Bernard L. Madoff

From Metapedia

Jump to: navigation, search
Bernard L. Madoff

Bernard Lawrence Madoff (born April 29, 1938) is a former American fund manager and business owner who started the Wall Street firm Bernard L. Madoff Investment Securities LLC. He was chairman of that firm, which he founded in 1960, until December 11, 2008, when he was arrested and charged with securities fraud.

Bernard L. Madoff Investment Securities, which is in the process of being liquidated, was one of the top market maker businesses on Wall Street and also encompassed an investment management and advisory division, which is now the focus of the fraud investigation.[1]

On December 11, 2008, Federal Bureau of Investigation arrested Madoff on a tip from his sons, Andrew and Mark, and charged him with securities fraud. On the day prior to his arrest, Madoff told his senior executives that the management and advisory segment of the business was "basically, a giant Ponzi scheme."[1] Five days after his arrest, Madoff's assets and those of his firm were frozen and a receiver was appointed to handle the case.[1] Madoff's fraud is alleged to involve up to $50 billion in cash and securities[1] and to have taken place over a period of decades.[1] To date, it is the largest investor fraud ever attributed to a single individual.[1] Banks from Spain, France, Switzerland, Italy, Holland and other countries have announced that they have potentially lost billions in U.S. dollars from the Madoff scandal.[1][1][1][1]

Before his arrest, Madoff was a prominent businessman and philanthropist.[1][1] As a result, the freeze of his and his firm's assets significantly affected businesses around the world, as well as a number of charities,[1][1][1] one of which – the Lappin Foundation – had to close as a consequence of his actions.[1][1]

Contents

Personal

Madoff was born in New York to a Jewish family.[1] He is married to Ruth Madoff and has two sons, Mark and Andrew.[1] Madoff has several homes in New York State. Two of them are on Long Island in Roslyn and Montauk respectively and the third one, his primary residence on Manhattan's Upper East Side, is valued at more than $5 million.[1] He also owns homes in Palm Beach, Florida and in France.[1]

His 55-foot fishing boat is named "Bull,"[1] and he is a member of the Palm Beach Country Club.

Career

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.[1]

He has been 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.[1]

Madoff's firm was known for "paying for order flow," in other words paying a broker to execute a customer's order through Madoff. A reporter for CNN asked him about this in May 2000. He replied, "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."[1]

Academics have questioned the ethics of these payments, and compared them to "kickbacks".[1][1] Paying for order flow is a common practice and has been recognized by the SEC. Madoff has argued that these payments did not alter the price that the customer received.[1]

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, a son of Mr. Madoff’s sister, also joined the firm, and Peter Madoff’s daughter, Shana, took a job with the company as a lawyer.[1]

His sons Mark and Andrew were apparently unaware of the imminent insolvency of Madoff Investment Securities.[1] 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.[1] The FBI investigation shows no signs of implicating family members of fraud.[1]

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.[1][1] He resigned his position at Yeshiva University after his arrest.[1] Madoff also serves on the Board of New York City Center and is a member of New York City's Cultural Institutions Group (CIG).[1] He also did charity work for the Gift of Life Bone Marrow Foundation, and ran a $19 million private foundation that donated money to hospitals and theaters.[1][1]

Philanthropy

Madoff's family has been important in philanthropic circles.[1] 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.[1] Madoff donated approximately $6 million to lymphoma research after his son Andrew was diagnosed.[1]

Madoff has also undertaken 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,[1] he donated money to hospitals and theaters.[1] 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.[1][1] Madoff was also a major contributor to the Democratic party.[1]

In the wake of Madoff's arrest, the assets of the Madoff Family Foundation have been frozen by a federal court.[1][1]

Methods of operation, accusations, and case

Investment strategy

Barron's Magazine reported in 1992[1] on a Madoff hedge-fund offering memorandum which described the 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."

A simple split-strike or collar trade involves buying a stock at price X, selling a call option with a price Y which is above X, and purchasing a put option with a strike price Z which is below X. If the price of the stock is above Y at expiration, the stock will be called away and the investor receives Y for the stock. If the price is below Z at expiration, the put can be exercised and Z received in cash. This effectively caps the maximum gain (till the options expire) at the Y minus X, and the maximum loss at the X minus Z. The options transaction can generate positive or negative cash-flow depending on the cost of purchasing the put, the premium received to write the call and any dividends from the stock holdings. 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. The description of the strategy suggests the stocks are picked because they provide maximum correlation to the index; correlations are however, apt to change. For instance, as market-cap weighted indexes, the S&P 500 and S&P 100 naturally overweight a sector when prices for stocks in that sector are inflated; this can impact the results achieved by a value-driven investor employing collars. 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.[1][1] Since Madoff's arrest, the purported investment strategy is being scrutinized and it appears that Madoff may have been producing fictitious client confirmations since his trades would have exceeded the total volume of option contracts traded. Since Madoff claimed to have been entirely in cash at the end of most quarters, he would have had to buy and sell option contracts with many billions in notional value each quarter. There is little evidence of such extensive trading on his firm's part.[1]

Sales methods

The Wall Street Journal has 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."[1]

The New York Post reports that Madoff, "worked the so-called 'Jewish circuit' of well-heeled Jews he met at country clubs on Long Island and in Palm Beach, and through his position on the boards of directors of several prominent Jewish institutions, he was entrusted with entire family fortunes".[1] According to CNBC, Madoff was able to sell to European investors at ski competitions organized by stock exchanges.[1]

While hedge funds typically hold their portfolio at a securities firm (typically a major bank or brokerage), allowing an outside investigator to verify their holdings, Madoff's firm was its own broker-dealer and supposedly processed all its trades.[1]

Although Madoff was a pioneer of electronic trading he refused to provide his clients online access to their accounts.[1] He sent out accounting statements by mail, whereas most hedge funds email statements and allowed them to be downloaded via computer for easier analysis by investors.[1]

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.”[1][1]

Madoff had a remarkable track record of success year after year. Moderately-high consistent returns was 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 and ended quickly collapsing. 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. In November 2008, amid a general market collapse, the fund reported that it was up 5.6 percent that month, while the S&P 500-stock index fell 38 percent.[1]

The operation was conducted out of the 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, was taking place on the 17th floor, which was occupied by no more than 24 employees.[1]

Signs of trouble

Outside analysts raised concerns with Madoff's firm for years.[1] Financial analyst Harry Markopolos complained to the SEC's Boston office in May 1999 telling the SEC staff they should investigate Madoff because it was impossible for the kind of profit Madoff claimed to have been made legally.[1] Among the suspicious signs were the fact that Madoff's company avoided filing disclosures of its holdings with the SEC by selling its holdings for cash at the end of each period.[1] Such a tactic is highly unusual. Improbably steady investment returns despite exceedingly volatile markets was another red flag.[1] A longtime friend said that "his rate of return [...] was never attention-grabbing, just solid 12-13 percent year in, year out".[1] Robert Ivanhoe, chairman of the real estate practice of the law firm Greenberg Traurig, added that Madoff increased his allure by refusing some investors.[1]

Harry Markopolos, a former Boston investment professional, said he repeatedly tried to get the SEC to investigate Madoff, first contacting the agency's Boston office more than a decade ago. The SEC said it conducted two inquiries of Madoff in the last several years and didn't find major problems.[1] An SEC statement detailed that inspectors examined Madoff's brokerage operation in 2005, finding three violations of rules requiring brokers to obtain the best possible price for customer orders, while in 2007, SEC enforcement staff completed an investigation and did not refer the matter to the SEC commissioners for legal action.[1]

Charles Gradante, co-founder of hedge-fund research firm Hennessee Group, observed that Madoff "only had five down months since 1996",[1] and commented on Madoff's investment performance: "You can't go 10 or 15 years with only three or four down months. It's just impossible."[1]

Madoff also operated as a broker dealer with an asset management division. Joe Aaron, a longtime hedge fund professional, found the structure suspicious and in 2003 warned a colleague to steer clear of the fund, saying "Why would a good businessman work his magic for pennies on the dollar?"[1]

Early indications that Madoff may have been trouble emerged in 2007. The Madoff Family Foundation donated only $95,000 to charitable groups. This was a major drop from previous years. In 2006, the foundation donated $1,277,600.[1]

Madoff ran into trouble, in 2008, when clients wanted to withdraw $7 billion from the firm and he had to come up with the cash.[1]

Criminal and civil charges

Madoff was arrested by the FBI on December 11, 2008 on criminal charges of securities fraud, after he allegedly said that his business was "a giant ponzi scheme."[1][1] The alleged behavior involves an asset management unit of his firm, rather than the better known market making unit.

The criminal complaint alleges that investors lost $50 billion because of the scheme.[1] He was charged with a single count of securities fraud. Madoff was released on the same day of his arrest after posting $10 million bail.[1] He faces up to 20 years in prison and a fine of $5 million if convicted.[1] According to the SEC, Madoff confessed to an FBI agent that there was “no innocent explanation” for his behavior,[1] and that he "paid investors with money that wasn't there".[1] His attorney stated that he "will fight to get through this unfortunate set of events."

The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan).[1]

The Securities and Exchange Commission filed a separate civil suit against Madoff on December 11, 2008.[1][1]

Separately, individual investors have filed civil suits against Madoff. The two firms leading the suits, Milberg LLP (suit led by partner Brad Friedman), and Seeger Weiss LLP (suit led by partner Stephen Weiss) announced on December 12, 2008 that the two firms have been retained by dozens of individual investors.[1]

Affected clients

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.[1]

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."[1]

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,[1] 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."[1] Those affected include banks, Wall Street investors, charities, and individuals.

According to The Wall Street Journal[1] the investors with the largest potential losses include:

  • Investor, Potential loss
  • 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 Privee, $1.00 billion
  • HSBC, $1.00 billion

Other investors, with potential losses between $100 million and $1 billion include Natixis SA, Carl Shapiro, Royal Bank of Scotland Group PLC, BNP Paribas, BBVA, Man Group PLC, Reichmuth & Co., Nomura Holdings, Maxam Capital Management, EIM SA, and AXA SA. Twenty-three investors with potential losses of $1 million to $100 million were also listed.

References


    External links

    See Also

    List of Jewish Organizations bankrupted by Bernard Madoff


    Part of this article consists of modified text from Wikipedia, and the article is therefore licensed under GFDL.
    Retrieved from "http://en.metapedia.org/wiki/Bernard_L._Madoff"
    Personal tools
    In other languages