Madoff Scandal: 'Biggest Story of the Year' 25 comments
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According to RealMoney.com columnist Doug Kass, general partner and investment manager of hedge fund Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd., today's late-breaking report of an alleged massive fraud at a well known investment firm could be "the biggest story of the year." In his view,
it is bigger than Enron, bigger than Boesky and bigger than Tyco.
It attacks at the core of investor confidence -- because, if true, and this could happen ... investors might think that almost anything imaginable could happen to the money they have entrusted to their fudiciaries.
Here are some excerpts from the Bloomberg report, entitled "Madoff Charged in $50 Billion Fraud at Advisory Firm":
Bernard Madoff, founder and president of Bernard Madoff Investment Securities, a market-maker for hedge funds and banks, was charged by federal prosecutors in a $50 billion fraud at his advisory business.
Madoff, 70, was arrested today at 8:30 a.m. by the FBI and appeared before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged in a criminal complaint with a single count of securities fraud, he was granted release on a $10 million bond guaranteed by his wife and secured by his apartment. Madoff’s wife was present in the courtroom.
"It’s all just one big lie," Madoff told his employees on Dec. 10, according to a statement by prosecutors. The firm, Madoff allegedly said, is "basically, a giant Ponzi scheme." He was also sued by the Securities and Exchange Commission.
Madoff’s New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co (GE). and Citigroup Inc. (C).
...
SEC ComplaintThe SEC in its complaint, also filed today in Manhattan federal court, accused Madoff of a "multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm."
The SEC said it’s seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. Ira Sorkin, another defense lawyer for Madoff, couldn’t be immediately reached for comment.
...
Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two individuals listed on regulatory records as "direct owners and executive officers."
Peter Madoff was a board member of the St. Louis brokerage firm A.G. Edwards Inc. from 2001 through last year, when it was sold to Wachovia Corp (WB).
$17.1 Billion
The Madoff firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.
...
Madoff’s Web site advertises the "high ethical standards" of the firm.
"In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door," according to the Web site. "Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark."
..."These guys were one of the original, if not the original, third market makers," said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. "They had a great business and they were good with their clients. They were around for a long time. He’s a well-respected guy in the industry."
The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan)
And here is the SEC press release:
SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme
FOR IMMEDIATE RELEASE2008-293
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.
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This article has 25 comments:
Simply turn and look the other way folks -- business as usual.
Where do all these Forrest Gumps come from.....
Another $17B, oh pardon me, $50B that we thought that were there but were never there in the first place to begin with ?
Huunmm... sounds quite familiar...didn't Congress under Paulson's insistence just pitch in around $700B?
And it is really interesting too...the bureaucrats didn't start to smell a rat until yesterday, some 40 years later? Sounds like someone is sending the air pilot licensea to those 9/11 terrorists months after they were dead...
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I think Wall Street for some time is going to go back to being that "little backwater where rich peoples money go to die". No more John Q Public putting widows and orphans money in the pockets of egregious shysters like this guy.
Dividends will come back in a big way (they're already higher than treasury rates). And stock appreciation via the greater fool theory will abate for a while, at least until I become a buy and hold investor again.
Does the GLD ETF really hold any gold? (www.goldensextant.com/...)
Once again, where were the auditors/accountants? Did it not raise any red flags that the company had reported consistent earnings for the past 20 years? And how could this privately-held company managing that amount of money not be regulated, audited, controlled or provide any safeguards to their so called “investors?”
Apparently the SEC had even received numerous letters from investors trying to sound the alarm that something didn’t smell right. Why was no investigation conducted?
Yes, I understand the secretive nature of Hedge Funds, but will this finally be enough to wake up regulators to change these ineffective oversight rules?
I’ve always maintained that the word “investment” is a misnomer. It’s all speculation. Nothing is really safe. Now the search begins to find the gory details of the billions lost. But what has really been lost is more faith and trust in our financial system. Madoff’s firm had been highly regarded on Wall Street, but trust me, this downfall will just be the tip of the iceberg.
The economic downturn has already caused a run on Hedge Funds and the redemptions have been enormous. Investors cashed out a record $130 billion in November alone. In Madoff’s case, he’d only had requests for $7 billion of redemptions but was struggling to find the liquidity to return funds.
We’ll find out in the next few hours just how serious the collateral damages will be. Early indications are that the actual number of clients is few, but each stands to lose billions. This will not do much to bolster the confidence in the rest of the investment world.
It just drives home the point that there are so many weak links in our financial system, so little government oversight, and too many loopholes that invite under-handed deals.
It will take years to revamp the structure of the system. But I still have a hard time understanding how the watchdogs, the regulators, state auditors, private auditors, accountants, and even the investors can be so blind.
There are tough lesson to be learned, and many questions to be answered. One of the most important and relevant questions we have to ask ourselves is posed in the title of our book, “The Big Gamble: Are You Investing or Speculating?”
This comment was posted by Jose Roncal, co-author of "The Big Gamble: Are you investing or speculating?" - For more information, visit financialspeculation.c...