I have no special insight into the Madoff story.

However, my spidey sense is tingling.

Consider this: Running a billion dollar Ponzi scheme has to be very time consuming. Running a $50 billion Ponzi scheme by yourself, at age 70?

I don’t think it can be done.

Just generating the phony transaction receipts is a full time job.  How did this son-of-a-bitch do it all by himself? Madoff HAD TO HAVE HELP.

I simply cannot believe he did it himself, all alone. His entire scheme was predicated upon finding another 1% of assets every month to payout to the prior investors. Between raising moeny and running operations, it was more than a 1 man job.

And when the market hit the skids and topped out so fast — it fell much quicker in 2008 than in 2000 — he ran out of manuevering room. Madoff had to know he was going down, and everyone who was working with him — everyone who knew of the scheme — they were going down, too.

So he confessed — TO HIS SONS. AND THEY TURNED HIM IN.

And Bloomberg reports they are already represented by Martin Flumenbaum, a lawyer.

~~~

Maybe I’ve read one too many detective novels, but consider this strictly hypothetical, based on-no-facts whatsoever, wildly imaginative hypothesis: If I were running a $50 billion Ponzi scheme, I would have to bring in someone close to help me with it.

Who is closer than my family?

When it became clear there was no where else to turn, instead of bringing down the entire dynasty, I would have them turn me in, to protect the family and what left of the legacy.

I would take the fall so they wouldn’t have to.

~~~

As I noted, I have no special facts, no insight into this what-so-ever.  Other than the story we have been fed so far doesn’t make any sense.

Who was Madoff’s accomplices? I have no idea, but there has to be some! If I were the SEC, I would be looking over close friends and family closely. Very, very closely.

>

UPDATE: December 16, 2008

Dealbook notes that

Inquiry Finds No Signs Family Aided Madoff

Federal investigators have found no evidence so far that members of Bernard L. Madoff’s family helped him carry out what may be the largest financial fraud in history, The New York Times’s Alex Berenson and Diana B. Henriques reported, citing a person briefed on the case

Mr. Madoff’s sons, Andrew and Mark, and his brother, Peter, all occupied senior positions at his firm, Bernard L. Madoff Investment Securities, whose assets were frozen after Mr. Madoff told law enforcement agents on Thursday that he had defrauded investors of up to $50 billion.

Although the enormous scale of the fraud prompted widespread questions about whether one person could concoct all the necessary paperwork such a fraud would entail, Mr. Madoff, 70, had insisted that his family was not involved in the Ponzi scheme. He said it was “all his fault,” according to a criminal complaint filed last week.

And so far, investigators have not uncovered evidence that contradicts those statements, The Times said, citing the person briefed on the case, who was not at liberty to comment publicly on it.

The person cautioned that the investigation was in its earliest stages, and examiners could still unearth evidence that Mr. Madoff’s family knew about the fraud or even helped carry it out, The Times said.

But employees of the firm have said that Mr. Madoff’s sons and brother all seemed shocked on Thursday after the fraud was disclosed and Mr. Madoff was arrested. One of Mr. Madoff’s sons had a substantial amount of money invested in the accounts that Mr. Madoff managed, investigators said.

Category: Credit, Legal, Markets, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

87 Responses to “Madoff Story Smells Funny”

  1. karen says:

    The corruption is so obvious and so outrageous. How did he get bail? The entire linked families’ funds should be frozen…

    We talk about Russian oligarchs?! Here’s another one from the USSA…

  2. Mannwich says:

    There’s about a zero pct chance that Madoff pulled this off on his own. No way.

  3. Vermont Trader says:

    it’s called organized crime.

  4. philipat says:

    Does that mean he won’t be able to apply for a TARP bailout?

  5. deep captrue blah blah blah

    ~~~
    BR: no deep capture crap please

    they are too stupid for words

  6. Simon says:

    I’ve been waiting for a post on this by Barry. I’m not disappointed. You gotta listen to your spidey sense! Esp. in NY.

  7. Mannwich says:

    Although we’re talking about far lesser numbers, has anyone kept up with the details of the recent Dreier arrest? There’s a pretty decent account of it in today’s NYTimes. Pretty bizarre…..

  8. Stuart says:

    It’s just another illustration of how a culture of greed and corruption was take control throughout the financial markets, prosper, spread in a era devoid of any effective oversight, nourished by opacity. No oversight whatsoever. If the airline industry had similar standards, planes would be dropping out of the skies. It’s truly shocking, stunning.

  9. constantnormal says:

    It would be great if the end result of all this was a system with much greater transparency, but that would require integrity and competence in both the legislative and executive branches, and frankly, I may as well click my silver slippers together three times and wish for it as soon as depend upon the stars aligning in favor of competence and integrity.

    This system is coming apart at the seams.

  10. Mich@TBP says:

    A kid wouldn’t believe the current story, I am sure they sat down with family attorneys for days working out how the story should end, but only after realizing without a hope that they couldn’t hold the flood gates anymore and it was time to fold, pick a patsy and cut your losses. Who better than the elderly, right?

    Pathetic state of affairs abound these days. This system needs a strong flush!! It became unstable because its foundations are rotten to the core.

  11. Steve Barry says:

    Funniest thing…he had the blind trust of such wealthy clients, that with a little honest effort early on, he could have turned his Ponzi into a great franchise. This is massive brain lock along the lines of Saddam Hussein, who if he just let those pesky inspectors in and proved no WMD, would still be living in luxury.

    Hedge fund investors will now reconsider leaving millions with any one blackbox manager…the older ones should be all in bonds anyway. Amazing that millionaires are instantly destitute now.

  12. r says:

    “If I were the SEC, I would be looking over close friends and family closely. Very, very closely.”

    The SEC will get all of those responsible right after the gov’t gets Bin Laden. They’re right on top of things.

  13. Steve Barry says:

    Mitch…you maybe onto something…maybe the sons stole everything and the old man is willing to take the rap. Where did the assets go? Clients gave them money that has disappeared…we need to follow the money trail.

  14. TheReformedBroker says:

    Regulators may have just breezed in and out of Madoff’s offices during regular audits and there was never a customer complaint at the broker dealer level (because everyone was up on their investment at all times…who WOULD complain!)

    Regulators are still fighting the battles of the 90′s (small firms, penny stocks, market-making scams, IPO scams, high pressure sales etc.)

    They have not yet regrouped or redirected attention and resources to combat the new and bigger threat that these enormous pools of unaccounted-for investor money pose….

    and dont give me this BS about “accredited investors”…you could have money in a pension that is at a hedge fund without you knowing it. time to snap on the latex gloves and get a look at what these people are doing with OPM.

  15. Jim C says:

    I cannot wait until the movie comes out.

  16. debreuil says:

    Not only did his family know, I suspect MANY people who invested with him knew as well. Just like the rest of the financial problems, everyone knew it stank, but they liked the returns. I feel so not sorry for any of them.

  17. philipat says:

    TRB, off-topic. How did you get the avatar in there? I tried on the profile page and couldn’t find a way. Br’s folks don’t know either.

  18. DL says:

    No one is going to believe that the sons weren’t in on it. But proving it in a criminal case may not be easy.

    And probably, the two sons were smart enough to “squirrel away” 50 million or so in a place where no one will find it.

  19. Mike in Nola says:

    Thinkin like a lawyer, Barry.

  20. TheReformedBroker says:

    philipat
    its called a gravatar…globally recognized avatar

    go to gravatar.com and upload a photo or image, then you crop it, approve it and anytime you post comments on most blogs, you’re gravatar will show up

    literally made it yesterday…LOL

    TRB

  21. Andy Tabbo says:

    This whole thing is remarkable is SOOOO many ways. I have to agree with BR on this one. There are many shoes to fall on this deal. This enterprise was so large, there is NO WAY to do this on one’s own.

    And I will say that the most remarkable thing so far is the LACK of coverage in the wider media…the story was never on CNN.com that I could see…maybe nobody else cares when one OLD RICH GUY steals money from other OLD RICH GUYS?!?

    - AT

  22. mark mchugh says:

    I couldn’t agree more – Something smells funny.

    While I agree with everything Barry says about family etc., I’d like to address another concern. They’re calling this a “Ponzi” scheme. Why? First, let me say that I believe this whole administration’s reaction to everything has always been LIE FIRST. Why change now? especially with such big numbers involved.

    To me, a Ponzi scheme is not an actual attempt to make money, but I get the impression that these guys were actually attempting to make money. They’ve probably been engaging in higher and higher risk trades to try to recoup losses. Yes, they’ve been cooking the books, but I imagine they still have large trades to be unwound. So the big question is, “what are they still holding, and how are they going to unwind those trades?” Maybe those trades will not be unwound anytime soon – just quietly transferred to someone else’s off-balance sheet, so as not to roil the markets again.

    Another possibility I’ve entertained goes something like: You get caught doing something really bad (like manipulating markets over long periods of time, cheating millions of investors), and your actual crime would completely destroy confidence in markets, and put many people in jail for long periods of time. If someone offered you a deal whereby your investors get wiped out and the old man agrees to be the fall guy, you’d agree.

    And you’d read whatever script they gave you.

  23. Pat G. says:

    Very intuitive BR. I had the same feeling when I read the story. But I’m a conspiracy theorist.

  24. whatever_6170 says:

    Garbage in, garbage out. How could they possibly model something when even after it blew up the people who OWN the poo still have NO idea what they own or what it’s worth? Whatever assumptions that went into the models had to be purge garbage.

  25. Hal says:

    first, as already pointed out its pretty obvious that this is a family business–and you can’t hide things in a small family business for long–and they kids are not dumb, I’d bet.

    Second, and more important–as Steve Barry points out, Madoff had critical mass. If he had not set expectations to have consistent positive returns in the 8-12% range they would have done quite well just running a managed covered call fund. Except, how much portfolio managemnet work did they do anyway?

    They bought the oex and sold calls an puts–passively. Set it and forget it. And all along what apparently has not been raised (I have not seen it yet) is how much did they take out over the years in their 2 and 20 (if it was indeed 2 and 20) and how much of that is now offshore.

    Anybody know if Bernie Madoff has a health problem?

    That would be the crowning touch.

    There is a lot that smells here.

  26. coveredwagon says:

    I guess we all forgot this one — http://www.youtube.com/watch?v=rh92DDFMW2s

  27. emmanuel117 says:

    Hal,

    I’ve always thought Ken Lay’s heart attack was a little too convenient.

  28. Hal says:

    The SEC does not necessarily go in expecting to find something big unless forewarned–but when the SEC appears they are, lik eany good auditing firm, do some basic compliance testing.

    Now, having said that, we know goldman sachs, for example (as they said this) was short sub prime for their own account while they were selling subprime investments to clients. Then another issue (frontrunning was mentioned in one article about Medoff I read) is how brokerage firms got to the point where their trading desk was a very profitable arm of their company-did their clients in general come close tot he returns of the trading desks?

    We know (or think we know) that JPM loaned Amaranth the funds it needed to go long nat gas a few years ago and when amaranth finished building its long nat gas portfolio, JPM went short nat gas-drove amaranth into oblivion and took over its long nat gas poprtfolio to cover JPMS short positions.

    There is a lot of talk in many corners about manipulation and PPT–while I am sure some of that exists (cause it has to statstically and has been admitted by stepanopoulous) the bigger motivation is personal profit.

    So back to Madoff–things start as a “little lie” and then start growing. Sometimes it starts as an honest mistake. But it grows.

    And while there are regulations and all sorts of laws and ethical rules (as brokers and ria’s remember from the exams) if there is no true enforcement what good are laws?

    Kind of like speed laws–everybody knows its ok to go 7 over–10 you are pushing it–unless there are no patrols around in which case….ergo the photo enforcement starting now.

    Character is doing the right thing when nobody is looking.

  29. AGG says:

    I’m with Vermont Trader on this one. Didn’t the 13F not even show a billion? There lots of underworld operations that, for a sum, would let you wash their money. Software programs can print out any amount of bogus stock transactions with the desired gain or loss complete with second by second trades. It’s just a matter of having your data base packed with all the actual trades (or a all the ones in the equities you claim to own) which were made by all the players that day, month, etc. You then cherry pick them for your clients. An ex-NASDAQ chief with some smart programmers could set this up. This guy had time and friends. So you make 15% off the mob, run a nice front trading operation with the cachet of an ex-Nasdaq boss and you pay out about 11-13%. So what went wrong? The mob wanted their money because of the liquidity problems in a rapidly contracting world economy. He HAD to give it to them. Of course there is a rat line going way up there which knew and profited from this operation. Sure his family knew about it. Prove it. Madoff may be crooked but he isn’t dumb. He’s stiffing those he thinks won’t come after him. That is, I think, where he underestimates some crafty widows in Palm Beach. Again, we will all benefit from this because great pains will be taken to reward and insure integrity in finance for a few decades.

  30. Katie says:

    Barry,

    it’s difficult NOT to come to the the conclusion that the family was in it. Family you can trust. His efforts to save them may be a little too late. And if so that may be his real punishment. Sad story.

  31. Jojo99 says:

    Fairfield Greenwich Group which is one of the biggest Madoff losers so far (over $7.5 billion) and claims it did full due diligence back in 2001 (after a couple of negative Madoff stories) but that Madoff passed with flying colors. Doesn’t sound possible to me. Someone is lying. This will make a good long story for Vanity Fair and others.
    ====================
    December 15, 2008
    The 17th Floor, Where Wealth Went to Vanish
    By DIANA B. HENRIQUES and ALEX BERENSON

    The epicenter of what may be the largest Ponzi scheme in history was the 17th floor of the Lipstick Building, an oval red-granite building rising 34 floors above Third Avenue in Midtown Manhattan.

    A busy stock-trading operation occupied the 19th floor, and the computers and paperwork of Bernard L. Madoff Investment Securities filled the 18th floor.

    But the 17th floor was Bernie Madoff’s sanctum, occupied by fewer than two dozen staff members and rarely visited by other employees. It was called the “hedge fund” floor, but federal prosecutors now say the work Mr. Madoff did there was actually a fraud scheme whose losses Mr. Madoff himself estimates at $50 billion.

    Fairfield boasted about its investigative skills. On its Web site, the firm claimed to investigate hedge fund managers for 6 to 12 months before investing. As part of the process, a team of examiners conducted personal background checks, audited brokerage records and trading reports and interviewed hedge fund executives and compliance officials.

    In 2001, Mr. Madoff called Fairfield and invited the firm to inspect his books after two news reports questioned the validity of his returns, according to a person close to Fairfield. Outside auditors hired to inspect Mr. Madoff’s operations concluded that “everything checked out,” this person said.

    The Fairfield Greenwich Group “performed comprehensive and conscientious due diligence and risk monitoring,” Marc Kasowitz, a lawyer for Fairfield, said in a statement. “FGG, like so many other Madoff clients, was a victim of a highly sophisticated massive fraud that escaped the detection of top institutional and private investors, industry organizations, auditors, examiners and regulatory authorities.”

    Now, Fairfield is seeking to recover what it can from Mr. Madoff.

    Full article

  32. debreuil says:

    And yet the WSJ essentially says that transparency and regulations of hedge funds wouldn’t help at all:

    http://online.wsj.com/article/SB122929932900805255.html

    That has to be written by a crook. I agree with AGG there is obviously a lot of dirty money in Hedge funds getting cleaned. I remember after 911 there was a move to open up books (to root out AQ financing), and the big money put an instant veto on it. That was quite a feat considering what a sensitive time it was. But hey, what are a bunch of dead people to crooks like these.

    The other question is, given everyone is now saying how obvious it was, what are the other ‘obvious’ calls? (other than the whole financial industry has also been basically a Ponzi scheme since 1980 or so)

  33. skardin says:

    Just imagine, if Wall Street/world economy didn’t tanked, he could have gotten away with this for even longer. But then again, so would Detroit and all the investment firms that seems to be running on Monopoly money and schemes of their own.

    One good thing that can be learn from this current economic mess, cash is king (at least until dollar devalues).

  34. Katie says:

    Bloomberg reports that Madoff ran another unit linked to the name of his wife.

    Dec. 15 (Bloomberg) — Federal investigators working through the weekend to unravel Bernard Madoff’s alleged $50 billion Ponzi scheme found evidence he ran an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries, two people with knowledge of the inquiry said.

    Clients of the undisclosed unit may have included hedge funds, according to the people, who declined to be identified or to name the funds because the probe isn’t public. Investigators from the U.S. Securities and Exchange Commission are looking for signs that others participated in the alleged fraud and are examining why Madoff’s wife’s name appeared on documents linked to transactions under scrutiny, the people said. His wife, Ruth Madoff, has not been accused of any wrongdoing.

  35. Steve Barry says:

    Again, we see risk management out the window, as very large institutions have exposure here…Nomura? Santander? Failure to do due diligence and assess risk by individuals, money managers and institutions is the failure which allowed this to mushroom. Maybe we should have the credit agencies rate hedge funds…oops, scratch that.

  36. ” what are the other ‘obvious’ calls?”

    the amount, tremendous, of Drug Money laundered through every orifice of the Economy/Financial Markets/Institutions..

    and, the Profits, therein, made outsized by their, Drugs, extra-legal nature, fuels the Profits of the Police State(“War on Drugs”) and the Prison Industrial Complex(PIC)..

    see, for one facet of PIC:
    http://www.nowpublic.com/health/prisons-earn-878-million-annually-poisoning-inmates-and-guards-lawsuit-alleges
    …Fourteen years ago, the Federal Corrections Institute in Marianna began recycling obsolete computer parts from various government facilities.

    “They (inmates) would bust the monitors from hammers to retrieve the gold out of it to send back to the Dell or Hewlett Packard companies because they have contracts with them to refurbish and reuse them in the new computers,” she says.

    Cobb says hers was one of seven federal prisons across the country under contract. “They made quite a bit of money like $878 million a year with all the institutions together.” While the prisons were making money, Cobb says the inmates and employees doing the work were getting sick.

    “We were told it was safe, but they lied. There’s eight pounds of lead, in one monitor.” And Cobb says they were busting thousands of monitors a day.

    Cobb says she was also exposed to massive amounts of Cadmium, Barium, Beryllium, and Arsenic. All of it spread through the facility in the form of dust.

    “In the summer it was 127 degrees inside the building,” Cobb says “We would sweat and wipe our face and eyes. It was on us and in our mouths.”

    Cobb says 100 inmates would spend eight hours a day in these conditions and also got extremely sick.

    “We were helping inmates on ambulances, because their heart wanting to stop or they had kidney infections.”

    See full article at this link: http://www.panhandl eparade.com/ index.php/ mbb/article/ woman_sues_ prison_system/ mbb7712472/

  37. further, on PIC:
    http://blogs.icerocket.com/search?tab=web&q=Prison+Industrial+Complex

    Writing for The Atlantic in December 1998, Eric Schlosser said that “The prison-industrial complex is not only a set of interest groups and institutions. It is also a state of mind. The lure of big money is corrupting the nation’s criminal-justice system, replacing notions of public service with a drive for higher profits. The eagerness of elected officials to pass tough-on-crime legislation — combined with their unwillingness to disclose the true costs of these laws — has encouraged all sorts of financial improprieties.”[1]
    http://www.sourcewatch.org/index.php?title=Prison-industrial_complex

  38. VennData says:

    Sour grapes. At least Madoff’s returned weren’t correlated. He and his family were providing a valuable service.

  39. Bob the unemployed says:

    A very interesting message posting here, with a link to a YouTube video of Madoff in October 2007. The video talks about market making around 30 minutes into it.

    a lot of naked shorting went through there too, you all have to remember is that bernie has hid the money and now calling it all a ponzi scheme is just more smoke to hopefully get his kids and cohorts off the hook. bernie’s best friends are the regulators, he says so in the you tube conference 10/2007 ,he was the chairman of the nasdaq ,otc and pinks for years, he helped create the order flow to computers ,he knows the only real way to make money is naked shorting stocks on the otc and pinks as soon as they come out of the box,thus his big clients knew this too, they are not stupid. he has been in the business since 1960.

    he knows where all the skeletons are buried and this knowledge will limit his punishment. god forbid this guy spills all the beans because major peeps in all categories will go down. bernie contributed many dollars to clinton campaign and sec cox i am positive has big freindship with bernie. nssing is like shooting pigs in a barrel.bernie madoff and bernie ebbers don’t have the same connections. the problem here is that the jig is up, over, kaput, and the naked shorting has to be covered starting next monday 12/15/2008. bernie confesses and turns himself in on 12/11/2008.

    bernie doesn’t want to use his own money to buy back all the years of naked shorting, he can’t, there is not enough money with doing that and at the same time a lot of his investors want their money back.
    the fbi has been working with madoff a long time on this prepackaged deal. look he is out on bail for $10 million only. he is eating his cream cheese and lox on a multi grain bagel as we speak from his new york apartment.

    the deal has already been predetermined how many years ot months he gets and the fed will step in and buy back these short positions.

    bernie was number 23 or the top 30 market makers, prime brokers but more importantly he was the main king pin of pink and otc nssing.

    One Trillion Dollars of trading a year went through madoffs firm!!
    and he talks about pinksheets and OTCBB Stocks!!>>>>

    It gets interesting at the 30 minute mark!

    Notice how Josh looks at the ground when he explains KEY points of Market Making!
    :::::::::::::::
    This IS the Smoking Gun!! IMO

    http://uk.youtube.com/watch?v=Gclja-C2sOU

    there will be many more coming stay tuned and ride your cellar boxed wonders. imho do some dd

  40. danm says:

    If the airline industry had similar standards, planes would be dropping out of the skies. It’s truly shocking, stunning
    —————–
    For the next 20 years, planes might be dropping out of the skies as all capital is sucked up by government and all engineers and their kids work on rebuilding highways and bridges.

  41. danm says:

    Not only did his family know, I suspect MANY people who invested with him knew as well. Just like the rest of the financial problems, everyone knew it stank, but they liked the returns. I feel so not sorry for any of them

    I can’t help but wonder if he picked his clients by how much they deserved to lose their money!

  42. eric davis says:

    Didn’t his sons turning him in, sound like:

    Renault, “I’m Shocked! Shocked to hear that gambling is going on in here.

    It’s not like they toiled with the decision to turn him in…. THEY WERE COVERING THEIR ASSES.

    My bet would be that they had just been turning a blind eye to it.

    I guess it’s possible dad just decided to take the fall.

  43. DonRobbie says:

    There are one or two hedge funds that had substantially all of their money with Madoff. That’s pretty cute, charge 2 and 20 to put your investors’ money with someone else.

    I wonder how long it was really a Ponzi scheme. It seems like a slippery slope from returns “management” (like the big publicly traded firms “manage” earnings) to Ponzi scheme.

  44. E says:

    LTCM was bailed out for $3.65 billion in order to stabilize the markets. 10 years later a $50 billion fund of funds disappears overnight, and the markets don’t even shrug?

    Barry, I think one of the fishy things about this story is the non-impact to the markets – at a time when the Treasury and the Fed have hundreds of billions at their disposal to deal with this kind of stuff. Did a bailout quietly occur behind the scenes?

  45. swissfondue says:

    By the way, the SEC was a company created by Charles Ponzi: the Securites Exchange Company ;-)

  46. Stuart says:

    “I think one of the fishy things about this story is the non-impact to the markets – at a time when the Treasury and the Fed have hundreds of billions at their disposal to deal with this kind of stuff. Did a bailout quietly occur behind the scenes?”

    Nailed it. That is THE question. That is what really smells funny.

  47. carmen101 says:

    Apparently he had 2 separate operations going on, and at least 4 members of his family in top positions, that includes his brother, his niece and his two sons. And his niece’s second marriage in 2007 was to a fellow who just the year before the wedding was an SEC regulator. Obviously we don’t know who is clean in this mess, just Bernie has confessed. But he could be protecting others. But I believe that whole issue is up to the FBI to pursue and not the SEC at this time.

  48. ottovbvs says:

    BR: with due respect it doesn’t require a spidey sense just commonsense to realize he wasn’t doing this on his own. The generation of income statements, depositing of checks and wires, redemptions etc etc would have required dozens of people, probably hundreds actually, to manage assets of $17-21 billion which are the figures I see bandied about. One also has to assume investment decisions were being made as well and this would have required a bunch of qualified people. Readers can make up their own minds about who are the most likely accomplices.

  49. When I first heard this story I had the exact same reaction – there’s no way, no how, this guy acted alone. My gut feeling is you have a mini-Enron here – lot’s of regulators and auditors looking the other way or just plain old fraud. The truth will come out in time.

  50. Casius King says:

    There’s an investor named “Ira Roth”? C’mon.

  51. Lugnut says:

    I think DonRobbie’s question is really the interesting one. I bet he was legit up until the point where he made a couple of really wrong bets, and decided to take the bad path to ensuring his returns average. I wonder if he got cuaght up in some bad CDS paper?

  52. ottovbvs says:

    ” debreuil Says:

    December 15th, 2008 at 4:30 am
    And yet the WSJ essentially says that transparency and regulations of hedge funds wouldn’t help at all:”

    I’m glad you posted this debruil because I read this WSJ ed with total disbelief this morning. It’s all Shakespeare’s fault according to them. And this is the leading financial newspaper in the country. As I posted on Friday just after the news broke a couple of Wall St. contacts tell me people have no idea the hearturn this is causing among the upper echelons of the legal and financial world.

  53. dead hobo says:

    Kudos, young hobo. Your powers are growing.

    Now, let’s talk about auditors and due diligence. A quick Google of Madoff and auditor provides information that should get a lot of people fired. The auditor appeared to be a one person firm that kept scant office hours. Auditing standards require auditors to be qualified to audit their client, at least by the conclusion of the audit. A company as large as Madoff’s should, according to the common sense of an idiot, have an auditor that has a multinational reputation. Didn’t anybody notice this?

    The SEC might have also questioned this little detail. (Not being a legal scholar, I wonder if the SEC performed so poorly that they could have liability in this matter?)

    I think a lot of purchasing departments investigate potential office supplies vendors with more due diligence than most banks and hedge funds looked into Madoff. Institutional investor just took a big bath. Individual hedge fund investors have a pretty good legal claim against hedge fund managers unless they indemnified the hedge fund managers against all forms of stupidity and incompetence. Did multinational banks just wire a few dozen million dollars with less thought than most people use when they deposit a few hundred dollars with Fidelity? (it would seem so at this time)

    So, move the story overseas and ask some of the ‘sophisticated institutional investors’ about their policy to authorize where cash is sent and how they approve their ‘vendors’.

    I agree that a fraud like this would take more than a tool like Quickbooks to keep straight, although a custom program written using VBA and MS-Access could probably have done it. All he would have had to keep track of was account ownership, cash in and cash out from it, regular percentage increases of accout balances, and account reporting. Then he would just need to know his actual cash and equivalents on hand on a secret ledger. Maybe actual investments could have been accounted for in Quicken.

    Keep training young hobo.

  54. BKM says:

    Was the money lost in actual trades? From what I have read, he didn’t have near enough staff to trade/manage 17 + billion dollars.
    If it was a ponzi scheme, where did the money go? You can’t spend 17+ billion, if the money wasn’t lost on trades where did it go ?
    A modern day financial ponzi scheme doesn’t require a return of actual cash to investors, you just doctor the documents to show the returns. It doesn’t add up.

  55. Transor Z says:

    The Brits are going apesh*t about this. RBS and others want to know how the fund got a clean bill of health from the SEC as recently as 3 years ago.

    Money laundering hiding in plain sight behind inscrutable hedge fund structure? Sounds like life imitating John Grisham pulp fiction.

  56. dead hobo says:

    Transor Z Said:
    December 15th, 2008 at 10:39 am

    The Brits are going apesh*t about this. RBS and others want to know how the fund got a clean bill of health from the SEC as recently as 3 years ago

    comment:
    ————————————-
    Help me God, but I just love this Sh*t.

    Yes! I’m quite sure the office staff at RBS is shocked and outraged that the SEC just let this happen. It’s not their fault in England. I wonder how many RBS bankers spend, on average, more time thinking about where to go for lunch than how safe their millions are when wired across the Pond to damn near anybody. It’s time for a Jabba The Hut styled ‘Ho Ho Ho’.

  57. going broke says:

    This IS going to go alot deeper than him, no way on gods green earth did he do this without at least a few others involved. Many others probably knew about this but they we making good returns so keep it up for a while then think about getting out later. Greed may have kept them in just one more month, then one more… Either the inflow of cash was slowing or many got out faster than he could get new clients, that’s what did him in. About using “Quickbooks”, I doubt he could run that kind of business with Quickbooks. The trail might go all the way to dubya’s backyard.

  58. dead hobo says:

    going broke said:
    December 15th, 2008 at 10:56 am

    This IS going to go alot deeper than him, no way on gods green earth did he do this without at least a few others involved.

    reply:
    ——————————————–
    My hobo instincts say it was a much smaller conspiracy than the dollar amount would imply. A good MS-Access program or the like to keep the bogus accounts straight, maybe a trusted bookkeeper named Shirley to do the data entry and get lunch, a couple of stupid progeny that probably considered burping and scratching simultaneously to be complex multitasking, and a crooked auditor. Of course, Uncle Stupid at the SEC was a silent partner, as were the half witted accomplices who sent money without asking questions.

  59. bonghiteric says:

    Possible Silver Lining:

    Chris “California” Cox versus Scammed NYC investors… You make the call.

    Its one thing when the SEC doesn’t enforce when the wealthy are making money, an entirely different animal when the wealthy lose their savings.

  60. Hal says:

    he was running a suppossedly conservative covered call fund (also selling cash covered puts-something Buffett did last december and has lost serious money)

    but in a whipsaw market like this where if you close a short put position then the market rallies and then you reopen the short put position you can get creamed in one day.

    Add to it the notion he was trading just oex stocks–and a lot so he himself was pushing the kmarket making it more expensive to close his shorts or making them cheaper when opening shorts.

    The first flaw as selling the fund based on consistent returns, the next flaw was the series of lies. Selling options to gather premium does not give consistent positive return–it can enhance return or reduce/minimize loss.

  61. Mannwich says:

    How predictable is this? There are already calls for bailing out the people who are being affected by this scam. So I guess Madoff’s investors might be “too big to fail” after all. The rest of us? Not so much…..

    LONDON, Dec 15 (Reuters) – Hedge fund trade association the Alternative Investment Management Association (Aima) called on Monday for restitution for investors caught out by an alleged $50 billion fraud at New York hedge fund firm Madoff Securities.

    “Clearly, lessons must be learned, restitution must be secured for investors, and processes/safeguards must be improved to prevent such a situation recurring,” said a spokesman for the association, which is based in London but has 1,280 members worldwide.

    http://www.reuters.com/article/ g…LF6597520081215

  62. leftback says:

    Barry, I think your “spidey sense” is right on. This could end up bringing down the house.

    Interesting that the Sulzberger Times had a news blackout on Madoff yesterday, probably did not want to embarrass their friends at the country club. I suspect that some really big names are involved in this. Laura Unger was on this morning and even speculated Arthur Levitt was in on it.

    If I were you, I would poke around in some of the funds-of-funds that invsted with Madoff. Some of them may have had good reason not to do any due diligence here. Remember that he could not have pulled off this scam without the feeder funds that led his victims, I mean inwestors, to their doom. Fairfield and Maxam apparently were heavily invested in Madoff. I wonder why?

  63. Mannwich says:

    @leftback: Paul Kedrosky’s site has a take on this that sounds pretty plausible to me. Many of Madoff’s clients thought thought he was trading on inside information but they were OK with it if it meant a consistent 8-12% every year. This story is already epic, one for the ages, but is even more so, if there is any truth to this or if there was other nefarious things going on that likely will never be revealed. I know it sounds far-fetched but could there be a cover up taking place with many of the investors being “made whole” behind the scenes using some of the TARP bailout money?

    At this point, I would be believe that just about anything is possible. Things get curiouser and curiouser.

  64. Mannwich says:

    @lb: And remember, it’s “investor” not “inwestor”……..

    Sorry, but that commercial is unfortunately etched in my brain today.

  65. EDF says:

    DL said:

    “And probably, the two sons were smart enough to “squirrel away” 50 million or so in a place where no one will find it.”

    Yeah, but wait until they try to spend it.

  66. karen says:

    the sec ties to madoff are beginning to get tangled:

    http://www.aleablog.com/you-cant-make-this-up/

  67. DC says:

    To second ottovbvs –

    The WSJ and CNBC and Forbes and all the rest of the financial media are failures. The press is supposed to be a watchdog, not a lapdog.

    Today Kudlow says the SEC should be abolished. That’s right — they failed to stop Madoff, so they should be eliminated. Of all his shit-for-brains ideas this one ranks near the top, and it’s a damn long list.

    Thanks to Barry and others there is now building a critical mass of real financial journalism. Everyone here knows in their gut that Madoff is just one of many criminals operating at very high levels. No, certainly not every fund manager is a crook, but Madoff sure as hell isn’t the only one either.

    The corporate media is as corrupt as the industry they cover. Maybe the internet can bring back serious scrutiny to finance.

  68. Mannwich says:

    Madoff reported only 2 investment “losses” in over 214 (or so) quarters. C’mon, do most of his clients really believe this was legit while it was happening? If they did, then shame on them for not doing more digging.

  69. Transor Z says:

    A few years back a friend and I were laughing oh-so-smugly at how a pyramid scam took down the entire Albanian economy.

    What a pathetic bunch of rubes, those Albanians, eh?

  70. jmay says:

    I absolutely agree that something smells funny here. I’ve been thinking the same thing for a few days.

    But my instinct is different. I think the whole “ponzi” idea is the scam.

    What if Madoff was running a typical hedge fund and taking on too much risk. What if he had outsized losses over the last few months — 60, 70 percent?

    If he’s staring at the precipice wondering what to do — he can’t get loans to pay out his dividends, and he knows if he comes clean about the losses, the redemptions are going to wipe him out. He’ll be ruined anyway. What if, as a 70 year old man who feels indebted to his loyal employees, he feels that they are “entitled” to their lifestyles, he engineers a way to move what’s left of the money into accounts for his family and his core employees, and then takes the fall, saying that it was all a Ponzi scheme and all the money is gone?

    People are taking it as a given that the money is gone. I think that’s where the stink is coming from.

  71. S Brennan says:

    May I suggest Madoff follow Kenneth Lay’s lead:

    1] Don’t squeal on non-implicated.

    2] If you can’t escape justice take as much blame as is believable.

    3] Take your [KaCl]*, but don’t use oral methods and make sure the injection site is not obvious.

    4] Wait until clinically dead before calling the ambulance. Have spouse take a LONG walk.

    5] Make sure spouse has it ID’d as a heart attack and that ALL means of revival are tried. [that way there lots of injection sites]

    6] Have [grieving] relative call for an immediate cremation without autopsy [we all know it was a heart attack], this avoids any exhumations later on.

    7] Get the conviction vacated posthumously and the money stays in the family.

    8] See 1

    * There should be no trouble getting tranquilizers and a sedative to “help” you sleep from your doctor, take them in non-lethal doses ahead of time.

  72. leftback says:

    @ S Brennan: Plausible but it is KCl not KaCl. Almost undetectable. Especially if no-one is looking.

  73. Transor Z says:

    @jmay:
    The flaw in your reasoning is that you can’t lawfully accept a “bonus” after your boss has just told you that the entire business is a scam and he wants to distribute the remaining money quickly before the feds can get hold of it.

    For those who think fancy lawyering might insulate the employees from having to disclose “bonus” amounts and checking account numbers to the US Attorney or State AG, guess again…

    @ Mannwich:
    Interesting question about TARP funds. I wonder how detailed Treasury needs to be in its bookkeeping here. Hopefully more detailed than in congressional earmarks so entries don’t look like this:

    12/15/2008
    APG17/3-b(2): $1,000,000.00

    or, God forbid:

    12/15/2008
    Misc. Discretionary Expenditure: $1,000,000,000.00

  74. leftback says:

    @ Mannwich: I mis-typed while I was looking at my own inwestments… Still in COP and Walero.

    I haven’t traded in days, market is becalmed waiting for the Fed. The hedge fund business is so dirty that Barack is going to have to appoint a Special Prosecutor and a Star Chamber to go through the entire Street and all of Greenwich, beginning January 20th. Assume criminality and malfeasance everywhere until proven otherwise.

    Does anyone else see the irony in Darien and Fairfield-based funds investing with an old Jewish guy who turned out to be an embezzler? For many years, certain ethnic and religious groups could not even live in those towns in Connecticut due to an unspoken contract between WASPy inhabitants, local politicians and the real estate industry. These days of course if you go to New Canaan and Darien you will see that they are integrated… NOT !

  75. Mannwich says:

    @lb: LOL. I though you were parroting that commercial that often airs on CNBC but maybe I’m the only one who has the TV on too much……

  76. Mannwich says:

    By the way, I’m still in COP, VLO, RTP and ACI as well. Bought some MOS today.

  77. dss says:

    Could all this mess be the fault of one single individual at the SEC?

    House Oversight Committee Hearing on AIG – 7th Oct 2008.
    Excerpt between Rep. Peter Welsh (Democrat, Vermont) and Mr Lynn Turner (Chief Accountant, SEC. 1998–2001.)

    Rep. Peter Welsh: Mr Turner… I think you said that the SEC Office of Risk Management was reduced to a staff, did you say of… ‘one’?

    Lynn Turner: Yeah when that gentleman would go home at night he could turn the lights out. In February of this year we had gotten down to just one person at the SEC responsible for identifying the risk at all the institutions

    Rep. Peter Welsh: So that included the 62 trillion dollar credit default swap…?

    Lynn Turner: That’s correct.

    Rep. Peter Welsh: And how did he do..?

    Lynn Turner: Well I suppose he got the lights turned out, but he didn’t get the problems taken care of… [ ] …Yeah in all fairness to the SEC… the staff over there that I’ve dealt with over the years have been excellent. But when you only have one person, there’s no way on gods green earth that anyone, Chairman Cox, or anyone else, could even imagine that this person could do the job. When you cut it down to ‘one’, you know what your doing, you know that your basically saying were not gonna do the job.

    Rep. Peter Welsh: Yes… was there a systematic depopulating of the regulatory force so that it was impossible actually for regulation to occur if you have one person in that office? …and then I understand that 146 people were cut from the enforcement division of the SEC, is that what you also testified to?

    Lynn Turner: Yes… Yeah, I think there has been a systematic gutting, or whatever you want to call it, of the agency and it’s capability through cutting back of staff.

  78. bpreader says:

    That’s why bear market is good for the system. Without this bear market, this scheme could, theoretically, have gone on for a lot longer and more money would have been swindled.

  79. Lugnut says:

    Like any good Ponzi scheme, to see who the other players are , you need to track down who were some of the final people to leave and liquidate their holdings just prior to the ‘confession’. No doubt the family and other co-workers were probably complicit, but I think there were some”Friends of Madoff” who were vested in this and probably knew the true nature of the beast, and were given sufficient heads up that they were allowed to unwind their positions with him before this went public.

    I bet his policy of “gradual sells”, and “structured illiquidity” were sorely put to the test by his closest clients in November.

  80. mudpuppy says:

    All I want to know is: How do I make money off this?

  81. Brett Tibbitts says:

    The other thing that smells funny is Madoff’s political contributions. Many are saying that the SEC’s failure to regulate lies at the heart of his ability to pull off this scam. One would think therefore that his political contributions would be to those pushing for laissez faire policies. NOPE. The vast majority are to mostly traditional, Democratic legislators.

  82. Fred C Dobbs says:

    What I haven’t seen so far in the coverage is a development of Investment Advisor Regulation in the US. There is regulation, but what is reported to the public so far is a little false, and misleading, and the investing public probably deserves to be informed truly and fully.

    A long time ago, I was a member of a board of directors for an investment advisory firm. At that time, to start an investment advisory firm, in contrast to a broker/dealer firm, one only had to register with the SEC. I don’t believe it required an application (which could be refused), but merely a registration, making one a ‘registered’ investment advisor (as a matter of right). After that, the only thing the firm did of an informative nature was to file an annual registration statement with the SEC. That was it. Once in while, more than a year but less than two years later, a gentleman from the SEC would show up, and satisfy himself the sums stated in the filed statements were correct.

    He did not ‘audit’ the company’s books. That would require access in greater detail, and require much more time. And should not be the job of government in any case. It is the job of a solvent private auditor against whom one might collect a private judgment for negligence etc. One can’t sue the sovereign, the US, without its consent, and it does not generally consent to being sued. And wouldn’t that be lovely, with juries returning tremendous judgments against the US as the auditor of last resort to be paid by taxpayers?

    As for private auditors, they confer no real assurances that financial statements are true and correct. They only confirm, after taking a statistical significant sampling, that that the company statements appear to be true and correct. To guarantee that they are correct, the auditor would have to have all funds going in and out of the company, and all bills sent to the company for payment be directed first to the auditors. In other words, the auditor would have to a ‘lock box’ where only the auditor first got to see everything concerning the company of a financial significance, before sending things along to the company to take care of and enter in its books. Then, the auditor would have to have significant insurance coverage against one of its employees turning against the auditor and knowingly approve false and misleading company financial statements.

    Regardless of how much responsibility should be and is off loaded by government to the private sector auditors, the fact also remains the SEC has only a very few people to check on investment advisors. I don’t know the number, but I bet it is impossibly high, maybe 5,000 advisors to 1 SEC statement checker, due entirely to Congressional failure to fund a sufficient number of checkers.

    Separately, I have not seen it adequately developed that smarty pants investors, such as Nicola Horlick, have no right to complain in any event. After the Depression, no one was exempted from the protection given investors by the ’33 and ’34 Acts. If a public offering was involved, one had to satisfy all protective requirements. A ‘public offering’ was defined and the definition disputed, but some believed that if you were going to or might offer a ‘deal’ to 100 or more, regardless of their acceptance of your offer, you were making a public offering, and had to go through the chairs to get a governmental permit to offer your deal to anyone.

    Then, in the late ’60s, state and federal governments decided to withdraw protection for so-called ‘sophisticated investors.’ The term was variously defined, but it usually required a statement from the investor that the investor had some sort of experience making investment decisions for one’s own account, and had some minimum amount of income and net worth. It was justified on the basis that the government didn’t need to spend money protecting those capable of protecting themselves and this same class of people didn’t want to waste money (getting new public issues approved was and is extremely costly) on things they didn’t need. The rich, knowledgeable sophisticated investor was better able than government to assure themselves the deal being offered was legitimate, and only they, the buyers, knew what is was really worth (what they were willing to pay).

    Just as anyone can gain admission to any internet website offering views of naked persons in provocative poses by clicking on the button claiming one is ’18 years or older,’ one could qualify as a ‘sophisticated investor’ by claiming they were possessed of the minimum experience, income, and net worth. No one checked their claims. At this point, riskier deals got peddled, and the buyers/investors who wanted ‘in’ merely lied as did the subprime borrowers who also wanted ‘in.’ (Those who are not but want to be rich are just as capable of lying as are the poor.) They wanted ‘in’ for reasons of fear (to be just as socially superior and accepted as their relatives, friends, neighbors etc. who also were ‘in’), and for greed (just like the janitor who buys lottery tickets).

    Through this door, the avarice of salesmen went directly to the those who had more dollars than sense, and the rise of speculation in real estate (almost all of the syndicated deals of the ’70s + were offered to sophisticated investors), venture capital, and hedged stock funds. The compensation was unregulated, and the lawyers, accountants and salesmen probably made far more money offering these non-public deals. Fast forwarding to today, I know things have changed since I was a director almost 20 years ago, but I don’t think human nature has changed. These stories feigning sympathy for the fools whose arrogance and conceit prevented them from checking things out thoroughly before investing, and passing on questionable deals are repugnant. They are getting what they wanted and deserved.

    In closing, I can also assure you from personal experience that most of the ‘investors’ in Madoff’s scheme do not want to be exposed as investors in his scheme. If their names remain silent and are not exposed, they can ignore their loss, but once their names are public they look absolutely stupid, ignorant, negligent and so on. A bunch of people I know personally once invested in an absolutely fraudulent multi-million dollar oil and gas syndicated deal, and when the fraud was discovered, and everyone was offered their money back, almost half wanted nothing to do with the recovery. Almost all who refused, were stock brokers and salesmen, who did not want it known they were ever in. They did not want it known by their clients that their brokers and salesmen were capable of making such stupid mistakes. They got their way, as the deal never made headlines, even when the principals were sentenced to jail about a year later. Look at Nicola. Who would want to put money in the hands of someone so fat, dumb, and lazy. Who would invest almost 10% of her firm’s money with someone she herself did not check out thoroughly, like, for example, visiting Madoff’s one room office? They don’t need her to throw their money away on silly deals. If I had money in her firm, I would ask for it back immediately, because all of her investments are now questionable.

    Regardless, I hope you find time to report on the fact that the ‘rich’ asked not to be protected, and weren’t and should receive no sympathy for getting what they wanted.

  83. AGORACOM says:

    First thing I posted straight to Twitter as soon as I heard the sons “turned him in.” http://twitter.com/AGORACOM/status/1054851622

    George

  84. tradeking13 says:

    I don’t understand what was so bad about Madoff’s “scheme”. It sounds a lot like how Social Security works.

  85. WilliamBanzai7 says:

    PALM BEACH GOT RUN OVER BY MADOFF’S PONZI REINDEER
    (Grandma Got Run Over By a Reindeer)
    WilliamBanzai7

    (chorus)
    Palm Beach got run over by Bernie Madoff’s Ponzi reindeer
    Just two weeks before Christmas Eve
    You can say there’s no such thing as a Wall Street scamster
    But as for we in America, we believe

    He’d been chalking up bogus Alpha
    So the SEC said he had to go
    And as he waltzed out of his lair on Third Avenue
    Defiant as he was, he said, “Positive returns, hell no!”

    When they woke up yesterday morning
    It was clear the Palm Beach clique had been attacked
    May as well stick a note to their own foreheads
    Saying, “Oh Lord, please give us our money back!!”

    (repeat chorus)

    Now we’re all so proud of our regulators
    They’ve been taking this so well
    See them crammed in Madoff’s office
    Knowing that SEC Chairman Cox will soon be sent to pink slip h-e-l-l

    It won’t be a Merry Christmas thanks to Madoff
    Nor a Happy Hannukah as well
    And we just can’t help but wonder
    Dosn’t all of Wall Street have that pungent Ponzi smell?

    (repeat chorus)

    Now that Madoff’s books are on the table
    See all the other asset managers dance a jig (Ah!)
    And the bogus billion dollar earnings
    That not surprisingly had been rigged!

    Be forewarned all you rich country club investors
    Better watch out for yourselves!
    You should not make be dreaming of serial Alpha
    With hedge fund goofs who play golf better than yourselves!

    (repeat chorus)

  86. mikaeel says:

    First of all Madoff’s returns were so high during bad times that the word on the street is the smart money knew something was wrong. The word is that the smart money felt he was engaging in insider trading. I’m pretty sure one of the bankers or hedge funds that invested with him knew it was almost impossible to legally get these types of returns year after year. But that didn’t stop them from investing. When they first started trading on Wall Street they met under a tree, I guess it was shady. They no longer meet under the tree, but its still shady.

    Maybe if we turned out engineers instead of MBA’s we could invest in companies that actually manufacture and sell products profitably instead of giving our money to three card Monte men who hang on the Street.