George S. May Business Blog

Madoff Fraud

Last week Bernard L. Madoff, former chairman and CEO of New York-based BMIS, (Bernard Madoff Investment Securities), was arrested in what looks to be the largest case of fraudulence in the history of Wall Street. How did he do it? Really it’s quite simple. Madoff a man described as “charismatic” and “connected” would promise his investors large returns on investments that were seemingly too good to be true. As he would take in money from new investors he would use that money to pay out the old investors. A plan that worked seamlessly for years; until investors nervous with todays volatile market all asked to cash out at once.

So, Madoff unable to grant those requests, called two of his top executives to his apartment to spill the beans. Those executives also happened to be his sons. At his apartment he let both his sons know that in short, his firm was just all “one big lie”. The next morning he was arrested. As Fed investigators asked him for an explanation to the charges, his response was that there was “no innocent explanation”.

Today employees at his firm were seen packing up and moving out, some of whom when interviewed admitted they had lost their life savings. As the reports come in, it is absolutely astonishing to see how much money was swindled across the globe in Madoff’s ponzi-like scheme.

From GMA News and Public Affairs:

[Nationally]

The Boston-based Robert I. Lappin Charitable Foundation, a charity that financed trips for Jewish youth to Israel, sacked its staff after revealing that the money for its operations was invested with Madoff.

New Jersey Sen. Frank Lautenberg, one of the wealthiest members of the Senate, entrusted his family’s charitable foundation to Madoff. Lautenberg’s foundation handed out more than $765,000 to at least 100 recipients in 2006, according to the most recent listing on Guidestar, which tracks charitable organization filings. The foundation helps support a variety of religious, educational, civic and arts organizations in New Jersey and elsewhere, and its contributions range from a gift of than $300,000 to the United Jewish Communities of MetroWest New Jersey to a $2,000 donation to a children’s program at the Hackensack Medical Center.

Reports from Florida to Minnesota included profiles of ordinary investors who gave Madoff their money…They told stories of losing everything from $40,000 to an entire nest egg worth well over $1 million. They join a list of more powerful investors that have come forward, all worried about the extent of their losses. The roster of names include former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services, among others.

[Internationally]

“Banco Santander, the largest bank in the euro zone by market capitalization, said its clients have €2.33 billion ($3.07 billion) in exposure with Madoff, mostly through a fund called Optimal Strategic US Equity.
Banco Santander said it has another position of €17 million of its own money through another fund which it did not name.

Royal Bank of Scotland – Britain’s second-largest bank, which is now 58 percent owned by the British government – said it could lose around €400 million pounds ($600 million) through exposure in trading and collateralized lending to funds of hedge funds invested with Bernard L Madoff Investment Securities LLC.

Nomura Holdings said it has 27.5 billion yen ($306 million) in exposure, but added that any losses were likely to be limited compared to its capital base.

Man Group, the world’s largest publicly traded hedge fund manager, said its risk came through two funds that are directly or indirectly sub-advised by Madoff Securities through RMF, its predominantly institutional fund of funds.

Switzerland’s Reichmuth & Co. said that the private bank has $327 million at risk and from BNP Paribas that estimated its exposure at €350 million.”

What I find to be interesting is to now to look back at his fairly popular you tube videos in which he explicitly states, “in today’s regulatory environment, it is virtually impossible for a violation to go undetected”.

Madoff is likely to be looking at a sentence of at least 20 years and fines for millions of dollars. The unfortunate part is that thousands of people are still going to be out a lot of money that they most likely will never receive back. When things like this happen, even if the criminal is prosecuted and sentenced accordingly, I feel that, in the end, it is always the victim that suffers the most. Sure they will feel a bit of vindication by watching Madoff get sentenced and fined, but it still won’t put the money back into their pocket.

Related posts:

1. Peter Madoff under fire from Manhattan U.S. Attorney’s office Another member of the Madoff family has found themself on the hot seat. The New York Post reports that Peter Madoff, brother of the infamous Ponzi Schemer, Bernard,...