Big Fat Story
Bernard Madoff’s clients were too sophisticated to fall for get-rich-quick schemes, but they sure fell for the promise of steady returns from one of their own. Madoff was the money manager of choice for the private club circuit in Palm Beach and golf clubs as far away as Minneapolis. By hiring unofficial agents and creating "invitation only" policies for investors, Madoff recruited new clients, The Wall Street Journal reports. Older Jewish investors referred to him as “the Jewish bond,” said Ken Phillips, head of a Boulder, Colorado investment firm. "It paid 8% to 12%, every year.” Victims range from U.S. hedge funds, two charities, a private Swiss bank, a law school dean and a who’s who of Palm Beach society, according to reports. New York Mets owner Fred Wilpon invested hundreds of millions, potentially harming the Mets’ status as a big-payroll franchise. Senator Frank Lautenberg of New Jersey, Mort Zuckerman, Steven Spielberg's foundation, and the Elie Wiesel foundation all bought in; so did the Loeb family. Yeshiva University is on the Madoff list, as is the Carl and Ruth Shapiro Family Foundation, which lost $145 million. On Monday, real estate titan Mort Zuckerman, Steven Spielberg's Wunderkinder Foundation, Sen. Frank Lautenberg and an Elie Wiesel foundation joined. Silicon Alley Insider is updating a list of reported investors – and their purported losses—here.
Photo: Nati Harnik/AP
What’s worse? That Bernard Madoff plundered some $50 billion under their noses, or that the SEC looked twice and walked away? The commission investigated Madoff in 2005 and again 2007 but came up with nothing. SEC officials stress that examinations of Madoff’s brokerage wouldn't necessarily have detected irregularities, and that the separate investment-adviser business run solely by Madoff was behind the alleged scheme. But given how “easily identifiable” Madoff’s Ponzi scheme was mathematically, economist Barry Ritholtz at The Big Picture wonders if anyone at the commission does quantitative research, and if not, perhaps it’s time they did. “There is little evidence that the SEC is using any of the quantitative methods,” to ferret out fraud, he said. They should give it a try. “This is a debacle for the SEC," said Joel Seligman, SEC historian and president of the University of Rochester.
Photo: Susan Walsh/AP
An advisor who scrutinized Madoff’s investment returns says auditor Friehling & Horowitz was a real red flag. The three-man office operates from a 13-by-18-foot storefront in upstate Rockland County, New York. A woman in a nearby office, Leslie Cousar, said a man who comes to the auditor's office does so for 10- to 15-minute periods, and wears tight pants and tie-dyed shirts, Bloomberg reported. New York-based Aksia urged clients last year not to invest with Madoff’s firm after learning the identity of the auditor. Local newspaper The Journal News failed to contact David Friehling but reports that Rockland District Attorney Thomas plans to look into Madoff's dealings with the audit firm “to see if any crimes were committed in Rockland.”
How He Duped Them All
Bernard Madoff's sophisticated clients, his traders, his sons, even the SEC (despite two investigations) all missed the red flags. How in the world did that happen? Who knew what and when in this "giant Ponzi scheme" with losses that could total $50 billion.
“Shakespearean drama of betrayal and family strife.”
Mark and Andrew Madoff run the family’s market-making business but, it appears, were left out of the secretive asset management side, which was run solely by dad. Officials say the brothers questioned their father after he tried to pay bonuses to employees early, and turned him in to the FBI on December 10. But questions about how much the sons knew, or suspected, are building. “There’s been a lot of speculation that it was a deal to keep the sons away from the criminal liability,” said Brad Friedman, one of the lawyers representing defrauded Madoff investors, according to the hard-copy edition of the New York Daily News. “Perhaps it was because of his social standing that, ultimately, it had to be members of his own family who turned him in,” surmised Philip Delves Broughton in Forbes. “But again, who is the one to trust in this unfolding Shakespearean drama of betrayal and family strife?” Is it possible Madoff orchestrated his own demise to protect his sons?
Photo: AP
Madoff didn’t like too many questions.
No matter what the market conditions, Madoff delivered reliable returns. The very consistency of those 10% returns in such volatile markets raised the alarm for some. Harry Markopolos, who worked for a rival firm, called Madoff Securities “the world's largest Ponzi Scheme” in a letter to the SEC in 1999. The basics of Madoff’s index and options-based investment strategy were known, yet some say that was enough to raise eyebrows. “Split-strike conversions were the official line. But every skeptical arb trader knew this couldn't be true,” writes blogger/investor Cassandra. Charles Gradante, an advisor to hedge fund investors, noted Madoff had only been “down” five months since 1996. “There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it.”
Will skittish rich abandon Wall Street brokers and hedge funds?
Hedge funds are reeling under market losses and investor redemptions—as much as $400 billion this year. The Madoff scandal may spark another round. While the feds aren’t done tabulating the damage done by Madoff’s Ponzi scheme, trust in Wall Street wizards has taken another deep hit. “Now, with the massive amount of wealth lost in America, the downturn in housing partly blamed on bankers, credit concerns, and just an overall feeling of frustration at the investment world, the Madoff and [Marc] Dreier news — whatever the conclusion — may be the one-two punch to send the broker and banker boxers to the mats for the 10 count,” concludes Brian Sullivan from Fox Business. A little more measured, the New York Times figures the scope of the Madoff fraud is likely to “increase pressure on hedge funds to accept greater regulation and transparency and protect their investors.
Photo: Charles Rex Arbogast/AP
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Girish Reddy , while not investing with Madoff, said," The numbers were too good for too long.Was he the only one out there that can count?
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