Who is Bernard Lawrence Madoff? He is a businessman and former chairman of the NASDAQ stock market. He was born April 29, 1938. He started the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960 and was its chairman until December 11, 2008, when he was arrested and charged with securities fraud.
Bernard L. Madoff Investment Securities, which is in the process of liquidation, was one of the top market maker businesses on Wall Street, often functioning as a "third-market" provider that bypassed "specialist" firms and directly executed orders over-the-counter from retail brokers. The firm also encompassed an investment management and advisory division that is now the focus of the fraud investigation.
On December 11, 2008, Federal Bureau of Investigation agents arrested Madoff on a tip-off from his sons, Andrew and Mark, and charged him with one count of securities fraud. On the day prior to his arrest, Madoff told his senior executives at the firm that the management and advisory segment of the business was "basically, a giant Ponzi scheme." Five days after his arrest, Madoff's assets and those of the firm were frozen and a receiver was appointed to handle the case. Madoff's alleged fraud may be valued at a loss of up to a $50 billion in cash and securities.Banks from outside the U.S. have announced that they have potentially lost billions in U.S. dollars as a result. To date, it is the largest investor fraud ever attributed to a single individual.Madoff was a prominent businessman and philanthropist. The freeze of his and his firm's assets significantly affected businesses around the world and a number of charities, some of which, including the Robert I. Lappin Charitable Foundation, the Picower Foundation, and the JEHT Foundation, have been forced to close as a consequence of the fraud.
Investors have questioned Madoff's statement that he alone is responsible for the large-scale operation, and investigators are looking for others involved in the scheme.
Madoff was born in the New York City borough of Queens to a Jewish family. He is married to Ruth Madoff and has two sons, Mark and Andrew. Madoff has owned an ocean-front residence in Montauk since 1981. His primary residence, valued at more than $5 million, is on Manhattan's Upper East Side. Madoff is listed as chairman of his Upper East Side building's co-op board. He also owns a home in France and a $9.3 million mansion in Palm Beach, Florida on the Intercoastal Waterway just north of Flagler Memorial Bridge. He is a member of the Palm Beach Country Club and owns a 55-foot (17 m) fishing boat named "Bull".
Madoff started his firm in 1960 with an initial investment of $5,000 that he said was earned from working as a lifeguard and installing sprinklers. At first, 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, the firm began to use information technology to disseminate its quotes. After a trial run, the technology the firm helped develop became the NASDAQ. According to sources involved in the government inquiry into Madoff, the fraud might have gone back to the 1970s.
He was active in the National Association of Securities Dealers (NASD), a self-regulatory organization for the U.S. securities industry. His firm was one of the five most active firms in the development of the NASDAQ, and he served as its chairman of the board of directors, and on its board of governors.
Madoff's firm was "the first prominent practitioner" of "paying for order flow", in other words paying a broker to execute a customer's order through Madoff, which has been called a "legal kickback".[28] Using this method, the firm became the largest dealer in NYSE-listed stocks in the U.S., trading about 15 percent of transaction volume in these stocks.
Madoff 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." Academics have questioned the ethics of these payments. Madoff has argued that these payments did not alter the price that the customer received.
He brought several relatives into his business. His brother, Peter, was a senior managing director. Both of Madoff’s sons, Mark and Andrew, joined the team after finishing their education. Charles Weiner, Madoff’s nephew, also joined the firm, and Peter Madoff’s daughter, Shana, took a job with the company as a lawyer.
His sons Mark and Andrew were allegedly unaware of the imminent insolvency of Madoff Investment Securities. According to the authorities, the sons confronted their father, asking him how the firm could pay bonuses if it could not pay investors, prompting Madoff's admission that he was "finished", after which they reported him to the authorities. The FBI investigation shows no signs of implicating family members of fraud, with federal authorities saying his wife Ruth is not accused of wrongdoing.
Before his arrest Madoff's family was involved in philanthropic circles. When his nephew, Roger Madoff, died of leukemia in April 2006, paid death notices appeared in newspapers from a range of charitable organizations, including the Lower East Side Tenement Museum. Madoff donated approximately $6 million to lymphoma research after his son Andrew was diagnosed.
Madoff served as the Chairman of the Board of Directors of the Sy Syms School of Business at Yeshiva University, as well as Treasurer of its Board of Trustees. He resigned his position at Yeshiva University after his arrest. Madoff also serves on the Board of New York City Center, a member of New York City's Cultural Institutions Group (CIG).
Madoff undertook charity work for the Gift of Life Bone Marrow Foundation, and through The Madoff Family Foundation, a $19 million private foundation which he managed along with his wife, he donated money to hospitals and theaters. The foundation has also contributed to many Jewish educational, cultural, and health charities. The various organizations were mostly given charity funds backed by Madoff securities. Madoff was also a major contributor to the Democratic party.
In the wake of Madoff's arrest, the assets of the Madoff Family Foundation have been frozen by a federal court
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Through the years, Madoff claimed his investment strategy consisted of purchasing blue-chip stocks and taking options contracts on them, although he may not have invested much at all.[39] In 1992, Madoff told The Wall Street Journal about his stock strategies: in the 1970s, he had placed invested funds in "convertible arbitrage positions in large-cap stocks, with promised investment returns of 18% to 20%."[39] Madoff said that beginning in 1982, he began using futures contracts on the stock index, and he said he was in index puts (a form of options contract) during the 1987 stock market crash.
Barron's Magazine reported in 2001[40] that a Madoff hedge fund document (a so-called "Offering Memorandum") described Madoff's strategy as follows: "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 sale of the calls, limit the portfolio's downside."
This split-strike or collar trade involves three steps: 1) buying a stock at price X — say 100, 2) selling a call option with a strike price Y — say 120 — which is above X, and 3) purchasing a put option with a strike price Z — say 80 — which is below X. If the price of the stock is 125, which is above Y at expiration, the stock will be called away and the investor receives Y (120) for the stock. If the price is 70, which is below Z at expiration, the put can be exercised and Z (80) received in cash. This effectively caps the maximum gain (until the options expire) at the Y minus X (120 − 80 = 40), and the maximum loss at the X minus Z (100 − 80 = 20). The options transactions can generate positive or negative cash-flow depending on the cost of purchasing the put (say 3%), the premium received to write the call (say 4%) and dividends from the stock holdings (say 5%). To create an effective collar for a long-term stock holding, the option contracts should be rolled into contracts farther out prior to expiration.
Madoff's strategy as described in Barron's is not a perfect hedge since options are purchased/sold on an index which contains a much larger basket of stocks than the 30–35 purchased to hold. A few analysts performing due diligence on Madoff did raise alarms because they were unable to replicate the fund's past returns using historic price data for US stocks and options on the indexes. There is no credible evidence that Madoff actually made all the required trades dictated by this strategy. Barron's raised the possibility that Madoff's returns were not due to this strategy, but rather from front running the firm's brokerage clients.
Rival fund managers were unable to replicate the same returns, using the strategies from Madoff's quarterly reports
The New York Post reported that before his arrest Madoff "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach." The New York Times reported that Madoff counted many prominent Jewish executives and organizations among those investing in his funds — Jeffrey Katzenberg, Eliot Spitzer, Yeshiva University, the Elie Wiesel Foundation, and charities set up by the publisher Mortimer Zuckerman and Hollywood film director Steven Spielberg. Among one of the most prominent Jewish promoters was J. Ezra Merkin, whose fund Ascot Partners steered $1.8 billion USD towards Madoff's firm.[46] A scheme like this that targets members of a particular religious or ethnic community is a type of affinity fraud.
Fairfield Greenwich Group, based in Greenwich, Connecticut, had a Fairfield Sentry fund which was one of several so-called feeder funds that gave foreign investors portals to Madoff. Fairfield, in turn, set up further feeder funds such as Lion Fairfield Capital Management in Singapore and Stellar US Absolute Return, all ultimately conduits to Madoff, having directed a total of $7 billion USD. The Wall Street Journal reported that "Several investors say Mr. Madoff's main go-between in Palm Beach was Robert Jaffe. Mr. Jaffe is the son-in-law of Carl Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Madoff. Jaffe, a philanthropist in Palm Beach, Florida, attracted many investors from the Palm Beach Country Club."
The large sovereign wealth fund Abu Dhabi Investment Authority also indirectly invested US$400 million with Madoff. Madoff also promoted in Asia, most recently targeting China, though by that time, he was advertising to anyone with money (contrary to his initial strategy, when he handpicked investors).
The Madoff sales force were well-dressed, multilingual sales representatives in the financial capitals of Europe. Madoff's fund was also considered exclusive, as he was initially giving the appearance of being very selective of which investors to take on.
Madoff had a very successful track record year after year. Moderately-high consistent returns were a key factor in the perpetuation of Madoff's fraud for decades; other Ponzi schemes paid out higher returns in the neighborhood of at least 20 percent. A hedge fund run by Madoff, which described its strategy as focused on shares in the Standard & Poor's 100-stock index, averaged a 10.5 percent annual return over the past 17 years. Through November 2008, amid a general market collapse, the fund reported that it was up 5.6 percent year to date, while the year-to-date total return on the S&P 500-stock index had been negative 38 percent. One investor who declined to be named said “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.”
The operation was conducted out of floors 17 to 19 of the Lipstick Building, with 18 and 19 used for administration and stock-trading. The core of the business, the hedging, took place on the 17th floor, which was occupied by no more than 24 employees.[48] Since funds controlling billions as Madoff did would usually require hundreds of employees for the administrative work involved, employees from other floors say that they always assumed Madoff had an office in another location in addition to the Manhattan headquarters.
The victims of the alleged fraud are considering how to best recover some of their investments. The use of the legal doctrine of fraudulent conveyance in bankruptcy proceedings might mean that investors who withdrew their money before the fraud was revealed, might be forced to return their profits or even part of their initial investments. Returning funds is uncontroversial for clients who may have known that the Madoff's business was fraudulent, but it is not so clear for clients who were not aware of Madoff's activities.]The current statute of limitations on cases involving fraudulent conveyance is six years, which means that clients who withdrew their money from Madoff's firm more than six years ago could not lose their withdrawals. But clients who withdrew their funds less than six years ago might have to return their withdrawals.
Investors may also have access to funds from the Securities Investor Protection Corporation (SIPC), which offers assistance to investors of failed brokerage firms. Investors may receive a maximum of $500,000, but only for cash or securities that are missing from their accounts. It could take several years before investigations into the scandal are concluded and investors are able to file claims. Victims may also file suit to have taxes already paid on "fictitious income" restored to them.
The Securities Investor Protection Corporation (SIPC) is liquidating Madoff’s brokerage, with Irving Picard acting as trustee. The SIPC provides up to $500,000 in insurance for missing money or securities in individual brokerage accounts, but does not protect against bad investments.
Stephen Harbeck, president of the SIPC, stated that the investment management department's financial records will take six months to sort out. “There are some assets, but I have no idea what the relationships of the assets available are to the claims against them. The records are utterly unreliable on this case.”
Although Madoff filed a report with the SEC in 2008 stating that his advisory business had only 11–25 clients and about $17.1 billion in assets, dozens of investors have reported losses, and the SEC reports a $50 billion fraud. According to Bloomberg, “in all, companies, individuals and foundations have disclosed about $24 billion of investments with Madoff.” Those affected include banks, Wall Street investors, charities, and individuals.
In December 2008, the Elie Wiesel Foundation for Humanity issued a press release on their website stating that nearly all of the foundation's assets (approximately $15.2 million USD) have been lost through Madoff's firm.
According to The Wall Street Journal the investors with the largest potential losses include:
Fairfield Greenwich Advisors, $7.50 billion
Tremont Capital Management, $3.30 billion
Banco Santander, $2.87 billion
Bank Medici, $2.10 billion
Ascot Partners, $1.80 billion
Access International Advisors, $1.40 billion
Fortis, $1.35 billion
Union Bancaire Privée, $1.00 billion
HSBC, $1.00 billion
The potential losses for these nine investors total $22.32 billion. Other investors, with potential losses between $100 million and $1 billion include Natixis SA, Carl J. Shapiro (a 95-year-old Boston philanthropist, and the individual who seems to have lost most, $500 million; see also above), Royal Bank of Scotland Group PLC, BNP Paribas, BBVA, Man Group PLC, Reichmuth & Co., Nomura Holdings, Aozora Bank, Maxam Capital Management, EIM SA, and AXA SA. The potential losses for these investors total $4.02 billion. Twenty-three investors with potential losses of $500,000 to $100 million were also listed, with total potential losses of $540 million. They included Bramdean Alternatives run by Nicola Horlick, for example. The grand total potential losses in the Wall Street Journal table is $26.9 billion.
On 23 December 2008, one of the founders of Access International, Rene-Thierry Magon de la Villehuchet, was found dead in his New York City office. Both of his wrists were slashed, in what appeared to be suicide.[83] Access International had invested $1.4 billion with Madoff's firm. De la Villehuchet had also invested his personal money with Madoff's business. De la Villehuchet came from a prominent French family and Access International had connections to wealthy and powerful aristocrats from Europe. [84] No suicide note was found at the scene. more
