Biggest investment fraud ever: Madoff's $50B ponzi scheme

It’s been in the news for a while now. I guess it’s time to start a thread on it.

I’m not all that familiar with the case, but as many of you know, Bernie Madoff was an extremely well-trusted and well-respected person, once Chairman of the Nasdaq exchange, founder of an apparently extremely successful investment firm, and huge philanthropist. Now it turns out, the fantastic returns he was earning for his investors over the years were largely fake, he was actually losing money for years, and only paying off those who withdrew money by using the money coming in from new investors. In short, it was a massive Ponzi scheme, offering phoney high returns to those who withdrew money first at the expense of the suckers who signed up later. Losses are now estimated in excess of $50 billion, and all kinds of decent and trusting people and institutions (many of them charitable) are being screwed for tens or hundreds of millions of dollars. The whole phoney castle came crashing down finally, becasue in these horrendous financial times, investors requested billions of dollars of withdrawals, Madoff just couldn’t scrape up the cash to pay them off, and his grown sons turned him in to the authorities. Madoff himself has admitted it was all fake and he was losing money for years.

Interestingly, many outsiders suspected him for years, because it seemed impossible for him to generate the terrific returns he claimed to be generating, month after month, year after year, through good times and bad. Turns out they were right. As the old saying goes, if it looks too good to be true, it probably is. But, for the past few years, and decades, people have grown so incredibly stupid, greedy, spoiled and trusting of financial institutions, regulators, advisors, and the like, and those institutions, regulators, advisors and the like have grown so lax, ineffective, greedy and morally corrupt, that they were led like lambs to their slaughter.

Check this out.

[quote]The three-person auditing firm that apparently certified the books of Bernard Madoff Investment Securities, the shuttered home of an alleged multibillion-dollar Ponzi scheme, is drawing new scrutiny.

Already under investigation by local prosecutors for its potential role in the scandal, the firm, Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants, the prestigious body that sets U.S. auditing standards for private companies.

The problem: The auditing firm has been telling the AICPA for 15 years that it doesn’t conduct audits.[/quote]
money.cnn.com/2008/12/17/news/co … 2008121808

How could people invest $50B in a firm that has never been audited? Go figure.

Anyway, this catastrophe seems typical of all the other financial catastrophes the world is presently experiencing, starting with the absurd inflated housing price and explosion of mortgage loans to people with no credit whatsoever scandal that is described in that great Michael Lewis article I linked yesterday. People have been living in a fantasy world and now are crashing back to reality.

It will be interesting seeing how this massive fraud unfolds, but what I fear is the government will end up bailing these victims out, too, and tacking the $50B onto bill with all the other scandals the common taxpayers must make amends for.

A good number of wealthy, influential people get taken to the cleaners because they treated investment as a social climbing activity. Oh, and a few charities lost it all, too. The latter cases will be used by the former’s lobbiests as an excuse for why a “bailout” of these fucking morons is necessary. Nevermind the fact that this should NOT fall within the brief of the Securities Investor Protection Corporation. Some slick lawyers and financiers will figure out some bullshit way of rationalizing it.

He had a style and recruiters. They made it exclusive and required a large investment, $10+Million. When you look back at the rush they had the last few years to get into hedge funds, it makes a lot more sense. Am I the only one to remember when everyone was trying to get into a hedge fund? It was a status symbol.

As far as scamming people, does anyone remember Enron and it’s “black box” method of making money? Worked great till short sellers came in(in a concerted effort) and blew it up finally. Lets also not forget the mother of all frauds, The Oil for Food program. I believe that that only ended due to US military action. Russia and Europe where making way too much money off of that to see it end otherwise.

Now prosecutors say it’s more than just a ponzi scheme (where it’s like a FIFO money funnel). Instead, it’s a “hybrid”, whatever that means, whereby Madoff (and possibly accomplices) have been funneling money offshore.

There are articles talking about potential investors and due diligence firms in the past that declined or advised not to invest, because of the dodgy self-dealing set-ups.

Also, apparently, a complaint or warning was made to the SEC, but the SEC didn’t investigate - now it seems the SEC investigator was “related” by marriage to Madoff.

and it just gets better.

news.yahoo.com/s/ap/20081221/ap_ … ZmG6myBhIF

apparently, the whistleblower has been complaining to the SEC about Madoff for about a decade!!! It’s all about the old boys’ club.

Try being informed. It was US oil companies, mostly Texas based, which circumvented rules in the Oil-for-food scandal.

IRS could lose $17 billion

Boy, is this a year or what? I am amazed by the constant financial losses that have been occurring in the US. Almost want to think it’s either:

a)The chickens coming home to roost
or
B) Karma

[quote=“Namahottie”]IRS could lose $17 billion

Boy, is this a year or what? I am amazed by the constant financial losses that have been occurring in the US. Almost want to think it’s either:

a)The chickens coming home to roost
or
B) Karma[/quote]

Or option C. Option C involves 20 to 30 years of negligence on the part of many different aspects of the American Economy. You have : a decline in people saving money for the future, a lowering of the requirements to own houses (including not checking for valid income), an increase in the number of houses built, an explosion in the number of credit cards and credit offered to individuals, a consumer culture on speed, high risk investment in the housing and the stock markets, and pure greed. You throw all that together and mix with not having had a real recession in 30 years and you get the current situation.

Ohh and I forgot to mention shows like “Flip that House” which show “investors” buying a run down house, cleaning it up cosmetically, and turning around to sell it again a few weeks later for profits ranging from 20k to 100k US. I always hated that show because no one failed, no matter how many stupid decisions they made (i.e. one guy putting a waist high window right next to the toilet)

As far as Madoff goes, I was talking to my dad this morning when he mentioned a radio interview he had heard yesterday in CA. The interview was with a forensic accountant who is one of several firms trying to get the contract to look over Madoff’s books. This guy gave a SWAG that Madoff still has most of the money somewhere, that his life style couldn’t have spent all the money. The accountant estimates that investors might be able to recover about 40 cents on the dollar invested. If I find a copy of the interview I’ll post it.

The whole stock market is one big Ponzi scheme … profits always come from other people buying in … it’s become worse the last decade, nothing was based on real life situations of the listed companies … bubble after bubble have popped and now even the huge trusted car industry seemed to be a bubble …

Wow, amazing what the investigators are discovering. I had assumed Madoff started out as an honest man who was driven to fraud to cover for huge losses he was incurring due to the global crisis. Apparently that’s not even close.

[quote] The clients who trusted Bernard L. Madoff still do not know exactly what he did with their money. But they know what he did not do with it: He did not buy any of those blue-chip stocks and Treasury bills listed on their account statements over the last 13 years.

The court-appointed trustee who is winding down Mr. Madoff’s business said on Friday that his team had [color=#FF0000]searched records going back almost to 1993 and found no evidence that any securities were bought for investors during that time[/color].

That pattern probably stretches back even further, according to the trustee. . . But his team. . . simply has not yet been able to dig back any further . . .

it raises the question of how all those fake statements and trade confirmations were generated in the absence of any genuine trading. . .[/quote]
nytimes.com/2009/02/21/busin … ml?_r=1&hp

Of course it does cause one to wonder what the hell the SEC were doing all those years. How could they have not known?

[quote=“Mother Theresa”]Wow, amazing what the investigators are discovering. I had assumed Madoff started out as an honest man who was driven to fraud to cover for huge losses he was incurring due to the global crisis. Apparently that’s not even close.

Of course it does cause one to wonder what the hell the SEC were doing all those years. How could they have not known?[/quote]

They investigated him 8 times in 16 years. You wouldn’t know that reading articles like this one in the Washington Post: SEC Didn’t Act on Madoff Tips. If they, the watchdog organization, couldn’t see that the guy never actually purchased the securities he said he purchased, what does that say about the role of the SEC? How is the average person supposed to discern fraud (other than something sounding too good to be true) if the professionals can’t?

If Madoff really has been doing this since the 1970’s, he succeeded through Republican and Democratic presidencies. How did he make it through the 80’s when the SEC was busting other people for securities violations? He has succeeded through times of strong regulation and weak regulation, so what does that say about the security regulations?

[quote=“Wall Street Journal”]Bernard L. Madoff Investment Securities LLC was examined at least eight times in 16 years by the Securities and Exchange Commission and other regulators, who often came armed with suspicions.

SEC officials followed up on emails from a New York hedge fund that described Bernard Madoff’s business practices as “highly unusual.” The Financial Industry Regulatory Authority, the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers.

Mr. Madoff was interviewed at least twice by the SEC. But regulators never came close to uncovering the alleged $50 billion Ponzi scheme that investigators now believe began in the 1970s.[/quote]

They were definitely told. I forget the guys name but he was stock analyst or something and had been following and reporting on ol’ Barnie for years.

They have to slap us in the face once more of course by leaving him in his penthouse until now. When the police first approached him he admitted to the crime immediatley. Why didn’t they arrest him? Is there some legal rational or what?

The whole economy is a ponzi scheme. Just print more dollars and use a wheelbarrow to buy a loaf of bread.

So, has “Made-off” been arrested? And if not, why the hell not??

It might be, and this is a SWAG (Scientific Wild Ass Guess), that they are still putting together the case against him. Remember that the 6th amendment guarantees the following:

If you arrest him, then the clock starts on how long you have until you can bring him to trial. A more famous example of this was the OJ Simpson trial. Simpson’s lawyers pushed to move the court date up, instead of delaying it, and the prosecution couldn’t get it’s case together in time. As a result, DNA evidence was introduced sporadically and some analysts believe that helped with the acquittal.

The US Supreme Court found in Strunk vs. US that if you violate someone’s 6th amendment right to a speedy trial, then you have to dismiss the indictment or overturn the conviction. After that, double jeopardy applies and you can’t retry the defendant for those same crimes. That would mean if they arrest Madoff and take too long to bring him to trial, he’ll walk scott free on all the charges. That’s why they are waiting.

[quote=“Mother Theresa”]{T}his catastrophe seems typical of all the other financial catastrophes the world is presently experiencing, starting with the absurd inflated housing price and explosion of mortgage loans to people with no credit whatsoever scandal that is described in that great Michael Lewis article I linked yesterday. People have been living in a fantasy world and now are crashing back to reality.

It will be interesting seeing how this massive fraud unfolds, but what I fear is the government will end up bailing these victims out, too, and tacking the $50B onto bill with all the other scandals the common taxpayers must make amends for.[/quote]

The whole of Wall Street is a ponzi scheme, a recursive system of trust dependent on trust.

As for the bailout…

Banks don’t insure individual deposits for more than around US$150,000 or in that neighborhood. The same should be done for private individuals “investing” in the institutions that are collapsing. No more than about US$500,000 should be covered, and coverage should be done in this order: individual savings first, then charities and bonds and funds last. If that means nothing is left for the wealthy, well, screw 'em.

The choice individuals and governments have is:

  1. stay in the building and try to prop up its supports to prevent it from collapse, or

  2. get the hell out before it collapses

I’ll take the second option, even if my departure contributes to the problem.

By the by, has anyone noticed that the Taiwan dollar has dropped to nearly
$35 to the US$1
, down from around NT$32 a while back? I’ve got travellers cheques in US dollars and have been debating for months whether to convert it to TWD and make money in a bank, or keep it as travelling money. If it gets to NT$40=US$1, I’m cashing in. Interestingly, no other currencies seem to be changing compared to each other, it’s only the inflation caused by the “stimulus package” that’s driving the rate up.

At least there’s one good point of an overvalued US dollar: Taiwan’s exports to the US are cheaper to buy, which keeps foreigners’ jobs here more secure.

“Little people pay taxes.”

  • Leona Helmsley

The wealthy think they are “entitled”.

The US seems to be doing the same thing on Wall Street that it has been doing in light of the Abu Ghraib and Guantanamo torture scandals: those at the bottom who obeyed orders are getting punished while those who set up the conditions are getting off with no more than a “tsk tsk” in the court of public opinion.

There is something very wrong with a system that says an individual who robs one person with a gun is more dangerous than someone who robs millions with a computer. One thief might kill one or two people, but Madoff has the blood of at least a half-dozen people on his hands already due to suicides, not counting how many cases of “domestic abuse” (read: wife beating) due to people lashing out after losing their money.

[quote=“Okami”]He had a style and recruiters. They made it exclusive and required a large investment, $10+Million. When you look back at the rush they had the last few years to get into hedge funds, it makes a lot more sense. Am I the only one to remember when everyone was trying to get into a hedge fund? It was a status symbol.

As far as scamming people, does anyone remember Enron and it’s “black box” method of making money? Worked great till short sellers came in(in a concerted effort) and blew it up finally. Lets also not forget the mother of all frauds, The Oil for Food program. I believe that that only ended due to US military action. Russia and Europe where making way too much money off of that to see it end otherwise.[/quote]

Where exactly do you get your “news” from? FAUX? CNN?

globalpolicy.org/security/sa … lindex.htm

globalpolicy.org/security/sa … backed.htm

[quote]
US “Backed Illegal Iraqi Oil Deals”

Report claims blind eye was turned to sanctions busting by American firms
By Julian Borger and Jamie Wilson
Guardian
May 17, 2005

The United States administration turned a blind eye to extensive sanctions-busting in the prewar sale of Iraqi oil, according to a new Senate investigation. A report released last night by Democratic staff on a Senate investigations committee presents documentary evidence that the Bush administration was made aware of illegal oil sales and kickbacks paid to the Saddam Hussein regime but did nothing to stop them.

The scale of the shipments involved dwarfs those previously alleged by the Senate committee against UN staff and European politicians like the British MP, George Galloway, and the former French minister, Charles Pasqua. In fact, the Senate report found that US oil purchases accounted for 52% of the kickbacks paid to the regime in return for sales of cheap oil - more than the rest of the world put together.

“The United States was not only aware of Iraqi oil sales which violated UN sanctions and provided the bulk of the illicit money Saddam Hussein obtained from circumventing UN sanctions,” the report said. “On occasion, the United States actually facilitated the illicit oil sales.”[/quote]

“Little people pay taxes.”

  • Leona Helmsley

The wealthy think they are “entitled”.
[/quote]

I’ve been thinking recently that the wealthy are so opposed to taxes because they actually have to pay them, as in sign a check that transfers money from their bank account. On the other hand, little people have them deducted from their paychecks each month, so that even 50% taxes (Norway?) are understood to be part and package of being an employed citizen, a productive member of society, and your real salary is what you take home. This difference alone could be bringing about a significant psychological difference in attitude between the wealthy.

It might be, and this is a SWAG (Scientific Wild Ass Guess), that they are still putting together the case against him. Remember that the 6th amendment guarantees the following:

If you arrest him, then the clock starts on how long you have until you can bring him to trial. A more famous example of this was the OJ Simpson trial. Simpson’s lawyers pushed to move the court date up, instead of delaying it, and the prosecution couldn’t get it’s case together in time. As a result, DNA evidence was introduced sporadically and some analysts believe that helped with the acquittal.

The US Supreme Court found in Strunk vs. US that if you violate someone’s 6th amendment right to a speedy trial, then you have to dismiss the indictment or overturn the conviction. After that, double jeopardy applies and you can’t retry the defendant for those same crimes. That would mean if they arrest Madoff and take too long to bring him to trial, he’ll walk scott free on all the charges. That’s why they are waiting.[/quote]

Thanks. That makes quite alot of sense, although he admitted to the crime when the police first confronted him and if he had not been investing people’s money in the stocks he said that he had that should have been pretty easy to establish you would think. Anyway, it is nice to think that there might be some explanation other than the ol’ one law for the rich and another one for the poor routine.

Madoff gets Maximum Sentence: 150 years.

At age 71, it appears to be a life sentence.