1.1bn while its rival Benbassat & Cie was reported to have $935m of exposures. Another Swiss private bank, Benedict Hentsch, said it had unwound its merger with the alternative investment specialist Fairfield Greenwich, which said it had put half its assets in a fund set up by Mr Madoff. Italy's UniCredit revealed exposure of about €75m. Other smaller exposures included Sweden's Nordea, with €48m, and Switzerland's Neue Private Bank, with $5m. Nicola Horlick's Bramdean Alternatives asset management company had $25m invested with Mr Madoff's venture, which was exposed last week as an alleged fraud. Lawyers, Lawyers Everywhere in Wall Street's Latest Scandal By Brian Baxter The ramifications from the arrest of Bernard "Bernie" Madoff, former chairman and CEO of New York-based Bernard L. Madoff Investment Securities (BMIS), continued to unravel over the weekend as investigators worked to unwind the hedge-fund-cum-Ponzi-scheme, and as individuals and institutions sought to assess their exposure. As reported by The Am Law Daily on Friday, Madoff has retained Ira "Ike" Sorkin, cohead of the securities litigation and white-collar defense practice at Dickstein Shapiro, to represent him in the criminal case, which so far only includes one securities fraud charge. Sorkin is being assisted by Dickstein Shapiro litigation partners Daniel Horwitz and Mauro Wolfe. Also on Friday, U.S. district court judge Louis Stanton in Manhattan appointed Lee Richards III of New York's Richards Kibbe & Orbe to be receiver for BMIS. The firm's funds were frozen as regulators worked to unwind details of an estimated $50 billion fraud that some claim could be the largest in Wall Street's history. Two European banking giants detailed their exposure over the weekend. Madrid-based Grupo Santander said that it's Optimal Strategic U.S. Equity Fund had roughly $3.1 billion invested in Madoff's firm. Paris-based BNP Paribas estimated its potential exposure is in excess of $460 million. Japan's Nomura Holdings announced that it stands to lose roughly $302 million. (The growing scandal even had some commentators wondering whether Madoff's downfall means the end of hedge funds.) U.S. Attorney for the District of Columbia Jeffrey Taylor and acting assistant U.S. attorney of the criminal division Matthew Friedrich will speak at a Justice Department press conference this afternoon in Washington, D.C. Assistant U.S. attorney Marc Litt in Manhattan is serving as the line prosecutor in the Madoff case. Other lawyers retained as the scandal unfolds: For Individuals Bernie Madoff's sons, Mark and Andrew, who reportedly blew the whistle on their father last week, have retained Paul, Weiss, Rifkind, Wharton & Garrison senior litigation partner Martin Flumenbaum. Frank DiPascali, an official with BMIS, has retained Marc Mukasey, head of the white-collar defense and special investigations practice at Bracewell & Giuliani. (Mukasey is the son of current U.S. Attorney General Michael Mukasey.) According to The Wall Street Journal, wealthy investors like Boston Properties chairman and media magnate Mortimer Zuckerman, New York Mets owner and Sterling Equities cofounder Fred Wilpon, GMAC chairman J. Ezra Merkin, and Bed Bath & Beyond cofounder Leonard "Lenny" Feinstein have significant investments in BMIS. (We'll update their legal representation as we learn of it.) For Institutions The Wall Street Journal reports that two investment management funds with significant investments in BMIS--Fairfield, Conn.-based Fairfield Greenwich Advisors and Rye, N.Y.-based Tremont Capital Management--have retained Scott Berman of New York's Friedman Kaplan Seiler & Adelman to determine how to recover lost assets and examine due diligence procedures. (The Journal reports that Marc Kasowitz of New York's Kasowitz, Benson, Torres & Friedman represents Fairfield Sentry, a fund thought to have the most exposure to BMIS.) Two renowned plaintiffs firms also have jumped into the fray. Milberg's Brad Friedman and Seeger Weiss cofounder Stephen Weiss announced on Friday that they have been retained by dozens of individual investors--including a senior citizens center, corporate executives, banks, and hedge funds--thought to have lost hundreds of millions of dollars in BMIS. Milberg partners Sanford Dumain and Matthew Gluck also will work on the matter. There's plenty to go around. Regional firms like Long Island's Ruskin Moscou Faltischek and Fort Lauderdale's Sonn & Erez are representing a well-known MarketWatch economist and several South Florida investors, among others. Seattle's Hagens Berman Sobol Shapiro, New York's Rich & Intelisano, and Boca Raton, Fla.-based securities litigation firm Klayman & Toskes are investigating possible claims on behalf of clients they represent. The Am Law Litigation Daily's Andrew Longstreth has learned that Steptoe & Johnson litigation partner Michael Miller, a former prosecutor familiar with Ponzi-style schemes, is representing a New York-based investor group. Charities and Foundations The Wall Street Journal reports that in addition to individual investors and financial institutions, many prominent Jewish charities and foundations are thought to have significant exposures to BMIS, given Madoff's philanthropic activities. BMIS had about $17 billion in assets under management, Newsday reports, with about half of the firm's clients being hedge funds. Jerome "Jerry" Reisman, a lawyer with Garden City's Reisman Peirez & Reisman, told the Long Island newspaper that Madoff used his social connections to solicit new investors. "[Madoff's] returns far exceeded the market," said Reisman, noting that his firm represents several individuals with investments in BMIS. Now Reisman claims that many of them, including "one of the wealthiest real estate families on Long Island," have been wiped out. Madoff ‘Tragedy’ Said to Have Escaped Scrutiny by SEC By David Scheer and Jesse
Westbrook U.S. regulators never inspected Bernard Madoff’s investment advisory business, alleged to be a Ponzi scheme that cost investors $50 billion, after he subjected it to oversight two years ago, people familiar with the case said. The Securities and Exchange Commission hadn’t examined Madoff’s books since he registered the unit with the agency in September 2006, two people said, declining to be identified because the reviews aren’t public. The SEC tries to inspect advisers at least every five years and to scrutinize newly registered firms in their first year, former agency officials and securities lawyers said. Madoff, 70, who had advised the SEC how to regulate markets and donated regularly to politicians, was arrested Dec. 11 and charged with operating what he told his sons was a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions. His ability to avoid detection may fuel debate about the SEC’s effectiveness and the adequacy of its resources for policing money managers. "Given what the SEC claims is the magnitude of the fraud, this is something you would hope an inspection would have uncovered," said Mercer Bullard, a University of Mississippi law professor and former mutual-fund attorney at the SEC. "It’s hard to imagine a fraud of this alleged size not being accompanied by significant and pervasive compliance problems." Unregistered Business Federal officials investigating Madoff have found evidence he ran an unregistered money-management business beside his firm’s brokerage and investment-advisory units, said two people familiar with the matter who declined to be identified because the probe isn’t public. Authorities are examining why Madoff’s wife, Ruth Madoff, is listed on transactions under scrutiny, the people said, emphasizing they haven’t determined that she or other people did anything wrong. Madoff is scheduled to appear in federal court in Manhattan on Dec. 19 at noon for a hearing in the SEC case, according to his lawyer, Ira "Ike" Sorkin, of Dickstein Shapiro LLP in New York. "This is a tragedy," said Sorkin, a former U.S. prosecutor and SEC enforcement lawyer. "We are going to fight through these events and try to minimize the losses as much as possible." The Inspectors The SEC’s Office of Compliance Inspections and Examinations deploys teams from Washington and 11 regional offices to scout for fraud and gauge brokerages and investment managers’ adherence to securities laws. Its roster of full-time employees peaked at 880 in fiscal 2006, according to agency budget requests. The regulator expects to have 796 full-time workers in its inspections office for the fiscal year ending next September. SEC inspectors examined Madoff’s brokerage in 2005, finding three violations of so-called best-execution rules, which require that customer trades be made at the most advantageous prices, agency spokesman John Nester said in a statement. The regulator’s enforcement division completed an investigation involving the company last year without bringing a claim, Nester said. The SEC opened that inquiry after tipsters and press reports said Madoff’s purported investment returns may have resulted from front running, in which traders buy shares for their own account before filling customers’ orders, a person familiar with the inquiry said. The agency found no evidence that the brokerage did anything improper, the person said. Florida Accountants More than a decade earlier, in 1992, Madoff faced regulatory scrutiny as part of a lawsuit the SEC brought against two Florida accountants, whom it accused of raising $441 million while selling unregistered securities over three decades, according to SEC statements and a press report at the time. Madoff told the Wall Street Journal at the time that he had managed the funds unaware they had been raised illegally. The SEC determined that the investors’ money was all accounted for, and didn’t accuse him of wrongdoing, according to the report. Sixteen years later, on Dec. 11, the SEC and U.S. prosecutors announced in federal court in Manhattan that Madoff had confessed. His advisory business was "all just one big lie," Madoff had allegedly said. The business had been insolvent for years, with losses of more than $50 billion, according to the SEC’s account of his statement. Madoff delivered the confession to his sons, Mark and Andrew, who turned him in, according to Martin Flumenbaum, a lawyer representing the brothers. Untangling the Mess On the morning of Madoff’s arrest, more than a dozen SEC inspectors assembled at his office in Manhattan and have since worked overtime to untangle the mess. Though some investigators initially thought the $50 billion total was too high, they now see it as plausible, people familiar with the matter said. The increasing tally is still below that, one person said. The Securities Investor Protection Corp., which insures customers’ brokerage accounts, plans to take over the brokerage side of Madoff’s business as early as today, three people said. The Washington-based SIPC oversees the transfer of client holdings, including cash and securities, when a brokerage fails. "We are aware of the situation," SIPC President Stephen Harbeck said in an interview. "Our long-standing policy is not to comment until we do something." ‘Just So Many’ Such a large Ponzi scheme -- in which early investors are paid with money raised from subsequent victims -- should prompt lawmakers to review how the U.S. polices brokerages, wealth managers and unregistered advisers, such as hedge funds, said James Cox, a securities law professor at Duke University in Durham, North Carolina. "There are just so many people out there who are and aren’t registered that it really just overwhelms the system," Cox said. "There is no easy way to expand the regulatory net unless we’re willing to put the might of the federal budget behind it to carry out more inspections." Barry Barbash, a former head of the SEC’s investment management division, said the agency has tried to focus its inspections on money managers who pose the biggest risks. The regulator uses criteria such as which securities a firm is buying and who its clients are, said Barbash, a partner at Willkie Farr & Gallagher LLP in Washington. "Given the state of SEC resources and given the way that they go about determining whether an inspection is necessary, it wouldn’t surprise me that a newly registered firm wasn’t inspected," Barbash said. Committee Man Any suspicions about Madoff may have been damped because of his association with industry groups, watchdogs and politicians. He sat on a committee of academics, regulators and executives formed in 2000 by former SEC Chairman Arthur Levitt to advise the agency on new stock-market rules in response to the growth of electronic trading. Madoff has led the trading committee at the Securities Industry Association, Wall Street’s biggest trade group, and served as chairman of the Nasdaq Stock Market. Since 2000, he has given at least $100,000 to the Democratic Senatorial Campaign Committee and more than $23,000 to the party’s candidates, including Senator Charles Schumer of New York and Senator Frank Lautenberg of New Jersey, who leads a charitable foundation that invested with Madoff. "You can see where people would pull the shades down over their eyes in terms of recognizing what could be one of the great frauds of our time," Levitt said in a Bloomberg Television interview. "I’ve known him for nearly 35 years, and I’m absolutely astonished." Levitt is a senior adviser to the Carlyle Group and a board member of Bloomberg LP, the parent of Bloomberg News. Europe’s Banks Pay Price for Guarantees By James Mackintosh in
London and Victor Mallet in Madrid European banks are among the biggest victims of the alleged Madoff fraud after the rapid expansion of divisions helping clients borrow to invest in hedge funds. Britain’s HSBC and Royal Bank of Scotland, France’s BNP Paribas, Italy’s UniCredit and Santander and BBVA of Spain as well as Japan’s Nomura Holdings all confirmed heavy losses for themselves or their clients on Monday, even as US banks appeared to have little or no exposure. This was not, in the main, due to smarter warning systems at the US banks. Instead, it is because the five-year boom in hedge funds in Europe has driven explosive growth in fund-linked derivatives, products provided by banks which either guarantee capital for clients or gear up returns. "The business is balance-sheet intensive and funding intensive so commercial banks have been more involved than investment banks over the years," said the head of fund-linked derivatives at one European bank. "The US business is very different." Where is the $50bn loss?
The products worked either by simple lending to clients to invest in hedge funds which then placed the capital with Madoff Securities to manage, or by providing a guarantee of no losses to clients – something they must now be regretting. In the rush to expand, the European banks appear to have missed warning signals that some hedge fund consultants and investors claim were obvious. But many of the biggest fund of hedge funds made the same mistake, while regulators also missed the problem. Among those losing out in Europe, Spain’s banks and prominent Spanish families are among the hardest hit. Santander, the country’s biggest bank, has so far revealed the biggest client exposure among European banks, announcing late on Sunday that international and local customers of its Optimal fund of hedge funds management arm had €2.33bn ($3.2bn) at risk. M&B Capital Advisers, part of a group linked to the family of Emilio Botín, Santander chairman, on Monday disclosed direct and indirect client exposure to Madoff of €152.4m – about €100m to institutional clients and the rest to private clients. M&B was founded by Guillermo Morenés, Mr Botín’s son-in-law, and his son Javier Botín. BBVA, Spain’s second biggest bank, meanwhile said its clients had €30m at risk, but its own exposure was €300m because of the way it structured and sold funds linked to Madoff. Miguel Angel Fernández
OrdóZez,
Bank of Spain governor, said the central bank did not expect the
Madoff affair to have a significant impact on earnings or solvency
at the banks. Bernie Madoff, a Former Chairman of the Nasdaq Stock Exchange Has Been Accused of Potentially the Biggest Fraud in Corporate History. By Tom Leonard and James
Quinn in New York Even by the standards of New York's recent financial turmoil, the charges levelled at Bernard Madoff are eye-watering – a $50 billion (£33.5 billion) swindle perpetrated by one of the most celebrated traders on Wall Street. Mr Madoff, 70, a former chairman of the NASDAQ stock exchange and a supposed pillar of the financial community, has been accused of defrauding hedge funds of billions with a fake investment scheme called a 'Ponzi'. In the fraud outlined by the government, Mr Madoff allegedly promised huge returns to early investors in his asset management business, only to lose their money on the markets. He then paid them back with money put in by later investors, rather than from revenues generated by any real share trading, prosecutors claim. The news has rocked the hedge fund world as investors faced losing all their money in a scam that, if confirmed, would have what one expert described as a "monumental impact" on the $1.6 trillion (£1 trillion) industry. Prosecutors say Mr Madoff ran his fraudulent operation for years secretly from a separate floor of the Manhattan offices of his trading firm, Bernard L Madoff Investment Securities, keeping its financial statements "under lock and key". They believe his scheme unravelled earlier this month after clients – who include hedge funds, banks and wealthy individuals – wanted to redeem some $7 billion (£4.7 billion) and Mr Madoff realised he could not find the money. In a criminal complaint filed by the FBI and the US Attorney's office, Mr Madoff allegedly told colleagues earlier this week that his investment advisory business was "all just one big lie" and that his firm was "basically, a giant Ponzi scheme". He said he was "finished" and resigned to going to prison, say prosecutors who arrested him on Thursday after – according to the Wall Street Journal – he was turned in by his two grown-up sons. Mr Madoff has been charged with a single count of securities fraud and faces up to five years in prison and a fine of up to $5 million (£3.3 million). He also faces a separate civil lawsuit filed by the US Securities and Exchange Commission which accuses him of defrauding his clients in an ongoing $50 billion (£33.5 billion) fraud. "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew Calamari, the associate director of enforcement at the SEC's New York office. According to the SEC's complaint, Mr Madoff told an FBI agent there was "no innocent explanation" and that it was his fault that he had "paid investors with money that wasn't there". Mr Madoff has been released on $10 million (£7 million) bail, said his lawyers. "Bernie Madoff is a long-standing leader in the financial services industry. He will fight to get through this unfortunate set of events," said Daniel Horwitz, one of his lawyers. Christopher Miller, chief executive of Allenbridge Hedgeinfo, a hedge fund ratings agency in London, told the Wall Street Journal that "some very big investor names are involved in this" and said it would have a "monumental impact for the hedge fund industry". He blamed the "credulousness" of investors who failed to question how they got such big returns on their investments and predicted the case – if proved – was likely to lead to tighter regulation. Mr Madoff founded the investment firm that stills bears his name in 1960 with $5,000 (£3,000) he earned working as a beach lifeguard on Long Island. Joined later by his brother, Peter, they took advantage of American moves to increase stock market competition and built their firm into a business that last month was managing some $17 billion (£11 billion) in assets. The firm's website boasts how clients know that Mr Madoff "has a personal interest in maintaining an unblemished record of value, fair dealing and high ethical standards". Madoff Securities International Ltd, a London-based business in which Mr Madoff was a major shareholder, stressed yesterday that its business activities were not involved with the American asset management firm under investigation. Charity Caught Up in Wall Street Ponzi Scandal By Roger Friedman There was at least one warning sign everyone missed in the Bernard Madoff story. Madoff, a former Nasdaq chairman who reportedly created the largest swindle in Wall Street history, liked to spread around the money he allegedly stole to make himself look good. Madoff was arrested on one charge of securities fraud Thursday and released on $10 million bail. He faces up to 20 years in jail in what authorities say was "a giant Ponzi scheme." Such a scheme can involve taking investments from clients, spending the money on yourself and repay the clients out of other clients' accounts. Readers of this column may recall such a case with Hollywood money manager Dana Giacchetto back in 2001. Madoff kept his story secret for years, and got away with it. "Everyone wanted him to manage their money. They would say, If only I get with Bernie Madoff," a very rich media person told me Thursday night. There were some indications that Madoff might have been in trouble. The signs were there. Last year, his own Madoff Family Foundation gave only $95,000 to other charity groups. This was a significant drop from 2006, and from every year since 2000. In 2006, Madoff (which is pronounced "made-off," as in, made off with all our money) gave away a total $1,277,600. It's surprising no one noticed the difference in 2007 since it affected a number of hospitals and other health organizations. The Madoff family established its charity in 1998 and since then have given multimillion-dollar donations to New York's big-league charities. These donations afforded the Madoff family — Bernard, his wife, Ruth, their two sons and the sons' wives — the chance to play with the rich and powerful in various New York society circles. The charity started out slowly with the Madoffs putting in around $4 million for each of the first two years. But in 2000, they parked an astounding $25 million in their tax-free Madoff Family Foundation. It was then that they turned into big-time givers. Madoff's knack for largesse also spread to members of his family. One son, Andrew, has a tax-free foundation that lists $5 million in assets. Another son, Mark, has one with $2 million in assets. But it's Bernard and Ruth Madoff's foundation that might be interesting for investigators to look at. In 2007, though they claimed on their federal tax Form 990 total assets in the fund of $19.1 million, the Madoffs also noted a "gross sales price for all assets" — meaning stocks, bonds, and securities — of $182 million. However, the couple's annual charitable contributions have never exceeded $7 million and have dipped as low as $90,000. Cancer, lymphoma especially, became a cause close to the Madoffs when son Andrew was diagnosed with it a few years ago. Ironically, according to reports, it was Andrew and his brother, Mark, who discovered their father's alleged pyramid scheme and may have alerted authorities. In fact, the Madoffs have poured millions upon millions into lymphoma research — just under $6 million in just 2003, their peak year of total giving to charities. In 2004, a year when their total donations came to almost $6 million, the Madoffs sent $2.5 million to Memorial Sloan Kettering Hospital and $1.7 million to the Leukemia and Lymphoma Society. Some non-cancer charities made out pretty well in 2005. Girls Inc – a sort of "Big Sisters" group — got $25,000; Lincoln Center put $50,000 in its till; the Special Olympics had a gift of $25,000 and Robin Hood Foundation, $30,000. Madoff wasn't stupid, either. In 2005, he donated $100,000 to the famous Manhattan private school for rich kids, Dalton; and $25,000 to Prep for Prep, which takes poor kids who are smart and sends them to boarding school on an Ivy League track. In 2006, that huge total sum included one big winner: the Gift of Life Bone Marrow Foundation, which received $1 million. The contribution earned the couple the right to be chairmen of the charity's annual gala dinner. And son Andrew became chairman of the Lymphoma Research Foundation. Meanwhile, New York's Lincoln Center — currently in a huge rebuilding phase — got a healthy additional $77,500; Jessica Seinfeld's Baby Buggy charity received $12,500; Madoff sent the Robin Hood Foundation another $30,000; and Girls Inc. $25,000 more. The latter two groups have received money from the Madoffs in most years. Last year, things changed quite dramatically. Gone were the many millions for cancer research and other groups. Despite the $19.1 million in assets, the Madoffs gave away their least amount so far, divided among New York's Public Theater ($50,000), $25,000 to a Girls, Inc., $15,000 to a children's welfare group and $5,000 to The Door. The significant drop from 2006 to 2007 should have been a signal to the Madoff's regular recipients that something bad was about to happen. And it did. Fund Fraud
Hits Big Names By Robert Frank, Peter
Lattman, Dionne Searcey and Aaron Lucchetti
New York Mets owner Fred
Wilpon, Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter. And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff."I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said. Mr. Madoff, the founder and primary owner of Bernard L. Madoff Investment Securities LLC in New York, was arrested and charged Thursday. Prosecutors allege that the 70-year-old Mr. Madoff hid losses, paying certain investors returns using principal he received from other investors. Prosecutors and regulators have yet to determine how much has been lost, or the amount in assets still held by Mr. Madoff's business. The alleged fraud has "swept up some of the most prominent and wealthy Americans, along with many people who thought they were embarking on a comfortable retirement and have now been left destitute," says Brad Friedman, a lawyer at Milberg LLP, which with Seeger Weiss LLP represents more than 30 investors with losses they believe could total more than $1 billion. In criminal and civil complaints, Mr. Madoff is quoted as saying the losses could amount to $50 billion. "This is a real tragedy," Mr. Madoff's attorney, Ike Sorkin, said Friday. "We're going to fight through these events and do what we can to minimize the loss." Details emerged Friday of how Mr. Madoff ran the alleged scam, fostering a veneer of exclusivity and creating an A-list of investors that became his most powerful marketing tool. From New York and Florida to Minnesota and Texas, the money manager became an insider's choice among well-heeled investors seeking steady returns. By hiring unofficial agents, tapping into elite country clubs and creating "invitation only" policies for investors, he recruited a steady stream of new clients. During golf-course and cocktail-party banter, Mr. Madoff's name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff " 'the Jewish bond,' " says Ken Phillips, head of a Boulder, Colo., investment firm. "It paid 8% to 12%, every year, no matter what."As his reputation grew, Mr. Madoff gained the trust of prominent businessmen, including ex-Eagles owner Mr. Braman, who owns a chain of Florida auto dealers. A voicemail message left with Mr. Braman's office was not immediately returned. Mets owner Mr. Wilpon, who also owns real-estate investor Sterling Equities, often raved about Mr. Madoff's investment prowess and invested tens of millions of dollars of both his own money and the team's with his company, say financiers who have worked with him. Mr. Madoff handled investments for the Judy & Fred Wilpon Family Foundation, which distributed about $1 million a year in 2005 and 2006 to charities, according to its most recent federal tax returns.. Mets spokesman Jay Horowitz declined to comment Friday. Mr. Wilpon's Sterling Equities said in a statement: "We are shocked by recent events and, like all investors, will continue to monitor the situation." Mr. Merkin, the chairman of former General Motors Corp. financing arm GMAC, is also a money manager at Ascot Partners LLC in New York. Ascot, which had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff, according to a letter to Mr. Merkin sent to clients Thursday night. Mr. Merkin said as one of the largest investors in Ascot, he believed he had personally "suffered major losses from this catastrophe."Mr. Merkin could not be reached for comment. Mr. Madoff tapped social networks in Dallas, Chicago, Boston and Minneapolis. In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say. One of them estimated that investors from the two clubs may have invested more than $100 million combined. One of the largest clusters of Madoff investors was in Florida, where losses could be substantial. Mr. Madoff relied on a network of friends, family and business colleagues to attract investors. According to investors and agents, some of these agents were paid commissions for harvesting investors. Others had separate, lucrative business relationships with Mr. Madoff. "If you were eating lunch at the club or golfing, everyone was always talking about how Madoff was making them all this money," one investor says. "Everyone wanted to sign up." Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff's clients. "Every big divorce that came through my office had portfolio positions with Madoff," he says. Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he'd take down half the world with him. Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million -- or 95% of his net worth -- invested with Mr. Madoff. "That's how much I believed in him," Mr. Spring said. Mr. Spring said he was also one of the unofficial agents who connected Mr. Madoff with dozens of investors, from a teacher who put in $50,000 to entrepreneurs and executives who would put in millions. Mr. Spring said Mr. Madoff didn't want people to put in large amounts right away. "Bernie would tell me, 'Let them start small, and if they're happy the first year or two, they can put it more.' " Mr. Spring says he never was paid a commission, but he received fees from a small investment-research firm that counted Mr. Madoff as a client; he declined to say how much he received. He said investors would always come to him asking to invest with Mr. Madoff. "I never solicited anyone," he says.Mr. Spring says he never detected signs of impropriety with Mr. Madoff's investing, but he concedes that he may receive some blame from some investors. "I can understand where people who lost money are looking for a scapegoat," he says. "I'm heartbroken that so many people have been hurt so badly." Mr. Madoff's main go-between in Palm Beach was Robert Jaffe, say several investors. 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 Mr. Madoff's. Mr. Jaffe, a philanthropist in Palm Beach, attracted many investors from the Palm Beach Country Club in Palm Beach, Fla. A spokeswoman for Mr. Jaffe's family said several family members were investors with Mr. Madoff and were "significantly adversely impacted" by recent events. There are no indications that Mr. Jaffe or Mr. Spring are implicated in the alleged fraud. Mr. Jaffe didn't return messages yesterday. Other investors stand to lose through their investments with the likes of Fairfield Greenwich Group and Tremont Capital Management, funds of hedge funds that invested their cash with Mr. Madoff. "Needless to say, our level of anger and dismay over the apparent betrayal by Mr. Madoff and his organization of his 14-year relationship with Tremont is immeasurable," Tremont told clients in a letter Friday. Fairfield Greenwich said in a statement late Friday that it is trying to assess the extent of potential losses. The firm said that on Nov. 1, it had $7.5 billion in investments connected to Mr. Madoff's firm, slightly more than half of its total assets. Founding partner Jeffrey Tucker said the firm had no indication of any potential wrongdoing. "We are shocked an appalled by this news," he said. Ms. Manzke, 60, of Maxam Capital Management, said she met Mr. Madoff through investors in the mid-1980s and introduced him to Tremont, where she was then chief executive. That introduction led to Tremont's decision to market Mr. Madoff as a money manager to its own investors, she adds. In November, she says, Maxam asked to pull $30 million from Mr. Madoff, and he returned the money. "He was a low-key guy," Ms. Manzke says. "He would say, 'Look, I'm a market-maker, and I don't want anyone to know I'm running money.' It was always for select people. He was always closed, he wasn't taking new money." Several European investors were also apparent victims. Bramdean Alternatives in the U.K. said it had more than 9% of its portfolio invested in Madoff funds. Geneva-based Banque Benedict Hentsch, a white-glove private bank, said it is exposed for $47.5 million. BNP Paribas's exposure, the extent of which is not clear, may stem from BNP's lending relationship with a fund of funds that was a big Madoff client, said people familiar with the matter. A BNP spokeswoman declined to comment. Nomura and Neue Privat Bank, meanwhile, together marketed access to Fairfield Sentry Ltd., a fund overseen by Mr. Madoff and sold through Fairfield Greenwich. The shares offered by Neue Privat and Nomura were leveraged three times -- meaning $3 of borrowed money was added to every $1 of capital invested in order to magnify returns, greatly increasing the potential losses for those investors. A Nomura spokesman declined to comment. A message left with Neue Privat was not returned. The federal complaints against Mr. Madoff allege his fraudulent activities came through a secretive private wealth-management wing of Bernard L. Madoff Investment Securities, the investment firm he founded in 1960. On Wall Street, his company was perhaps better known for its operations in market-making -- the business of serving as a middleman between buyers and sellers -- and proprietary trading. Through those higher-profile parts of his operation, Mr. Madoff was a pioneer in trading New York Stock Exchange shares away from the exchange. He is a past chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the National Association of Securities Dealers and a member of numerous committees of the organization, according to his firm's Web site. Mr. Madoff owns a home in Roslyn, N.Y., records show, and an elaborate beachfront home and grounds in Montauk on Long Island. Mr. Madoff and his wife live in an apartment building on Manhattan's Upper East Side where property records list individual apartments valued at more than $5 million. One property database estimated the 2008 market value of Mr. Madoff's two-floor unit to be roughly $9 million. For years he has served as president of the building's co-op board, according to a tenant. Tenants say he appeared down-to-earth, friendly and always greeted everyone by their first name. Colleagues of Mr. Madoff said he was fair to those he dealt with and generous to charities including the Special Olympics. Mr. Madoff treated employees well and loved to take friends and colleagues on his 55-foot fishing boat, called Bull, said Frank Christensen, a retired New York Stock Exchange broker. "I really think very highly of him," said Mr. Christensen. "People make mistakes." —Matthew Futterman, Jenny Strasburg, David Enrich, and Craig Karmin contributed to this article.
People flocked to the lobby
of Mr. Madoff's office building Friday.
How Bernie Madoff Made Smart Folks Look Dumb By Jason Zweig The late comedian immortalized oxymorons, those absurd word pairs like "jumbo shrimp" and "military intelligence." Mr. Madoff just put the silliest of all financial oxymorons into the spotlight: "sophisticated investor." The accounts managed by Bernard L. Madoff Investment Securities LLC reported gains of roughly 1% a month like clockwork, with nary a loss, for two decades. Why did that freakishly smooth return not set off alarms among current and prospective investors? Of all people, sophisticated investors like Mr. Madoff's clients should know that if something sounds too good to be true, then it's not. But they believed it anyway. Why? Mr. Madoff emphasized secrecy, lending his investment accounts a mysterious allure and sense of exclusivity. The initial marketing often was in the hands of what one source described as "a macher" (the Yiddish term for a big shot). At the country club or another exclusive rendezvous, the macher would brag, "I've got my money invested with Madoff and he's doing really well." When his listener expressed interest, the macher would reply, "You can't get in unless you're invited...but I can probably get you in." Robert Cialdini, a psychology professor at Arizona State University and author of "Influence: Science and Practice," calls this strategy "a triple-threat combination." The "murkiness" of a hedge fund, he says, makes investors feel that it is "the inherent domain of people who know more than we do." This uncertainty leads us to look for social proof: evidence that other people we trust have already decided to invest. And by playing up how exclusive his funds were, Mr. Madoff shifted investors' fears from the risk that they might lose money to the risk they might lose out on making money. If you did get invited in, then you were anointed a member of this particular club of "sophisticated investors." Once someone you respect went out of his way to grant you access, says Prof. Cialdini, it would seem almost an "insult" to do any further investigation. Mr. Madoff also was known to throw investors out of his funds for asking too many questions, so no one wanted to rock the boat. This members-only feeling blinded many buyers of Mr. Madoff's funds to the numerous red flags fluttering around his operation. When you are in an exclusive private club, you do not go rummaging around in the kitchen to make sure that the health code is being followed. Here we have the biggest dirty secret of the "sophisticated investor": Due diligence often goes undone. For a brief window in 2006, the Securities and Exchange Commission required hedge funds to file standardized disclosure forms. William Goetzmann, a finance professor at Yale School of Management, found that hedge funds disclosing legal or regulatory problems and conflicts of interest ended up with lower future performance. But the disclosure of these risks had no impact at all on how much money flowed into the hedge funds. In other words, investors were getting useful information -- and paying no attention to it. Amaranth Advisors LLC, the commodity hedge fund that collapsed in 2006 with $6 billion in losses, did not even file the required SEC form at the beginning of that year, a clear signal that something might be wrong. Instead of standing pat or pulling money out, investors poured more money in. Last year, the Greenwich Roundtable, a nonprofit that researches alternative investments, conducted a survey of consultants, pension plans, "family offices," funds of funds and other large investors who shop for hedge funds. It's hard to imagine a more sophisticated crowd. Yet one out of five investors in the survey reported that they "always follow" not a formal checklist or analytical procedure, but rather "an informal process" of due diligence. That's for sure. One out of four investors surveyed will write a check without having studied the financial statements of the fund. Nearly one in three will not always run a background check on fund managers; 6% may not even read the prospectus before ever committing money. "Due diligence," says Stephen McMenamin of the Greenwich Roundtable, "is the art of asking good questions." It's also the art of not taking answers on faith. If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron. Madoff and SEC Neglect SocsFirst.com Madoff's
Arrest in Billion-dollar Fraud Case By Jane Musgrave While such wealthy people don't turn up just anywhere, the Palm Beach Country Club provided enough to make Madoff's membership in the predominantly Jewish club worthwhile. On Friday, many of those who had considered themselves lucky to invest their millions with the part-time Palm Beacher were calling their accountants, their brokers and each other, wondering whether they had lost it all. "Everyone is in shock," said Richard Rampell, a Palm Beach accountant. "They're embarrassed. They don't want to believe they got taken."But, according to federal investigators, that's exactly what happened. "It's all just one big lie ... basically a giant Ponzi scheme," Madoff told senior employees this week, according to documents filed in U.S. District Court in New York City. The feds swooped in quickly and arrested the 70-year-old, who splits his time between a Manhattan apartment and a $9.3 million mansion on the Intracoastal Waterway just north of Flagler Memorial Bridge. The five-bedroom, seven-bath Palm Beach property once belonged to Herbert and Hilary Pulitzer. After he told the employees that he had lost $50 billion invested with him, investigators were afraid he would carry through with plans to give the $200 million to $300 million that remained to favored employees, family and friends, according to court documents. The $50 billion loss, if accurate, would be one of the biggest frauds in history. By comparison, when energy trading giant Enron filed for bankruptcy in 2001, it had $63.4 billion in assets. Madoff late Thursday was charged with one count of securities fraud. He was released after posting a $10 million bond secured by his New York City apartment. His attorney, Daniel Horwitz, spoke of the contributions the founder of Bernard L. Madoff Investment Securities has made during his decades-long career as a Wall Street powerhouse, including a stint as chairman of the Nasdaq exchange he helped found. "Bernard Madoff is a long-standing leader in the financial services industry," he said. "We will fight to get through this unfortunate set of events." Calling the events "unfortunate" doesn't begin to describe the possible fallout, said Rampell and others. Not only would individuals lose millions if Madoff used their money to pay off other clients instead of investing it, but some of his clients were local charities, Rampell said, although he declined to name them. In addition, the types of people who invested with Madoff are those that the already strained nonprofits typically turn to for donations in tough economic times. Madoff also handled hedge funds, including Fairfield Greenwich Advisors LLC and Tremont Capital Management, according to published reports. "He had a very stellar reputation," Norman Braman, CEO of Braman Motors, told The Miami Herald. "I read this morning about Arthur Levitt, former head of the SEC, praising him. That's how you select people - by reputation." Braman, whose company has operations in Miami, West Palm Beach and Denver, said Friday he was one of Madoff's clients. Investing with Madoff also was attractive because the returns were so high, Rampell said. Even in recent years, when other securities tanked, returns were as high as 11 percent to 15 percent, he said. When one client asked him whether it was safe, Rampell said he tried to figure out how Madoff made money. Because the monthly statements he sent clients were hundreds of pages long, Rampell assumed Madoff was a day trader. Demurring that his technique was a secret, Madoff offered only this explanation: "I can make money when the market goes up. I can make money when the market goes down. But I can't make money when the market stays flat." Ultimately, Rampell said, he told the client: "I don't know what to tell you other than the guy has a good track record." Given the events of the past week, he said, he has doubts about the truth of the statements Madoff sent clients as well as the annual audits Madoff sent to the Securities and Exchange Commission. If the federal allegations are true, the surprise is that Madoff was able to sustain such a fraud for so long, Rampell said. Court documents show that it dates back to at least 2005. It fell apart when wary investors demanded $7 billion back and he didn't have the money to cover it, Madoff told investigators. "There is no innocent explanation," Madoff told FBI agents, according to court documents. He told the agents he "paid investors with money that wasn't there," that he was "broke" and that he expected to go to jail. The only bright spot for investors is that they may be able to get tax refunds if the investment returns were bogus, Rampell said. But, he acknowledged, that would be little compensation, either financially or psychologically, for those who knew him at the country club. While the club, which was formed in 1959 by Jewish Palm Beachers who were banned from other island haunts, proved to be an important connection for Madoff, fellow members described him as aloof. Others wanted to talk money; he wanted to golf. Or maybe it was something else, Rampell suggested. "Maybe it was all part of his mystique," he said. The Wall Street Journal and The Miami Herald contributed to this story Bernard L. Madoff Ex-Nasdaq Chairman By Larry Neumeister Ex-Nasdaq chairman arrested on securities fraud charge in NYC; accused of $50B `Ponzi scheme' NEW YORK (AP) -- A Wall Street powerbroker for nearly 50 years who built an influential firm has confessed to a massive fraud scheme that will cost investors at least $50 billion, federal authorities say. Bernard L. Madoff, 70, facing a single count of securities fraud, declined to speak with reporters after a federal magistrate judge in U.S. District Court in Manhattan ordered him released Thursday night on $10 million bail. Andrew M. Calamari, associate director of enforcement in the Securities and Exchange Commission's New York office, said the SEC had filed a civil securities fraud charge as well and was alleging "a stunning fraud that appears to be of epic proportions." The SEC said it was seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. A hearing was scheduled for Friday. If the allegations contained in a criminal complaint are true, it may be the largest fraud ever blamed on a single individual. Nearly all of the allegations stem from an FBI agent's recounting of what Madoff told two FBI agents and three senior employees of his firm, Bernard L. Madoff Investment Securities LLC. It would be a steep fall for Madoff, a former Nasdaq stock market chairman who founded his business in 1960 with $5,000 he earned in part working as a lifeguard on Long Island beaches. His firm was a market maker, handling trades in some of the largest securities on various stock exchanges, matching buyers and sellers. Investigators say Madoff's crime originated in a separate and secretive investment-advising business that served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. The criminal complaint signed by FBI Agent Theodore Cacioppi said Madoff told at least three senior employees at his Manhattan apartment Wednesday that the investment adviser business was a fraud and had been insolvent for years, losing at least $50 billion. Madoff told the employees he was "finished," that he had "absolutely nothing," that "it's all just one big lie" and it was "basically, a giant Ponzi scheme," according to the complaint filed in court. The employees understood Madoff's admission to mean that "he had for years been paying returns to certain investors out of the principal received from other, different, investors," said the complaint, which did not identify the investors impacted by the scheme. Cacioppi said one of the employees told him that Madoff was "cryptic" about the firm's investment advisory business and kept its financial statements locked up. The FBI agent said another employee told him that Madoff last week said clients had asked for about $7 billion in redemptions and he was struggling to meet those obligations but thought he could do so. Cacioppi said two senior Madoff employees told him that Madoff said during the Wednesday meeting that he planned to surrender to authorities in a week but first wanted to distribute $200 million to $300 million he had left to certain selected employees, family and friends. Cacioppi said he and another FBI agent arrived Thursday at Madoff's apartment, where Madoff invited them in and acknowledged knowing why they were there. "Madoff stated, in substance, that he had personally traded and lost money for institutional clients, and that it was all his fault," Cacioppi said. The agent wrote that Madoff said he had "paid investors with money that wasn't there" and that he was broke and insolvent and had decided that "it could not go on" and that he expected to go to jail. Defense lawyer Dan Horwitz called Madoff "a person of integrity" and said he intends to fight the charge. If convicted, Madoff could face up to 20 years in prison and a maximum fine of $5 million. Bernard L. Madoff Investment Securities LLC ranks among the top 1 percent of U.S. securities firms, according to the company's Web site. In 2001, Barron's reported that Madoff's firm was one of the three top market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange. Shortly after leaving law school, Madoff founded his firm in 1960. It was one of five broker-dealers most closely involved in developing the Nasdaq Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors. In the 1990s, Madoff was viewed as a maverick. He angered leaders of the New York and American stock exchanges by taking away some of their business by paying brokerage firms a penny a share to route orders through his system. Hedge Funds: Victims of Their Own Success (and Leverage) By Aaron Task According to two former hedge fund managers, the industry was victimized by its own success. "The money came in faster than their ability to manage it," said Rick Schottenfeld, chairman of Schottenfeld Group, a proprietary trading firm. "In order to move a big pool [of capital] they were forced into strategies that were leveraged-based, not alpha-based." Alpha is a measure of a fund's risk-adjusted return; a higher alpha implies a better return vs. other investment objects with the same market risk. During the low-volatility days of 2004-2007, many hedge funds gave the allusion of providing alpha. But "when there's a flood of capital, you run out of places to do things that create unique value," says Rob Roy, co-chief investment officer at Atlantic Advisors, which has about $3.5 billion under management. "You reach for things that allow you to create returns, which is different from value." Indeed, the smooth returns of the hedge fund industry proved illusory when market volatility began to surge. Hedge funds posted losses averaging 22% this year through Nov. 24, Bloomberg reported. As hedge fund performance tumbled this year, many investors clamored for their money back, which only put additional pressure on over-leveraged positions, hence the recent trend of funds halting redemptions. Many hedge fund investors are in a "prisoner's dilemma," Schottenfeld says. "If they force the funds to open, there might not be any money left." To Roy, a former hedge fund manager, this raises the question of whether hedge funds really are a suitable asset for all investors — including pension funds and endowments — as had been the trend prior to 2008. In 1990 there were just 610 hedge funds, with $38.9 billion under management, according to Vanity Fair. At the end of 2006 there were 9,462, with $1.5 trillion under management. (The industry's assets peaked at $1.9 trillion in June 2008, according to Bloomberg.) "There needs to be a place for unbridled capitalism," Schottenfeld says. But "people need to change their expectations of hedge funds." I think 2008 has taken care of that. You can listen to Bernard Madoff
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While
lawsuits over the Bernie Madoff swindle proliferate, one investor
suit seeking class-action status in Miami federal court is pursuing
the recovery of fees charged to invest in a fund that funneled money
to the convicted con man. 
Bernard
L. Madoff was led off to prison yesterday morning for what may be
the rest of his life. 
If Bernie Madoff has
lost $50bn (€35bn, £32bn) of other people’s money, as he is said to
have admitted, why did they trust him with it?
New
potential victims emerged of Wall Street veteran Bernard Madoff's
alleged giant Ponzi scheme, with international banks, hedge funds
and wealthy private investors among those sorting out what could
amount to tens of billions of dollars in losses.
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A Feast
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