hahaha more wall street chicanery!!!

by Aristotle Thu Dec 11, 2008 9:11 pm

* DECEMBER 12, 2008

Top Broker Accused of Fraud
Madoff, Money Manager for the Wealthy, Said to Have Run 'Giant Ponzi Scheme'

By AMIR EFRATI, TOM LAURICELLA and DIONNE SEARCEY

Bernard L. Madoff, who helped start the Nasdaq Stock Market and has been a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after allegedly telling two senior employees that his business was "a giant Ponzi scheme."

The extent of investor losses alleged by federal prosecutors wasn't immediately clear, the alleged scheme involved the asset-management unit of Bernard L. Madoff Investment Securities LLC, a New York firm owned mostly by the 70-year-old Mr. Madoff.

Founded in 1960, Bernard L. Madoff Investment Securities is primarily known for its business in market-making, that is, serving as the middleman between buyers and sellers of stock. Mr. Madoff also oversaw an investment advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

In a criminal complaint filed Thursday, Federal Bureau of Investigation agent Theodore Cacioppi said Mr. Madoff "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 criminal complaint says Mr. Madoff told the two employees that he believed losses from his fraud exceeded $50 billion. That figure couldn't be confirmed.

After his arrest by Federal Bureau of Investigations officers, Mr. Madoff was charged Thursday with criminal securities fraud by federal prosecutors in Manhattan. He was arraigned late Thursday.

Mr. Madoff didn't enter a plea during a court hearing Thursday evening. He was expected to be released after agreeing to post a $10 million bond secured by his Manhattan apartment. A preliminary hearing was scheduled for Jan. 12. He declined comment after the hearing.

Dan Horwitz, a lawyer for Mr. Madoff, declined to elaborate on the allegations. "Bernard Madoff is a longstanding leader in the financial services industry with an unblemished record," Mr. Horwitz said in an interview. "He is a person of integrity. He intends to fight to get through this unfortunate event."

The Securities and Exchange Commission is expected to file parallel civil charges against Madoff.

According to two senior employees at the firm, the complaint says, Mr. Madoff kept financial statements for his secretive investment advisory business "under lock and key." The employees said Mr. Madoff was "cryptic" about this end of his business, which they believed had more than $17 billion in assets under management from between 11 and 25 clients.

Earlier this month, the 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."

On Tuesday, the complaint alleges, Mr. Madoff told one of the senior employees that the wanted to pay bonuses to employees this month, which was earlier than usual.

The next day, the two employees met with Mr. Madoff at his office to ask about the bonus situation because he had been under "great stress" in prior weeks, the employees told the FBI. Mr. Madoff refused to answer their questions and arranged to meet at his Manhattan apartment, the complaint says.

One of the employees stated that Mr. Madoff "wasn't sure he would be able to hold it together" if they continued to discuss the issue at the office, the complaint says. At the apartment, Mr. Madoff confessed that his business was a fraud and that he was "finished." He said he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The employees understood that to mean he had "for years been paying returns to investors out of principal received from other, different investors." He told them the firm was insolvent.

Mr. Madoff told them he planned to surrender to authorities but before he did he wanted to pay certain employees portions of the $200 million to $300 million dollars that were left.

The SEC, which sent more than a dozen investigators to the firm today, is seeking to freeze Mr. Madoff's assets and those of his firm, and to appoint a receiver to take over the firm.

One of the marketing channels that Mr. Madoff used was the Palm Beach Country Club -- the exclusive golf and beach club in Palm Beach that counts some of the island's richest residents as members.

According to two members of the club, Mr. Madoff had an agent and at least one major investor at the club who would help attract new investors for the fund. Some members were told that one of the benefits of joining the Palm Beach Country Club was being able to invest with Mr. Madoff.

"They always sold the fund as being 'regular variable income,'" said one Palm Beach Club member. "But no one really knew what the strategy was."

A spokesman for the Palm Beach Country Club couldn't be reached for comment.

Mr. Madoff has been chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the NASD and a member of numerous NASD committees, according to the Web site.

Mr. Madoff founded his firm in 1960. His brother, Peter Madoff, joined the firm a decade later. Peter Madoff did not return calls for comment.

Two sons, Andrew and Mark, have worked for the securities firm since graduating from college 20 or so years ago. Mark Madoff is the firm's senior managing director and chief compliance officer, according to a regulatory filing. Andrew Madoff is its director of trading.

Neither is involved in the asset management business that their father runs.

Mr. Madoff's business has also included a niece and nephews, according to a trade magazine report.

He started his firm with $5,000 saved from a lifeguard job at Queens' Rockaway Beach and a job installing underground sprinkler systems, the report said.

"All of his family members grew up with this being our lives. When it is a family operated business you don't go home at night and shut everything off. So you take things home with you, which is how all of us grew up," Mark Madoff told the magazine, "Wall Street and Technology."

Bernard Madoff and his sons have been quoted often in financial media publications as expert traders. Mark Madoff is a former president of the Securities Traders Association of New York.

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 was a constant on the Palm Beach social scene, attending the Red Cross Ball and many political fund raisers, says Charles Gradante, a founder of Hennessee Group.

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.

For separate account holders, at the end of each month, the firm would send a listing of the investments in the account. The firm would provide copies of the trading tickets to investors a few days after each trade, according to a person familiar who works with some of Mr. Madoff's clients.
—Robert Frank and Chad Bray contributed to this article.

Write to Amir Efrati at amir.efrati@wsj.com, Tom Lauricella at tom.lauricella@wsj.com and Dionne Searcey at dionne.searcey@wsj.com