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.8 million from Ruth Madoff, theswindler s wife of 45 years, in addition to the $80 million she hadpreviously agreed to transfer to the government for the benefit offraud victims.In this unusual case, over 113 victims wrote heart-wrenchingletters and e-mails to the judge, and a representative sample spokeat the sentencing.Judge Chin was clearly infl uenced by the letters; heread part of one in open court.10Partial Settlement with SECMeanwhile, Madoff entered into a partial settlement with the SECthat prevents him from working in the fi nancial industry again, whichseems pretty improbable anyway but ensures that all the i s are properlydotted and the t s crossed.As part of the settlement, the SEC statedthat  the facts of the complaint are established and cannot be con-tested by Madoff  when determining a monetary penalty still to bedetermined (which, if assessed, will be symbolic anyway, since Madoffforfeited all his assets and is locked up for life; he has little chance ofearning any new money).11The SEC s complaint, filed on December 11, 2008, in federal courtin Manhattan, alleges that Madoff and defendant Bernard L.MadoffInvestment Securities LLC have committed a $50 billion fraud andviolated Section 17(a) of the Securities Act of 1933, Section 10(b) ofthe Securities Exchange Act of 1934 and Rule 10b-5 thereunder, andSections 206(1) and 206(2) of the Advisers Act of 1940, and is similar tothe criminal complaint.The government s Information (list of charges) says thatMadoff  s fraud began in the 1980s.12 At his plea hearing, Madoff Madoff and the World s Largest Ponzi Scheme 151said that he believes the scheme began in the early 1990s, eventhough the trustee believes that it began much earlier.A classicPonzi scheme, Madoff  s fraud depended on new money to pay forredemptions and apparently proceeded for years without detection.However, the market crash of 2008 prompted requests for $7 billionin withdrawals from his fund (mostly from hedge funds strugglingto meet their own redemption requests), at a time when not muchnew money was coming in; this led to a liquidity crisis and theunraveling of the scheme.Remarkably, Madoff, who was 70 at the time of his confession,was a legend on Wall Street.His fi rm was founded in 1960.He wasone of those who started the NASDAQ stock exchange, and for a timehe served as its president.He revolutionized trading, greatly reducingthe costs, and his firm was a large market maker, accounting for a sub-stantial percentage of the overall trading volume.As it turns out, beginning no later than 1990, Madoff also ranmoney in a secretive fund operated by an investment arm on a sep-arate fl oor, and that was allegedly kept separate from the brokeragebusiness that employed his brother, his two sons, and assorted otherrelatives.13 The FBI s criminal complaint states that when two federalagents arrived at the Madoffs apartment (after his sons turned himin), they asked him if there was an innocent explanation.He toldthem, the complaint says,  There is no innocent explanation. Theagents say that he also told them  he paid investors with moneythat wasn t there, that he was  broke, and that he expected to goto jail.14Madoff then told the agents that he was  finished, that he had15 absolutely nothing, and that  it s all just one big lie. He said theinvestment arm of his firm was  basically a giant Ponzi scheme, and16that it had been insolvent for years.While Ponzi schemes often promise unrealistic returns, Madoffpromised (and for many years appeared to deliver) returns of 10 percentto 13 percent large, but not totally unbelievable.The fund claimedannual returns of 10.5 percent on average since its inception in 1990.Nevertheless, there was skepticism for years on Wall Street over howMadoff managed to pay investors such consistently high returns ingood years and bad.152 hi s t or y of gr e e dMadoff Never Traded a ShareIrving Picard, the trustee liquidating Bernard Madoff  s investmentfirm, said in a meeting of Madoff  s creditors that his investigation hasfound no evidence that any securities were purchased on behalf of cus-tomers in at least 13 years.17Speaking at a meeting of Madoff  s customers, trustee Picardsaid the firm s customers will be able to recover up to the $500,000they re entitled to from the Securities Investor Protection Corporation(SIPC).If they purportedly had cash in their accounts, they can recoverup to $100,000 of that.Customers who have lost more than thatamount can also share in assets recovered by the trustee.They may alsobe entitled to recapture taxes paid on the fi ctitious income for the fivepreceding years.Not Like Enron or WorldComThe Madoff fraud was very different from other large frauds, like Enronor WorldCom.While Enron was a real company, did own many sub-stantial assets, and employed 22,000 people, many of Enron s recordedassets and profits were infl ated, or even wholly fraudulent and non-existent.Debts and losses were put into entities formed offshore thatwere not included in the firm s fi nancial statements, and other sophisti-cated and arcane financial transactions between Enron and related com-panies were used to take unprofitable entities off the company s books.Essentially, Enron was an accounting fraud, as discussed in Chapter 33.Ultimately, Enron s independent auditor, the worldwide firm of ArthurAndersen & Company, was forced out of business.WorldCom, too, was primarily an accounting fraud, as discussedin Chapter 33.Assuming that the Madoff fraud clocks in at $65 billion,it would be more than six times larger than the accounting fraud thatdrove WorldCom into bankruptcy proceedings in 2002.This one wasa classic Ponzi scheme.Madoff  s fraud was simply a Ponzi scheme, very carefully orchestrated.The firm provided detailed monthly statements purportedly showingmany transactions.No one doubted them, but no one checked.Unlike thenorm in most funds, there was no independent custodian for securities Madoff and the World s Largest Ponzi Scheme 153held for customers of Madoff  s fund; the securities were supposedlykept at Madoff  s own brokerage firm, but no one ever checked.Some ofthe CUSIP numbers (identification numbers used to identify securities)recorded in purported trades did not even exist.There were simply no independent checks and balances.Moreover,there were many pass-through vehicles (i.e., funds that served as feederfunds and gave all or most of their clients investments to Madoff, butpurported to actively manage those investments themselves).The pass-through vehicles were generally audited by leading big-name auditors, who merely accepted confirmations from Madoff withoutlooking any further.PricewaterhouseCoopers, for example, audited Sentryfunds, investment funds run by Fairfield Greenwich Group; they lost$7.5 billion of investors money, half their capital.Who Was Fleeced?Madoff  s investor list reads like a veritable who s who, especially of theJewish world, where Madoff was once known as  the Jewish T-bill.However, over time, many others were victimized.Madoff  s customerlist includes more than 8,000 victims and is known to include (eitherdirectly or through a feeder fund):" Ira Sorkin, Madoff  s own lawyer." Zsa Zsa Gabor, 91, legendary actress." Sandy Koufax, the Hall of Fame baseball player." Fred Wilpon, owner of the New York Mets." Morton Zuckerman s Charitable Trust (funded by the builder andpublisher)." Ira Rennert, #57 on the Forbes 400 list before his losses [ Pobierz całość w formacie PDF ]