A $50 Billion Fraud? So Where is the Money?

If $50 billion really went poof in Bernie Madoff’s self-described Ponzi scheme, where did the proceeds go? This has to top what any dictator ever siphoned out of a banana republic. (Note that the Journal suggests that at least $17 billion has disappeared, so inflation adjusted, the Perons may be ahead). The story also suggests he was merely a very bad trader and merely lost the money.

In the case of other Wall Street operations that are now toast, the losses were the result of very big losses on positions and overpaying themselves bonuses in years that appeared to be good, but if the profits had been risk adjusted, were not so hot.

But a Ponzi scheme is all about fraud, all about taking as much out for yourself as possible (well, that is also the name of the game on Wall Street generally, but the rent-seeking is presumed to be on the back of an underlying legitimate activity) So where did the dough go?

And Madoff had to know this would blow up. Wonder why he didn’t flee to Panama.

From the Wall Street Journal:

Bernard L. Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday a day after telling two senior employees that his investment advisory business was “a giant Ponzi scheme.”

In separate complaints filed Thursday, the Securities and Exchange Commission and the federal government alleged that Mr. Madoff had bilked his investors out of tens of billions of dollars.

The Securities and Exchange Commission, in a civil complaint, accused Mr. Madoff of an “ongoing $50 billion Ponzi scheme,” asking a judge to seize the firm and its assets.

“Our complaint alleges a stunning fraud that appears to be of epic proportions,” said Andrew M. Calamari, associate director of enforcement in the SEC’s New York office. Out of more than $17 billion in assets under management by Mr. Madoff’s firm at the start of 2008, essentially all the assets appear to be missing, the SEC alleged.

In a separate criminal complaint, Federal Bureau of Investigations agent Theodore Cacioppi said Mr. Madoff’s investment advisory business had “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”…

The FBI complaint quotes two senior Madoff employees as saying that Madoff Investment Securities’ proprietary trading and market-making activities are run separately from its investment advisory business. The complaint said investors’ losses came from the firm’s asset-management arm, which Mr. Madoff ran on a separate floor of the firm’s offices. These employees said Mr. Madoff kept the financial statements from the firm under lock and key and was “cryptic” about the firm’s investment advisory business, according to the complaint….

The criminal complaint says Mr. Madoff told the two that he believed losses from his fraud exceeded $50 billion. That figure couldn’t be confirmed…..

Earlier this month, the criminal complaint says, Mr. Madoff told one of the senior employees that “clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations.”…

Mr. Madoff told investors that he returned an average of 15.7% per year going back to January 1996, according to Hennessee Group LLC, an adviser to hedge-fund investors. Between January 1996 and December 2004, when Mr. Madoff’s fund provided monthly returns, there were only three reported down months. Most months chalked up returns between 1% and 1.5%

Mr. Madoff told investors that his strategy was trading in and out of large-cap stocks and buying options on those shares. When the firm did not see opportunities in the market the strategy was to shift to U.S. Treasuries, according to fund marketing documents and people familiar with his strategy.

From Bloomberg:
Madoff faces as much as 20 years in prison and a $5 million fine if convicted. His New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. It specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

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48 comments

  1. ndk

    Former NASDAQ chairman? This’ll do wonders for confidence in the markets.

    I can’t wait to see the redemption figures after this one gets circulated. This has potential depending on how much play it gets. Bad trading is one thing; larceny from the Treasury is another; larceny from your investors, especially in addition to the laughable 2-n-20, is special.

    I would like to personally applaud Mr. Madoff for going above and beyond the call of duty, and for his show of braggadocio to his lieutenants. Bra… vo.

  2. Mara

    Sadly, this seems predictable. Remember Dick “Hug a FARC rebel” Grasso? His $100+ mil salary was barely sufficient to cover all of his fabulous contributions to the NYSE.

  3. Anonymous

    Great title : where indeed did the money go ? Even Emelda Marcos couldn’t spend that amount.

    Wonder if this is just the first of many; maybe that is why the new interment camps are being built.

  4. Tom Lindmark

    “But a Ponzi scheme is all about fraud, all about taking as much out for yourself as possible (well, that is also the name of the game on Wall Street generally, but the rent-seeking is presumed to be on the back of an underlying legitimate activity”

    The operative word in your statement is presumed. Should we not start questioning that presumption. Maybe the whole game is rigged.

  5. Uncle Billy, Besotted

    I’m sure many have brushed off the ponzi scheme comments over the last couple of years as so much tinfoil. When the numbers get this big it starts to make more sense, doesn’t it. Impossible to follow all the money, isn’t it.

  6. eh

    He should issue a financial statement declaring everything Level 3 and then request bank holding company status. If he needs a few tips on how to go about that he won’t have to look far and wide for help.

  7. Anonymous

    It seems that between the Big 3 no-bailout and this that the market may have a bit of a problem tomorrow.

    Maybe its getting hot enough that many will want to get out of the kitchen…

    I am being critized by my “friends” because I am actively cheering the demise of fascist based capitalism. I really am sorry for the pain that many (including myself) will feel because of this implosion but it is loooooooog overdue (I have been watching for 40 years). These same friends say that they are not hearing alternatives from the economics world and I tell them that many good economists have totally withdrawn from public debate about policy alternatives because of the obvious fascist control over discussion in the corporate media of any alternative initiatives.

    I do want the system to crash and burn so as to provide the opportunity for more public centered (as opposed to rich) economic system designs and strategies.

    Crash baby, crash!!!

  8. Anonymous

    To the commenter “eh” above, re level 3 asssets and BHC status: Bravo! I am laughing still, you nailed it.

  9. mxq

    i wonder what kind of pressure this is going to put on funds that refuse redemption requests? given the type of extrapolation that is going on in this corner of the world, i wouldn’t be suprised to see investors get more aggressive about demanding their capital back (to make sure they actually DO have capital?)

  10. Anonymous

    It’s foolish to pin something this big on one person. There had to be a lot of people around him that knew about this, if it’s true.

    The sad part is even if it isn’t true, investors won’t wait to find out. Madoff is guilty until proven innocent in the eyes of the investment community, just like it is with the IRS.

  11. ndk

    It’s foolish to pin something this big on one person. There had to be a lot of people around him that knew about this, if it’s true.

    I’m not so sure. It sounds from the complaint like he’d ringed this off pretty effectively from the majority of the firm, both physically and organizationally separate. We’ll find out more later, but top employees from the investment advisory arm immediately turned him in, which would tend to make me think most of the firm didn’t have much of an idea.

    I’d imagine a handful of others did, but a Ponzi scheme isn’t a stupendously complicated operation. Ponzi himself apparently only aroused suspicion because his returns were so egregious. But in those heady bull market days, “only” returning one or one and a half percent a month wouldn’t have seemed so incredible. Their consistency in even these market conditions might’ve finally triggered the revelations here.

    Almost 13 years. Wow.

  12. Viv

    Kind of sums up the heady excess of the last few years thats now unwinding.

    The ridiculous amounts of leverage used to get “results” are now being exposed for what they are – another sham.

    I wonder how many other such schemes are running around wall street? Maybe wall street is it self a ponzi scheme of the highest order.

  13. bg

    when the tide goes out we dicover all the rapists were swimming naked. how ugly is this.

    There appear to be enough real bad guys this time so perhaps we don’t have to prosecute rich ex-treasury secretary’s for show during this depression.

  14. Anonymous

    Viv said: “I wonder how many other such schemes are running around wall street? Maybe wall street is it self a ponzi scheme of the highest order.”

    Wall Street couldn’t spell fundementals to save its soul.

  15. baychev

    but he created many jobs during the years and supported the local economy and politicians. he deserves a bailout too!

  16. Anonymous

    He may have been planning to flee. Apparently he was busted after informing his lieutenants that all the money was gone and there was only a couple hundred million left to divy up amongst them. Someone from that group ratted him out. Either they suddenly managed to develop a sense of ethics or perhaps he felt his share of the leavings wasn’t enough. This throws the AIG “retention” bonuses in a whole new light…

  17. Anonymous

    “the AIG “retention” bonuses in a hole new light..”

    you mean all these bonuses could be ‘keep us out of jail’ hush money? Wow, what a concept.

    The best explanation.

  18. Jim

    ‘Mr. Madoff told investors that his strategy was trading in and out of large-cap stocks and buying options on those shares.’

    The ‘strategy’ was just like Bayou’s, and should have made any canny investor nervous. How could your strategy be short term trading in the most efficient part of the market? Whoever bought into this was not paying attention.

  19. Scheherazade's Dad

    In a Ponzi scheme, you use money from X to pay Y, and pretend you really earned the Y’s money. Then you pay yourself a bonus, and start looking for a new investor Z so you can pay X.

    I think people are asking why Madoff doesn’t have 50 billion hidden somewhere — of course he doesn’t, he paid a lot of it out to make himself look good. His actual ‘take’ is much smaller, but still a huge chunk. At any rate, the amount of the fraud will be much larger than the amount the defrauder earns.

  20. Scheherazade's Dad

    In a Ponzi scheme, you use money from X to pay Y, and pretend you really earned the Y’s money. Then you pay yourself a bonus, and start looking for a new investor Z so you can pay X.

    I think people are asking why Madoff doesn’t have 50 billion hidden somewhere — of course he doesn’t, he paid a lot of it out to make himself look good. His actual ‘take’ is much smaller, but still a huge chunk. At any rate, the amount of the fraud will be much larger than the amount the defrauder earns.

  21. Anonymous

    If ones steps back and looks at the big picture, keeping the Treasury, the Fed, the People and Fiat in mind…..isn’t the Fractional Reserve Banking System a Ponzi scheme too, where more money gets created to pay for the ever increasing interests ????
    As long as we believe in it, (fiat) it works.

  22. Bob_in_MA

    I bet it will turn out he made a bad bet, or series of bad bets, a few years ago and rather than come clean and lose business, he covered it up than made bets at higher odds to make up for it, and kept getting in deeper and making bigger, longer bets.

    I’ll wager he didn’t do this to make a lot more money, just to maintain his business and prestige. Then it took on a life of its own.

  23. M.G.

    To deleverage the Ponzi’s scheme we need people like Madoff and few financial engineers: just to uncover what auditors, bankers and rating agencies are not yet willing to do it.

  24. Anonymous

    Thanks to “heityoas” for the naked shorts read.

    I knew someone once who’d seen the returns and description of the investment process and thought it was a bit “fishy”.

    Btw, Dr. Andrew Lo of MIT has done lots of interesting work showing how impressive return streams with almost no monthly deviations are pretty much provably “false” within 95%+ confidence intervals . . . . ..

  25. VoiceFromTheWilderness

    It’s really interesting to me that only one commentor so far has noticed the disparity between the potential sentence (assuming conviction) and the crime.

    Stealing 50 Billion dollars, and then getting fined 5 million? ’20 years’ in a minimum security prison with 10 years off for good behavior? That’s not just low punishment, compared to the business I’m in, that is stellar return on personal effort. More than stellar. Galactic.

    the fine is 0.01% of the take, and minimum security prison is no worse than being in grad school.

    Kids if you have any doubt at home about what this society believes is important, where the rewards are (which according to our grand and glorious betters is how we should evaluate our choices in life), and where the punishments are (do not under any circumstances go into anything associated with public service, or being on the public payroll, including in particular, anything relating to ‘science’ — your work will be overseen and controlled by pest inspectors and ‘MBA’s), this story ought to straighten you out.

    Good Luck America

  26. SherylH

    The epitome of Wall Street:

    http://www.youtube.com/watch?v=4…h? v=4GA8MQGvr_U

    Couldn’t find the clip for the most intense scene of Wall Street but Martin Sheen’s quote as father Carl Fox sums it up:

    “What you see is a guy who never measured a man’s success by the size of his WALLET!”

    May more perp walks follow this one

  27. Anonymous

    holy shit! I thought guys like this always got away. Maybe this jagoff will anyway.

    Considering his connections, and the role of his firm as a market-maker, the implications are almost as big as anything we’ve encountered over the last while. Yet here in the great white north, the story was placed in the business section, and wasn’t even the big headline.

  28. joebhed

    anon at 8:24 SAID:

    “…isn’t the Fractional Reserve Banking System a Ponzi scheme too, where more money gets created to pay for the ever increasing interests ????”

    Actually, I don’t think so, exactly.
    While the implication of the FED as a ‘ponzi’ scheme is impeccably accurate, I don’t think the mechanics are.
    You give them too much “credit”, my friend.
    I could be wrong.
    ALL money created by the FED is created as new debt.
    The new money and new debt is always created as a basis for a loan which present security of some form or another.
    It is never true that the security being presented to collateralize new money/debt being created is for the payment of interest.
    Anyone see a problem with that?
    There is no money created by the FED, nor anyone else in the banking/financial system, to pay the interest on ANY of that new money/debt.
    And, THAT, ladies and gentlemen, is THE problem.
    We’re so bogged down in the falling trees of this credit-banking-financial (fill-in-the-word-here), that we have completely lost sight of the forest in which these trees reside.
    THE problem is debt-money.
    Plain and simple.
    And the solution is monetary reform.
    Plain and simple.
    The Treasury Issuance, debt-free money system.
    The Chicago Plan.
    100 percent reserve banking.
    Let’s get on with the revolution of post-fractional-reserve, true-free-enterprise, capitalism.
    Either that, or we all go down with that same ship.

  29. Jesse

    Considering the ‘rhyme’ in the markets, this major embezzlement and Ponzi scheme by a (former) head of a major exchange is wonderfully remniscent of the infamous Richard Whitney, head of the NYSE from 1930-1935, staunch opponent of the Securities Act of 1934 and a major embezzler.

    He received 3 years in Sing Sing, served his time, and then retired to his mansion in Far Hills, NJ.

    http://jessescrossroadscafe.blogspot.com/2008/12/key-nasdaq-governor-and-executive.html

  30. Anonymous

    Haven’t read all the comments, but just want to point out that Madoff’s clients now have a taste of what it’s like to be a low level employee of, say, Enron or Lehman or just your average Joe/Josephine opening their 401k statements.

    *Poof*

    So, how’s it feel to be taken rather than on the take?

    ‘Course these “investors”, mad as they still have net worths in the multiples of your lowly average American…alas.

  31. Anonymous

    What’s with the cheap shot on Panama? Uncalled for. We have a well-regulated banking system and, especially now, Americans should know they have NO moral authority to put down anybody else.

    Hey, it’s not OUR financial sector that’s going belly-up from greed, corruption and all-around incompetence. Talk about the pot calling the kettle black.

  32. mainsailset

    All I want for Christmas is to find out that the Client list is populated exclusively by Bush Admin folk and Rep congresspeople. Please…

  33. Anonymous

    You have to wonder: why didn’t he just freeze redemptions like other hedge funds have done? He could have kept the thing going for many more years.

    Maybe he forgot to add a redemption-freeze clause to his client agreements. Maybe some other yet-undiscovered Ponzi funds weren’t so careless.

  34. masaccio

    Here’s another good question. How come no one at the company blew the whistle? It is inconceivable that no one noticed that they weren’t getting statements from someone showing the investments.

  35. Anonymous

    According to the WSJ:

    Would SIPC coverage apply to "Ponzi schemes"?

    It's likely, say securities attorneys. "If it's a true Ponzi scheme — that is, if you take my money without my permission and give it to a prior investor as a profit — then I would certainly categorize it as a theft," which should be covered under SIPC, says Robert Uhl, a securities attorney in Beverly Hills, Calif.

    Does SIPC have enough money to cover all of the potential claims?

    It may not if it has to cover losses as high as $50 billion. As of Dec. 31, 2007, the SIPC Fund had about $1.5 billion to cover potential claims. While the Securities and Exchange Commission can make another $1 billion in loans to them, it would probably have to go back to Congress for more money, says Steven Caruso, a partner at Maddox Hargett & Caruso PC, a New York law firm. "We'd be looking at another bailout, only this time it would be SIPC and not the auto industry," he says.

  36. Anonymous

    Is Wall St. Just One Big Ponzi Scheme ?

    With a $50 Billion Fraud,
    it could be one of the largest fraud schemes in Wall Street history.

    But didn’t anyone, including the SEC,
    wonder why this fund wasn’t audited by a known firm?

    That’s why I recommend to verify the people before doing any business.
    You can use any free services to prevent scams
    just looking in his public records.

    You can prevent some frauds just using:

    ArchiveNational.Com
    to make some background check to anybody before any serious deal.
    Get free information and don’t lose your money without research first.

    Hope that this helps someone!

    ArchiveNational.Com

  37. myrtle beach

    great post. that was my question too, where did the money go? it seems like it would be easy to track $50billion?

  38. Anonymous

    why not flee to panama?

    well, he’s 70 years old…not much can be done to him. he’s going to retire in a resort prison with full healthcare.

    besides, a hundred bucks says he’s taking all the blame to protect the others involved, e.g., his sons. you people don’t find it slightly suspicious that his boys didn’t have a clue about any of this, and they “turned him in”? knowing full well their fortunes came from stolen investor money, the family hasn’t made the slightest effort to return their unjust enrichments.

  39. Sky

    Small amounts of money (relative to the $50B) went to friends and family members over the last 30 years. The rest consisted of returns for institutional investors and large fund clients as the enterprise grew larger. There was no laundering or hiding of money, no export to foreign enclaves. The original motivation was to “take care of grandma and the kids.”

  40. Online Trading

    Just another blow to confidence from a regulatory point of view. This will surely bring an avalanche of new regulations. I believe its need, for sure, but regulators have a habit of over doing it, take Sarbanes Oxley for example.

    It has surely been shown now that the only people who lose with extensive (and very expensive) reporting requirements are legit companies. The fraudsters just lie…

  41. fav.or.it

    Well, the tell tale was his name: Madoff or mad off. Surely someone sees the irony here :P

    sent from: fav.or.it

  42. Anonymous

    Where is the money gone? It can’t just be gone, gone where? To Israel, that is why even the US Government won’t ask “where?” if it was an Arab etc. the country would be bombed unless the money was returned straight away! Jews do it again! Reporters won’t mention “safe haven” is Israel!

  43. Anonymous

    Normally the bulk of the funds are paid out to the early investors. So the folks who actually cashed out their winnings got the loot. Which leads to the claw back issues that many of them will face. When the legal actions start to recoup the distributions there is going to be even more upset folks. Madoff lived a great life, spent freely some of which may have a future value from which a recovery will come. Of what is recovered most will be spent in litigations. What a mess. IMHO

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