A $50,000,000,000 ponzi scheme.

[Little Raven]

Awesome.

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.

[LawBeefaroni]

If the Madoff story is correct, it is the single biggest financial story of the year. Indeed, it is bigger than Enron or Tyco, bigger than Boesky and far bigger than Bayou.

...

About three years ago, an investor of mine, who already was an investor with Madoff, came to me and asked my advice as to whether he should add to that investment. I requested and received his monthly brokerage statements. Now, I am very good with math, but after hours of analysis over a weekend, I could not understand how he generated his returns and suggested that he should withdraw his capital. (The investor discarded my advice and decided to add materially to his investment.)

Also, the Mets owners just released a statement indicating that they had money (not Met money) in the fund. There are quite a few hedge funds with large investments. It will be interesting to see what happens.



EDIT: And apparently there was a history of complaints to the SEC, as well as some private sector investigations but the SEC did nothing. They will probably get a reaming out of this too.

[LawBeefaroni]

It appears that at least $15 billion of wealth, much of which was concentrated in Southern Florida and New York City, has gone to money heaven. Real estate has been dealt a fatal blow, both in the luxury residential markets as well as in the office market, where Madoff funds were likely used as debt collateral.

The disclosure of the possible fraud last night suggest to me that anyone on the fence regarding redemptions to the hedge fund industry over the next several months will likely put in their requests for capital withdrawal, as confidence in the system and in investment managers has been irreparably impaired.

Kass's article quite good. It might be jumping the gun and making some assumptions but it's a nice read.

[Grifman]

It also sounds like it was his sons that turned him in. They had two separate businesses, the father managed the investment fund exclusively, the sons were in the other side of the business. According to reports, when two "senior executives" came to him with questions that had arisen, he admitted what was going on. Sad holiday for many people here.

[Kyosho]

Wow that is crazy.

Oh and... am I wrong, or do you have too many zeros there?

[Little Raven]

Oh and... am I wrong, or do you have too many zeros there?

You're right, I did.

A little over enthusiasm on my part, I guess.

[ichbinunique]

The only question is: Is the fund too big too fail? If so, here comes the bailout!

[Little Raven]

I think it would be easy enough to bail out. It's only another $50 billion. (worst case scenario) Paulson has at least $300 billion left, even if he's forced to bail out Detroit as well.

[LawBeefaroni]

The only question is: Is the fund too big too fail? If so, here comes the bailout!

No, this one is just tough luck for investors. Although like I said, the SEC is going to hear it.

[Grifman]

The question I have is this - if the $50 billion if gone, then where did it go? What did this guy spend it on? Estates, cars, planes, small Third World countries? I can comprehend stealing millions and spending the money, I just can't get my head around spending $50 billion. Or did he just make some really awful investments and lose all/most of it?

[Freezer-TPF-]

Instead, Mr. Madoff invited the two executives to his Manhattan apartment that evening. When they joined him there, he told them that his money-management business was “all just one big lie” and “basically, a giant Ponzi scheme.”

. . .

By this account, Mr. Madoff told the executives he intended to surrender to the authorities in about a week but first wanted to distribute approximately $200 million to $300 million to “certain selected employees, family and friends.”

On Thursday morning, however, he was arrested on a single count of securities fraud, which carries a maximum penalty of 20 years in prison and a maximum fine of $5 million.

According to the S.E.C., Mr. Madoff confessed to an F.B.I. agent that there was “no innocent explanation” for his behavior and he expected to go to jail. He had lost money on his trades, he told the agent, and had “paid investors with money that wasn’t there.”

/shakes head. Between the IL governor and this, it's like criminals aren't even trying anymore.

[LawBeefaroni]

The question I have is this - if the $50 billion if gone, then where did it go? What did this guy spend it on? Estates, cars, planes, small Third World countries? I can comprehend stealing millions and spending the money, I just can't get my head around spending $50 billion. Or did he just make some really awful investments and lose all/most of it?

The complaint puts it at $50B but the exact total is unknown. Kass in the article above has it closer to $17-$25B. I think the $50B probably includes paper returns, returns investors thought they had that were never really there in the first place. Regardless, it "disappeared" into poor investments. Madoff got his cut through commissions and fees.

In all likelihood, while posting consistent returns, Madoff (again, similar to Bayou) churned his accounts and earned high levels of commissions. At the same time the accounts were being churned and consistent returns were reported, both firms likely lost huge amounts of money in an extremely active trading strategy, with commissions inuring to the firm. I suspect that the losses dramatically increased this year, as his split-strike conversion strategy (similar to a classical buy/write strategy) backfired, providing little downside protection in the bear market of 2008. Madoff also said in the MAR/Hedge interview that this strategy works best in bull markets and that "we've really been in a bull market since '82, so this has been a good period to do this kind of stuff." Years of phony investment performance had the effect of compounding the alleged fraud over several decades.

And like any Ponzi scheme, at least some of it went to perpetuate the illusion by covering those who cashed out early.

[Octavious]

I love how he stole 50 billion dollars and the max he can get is 20 years in jail.

[Peacedog]

So it isn't precisely the same thing, but when is the Steven Soderbergh docu-drama about him coming out?

[Mr. Fed]

I love how he stole 50 billion dollars and the max he can get is 20 years in jail.

That's just the initial charge, brought hastily to get an arrest warrant. They'll supersede to add more counts.

[theohall]

I love how he stole 50 billion dollars and the max he can get is 20 years in jail.

and a $5 Million dollar fine. Steal $50 billion, be fined .1% (and yes that is 1/10th of 1 percent). Sounds like a deal.

That still leaves $49,995M profit

[LawBeefaroni]

I love how he stole 50 billion dollars and the max he can get is 20 years in jail.

and a $5 Million dollar fine. Steal $50 billion, be fined .1% (and yes that is 1/10th of 1 percent). Sounds like a deal.

That still leaves $49,995M profit

Even assuming that number is correct, $50B is the amount lost by investors not what he walked away with. Your point still stands but it's likely to be far less than $50B that he actually took for himself as "profit."

[hepcat]

I would imagine that the losses accrued in a ponzi scheme grow exponentially over time. Left unchecked it could eventually become an amazing amount...which in this case it seems to have.

[Mr. Fed]

Here's the real fun thing about Ponzi schemes.

Generally the government comes in and takes over all of the assets of the defendant, often appointing a receiver if the scheme is big enough. Then the government (directly or through its appointee, the receiver) starts gathering all of the assets of the defendant to divvy them up among investors.

But in doing so, the aim is to treat all investors evenly. That includes the lucky early investors who actually received enough "profit" distributions to cover their principal, and more.

Hence if you are a lucky early investor in a Ponzi, you are still screwed when the government calls in. The government will force you to disgorge all money -- including return of principal -- you got from the ponzi. Then it puts all of the assets into a big pot and divides it up -- after paying legal fees, the receiver's fees, and costs, of course.

So you could invest $10k, make 30% in a month, and wind up giving it all back and getting 20 cents on the dollar on your principal.

No one wins.

(Well, except the lawyers.)

[Mr. Fed]

I would imagine that the losses accrued in a ponzi scheme grow exponentially over time. Left unchecked it could eventually become an amazing amount...which in this case it seems to have.

The paper losses -- the amounts of "profit" that the investors believe they have gotten on paper -- grows that way. But the purpose of the ponzi schemer is to make as many of them as possible keep their principal -- and preferably most of their profit -- in the scheme with promises of bigger and bigger gains. "You did so well on investment A; let's roll it into investment B -- it may be even better!" The relatively few investors who pull money out prudently are the cost of doing business.

Ponzi guys, in my experience, like helicopters, yachts, extremely expensive cars, questionable real estate, and other things that lose a lot of value after they are purchased. Hence huge losses.

[craterus]

I love how he stole 50 billion dollars and the max he can get is 20 years in jail.

That's just the initial charge, brought hastily to get an arrest warrant. They'll supersede to add more counts.

Thank goodness... does it really matter though? Isn't the dude 70?

My new plan:
Screw everyone!
Live the good life for 30 years!
Then break the bad news to the suckers!
Go to jail for 5 years or so and then die with a smile

[Grifman]

What's crazy is from what I've read, there are some very, very formerly wealthy people who now could be almost penniless except for whatever is in their bank accounts or whatever real estate they own. Some people had all their investments with this guy.

[hepcat]

I forget if it was mentioned in the article, but is there an estimated time when it all went south? or was he running a scheme the whole time?

[LawBeefaroni]

Here's the real fun thing about Ponzi schemes.

Generally the government comes in and takes over all of the assets of the defendant, often appointing a receiver if the scheme is big enough. Then the government (directly or through its appointee, the receiver) starts gathering all of the assets of the defendant to divvy them up among investors.

But in doing so, the aim is to treat all investors evenly. That includes the lucky early investors who actually received enough "profit" distributions to cover their principal, and more.

Right now the word is that they are looking back bout 6 years. IBs, hedge funds, and investors across the world are calling lawyers and getting ready to defend any redemptions. It appears there will be plenty of civil suits as well.

Meanwhile, financial statements worldwide are being rewritten.

Dec. 22 (Bloomberg) -- Celfin Capital SA, the Chilean brokerage that manages about $4 billion, may see its 2008 profit cut in half on losses from investments in funds controlled by alleged U.S. fraudster Bernard Madoff.

[LawBeefaroni]

Rene-Thierry Magon de la Villehuchet, a founder of the hedge fund Access International Advisors, was found dead early Tuesday in his office in Manhattan, the French business daily La Tribune reported on its Web site, after losing as much as $1.4 billion that had been invested with Bernard L. Madoff, the money manager accused of running a $50 billion Ponzi scheme. Mr. de la Villehuchet, 65, committed suicide, La Tribune said, citing a someone close to Mr. de la Villehuchet.

[stessier]

This is impressive.

We have no evidence to indicate securities were purchased for customer accounts" in the past 13 years, said Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC. "This is a case where we're going to be looking at cash in and cash out" — the definition of a Ponzi scheme.

13 years!

[LawBeefaroni]

This is impressive.

We have no evidence to indicate securities were purchased for customer accounts" in the past 13 years, said Irving Picard, the court-appointed trustee overseeing the liquidation of Bernard L. Madoff Investment Securities LLC. "This is a case where we're going to be looking at cash in and cash out" — the definition of a Ponzi scheme.

13 years!

Yeah, it's amazing actually. He didn't trade a single security for the fund over those 13 years.

Anyone who got out with a profit has to give all that profit back. More than that probably, under the scenario Mr. Fed laid out above, but at the very least they are most certainly on the hook for any gains.

The problem is that many institutions and other funds were in this. And it could get complicated. JP Morgan, for example, had money in there that they took out (but didn't tell clients who had money in, BTW).




Sadly, there was another related suicide recently too:

A retired British army major killed himself after losing his life savings in the alleged fraud perpetrated by U.S. financier Bernard Madoff, his son said Friday.

...

William Foxton, who served in the French Foreign Legion and rose to the rank of major in the British army, lost an arm during service in the military. He retired in the 1970s. His son said he did not know the exact circumstances of the injury, explaining that his father told him little about his time in the army.

William later threw himself into humanitarian work, spending the 1990s and early 2000s in the Balkans, where he was a member of the European Commission Monitoring Mission and spent time as a spokesman for the Organization for Security and Cooperation in Europe. He also did work for the German charity Arbeiter Samariter Bund, his son said.

Foxton was made an Officer of the Order of the British Empire in 1999 for his work in the former Yugoslavia. His son said he had been investing his life savings in the Herald USA Fund and Herald Luxemburg Fund, both of which suffered hundreds of millions of dollars in losses as a result of Madoff's alleged scam. Foxton said he doesn't yet know how much his father lost, but thought it could be in the high six figures.

[LawBeefaroni]

150 years.

June 29 (Bloomberg) -- Bernard Madoff was sentenced to 150 years in prison for masterminding the largest Ponzi scheme in history.

Madoff appeared in court today before U.S. District Judge Denny Chin for the first time since his March 12 guilty plea for an epic swindle that may have reached $65 billion.

“I don’t ask for any forgiveness,” Madoff, 71, told Chin. He said he deceived his brothers, his two sons and his wife. The courtroom burst into applause as Chin imposed the sentence, which is about six times longer than those meted out to the chief executives of WorldCom Inc. and Enron Corp.

Madoff pleaded guilty to securities fraud, mail fraud, wire fraud, investment adviser fraud, three counts of money laundering, false statements, perjury, false filings with the SEC and theft from an employee benefit plan.

Still, it's mostly meaningless to victims who are still out huge sums of money. Madoff also surely did not act alone. I hope this isn't the end of it. The "deceived" sons and wife should also have to answer.

[Mr. Fed]

Yeah, but he'll only do 127 1/2, given good behavior. 126 1/2 if he gets into the drug/alcohol rehab program. And he may do the last six months in a halfway house.

[LawBeefaroni]

Yeah, but he'll only do 127 1/2, given good behavior. 126 1/2 if he gets into the drug/alcohol rehab program. And he may do the last six months in a halfway house.

So I take it he's serving his sentence at the Ponce de León Detention Facility and Baths?

[LordMortis]

150 years.

June 29 (Bloomberg) -- Bernard Madoff was sentenced to 150 years in prison for masterminding the largest Ponzi scheme in history.

Madoff appeared in court today before U.S. District Judge Denny Chin for the first time since his March 12 guilty plea for an epic swindle that may have reached $65 billion.

“I don’t ask for any forgiveness,” Madoff, 71, told Chin. He said he deceived his brothers, his two sons and his wife. The courtroom burst into applause as Chin imposed the sentence, which is about six times longer than those meted out to the chief executives of WorldCom Inc. and Enron Corp.

Madoff pleaded guilty to securities fraud, mail fraud, wire fraud, investment adviser fraud, three counts of money laundering, false statements, perjury, false filings with the SEC and theft from an employee benefit plan.

Still, it's mostly meaningless to victims who are still out huge sums of money. Madoff also surely did not act alone. I hope this isn't the end of it. The "deceived" sons and wife should also have to answer.

Because 150 years in what I am sure is going to be a retirement home is going to be so terrible. But at least it's just about the worst book that could be thrown at him for modern times.

I'm not sure how I feel about how much they are taking back. Theory has it the wife gets to keep $2.4 million. I'd say take it all (Don't care if she was ignorant of her husband's fraud) but quite frankly if it's going to take a similar bankroll to take the money from her, then I don't care about justice being served.

I also hope this isn't the end of it but I am really ignorant to how many people fall during these fraud trials. The press are only ever concerned about the big fish, so the big fish are all ever hear about. We only seem to be concerned with gestures of justice, so that's what the press seeks. Unless the press somehow influences what we are concerned with by what they publish.

All this does is make me fear more for the gravy train they insist so heavily I jump on, that they tax incentivize the hell out of it to make me do it. I've been pissing away $200 a month for the last two years to still not even cover my losses from when my investor talked me out of divesting myself from all the funds my retirement was in. So now I'm still shy about $10,000 in company contributions and $2400 in personal contribution for a portfolio that is still down to $55,000 from the high of $71,000 when I was going to bail out. Currently, that sound like a total $28,000 worth of free wealth to other people for me buying in to the system. This is to say nothing of the tiny interest that could earned honestly through a credit union.

But at least it will all be only be taxed when I pull it out right? Unless I pull it out before I'm like 67 or some such thing.

I hate our system.

[LawBeefaroni]

Because 150 years in what I am sure is going to be a retirement home is going to be so terrible. But at least it's just about the worst book that could be thrown at him for modern times.

Despite Mr. Fed's optimism, Madoff won't won't serve his life sentence for more than 20 years.

I'm not sure how I feel about how much they are taking back. Theory has it the wife gets to keep $2.4 million. I'd say take it all (Don't care if she was ignorant of her husband's fraud) but quite frankly if it's going to take a similar bankroll to take the money from her, then I don't care about justice being served.

I also hope this isn't the end of it but I am really ignorant to how many people fall during these fraud trials. The press are only ever concerned about the big fish, so the big fish are all ever hear about. We only seem to be concerned with gestures of justice, so that's what the press seeks. Unless the press somehow influences what we are concerned with by what they publish.

There are a lot of powerful/loud/annoying people out an awful lot of money here. There is a fund ($30M last I saw?) set aside already to cover legal and accounting fees to unravel the mess and recover what they can. Small fish will cooperate or get nailed. They aren't as important as fund recovery.

All this does is make me fear more for the gravy train they insist so heavily I jump on, that they tax incentivize the hell out of it to make me do it. I've been pissing away $200 a month for the last two years to still not even cover my losses from when my investor talked me out of divesting myself from all the funds my retirement was in. So now I'm still shy about $10,000 in company contributions and $2400 in personal contribution for a portfolio that is still down to $55,000 from the high of $71,000 when I was going to bail out. Currently, that sound like a total $28,000 worth of free wealth to other people for me buying in to the system. This is to say nothing of the tiny interest that could earned honestly through a credit union.

But at least it will all be only be taxed when I pull it out right? Unless I pull it out before I'm like 67 or some such thing.

I hate our system.

Eggs in many baskets.

[LordMortis]

Eggs in many baskets.

I don't have enough eggs. I'm actually proud that I am able to put away as much money as I do and ecstatic that my company is excellent enough to work dilligently to help me. However their investor for our retirement funds don't have a very good program for us self managing our portfolios (I'll trash the specific company all you'd like in private) I have no one to blame but myself for listening to the people who are supposed to know what is going on and not pulling my money when all my research and my instincts screamed at me to bail and then after ignoring them for three months continuing becoming resigned to the fact that the market had already crashed so there was no point in bailing then as the bottom either wasn't too far off or we were all fucked anyway. And now my every contribution is a continued tax on my own stupidity.

The good news is that I listened to my instincts enough to not increase my contributions, but rather pay down my 2nd mortgage and save toward a car. I managed to do the former in 7 years and had enough to half down on new car when I needed one. If I can get this car paid off in two years and I can start rebuilding a savings and then start eating away at my primary mortgage.

(Investment company advisors still piss me off to the point where I refuse to talk to them. That three months into the crash they came to our office to inform us that no one could have seen the extent of this crash coming and now all we can do is weather the storm. Fuck them. How can you invest others people's money for a living and not have seen any of that coming?)

[Pyperkub]

Because 150 years in what I am sure is going to be a retirement home is going to be so terrible. But at least it's just about the worst book that could be thrown at him for modern times.

I did read somewhere that his sentence is long enough that he won't be eligible for the minimum security prisons.

From CNN:

Madoff's status as a non-violent offender should keep him out of maximum-security, consultants said. But they added that the massive scale of his crimes and his hefty sentence would make him ineligible for a low-security prison or a minimum-security prison camp, which inmates usually prefer because of safety, fewer restrictions and better quality of life.

In a medium-security prison, he would live in a cell, separated from the outer world by double layers of razor wire fencing with electronic detection systems, according to the Federal Bureau of Prisons. He would have to work a menial job, possibly in a kitchen or laundry room, for 12 to 40 cents an hour.

[Odin]

He would have to work a menial job, possibly in a kitchen or laundry room, for 12 to 40 cents an hour.

But if he invests that money in a good ponzi scheme...

[Pyperkub]

He would have to work a menial job, possibly in a kitchen or laundry room, for 12 to 40 cents an hour.

But if he invests that money in a good ponzi scheme...

Methinks repeat offenders might get a more violent type of vigilante justice...

[Odin]

Methinks repeat offenders might get a more violent type of vigilante justice...

Meh. If he hasn't been lynched yet, he's not likely to be.

[LawBeefaroni]

One evening a fellow prisoner kept asking Madoff about the victims of his $65 billion scheme and Madoff, angered, said: "F*** my victims. I carried them for twenty years, and now I'm doing 150 years," [New York Magazine] reported.

In prison, Madoff is regarded as a success, is admired and has fans, the magazine wrote.

It quotes Robert Rosso, who serves life in prison, who wrote on a Web site he founded that Madoff is "a hero. He's arguably the greatest con of all time."

[LordMortis]

One evening a fellow prisoner kept asking Madoff about the victims of his $65 billion scheme and Madoff, angered, said: "F*** my victims. I carried them for twenty years, and now I'm doing 150 years," [New York Magazine] reported.

In prison, Madoff is regarded as a success, is admired and has fans, the magazine wrote.

It quotes Robert Rosso, who serves life in prison, who wrote on a Web site he founded that Madoff is "a hero. He's arguably the greatest con of all time."

In context I understand. How much different is what he did to what the banks have been doing with credit or our government been doing with Social Security and selling debt or with us and investing stock markets and housing? Only in the level of dishonesty is different.

He's a crook and deserves what he gets. But then I see a lot of crooks skating by all of the time. It's sad.

[LawBeefaroni]

In context I understand. How much different is what he did to what the banks have been doing with credit or our government been doing with Social Security and selling debt or with us and investing stock markets and housing?

Madoff did it to... [sixthsense] rich people. [/sixthsense]