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Bernie Madoff

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Bernard L. Madoff
StatusPrisoner at Metropolitan Correctional Center, New York City.
NationalityAmerican
EducationHofstra University (1960)
Occupation(s)Financial services,Businessman, Investment management
EmployerBernard L. Madoff Investment Securities
Known forPonzi scheme, Chairman of NASDAQ (prior)
SpouseRuth Madoff
ChildrenMark Madoff (ca. 1964), Andrew Madoff (ca. 1966)
Criminal chargeSecurities fraud, Investment adviser fraud, Mail fraud, Wire fraud, three counts of Money laundering, False statements, Perjury, Making A False Filing With The SEC, Theft From An Employee Benefit Plan
Penaltysentencing pending (up to 150 years in prison, and $170 billion in restitution)

Bernard Lawrence "Bernie" Madoff (/ˈmeɪdɒf/) (born April 29, 1938, in New York City) is an American businessman, and former chairman of the NASDAQ stock exchange. He pled guilty[1] on March 12, 2009 to eleven charges, including securities fraud, wire fraud, mail fraud, money laundering and making a false filing to the SEC, all related to the largest investor fraud ever committed by a single person, amounting to almost $65 billion according to the charges.[2][3] He was jailed immediately after the hearing pending sentencing, which may be up to life in prison, with restitution of up to $170 billion. There was no plea deal with Madoff; he simply pled guilty to all charges.[4][5]

He founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008.[6][7][8] According to the original federal charges, Madoff said that his firm had "liabilities of approximately US$50 billion."[9][10][11] Prosecutors increased their estimate of the size of the fraud from $50 billion to $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients in November 30, 2008. [12] However, several people involved in the case and outside observers have said that the actual loss to investors could be far less than that. The actual number is not known at this point, but former SEC Chairman Harvey Pitt estimated the actual fraud at between $10 and $17 billion. This estimate is much lower because it does not include the fictional returns credited to the customer accounts by Madoff.[13]

On December 10, 2008, Madoff told his sons that the asset management arm of his firm was a giant Ponzi scheme—or "one big lie."[14] They then passed this information to authorities.[9][15][16][17][18] The following day, Federal Bureau of Investigation agents arrested Madoff and charged him with one count of securities fraud. Five days after his arrest, Madoff's assets and those of the firm were frozen and a receiver was appointed to handle the case.[19] Some investors, journalists, and economists have questioned Madoff's statement that he alone is responsible for the large-scale operation, and investigators are looking to determine if there were others involved in the scheme.[20] The SEC has also come under fire for not investigating Madoff more thoroughly; questions about his firm had been raised as early as 1999. Madoff's firm, which is in the process of liquidation, was one of the top market maker businesses on Wall Street (the sixth-largest in 2008),[21] often functioning as a "third-market" provider that bypassed "specialist" firms and directly executed orders over the counter from retail brokers.[22] The firm also had an investment management and advisory division that was the focus of the fraud investigation.[10] Madoff is also an African American, some might call him a nigro.

Madoff was also a prominent philanthropist who served on the boards of nonprofit institutions, many of which entrusted his firm with their endowments.[23][24] He is a former National Treasurer of the American Jewish Congress. The freeze of his and his firm's assets have had effects around the world on businesses and charities, some of which, including the Robert I. Lappin Charitable Foundation, the Picower Foundation, and the JEHT Foundation were forced to close as a consequence of the fraud.[23][25][26][27]

Personal life

Bernard L. Madoff was born in the United States to Jewish parents, Ralph and Sylvia Madoff. [28][29][30] He grew up in the Laurelton neighborhood of the New York City borough of Queens.[31] He graduated from Far Rockaway High School in 1956,[32] attended the University of Alabama for one year, then transferred to and graduated from Hofstra University (then Hofstra College) in 1960 with a degree in political science.[33][34] The following year, he attended Brooklyn Law School, but did not continue.

Madoff is married to his high school sweetheart, Ruth Alpern, who has been involved with the firm and in the Madoff Charitable Foundation.[35][36] It has been reported that Mrs. Madoff had reconciled the firm's bank accounts. [37] They have two sons, Mark and Andrew.[38] Andrew, the younger son, was diagnosed with lymphoma. Deborah Madoff, Andrew's wife, reportedly filed for divorce the day before the scheme collapsed.[39] Mark took his money out of the investment arm to fund a divorce from his first wife in 2000 and both sons used outside investment firms to run their own private philanthropic foundations, but Andrew had millions invested with his father.[40]

Madoff lived in Roslyn, New York in a ranch house through the 1970s[34] and since 1981, has owned an ocean-front residence in Montauk.[41] His primary residence on Manhattan's Upper East Side, is valued at more than $7 million,[42] and he was listed as chairman of the building's co-op board.[43] He also owns a home in France[44] and a $9.3 million mansion in Palm Beach, Florida,[45] where he is a member of the Palm Beach Country Club. Madoff owns a 55-foot (17 m) fishing boat named Bull,[43] which is docked in the French Riviera.[46]

Before his arrest, Madoff's family was involved in philanthropic circles.[24] Madoff donated approximately $6 million to lymphoma research after his son Andrew was diagnosed.[47]

Madoff served as the Chairman of the Board of Directors of the Sy Syms School of Business at Yeshiva University, and as Treasurer of its Board of Trustees.[24][25] He resigned his position at Yeshiva University after his arrest.[25] Madoff also served on the Board of New York City Center, a member of New York City's Cultural Institutions Group (CIG).[48] He served on the executive council of the Wall Street division of the UJA Foundation of New York, a Jewish foundation which declined to invest funds with him due to the conflict of interest.[49]

Madoff undertook charity work for the Gift of Life Bone Marrow Foundation and also engaged in philanthropic giving through The Madoff Family Foundation, a $19 million private foundation, which he managed along with his wife.[23] They donated money to hospitals and theaters.[24] The foundation has also contributed to many educational, cultural, and health charities, including those later forced to close due to Madoff's fraud.[25][50] After Madoff's arrest, the assets of the Madoff Family Foundation have been frozen by a federal court.[23][25]

Early career

Madoff started his firm in 1960 as a penny stock trader with $5,000 (about $35,000 in 2008 dollars), earned from working as a lifeguard and sprinkler installer.[51][52] His fledgling business began to grow with the assistance of his father-in-law, accountant Saul Alpern, who referred a circle of friends and their families.[53] Initially, the firm made markets (quoted bid and ask prices) via the National Quotation Bureau's Pink Sheets. In order to compete with firms that were members of the New York Stock Exchange trading on the stock exchange's floor, his firm began using innovative computer information technology to disseminate its quotes.[54] After a trial run, the technology that the firm helped develop became the NASDAQ.[55] At one point, Madoff Securities was the largest buying- and-selling "market maker" at the NASDAQ.[54]

He was active in the National Association of Securities Dealers (NASD), a self-regulatory securities industry organization. His firm was one of the five most active in the development of the NASDAQ. He has served as the Chairman of the Board of Directors and on the Board of Governors of the NASD.[56]

Several family members worked for him. His younger brother, Peter, was Senior Managing Director and Chief Compliance Officer,[54] and Peter's daughter, Shana, was the compliance attorney. Madoff’s sons, Mark and Andrew, worked in the trading section,[54] along with Charles Weiner, Madoff’s nephew.[24] Andrew Madoff had invested his own money in his father's fund, but Mark stopped in about 2001.[57]

Access to Washington

The Madoff family gained unusual access to Washington's lawmakers and regulators through the industry's top trade group. The Madoff family has long-standing, high-level ties to the Securities Industry and Financial Markets Association (SIFMA), the primary securities industry organization. Bernard Madoff sat on the Board of Directors of the Securities Industry Association, which merged with the Bond Market Association in 2006 to form SIFMA.

Madoff's brother Peter then served two terms as a member of SIFMA’s Board of Directors. He stepped down from the Board of Directors of the Securities Industry and Financial Markets Association (SIFMA) in December 2008, as news of the Ponzi scheme broke.[58][59] Peter's resignation came amid growing criticism of the Madoff firm’s links to Washington, and how those relationships may have contributed to the Madoff fraud.[60] Over the years 2000-08, the two Madoff brothers gave $56,000 to SIFMA,[60] and tens of thousands of dollars more to sponsor SIFMA industry meetings.[61]

In addition, Bernard Madoff's niece Shana Madoff[62] was active on the Executive Committee of SIFMA's Compliance & Legal Division, but resigned her SIFMA position shortly after her uncle's arrest.[58][63][64]

Madoff investment scandal

Main article: Madoff Investment Scandal

According to the government investigation, the fraud in Madoff's investment management and advisory divisions may have begun in the 1970s.[65] In the 1980s, Madoff's market-maker division traded up to 5% of the total volume made on the New York Stock Exchange.[54] Madoff was "the first prominent practitioner"[66] who paid a broker to execute a customer's order through his brokerage, called a "legal kickback",[67] which gave Madoff the reputation of being the largest dealer in NYSE-listed stocks in the U.S., trading about 15% of transaction volume.[68] Academics have questioned the ethics of these payments.[69][70] Madoff has argued that these payments did not alter the price that the customer received.[71] He viewed the payments as a normal business practice: "If your girlfriend goes to buy stockings at a supermarket, the racks that display those stockings are usually paid for by the company that manufactured the stockings. Order flow is an issue that attracted a lot of attention but is grossly overrated."[71]

Madoff Securities was one of the top traders of securities in the USA by the year 2000, holding approximately $300 million in assets.[54] The business occupied three floors of the Lipstick Building, with the investment management division, referred to as the "hedge fund", employing a staff of approximately 24.[72] Madoff ran a branch office in London, separate from Madoff Securities, which employed 28, handling investments for his family of approximately £80 million.[73] Two remote cameras installed in the London office permitted Madoff to monitor events from New York.[46]

Investment strategy

Madoff's sales pitch was an investment strategy consisting of purchasing blue-chip stocks and then taking options contracts on them - which is sometimes called a split-strike conversion or a collar.[74] "Typically, a position will consist of the ownership of 30–35 S&P 100 stocks, most correlated to that index, the sale of out-of-the-money 'calls' on the index and the purchase of out-of-the-money 'puts' on the index. The sale of the 'calls' is designed to increase the rate of return, while allowing upward movement of the stock portfolio to the strike price of the 'calls'. The 'puts', funded in large part by the sales of the 'calls', limit the portfolio's downside." In 1992, Madoff explained his strategy to the The Wall Street Journal: In the 1970s, he had placed invested funds in "convertible arbitrage positions in large-cap stocks, with promised investment returns of 18% to 20%,"[74] and in 1982, he began using futures contracts on the stock index, and then, placed "puts" on futures during the 1987 stock market crash.[74]

A few analysts performing due diligence were unable to replicate the Madoff fund's past returns using historic price data for U.S. stocks and options on the indexes.[75][76] It is doubtful Madoff made any or all of the required trades this strategy dictates, because purported trade volumes appear to far exceed the listed derivative open interest.[77] Rather, Barron's raised the possibility that Madoff's returns were most likely due to front running his firm's brokerage clients.

Mitchell Zuckoff, professor of journalism at Boston University, author of Ponzi's Scheme: The True Story of a Financial Legend, says that "the 5% payout rule," a federal law requiring foundations to pay out 5% of their funds each year, allowed Madoff's Ponzi scheme to go undetected for a long period since he managed money mainly for charities. Zuckoff notes, "For every $1 billion in foundation investment, Madoff was effectively on the hook for about $50 million in withdrawals a year. If he was not making real investments, at that rate the principal would last 20 years. By targeting charities, Madoff could avoid the threat of sudden or unexpected withdrawals."[78]

Sales methods

Rather than offer high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele. The investment method was marketed as "too complicated for outsiders to understand." He was secretive about the firm’s business, and kept his financial statements closely guarded.[79] The New York Post reported that Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach".[80] The New York Times reported that Madoff courted many prominent Jewish executives and organizations. One of the most prominent promoters was J. Ezra Merkin, whose fund Ascot Partners steered $1.8 billion towards Madoff's firm.[81] A scheme that targets members of a particular religious or ethnic community is a type of affinity fraud, and a Newsweek article identified Madoff's scheme as "an affinity Ponzi."[82]

Madoff was a "master marketer,"[34] and his fund was considered exclusive, giving the appearance of a "velvet rope."[34][81] He generally refused to meet directly with investors, which gave him an "Oz" aura and increased the allure of the investment.[46] Some Madoff investors were wary of removing their money from his fund, in case they could not get back in later.[21] One New York real estate investor said she "literally begged" Madoff to take her money, and he refused.[73]

Madoff's annual returns were "unusually consistent, "[83] around 10%, and were a key factor in perpetuating the fraud.[84] Ponzi schemes typically pay returns of 20% or higher, and collapse quickly. One Madoff hedge fund, which described its "strategy" as focusing on shares in the Standard & Poor's 100-stock index, averaged a 10.5% annual return during the previous 17 years. Even at the end of November 2008, amid a general market collapse, the same fund reported that it was up 5.6%, while the same year-to-date total return on the S&P 500-stock index had been negative 38%.[23] An unnamed investor remarked, “The returns were just amazing and we trusted this guy for decades — if you wanted to take money out, you always got your check in a few days. That’s why we were all so stunned.”[85][clarification needed][86]

The Swiss bank, Union Bancaire Privée, explained that because of Madoff's huge volume as a broker-dealer, the bank believed he had a perceived edge on the market because his trades were timed well, suggesting they believed he was front running.[87]

Final weeks

The scheme began to unravel in December 2008, as the stock market began to plunge. Subsequently, as the general market downturn accelerated, investors tried to withdraw $7 billion from the firm, and in the weeks prior to his arrest, Madoff struggled to keep the scheme afloat. To pay off those investors, Mr. Madoff needed new money from other investors.

In November 2008, Madoff Securities International (MSIL) in London, made two fund transfers to Bernard Madoff Investment Securities of approximately $164 million. MSIL had neither customers nor clients, and there is no evidence that it conducted any trades on behalf of third parties.[88]

Madoff received $250 million around December 1 from Carl J. Shapiro, a 95-year-old Boston philanthropist and entrepreneur who was one of Madoff's oldest friends and biggest financial backers. On December 5, he accepted $10 million from Martin Rosenman, president of Rosenman Family LLC, who wants to recover a never-invested $10 million, deposited in a Madoff account at JPMorgan, wired six days before Madoff's arrest. Bankruptcy Judge Lifland ruled that Mr. Rosenman was "indistinguishable" from any other Madoff client, so there was no basis for giving him special treatment to recover funds. [89] The judge separately declined to dismiss a lawsuit brought by Hadleigh Holdings, which claims it entrusted $1 million to the Madoff firm three days before his arrest.[90]

Madoff asked others for money in the final weeks before his arrest, including Wall Street financier Kenneth Langone, whose office was sent a 19-page pitch book, allegedly created by the staff at the Fairfield Greenwich Group. Madoff said he was raising money for a new investment vehicle, between $500 million and $1 billion for exclusive clients, was moving quickly on the venture, and wanted an answer by the following week. Langone declined.[91]

On December 10, 2008, he suggested to his sons, Mark and Andrew, that the firm pay out several million dollars in bonuses two months ahead of schedule, from $200 million in assets that the firm still had.[21] According to the complaint, Mark and Andrew, reportedly unaware of the firm's pending insolvency, confronted their father, asking him how the firm could pay bonuses to employees if it could not pay investors. Madoff then admitted that he was "finished," and that the asset management arm of the firm was in fact a Ponzi scheme. Mark and Andrew then reported him to the authorities.[23]

Criminal charges

The criminal case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan) with presiding Judge Denny Chin.[92][51]

His attorney, Ira Lee Sorkin, also invested [93] about $64,000 with his client in the early 1990s through a retirement account. Sorkin’s now-deceased father also had a $900,000 account with Madoff. The investments were transferred to trust accounts set up for the benefit of Sorkin’s two sons, with Sorkin as trustee. [94]

On March 10, 2009, the Judge waived any potential conflict of interest Sorkin might have regarding his representation in the case.[95]

The original criminal complaint estimated that investors lost $50 billion through the scheme,[96] though The Wall Street Journal reports "that figure includes the alleged false profits that Mr. Madoff's firm reported to its customers for decades. It's unclear exactly how much investors deposited into the firm."[97] He was originally charged with a single count of securities fraud and faced up to 20 years in prison, and a fine of $5 million if convicted.[98]

Court papers indicate that Madoff's firm had about 4,800 investment client accounts as of November 30. 2008, and issued statements for that month reporting that client accounts held a total balance of about $64.8 billion, but actually "held only a small fraction" of that balance for clients. [99]

Madoff was arrested by the Federal Bureau of Investigation (FBI) on December 11, 2008, on a criminal charge of securities fraud.[100] The previous day, he had told his sons that his business was "a giant Ponzi scheme."[98][101] They called a friend for advice, Martin Flumenbaum, a lawyer, who called federal prosecutors and the SEC on their behalf. FBI Agent Theodore Cacioppi made a house call. "We are here to find out if there is an innocent explanation," Cacioppi said quietly. The 70-year-old financier paused, then said: "There is no innocent explanation."[102][96] He had "paid investors with money that was not there."[103]

Madoff was released on the same day of his arrest after posting $10 million bail.[98] Madoff and his wife surrendered their passports, and he was subject to travel restrictions, a 7 p.m. curfew at his co-op, and electronic monitoring as a condition of bail. Although Madoff only had two co-signers for his $10 million bail, his wife and his brother Peter, rather than the four required, a judge allowed him free on bail but ordered him confined to his penthouse.[104] Madoff has reportedly received death threats that have been referred to the FBI, and the SEC referred to fears of "harm or flight" in its request for Madoff to be confined to his Upper East Side apartment.[104][105] Cameras monitor his apartment's doors, its communication devices send signals to the FBI, and his wife is required to pay for additional security.[105]

Apart from 'Bernard L. Madoff' and 'Bernard L. Madoff Investment Securities LLC ("BMIS")', the order to freeze all activities[106] also forbids acting and trading from the companies Madoff Securities International Ltd. ("Madoff International") and Madoff Ltd.

On January 5, 2009, prosecutors had requested that the Court revoke his bail, after Madoff and his wife allegedly violated the court-ordered asset freeze by mailing jewelry worth up to $1 million to relatives, including their sons and Madoff's brother. It was also noted that $173 million in signed checks had been found in Madoff's office desk after he had been arrested.[107][108] His sons reported the mailings to prosecutors. Previously, Madoff was thought to be cooperating with prosecutors.[108] The following week, Judge Ellis refused the government's request to jail Madoff, but required as a condition of bail that Madoff make an inventory of personal items and that his mail be searched.[109]

Plea proceeding

On March 12, 2009, Madoff appeared in court in a plea proceeding, and plead guilty[110] to all charges, admitted to running a ponzi scheme, and expressed regret for his "criminal acts".[8] At least 25 victims have requested to be heard[111] on two issues that the Court will consider at the hearing: (1) whether to accept a guilty plea from Madoff to the eleven-count Criminal Information filed by the government, which provides for a maximum sentence of 150 years’ imprisonment; and (2) whether Madoff should be remanded or released on conditions of bail. Judge Denny Chin accepted the guilty plea and ordered Madoff to jail immediately awaiting formal sentencing in June 2009.[112]

It is predicted that Federal sentencing guidelines calculate to 54 points for his crimes and a $250,000 fine;[113] 42 points translate to life in prison. With his cooperation, it is 39 points, 22 years behind bars.[114] He has been assigned prisoner number 61727054.[citation needed]

Civil charges

On February 9, 2009, a partial judgment in the December 11, 2008, civil suit, SEC v. Madoff, 08-10791, U.S. District Court, Southern District of New York (Manhattan) was made permanent.[115] Madoff will keep a previously reached agreement to freeze his assets, and neither work in the financial industry ever again, nor violate any other securities laws. The agreement does not require Madoff to admit or deny any allegations against him. It also leaves the issues of any civil fines and repayments to be imposed against Madoff for a later time.[116] Without reaching an agreement, he would have had to testify or refuse. This settlement is unrelated to any plea or indictment in the criminal matter.[117]

On March 2, 2009, Judge Louis Stanton modified an existing freeze order to surrender assets Maddoff owns: his securities firm, real estate, artwork, and entertainment tickets, and granted a request by prosecutors that the existing freeze remain in place for the Manhattan apartment, and vacation homes in Montauk, New York, and Palm Beach, Florida. He has also agreed to surrender his interest in Primex Holdings LLC, a joint venture between Madoff Securities and several large brokerages, designed to replicate the auction process on the New York Stock Exchange.[118]

About 120 Madoff-related class actions have been filed -- mainly suits on behalf of investors who indirectly invested when they entrusted their money to funds-of-funds like Fairfield Greenwich Group, Kingate Management, Tremont Group, or J. Ezra Merkin's Ascot, Gabriel and Ariel Partners. The contingency fee to the attorney is usually 25% or more of the recovery.[119]

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