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Madoff's exclusive fraternity of dupes
Bernard Madoff is charged with running a "giant Ponzi scheme" which lost investors up to £33bn in what could be one of the largest fraud schemes in Wall Street history.
The former chairman of New York's Nasdaq securities-trading stock exchange, who presented himself as a champion of transparency and integrity, told his employees that his operations were "all just one big lie", according to court documents.
The criminal investigation will also throw the spotlight on high-profile fraud cases as President George Bush and his aides consider whether to commute the six-and-a-half year sentence of Lord Black of Crossharbour for his role in a multi-million dollar fraud scheme.
A Ponzi scheme is a fraudulent investment vehicle which gives very high returns to existing investors by using money put into the scheme by newcomers.
Such a scheme is named after Charles Ponzi, a swindler who emigrated from Italy to the United States in 1903. He was jailed for five years in 1920.
Mr Madoff, an influential investor whose self-named securities firm cut a high profile in Wall Street circles, reported gains of roughly one per cent a month for two decades in a scheme that sounded too good to be true – and was.
Investors, many of whom were Mr Madoff's friends, neighbours and country club investors, described a word-of-mouth operation with one after another recommending him as a sure thing, someone who took on new clients only reluctantly and as a favour.
They never questioned his strategy as they were part of an exclusive invitation-only club, which kept on posting profits.
Mr Madoff combined this exclusivity with secrecy and a reputation for throwing out of the club investors who asked too many questions – all of which helped him to evade the US federal regulators, who will now come under intense scrutiny themselves.
Jake Walthour, a principal at the hedge fund consulting firm Aksia LLC, said his firm was hired to investigate Mr Madoff's business dealings by a potential investor several years ago.
The investigation raised several red flags, he said.
Mr Madoff's returns were "abnormally smooth" from month to month and had none of the volatility usually associated with stock investments.
It also seemed impossible to replicate his investment strategy or verify his track record.
Mr Madoff claimed to be moving as much as $13bn (8.5bn) in and out of the market every month but "no one on the street could verify it or even see his footprints," Mr Walthour said.
"That organisation was incredibly secretive.
"We decided there are several scenarios here, one of which is: 'This could be a Ponzi scheme'. None of our clients invested."
Mr Madoff issued only simple paper reports to investors, not detailed electronic data streams.
There were few, if any, outsiders involved and his auditor was a tiny accounting firm in Rockland County, New York, that no one had ever heard of before.
Joyce Greenberg, a philanthropist and retired financial adviser in Texas, said her family began investing money with Mr Madoff in the 1970s after being introduced by a stepbrother.
She said she never questioned his strategy and was now trying to figure out how much of her money was gone.
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Saturday 26 May 2012
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