Bernie Madoff's Ponzi Scheme: Fall from grace

  

 

Bernard L. Madoff Investment Securities - BMIS, was made up of three businesses: investment adviser services, market making services and proprietary trading. It is the investment adviser services business that is at the centre of a scandal that came to light after Mr Madoff apparently confessed to his two sons — that he was “finished”, that he had “absolutely nothing” and “it’s all just one big lie”.

On Dec. 11, 2008, Madoff was arrested at his Manhattan home in what could be the largest fraud in Wall Street history. On March 12, 2009 the 70-year-old pleaded guilty to all 11 federal felony counts against him, including securities fraud, money laundering and perjury, which could earn him a total of 150 years behind bars.

He admitted that he had never invested any of his clients' money from the inception of the scheme. Instead, he simply deposited the money into his business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC filings. He used the Chase business account to pay clients who requested withdrawals, claiming the "profits" were the result of his own unique "split-strike conversion strategy". He declared that he had every intention of resuming legitimate activities in his asset management division, but it proved "difficult, and ultimately impossible" to catch up to the paper profits. Madoff admitted he knew his day of reckoning was inevitable.

Madoff's Firm: Bernard L. Madoff Investment Securities - BMIS
Madoff started his firm in 1960 and was instrumental in the development of the NASDAQ, which he eventually chaired. His fund was one of the largest on Wall Street; authorities estimate about $50 billion may be involved.

The firm functioned as a third-market provider, which bypassed exchange specialist firms, by directly executing orders over the counter from retail brokers. At one point, Madoff Securities was the largest market maker at the NASDAQ and in 2008 was the sixth largest market maker on Wall Street.

Madoff offered steady returns to an exclusive clientele. The investment method was marketed as "too complicated for outsiders to understand." He was secretive about the firm’s business, and kept his financial statements closely guarded. According to the SEC complaint against Mr Madoff, he kept financial statements for the firm “under lock and key” and was “very secretive” about the investment advisory business when discussing it with other employees.

The New York Post reported that Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach. The New York Times reported that Madoff courted many prominent Jewish executives and organizations; according to the Associated Press, they "trusted [Madoff] because he is Jewish. A scheme that targets members of a particular religious or ethnic community is a type of affinity fraud, and a Newsweek article identified Madoff's scheme as "an affinity Ponzi".

Madoff was a "master marketer, and his fund was considered exclusive, giving the appearance of a "velvet rope. He generally refused to meet directly with investors, which gave him an "Oz" aura and increased the allure of the investment. Some Madoff investors were wary of removing their money from his fund, in case they could not get back in later. One New York real estate investor said she "literally begged" Madoff to take her money, and he refused.


Access to Washington
The Madoff family gained unusual access to Washington's lawmakers and regulators through the industry's top trade group. The Madoff family has long-standing, high-level ties to the Securities Industry and Financial Markets Association (SIFMA), the primary securities industry organization. Bernard Madoff sat on the Board of Directors of the Securities Industry Association, which merged with the Bond Market Association in 2006 to form SIFMA.

Final weeks
The scheme began to unravel in December 2008, as the stock market continued to plunge. Subsequently, as the general market downturn accelerated, investors tried to withdraw $7 billion from the firm, and in the weeks prior to his arrest, Madoff struggled to keep the scheme afloat. To pay off those investors, Madoff needed new money from other investors.

Affected clients
On February 4, 2009, the U.S. Bankruptcy Court in Manhattan released a 162-page client list with at least 13,500 different accounts, but without listing the amounts invested. Individual investors who invested through Fairfield Greenwich Group, Ascot Partners, and Chais Investments were not included on the list.

Clients included banks, hedge funds, charities, universities, and wealthy individuals who have disclosed about $41 billion invested with Bernard L. Madoff Investment Securities LLC.

Maddof's assets frozen
All the company’s remaining assets have now been frozen in the hope of repaying some of the companies, individuals and charities that have been unfortunate enough to invest in the business.
However, with the fraud believed to exceed $50 billion, whatever recompense investors could receive will be a drop in the ocean.

 

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