2008-12-14 13:04:00
Bernard Madoff Made Off With As Much as 50 Billion Dollars in the Fraud
The sheer size of the fraud (estimated by some to be upwards of $50 billion dollars) that was perpetrated by Bernard L. Madoff has many people asking the question: how could this have happened?
How could one person elude the scrutiny of investors and regulators for so long without being caught?
How much of an impact will this massive fraud have on the already shaky hedge fund industry?
Will people assume that other hedge funds and money-management firms may be frauds, and seek to pull their money?
How many wealthy investors and companies will end up having exposure to Madoff and his elaborate Ponzi scheme?
Who is Bernard Madoff?
Madoff started his firm, Bernard L. Madoff Investment Securities, in 1960 with just $5,000. Madoff gained a great deal of clout within the industry by serving on the Nasdaq board of governors, and was at one time the chairman of the board of directors.
Madoff used his minority ownership in the Cincinnati Stock Exchange and appointments to the board of directors of several prominent Jewish institutions to procure new investments in his company. His company was divided into two pieces - a lucrative market-making unit, and a shadowy investment advisory unit in which the fraud took place.
This was a typical Ponzi scheme, meaning that old investors in the fund were paid off with new funds. Madoff lied about the results of the company, claiming that the investors were securing a 12-13% return on their capital, year in, and year out.
Many were suspicious of Madoff's results, and some actively tried to coerce the SEC into opening up an investigation in his company. Some just didn't believe the reported annual returns that Madoff was producing, while others believed that he was using his market-making arm to illegally front-run trades. It turns out that Madoff was simply lying about the results.
There were many prominent figures and institutions affected by this swindle, including: BNP Paribas, the Royal Bank of Scotland, various Swiss banks and a number of high net-worth individuals.
The end for Madoff came when investors requested $7 billion dollars in withdrawals from the company. Madoff's company didn't have the money, and Madoff eventually came clean to a number of high-ranking officials at his company, two of which were his sons. His sons reported Madoff to the FBI, and Madoff is currently out on $10 million dollars bail.
The total $ figure lost in the fraud is still unknown at this time - I've seen estimates varying from $17 billion dollars all the way up to $50 billion dollars. We probably won't know the exact amount for some time.
The obvious questions that need to be answered are: where did all this money go? How did Madoff avoid being caught for so many years? How will this impact an already deteriorating hedge fund industry? Were there other employees at the firm who were aware of this fraud? Was there anyone outside of the firm who knew about the fraud and may have benefited?
More details as they become available..
Filed under: Hedge Fund News | Stock Market Scandals
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