Top Broker Accused of Fraud

Madoff, Money Manager for the Wealthy,
Said to Have Run '$50 Billion Ponzi Scheme'

AMIR EFRATI, TOM LAURICELLA & DIONNE SEARCEY
Wall Street Journal 12dec2008

Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday a day after telling two senior employees that his investment advisory business was "a giant Ponzi scheme."

In separate complaints filed Thursday, the Securities and Exchange Commission and the federal government alleged that Mr. Madoff had bilked his investors out of tens of billions of dollars.

The Securities and Exchange Commission, in a civil complaint, accused Mr. Madoff of an "ongoing $50 billion Ponzi scheme," asking a judge to seize the firm and its assets.

"Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew M. Calamari, associate director of enforcement in the SEC's New York office. Out of more than $17 billion in assets under management by Mr. Madoff's firm at the start of 2008, essentially all the assets appear to be missing, the SEC alleged.

In a separate criminal complaint, Federal Bureau of Investigations agent Theodore Cacioppi said Mr. Madoff's investment advisory business had "deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars."

Dan Horwitz, a lawyer for Mr. Madoff, declined to elaborate on the allegations. "Bernard Madoff is a longstanding leader in the financial services industry with an unblemished record," Mr. Horwitz said in an interview. "He is a person of integrity. He intends to fight to get through this unfortunate event."

The 70-year-old Mr. Madoff is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of stock. Mr. Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

The FBI complaint quotes two senior Madoff employees as saying that Madoff Investment Securities' proprietary trading and market-making activities are run separately from its investment advisory business. The complaint said investors' losses came from the firm's asset-management arm, which Mr. Madoff ran on a separate floor of the firm's offices. These employees said Mr. Madoff kept the financial statements from the firm under lock and key and was "cryptic" about the firm's investment advisory business, according to the complaint.

According a person familiar with the firm, the two unnamed senior employees in the complaint are Mr. Madoff's sons, Andrew and Mark. Mark Madoff is the firm's senior managing director and chief compliance officer. Andrew Madoff is its director of trading.

A call to the sons' attorney was not returned.

The firm's trading arm, where the sons work, does not appear to be implicated in the complaints. But because all of its businesses were under the same umbrella, it threatens the solvency of the entire firm.

The criminal complaint says Mr. Madoff told the two that he believed losses from his fraud exceeded $50 billion. That figure couldn't be confirmed.

After his arrest by FBI officers, federal prosecutors in Manhattan charged Mr. Madoff with criminal securities fraud. He was arraigned late Thursday.

Mr. Madoff didn't enter a plea during a court hearing Thursday evening. He was expected to be released after agreeing to post a $10 million bond secured by his Manhattan apartment. A preliminary hearing was scheduled for Jan. 12. He declined to comment after the hearing.

Earlier this month, the criminal complaint says, Mr. Madoff told one of the senior employees that "clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations."

On Tuesday, the complaint alleges, Mr. Madoff told one of the employees he wanted to pay bonuses to employees this month, which was earlier than usual.

The next day, the pair met with Mr. Madoff at his office to ask about the bonus situation because he had been under "great stress" in prior weeks, they told the FBI. Mr. Madoff refused to answer their questions and arranged to meet at his Manhattan apartment, the complaint says.

Mr. Madoff "wasn't sure he would be able to hold it together" if they continued to discuss the issue at the office, the complaint quotes one of them as saying. At the apartment, Mr. Madoff confessed that his business was a fraud and that he was "finished." He said he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme."

The employees understood that to mean he had "for years been paying returns to investors out of principal received from other, different investors." He told them the firm was insolvent.

Mr. Madoff told them he planned to surrender to authorities, but before he did he wanted to pay certain employees portions of the $200 million to $300 million dollars that were left.

The SEC, which sent more than a dozen investigators to the firm today, is seeking to freeze Mr. Madoff's assets and those of his firm, and to appoint a receiver to take over the firm.

One of the marketing channels Mr. Madoff used was the Palm Beach Country Club -- the exclusive golf and beach club in Palm Beach that counts some of the area's richest residents as members.

According to two members of the club, Mr. Madoff had an agent and at least one major investor at the club who would help attract new investors for the fund. Some members were told that one of the benefits of joining the Palm Beach Country Club was being able to invest with Mr. Madoff.

"They always sold the fund as being 'regular variable income,'" said one Palm Beach Club member. "But no one really knew what the strategy was."

A spokesman for the Palm Beach Country Club couldn't be reached for comment.

Since its inception almost a half-century ago, the Madoff firm has been a family affair. Mr. Madoff's brother, Peter Madoff, joined the firm around 1970 and is the senior managing director. Peter Madoff did not return calls for comment.

The two sons, Andrew and Mark, have worked for the securities firm since graduating from college 20 or so years ago. Neither is involved in the asset management business that their father runs, according to a person familiar with the situation.

Mr. Madoff started his firm with $5,000 saved from a lifeguard job at Rockaway Beach in Queens and a job installing underground sprinkler systems, according to a report in a trade magazine, "Wall Street + Technology."

"All of his family members grew up with this being our lives. When it is a family operated business you don't go home at night and shut everything off. So you take things home with you, which is how all of us grew up," Mark Madoff told the magazine.

Mr. Madoff told investors that he returned an average of 15.7% per year going back to January 1996, according to Hennessee Group LLC, an adviser to hedge-fund investors. Between January 1996 and December 2004, when Mr. Madoff's fund provided monthly returns, there were only three reported down months. Most months chalked up returns between 1% and 1.5%

Mr. Madoff told investors that his strategy was trading in and out of large-cap stocks and buying options on those shares. When the firm did not see opportunities in the market the strategy was to shift to U.S. Treasuries, according to fund marketing documents and people familiar with his strategy.

U.S. District Judge Louis Stanton, who is overseeing the SEC's case against Mr. Madoff and his firm, appointed Lee Richards, a Manhattan lawyer, as the firm's receiver in order to preserve its assets and accounts outside the U.S. The judge also ordered the defendants not to move assets. At a hearing on Friday the judge will consider the SEC's request to grant powers to the receiver over the entire firm, and a complete asset freeze.

—Robert Frank and Chad Bray contributed to this article.

source: 11dec2008

FOR IMMEDIATE RELEASE 2008-293

SEC CHARGES BERNARD L. MADOFF FOR MULTI-BILLION DOLLAR PONZI SCHEME

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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For more information, contact:

Andrew M. Calamari Associate Director, Enforcement SEC’s New York Regional Office (212) 336-0042

Alexander Vasilescu Chief, Trial Unit SEC’s New York Regional Office (212) 336-0178