The Great Madoff scandal

It all happened at 17th floor of Lipstick Building, an oval red-granite 34-floor building at Third Avenue in Midtown Manhattan. Bernard L Madoff, the 70-year old founder of Bernard L. Madoff Investment Securities operated from there.
Madoff, ex-chairman of Nasdaq, was well respected in the investment community, made a name for himself in wealthy circles.
Was arrested on December 11, 2008, for an alleged fraud of around $50 billion. If convicted, Madoff faces 20 years in prison and a maximum fine of $5 million. At present, he is free on a $10 million bond but can’t travel far outside New York.

In one of the largest frauds in Wall Street history, prosecutors said, Madoff maintained a separate and secretive investment advising business that served between 11 and 25 clients and had about $17.1 billion in assets under management. The assets of Madoff’s investment company were frozen on December 12, 2008 and now US authorities want to sell it out

What is a Ponzi scheme?

A pyramid scheme, which uses cash from new customers or investors to pay returns to existing investors. It does little legitimate business, but just recycles money. The scheme depends on a constant stream of new investors to fund the payouts.

How did Madoff’s alleged fraud work?

Madoff was running a huge investment business for wealthy clients and investors, along with his stockbroking firm. It was on a separate floor from the stockbroking business. He was offering attractive returns to new investors. He made it look as if he was investing in blue-chip stocks and options, but there was very little capital at the heart of the operation.

How did he attract new investors?

He was paying clients a 10% to 12% annual return. He managed to offer consistent returns over 10-year period, which is extremely unusual for the fund management business. His broking, hedge funds and fund management businesses all recorded the same “success”.

How did it go wrong?

New clients began to dry up during US credit crunch. As stock markets crashed, many investors who lost money elsewhere, sought to withdraw money from Investments with Madoff

Why did regulators miss it?

US SEC argues that Madoff kept few records and was clever at hiding the alleged fraud. While he was a pioneer of electronic trading and rose to become chairman of the Nasdaq technology exchange, he refused to provide his clients online access to their accounts. According to the Washington Post, he sent out accounting statements by post, whereas most hedge funds e-mailed statements and allowed them to be downloaded via computer for easier analysis by investors.

Who was Ponzi?

Charles Ponzi gave his name to pyramid selling in US after he carried out America’s biggest fraud of the early 20th century. An Italian immigrant Ponzi bought postal coupons that were depressed in value in Europe and sold them at a 400% mark-up in US. There was only a limited supply, but that didn’t stop Ponzi advertising the scheme to thousands of clients, whose funds financed payouts to existing investors. He became a multi-millionaire. An investigation by the New York Post uncovered the fraud and he was sent to jail. He ended life in poverty.

BIGGEST LOSERS (according to reports)

British, Japanese, S Korean, French and Spanish banks have massive exposure: RBS | $600 million Nomura | $303 million HSBC | $1.5 billion S Korean FIs | $95.1 million Satander | Above $3 billion Man Group | $360 million Natixis | 450 million euro Swiss private banks |     £2.5 billion
   Many charitable trusts also fear losing money

 

(Source: The Times of India)