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50 billion dollar Ponzi Scheme

Discussion in 'BBS Hangout: Debate & Discussion' started by rockbox, Dec 13, 2008.

  1. rockbox

    rockbox Contributing Member

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    How does somebody pull off something like this. I guess rich people are just as big as suckers as the rest of us.

    What's sad is that guy will probably get less prison time than a person stealing cars.


    http://www.msnbc.msn.com/id/28196739/

    For years there were whispers on Wall Street about Bernard Madoff’s hedge fund. The cynics said the returns were too good, too steady and Madoff’s operation always looked too slim for the tens of billions of dollars it was managing. But given Madoff’s more than four decades of experience as trader and past service as chairman of the Nasdaq stock market, the wealthy kept giving him their money.

    Well, it looks like those concerns were right all along now that federal prosecutors have charged the 70-year-old Madoff with securities fraud in what could amount to one of the biggest Wall Street scams ever. Securities regulators, in a civil complaint, say Madoff’s scheme may have cost investors up to $50 billion. At a minimum, it appears the $17 billion Madoff was managing earlier this year may be gone.

    The allegations against Madoff describe a classic Ponzi scheme, in which money is taken in from new investors to pay out money to earlier investors. Madoff, authorities allege, even told his sons earlier this week that the hedge fund was nothing more than “a giant Ponzi scheme.’’
    Story continues below ↓advertisement | your ad here
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    It didn’t take long for investors in Madoff’s fund to begin crying foul. Hours after the news of Madoff’s arrest broke, investors were contacting lawyers to determine how they can get their money back — assuming there is any money left over. The Securities and Exchange Commission is moving to appoint a receiver to take control of the Madoff fund to protect whatever assets remain.

    It’s way too soon to know how long the alleged scheme had been going on, although authorities allege it began years ago, after Madoff tried to cover up for past losses. But it appears Madoff ultimately was unmasked by the worst financial crisis since the Great Depression. Just like many hedge fund operators, Madoff received a wave of redemption notices in recent months, from investors looking to preserve cash. Authorities say investors sought to pull out some $7 billion from the fund — money Madoff apparently did not have. In the end, most Ponzi schemes collapse when too many investors seek to pull their money out at the same time, and the operator doesn’t have the cash on hand.

    But the financial crisis appears to be hastening that unwinding process, as it has dried-up all sources of liquidity. Banks are unwilling to lend and investors are fleeing hedge funds, stocks, bonds, commodities and other asset classes for the safety of cash. In September, another alleged Ponzi scheme collapsed, when federal prosecutors arrested Minnesota businessman Tom Petters. Federal prosecutors allege that much of Petters’ empire, which consisted of buying up distressed businesses, was based on a series of lies. He’s been charged him with bilking some six dozen hedge funds out of $3 billion. Petters’ alleged scheme came undone when some of the hedge funds that lent him money had gotten redemption requests from their investors and began asking Petters to pay off his debt. Just like Madoff, Petters apparently couldn’t come up with the cash.

    More stories from BusinessWeek
    Investors and the 2009 economic outlook
    Fraud's red flags
    The biggest Ponzi scheme of them all?

    A lack of liquidity may have been behind the bizarre scheme involving New York attorney Marc Dreier. Earlier this week, federal prosecutors charged the high-profile attorney with allegedly scamming several hedge funds into giving him up to $100 million by selling shares in what appears to be a fraudulent real estate venture. It appears Dreier’s 250-lawyer firm was running low on cash and had failed to make payments on a bank loan.

    As the financial crisis deepens, don’t be surprised if other scams get flushed out in the coming weeks and months.
     
  2. Zion

    Zion Member

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    I just read about this. It really is quite amazing how long he got away with it and on top of all this the guy used to be the chairman of the Nasdaq stock market.

    These guys in suits and ties are robbing people blind.
     
  3. Zion

    Zion Member

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    Spain may have 3 bln euros exposure to Madoff-paper
    12.13.08, 08:39 AM EST


    MADRID, Dec 13 (Reuters) - Spanish investors could have up to 3 billion euros ($3.98 billion) of exposure to funds managed by Wall Street trader Bernard Madoff, accused of masterminding a fraud of up to $50 billion, Expansion said on Saturday.

    'The first estimates suggest both groups (large fortunes and Spanish funds) could have invested more than 3 billion euros in vehicles managed by Madoff,' the financial daily said without naming its sources.

    Investors in hedge fund Optimal, run by Spain's largest bank Santander, Santander's private banking subsidiary Banif, M&B Advisers Gestion (M&B Capital Advisers) and Spain's second largest bank BBVA were among those affected, the same sources told the paper.

    A spokesman for BBVA said BBVA customers in Spain were not exposed to the fraud. 'BBVA has not commercialised in its network of retail clients or private banking in Spain products managed or deposited in Madoff Investment Securities,' he said.

    A spokesman for Santander declined to comment on whether it had exposure.

    Santander's Optimal has commercialised more than $3 billion dollars of Madoff funds, the newspaper ABC said, citing data from Bloomberg.

    Two funds of M&B Capital Advisers have $578 million invested in a Madoff hedge fund, ABC said, citing Bloomberg data. No one was available to comment at M&B Capital Advisers.

    http://www.forbes.com/afxnewslimited/feeds/afx/2008/12/13/afx5817891.html
     
  4. F.D. Khan

    F.D. Khan Contributing Member

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    Recessions find what auditors don't.
     
  5. Invisible Fan

    Invisible Fan Insider Newsletter™ 2X Diamond Member

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    Maybe those rich elite types looked the other way because they assumed Madroff was traficking drugs, women and other black market goodies.

    As long as they get their 10% return...
     
  6. JeopardE

    JeopardE Contributing Member

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    I'm surprised it took this long for someone to post about this.

    We're talking about whole families who thought they were set for life and then woke up one morning to discover they had NADA. I can't even imagine what it must be like to be one of his victims. Reportedly several charities (including some Jewish foundations) have had to close up shop as a result...there are a LOT of people affected by it.

    You know your regulatory system is a complete failbasket when you have ONE guy running a 50 billion dollar fund with everything from baby boomers' life savings to multi-million-dollar charities to large corporate investments, with zero oversight and zero transparency. This is merely another consequence of the catastrophic failure of our financial regulatory system.
     
  7. JayZ750

    JayZ750 Contributing Member

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    I agree with all of the above. No caveats.

    BUT, there is also personal responsibility to blame here. Even if you don't have tons of money today, take this as a lesson...you don't just give someone a bunch of your cash to invest because your neighbor did and is apparantly doing great. it's called due diligence. i mean the auditor of the firm was itself a 1 man shop in a 200 square foot hole out in the burbs.
     
  8. MFW

    MFW Member

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    Um, which regulatory system would that be? Hedge funds (and Madoff's company is ran no differently than a hedge fund, despite the technicalities) aren't regulated.

    You can't have a regulatory failure when there is no regulation in the first place.
     
  9. Invisible Fan

    Invisible Fan Insider Newsletter™ 2X Diamond Member

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    ^Apparently the SEC would've checked up on his fund if it weren't for his reputation...
    Rest of article
    http://www.nakedcapitalism.com/2008/12/sec-skipped-normal-inspection-of-madoff.html
     
  10. MFW

    MFW Member

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    The SEC "would have" checked a lot of things... after the fact.

    Look, quite a while back I attended a certain seminar with a certain SEC regulator in which I asked why the SEC doesn't enforce certain of its own codes (regarding Form 8-K and auditor switches); and after a lot of pushing I got the answer "we simply do not have the resources to enforce all regulations."

    So there you have it, its underfunded, inefficient, probably both. If it can't even enforce its own set rules, what makes you think they would bother with things they don't have regulations for?

    Sure, maybe some guy somewhere at a certain time said "maybe we should ask Madoff some questions. But the bottom line is, they didn't.
     
  11. MFW

    MFW Member

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    One more thing. When looking at hedge funds, the SEC look a little more than how much money a fund has under management, nothing to the level of bitter companies/banks. I hardly call that regulation.
     
  12. yaoluv

    yaoluv Member

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    True, if the SEC cant uncover this massive scandal:

    Whos to say if the mutual funds we invest in just tell us they are investing in stocks, but really they are fronts for columbian cocaine drug lords?

    We have no way of knowing, and the regulators don't seem to be doing their jobs.
     
  13. Zion

    Zion Member

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    uhm this was posted three days ago, when the story broke.

    The really scary part is that some people had no idea they were investing with Maddoff. They would invest with one company which would in turn hand the money off to Maddoff.
     
  14. bnb

    bnb Contributing Member

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    Unless you were an SEC investigator with full access to the firm, I think you could do all the due diligence you wanted and still fall victim here. The guy running the fund had experience, reputation, track record, and no past shady dealings (apart from his involvement in the whole Wall Street game ;). Plus a reputable group of investors. Those things would outweigh any concerns about a local auditor for most people...

    Crazy.

    Was the guy then just making up statements to send to investors?
     
  15. JVG>Adelman

    JVG>Adelman Member

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    The American financial system is collapsing under the weight of Ponzi schemes like this one. This may be just the tip of the iceberg as the extent of the morbid corruption unfolds. 2009 is going to be a very difficult year for everyone.
     
  16. JayZ750

    JayZ750 Contributing Member

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    Yeah, he was making up statements.

    Individual investors typically don't have the resources to tackle the level of diligence required to invest in these types of funds, but when you consider how wealthy some of these individuals are, they should have done more. Institutions, on the other hand, big banks, fund of fund managers, etc...these people are charging their clients fees, on top of the fees Madoff was charging, specifically to look into these types of things. When you're a fund of funds manager, it's your freaking job to diligence. And again, while you may not have the resources personally, if you're investing $500 million+ (as some individuals have), or you manage the investing arm of a charitable foundation, your duty is to not just throw your money into something just because neighbor Joe did.

    It's not just the auditors. The guy apparently had his own part of the office where he ran the fund that very few people were allowed access to. The guy's strategy was completely off base. While it could have worked, it was pretty clear that he should have been a market maker with the size and amounts of trades that he claimed he was making - heck, on many many days his supposed strategy wasn't even possible because there just wasn't the volume in the market to support what he said he was doing. His returns - c'mon...I haven't been around that long, but even I know that such a narrow band or regular, recurring positive returns that consistently, every month, over all those years, isn't just unlikely or improbable, but impossible.

    Again, I'm not saying investors are at fault here. They got screwed...royally hosed. I'm just sayign there are tons of people out there who have reputation, track records, etc, etc. You simply just don't throw money around like most of the investors in Madoff's funds appeared to have done....which was by word of mouth, and in ridiculous allocations.
     
  17. GBRocket

    GBRocket Contributing Member

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    Well this is kind of obvious. Even the police can't enforce every law in every single occasion. Otherwise, we would live in a nanny state.
     
  18. rrj_gamz

    rrj_gamz Contributing Member

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    Exactly...In the world of Sarbanes-Oxley, I find it hard to believe this can go un-noticed...I'm not sure if it was a private co. or not, but still auditors are suppose to find this...

    It definitely won't be the last ponzi scheme...But $50 billion?
     
  19. tulexan

    tulexan Member

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    It's terrible what is happening to people who invested with Madoff, but there is a lesson that people continue to forget whether talking about Enron, Madoff, or any other collapse.

    DIVERSIFY YOUR INVESTMENTS!!!

    No matter how good the investment is, diversify into different companies, industries, and asset classes. If you have all of your money in a single company, industry, or asset class, you are setting yourself up to lose everything.
     
  20. JeopardE

    JeopardE Contributing Member

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    Actually this is the regulatory failbasket I'm talking about. The complete maverick nature of hedge funds and the fact that they can do pretty much whatever they want and not have to worry about the SEC watching what they do is a HUGE problem.

    And to make matters worse, this guy wasn't even technically running a hedge fund. He was a "market maker", and hedge funds gave him money to invest. The former chairman of GMAC's fund got wiped out as a result of this.

    It's hard to even blame his victims for not doing due diligence. This guy sent them monthly statements that looked as legitimate as anything, even detailing individual stock transactions and their prices. Former stock brokers were fooled. Only the SEC could have stopped this guy, but they never bothered to since he had this amazing reputation.
     
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