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Friday, December 12, 2008

Bernard L. Madoff Arrested for $50B Ponzi Scheme

Too good to be true? It probably was.

The NY Times reports in "Prominent Trader Accused of Defrauding Clients:"
On Wall Street, his name is legendary. With money he had made as a lifeguard on the beaches of Long Island, he built a trading powerhouse that had prospered for more than four decades. At age 70, he had become an influential spokesman for the traders who are the hidden gears of the marketplace.

But on Thursday morning, this consummate trader, Bernard L. Madoff, was arrested at his Manhattan home by federal agents who accused him of running a multibillion-dollar fraud scheme — perhaps the largest in Wall Street’s history.

Regulators have not yet verified the scale of the fraud. But the criminal complaint filed against Mr. Madoff on Thursday in federal court in Manhattan reports that he estimated the losses at $50 billion. “We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the enforcement division at the Securities and Exchange Commission. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors.”
  • According to the most recent federal filings, Bernard L. Madoff Investment Securities, the firm he founded in 1960, operated more than two dozen funds overseeing $17 billion.
Beware of anyone who doesn't show losses.
“The numbers were too good to be true, for too long,” said Girish Reddy, a managing director at Prisma Partners, an investment firm that invests in hedge funds. “And the supporting infrastructure was weak.” Mr. Reddy said his firm had looked at the Madoff funds but decided against investing in them because their performance was too consistently positive, even in times when the market was incredibly volatile.
Success of Traders’ Funds Bemused Rivals
The success of funds run by Bernard L. Madoff, the Wall Street trader arrested Thursday on accusations of running a multibillion-dollar fraud scheme, have apparently long flummoxed rivals, who wondered how Mr. Madoff could post such high returns through thick and thin.
The website, shows
The Honorable Louis L. Stanton, Federal Judge in the United States District Court for the Southern District of New York, has appointed Lee S. Richards of the law firm Richards Kibbe & Orbe LLP receiver over the assets and accounts of Bernard L. Madoff Investment Securities LLC (“BMIS”) as per the attached order. Link to Order

Should you have further questions, please contact the Receiver at the following number: 214-647-7511
The SEC press release:

SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme


Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

"We are alleging a massive fraud — both in terms of scope and duration," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable."

Andrew M. Calamari, Associate Director of Enforcement in the SEC's New York Regional Office, added, "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

The SEC's investigation is continuing.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York.

# # #

Buyer beware!

The good news is those of us with honest records of significantly beating the market can point to this story about why our bad years where we under perform the markets are a "good thing" as it aids our credibility.

To find out how I've profited greatly from these difficult market conditions, subscribe to "Kirk Lindstrom's Investment Newsletter" today!



  1. Fund Fraud Hits Big Names ; Madoff’s Clients Included Mets Owner, GMAC Chairman, Country-Club Recruits

    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.

    New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history’s largest financial scam.

    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.

    Full story

  2. From: pcyhuang 12/14/2008 10:45:37 PM

    SEC's Chances of Survival Questioned

    The WSJ reports: An enforcement case 16 years ago gave the Securities and Exchange Commission its first shot at figuring out how Bernard Madoff could rack up favorable returns with such uncanny consistency. After that, it received repeated warnings from outside whistle-blowers and at least twice looked into Mr. Madoff's brokerage itself.

    Each time, it blew its chance.
    It was only last week, when Mr. Madoff allegedly confessed to his sons that he was running what amounted to a "giant Ponzi scheme," that the apparent $50 billion fraud came to light.

    "This is a debacle for the SEC," said Joel Seligman, an SEC historian and president of the University of Rochester in New York. "The commission has a lot to answer for."

    The revelations are the latest blow to the reputation of an agency that has been criticized for insufficient enforcement and the failure to better monitor the dangerous risk-taking on Wall Street that triggered this year's financial crisis. Congress and the incoming Obama administration already were planning a regulatory revamp, and the Madoff case may make the SEC's chances of survival shakier.

    The case also will likely fuel calls for more regulation of areas that have fallen outside the scope of oversight, including certain types of investment advisers who can ply their trade without ever having to tell a federal regulator what they are up to. The SEC declined to comment about its record.

    Mr. Madoff's money-management business appears to have fallen into a regulatory gray zone for years, and the ambiguity may have helped him evade oversight. Though he was gathering investors' money and choosing how it was invested, he wasn't a registered investment adviser until 2006. Some people described his business as a hedge fund, but he didn't create a formal fund into which investors could put their money.

    In a 2001 interview with a trade publication, Mr. Madoff compared himself to a broker who handles investors' accounts and gives them tips on where to put their money. He was in fact a broker-dealer and regulated as such by the SEC. Several former SEC regulators said they thought Mr. Madoff's broker-dealer business dealt entirely with trading by Wall Street firms, not by individual investors.

    Mr. Madoff enjoyed a good reputation on Wall Street that may have helped him evade suspicion. His market-making business serving institutional investors went back to 1960, and he was a former chairman of the Nasdaq Stock Market. The SEC itself tapped his expertise, naming him to a 25-member advisory committee on market structure in 2000 and frequently calling on him to be a commentator at agency round-table discussions.

    He even got his name informally applied an SEC rule. The "Madoff exception" allowed market makers such as Mr. Madoff to sell stock short to facilitate a customer buy order, even if the stock in question was ticking downward. Under a rule that was in place until last year, short sales on a downward-ticking stock were normally prohibited. In a short sale, investors borrow stock and sell it, hoping to repay with shares bought at a lower price.

    In a statement late Friday, the SEC said its inspections unit reviewed Mr. Madoff's market-making business in 2005 and found that he violated technical rules about executing trades. The agency's enforcement division in 2007 investigated a part of a whistle-blower's concerns, but closed the probe without bringing a case.

    Mr. Madoff registered his firm as an investment adviser in September 2006, and newly registered advisers are supposed to be examined within the first year. There is no indication the SEC ever conducted that examination.His registration form said he was paid through trading commissions, rather than the usual method of taking a percentage of his clients' assets and investment profits. That apparently failed to raise red flags.

    The earliest clues to Mr. Madoff's business may have come in 1992, when the SEC sued two accountants who had been collecting money from investors to be managed by Mr. Madoff. The accountants raised money from Florida residents and guaranteed returns of 13.5% to 20%. The SEC sued the accountants but not Mr. Madoff, who claimed not to know they raised money illegally.

    An SEC official told The Wall Street Journal in a Dec. 16, 1992, article that the agency began its investigation of the accountants fearing a scam. A court-appointed trustee concluded that the money investors thought they had in Madoff accounts was in fact all there

    Full Story:



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