Biggest Fraud in History $50 billion Madoff Ponzi Scheme

By: Mike_Shedlock

The Madoff fraud story gets Curiouser and Curiouser . Let's take at the headlines starting from the top.

Bernard Madoff arrested over alleged $50 billion fraud - Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion "Ponzi scheme" in what may rank among the biggest fraud cases ever.

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.

Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him.

Fund Fraud Hits Big Names

Madoff's Clients Included Mets Owner, GMAC Chairman, Country-Club Recruits

New potential victims emerged of Wall Street veteran Bernard Madoff's alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses.

New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history's largest financial scam.

Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter.

And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.

"I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.

Madoff ‘Big Lie' Hits Hedge Funds

European firms Union Bancaire Privee, Bramdean Alternatives Ltd. and Pioneer Alternative Investments were clients of funds invested with Bernard Madoff, who allegedly confessed to running “a giant Ponzi scheme.”

Madoff's firm told investors it had just eight losing months in seven years, returns that were difficult for some to resist.

“Whenever a fund had money with Madoff, it raised a red flag,” said Konig [chief investment officer for Artemis Capital Partners LLC in Aventura, Florida, which invests with hedge funds], who said he rejected at least 20 funds of funds as potential investments for that reason alone. “It means that they didn't do their due diligence they were supposed to and were chasing those returns.”

Madoff fraud case raises questions about SEC

The stunning fraud Wall Street pillar Bernard Madoff is accused of has raised questions about whether federal regulators were lax in failing to scrutinize his operations and respond to alarms raised about them.

Madoff, a former chairman of the Nasdaq Stock Market, was influential and his self-named securities firm cut a high profile in Wall Street circles. SEC inspectors would have performed regular inspections of his securities brokerage operations as part of the agency's oversight program.

SEC officials stress that it was Madoff's separate and secretive investment-adviser business that was used to perpetrate the alleged scheme, and that examinations of the securities operations wouldn't necessarily have detected irregularities. The hedge fund business didn't register with the SEC until September 2006.

"If the SEC didn't come in and inspect (the Madoff hedge fund), then they have a hell of a lot to answer for," said James Cox, a Duke University law professor and securities law expert.

Other SEC critics questioned how Madoff could pull off, without the agency's notice, such an audacious fraud that prosecutors said amounted to a giant Ponzi scheme.

"The agency can't help but look bad," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does raise questions ... about the quality of the enforcement division generally. It's obviously something that the new (Obama) administration has to get to the bottom of."

Madoff - Did Your Trades Clear?

Yeah, the SEC couldn't see that coming. Uh huh.

Never mind that they were apparently warned several years ago in written communications that Madoff's "returns" were highly abnormal given the published strategies he was using and the numbers he was posting.

Investigate? What's that? Why, that's unamerican!

Now we have $50 billion in fraud and, apparently, $17 billion that is just plain old-fashioned missing. And Madoff's company, just so we're all in the know here, is a market maker on Nasdaq, which means that a lot of other people's money (and shares) pass through his hands.

Finally, let us never forget that there is never only one cockroach. Who knew, who was and is complicit, and how many more cockroaches are behind the wall?

U.S. Judge Freezes Madoff Assets, Appoints Receiver, SEC Says

A federal judge in New York froze the assets of New York investment adviser Bernard L. Madoff and his firm a day after the 70-year-old was arrested in a potential $50 billion fraud, regulators said.

U.S. District Judge Louis Stanton in Manhattan today granted a government request to give “emergency relief” to investors by freezing Madoff's assets and appointing a receiver, the U.S. Securities and Exchange Commission said on its Web site.

Madoff confessed to his two sons, who work for him, that the business bearing his name was a fraud that cost clients $50 billion. The sons told the FBI, according to their lawyer. Federal agents arrested Madoff yesterday morning at his Manhattan apartment. He is free on a $10 million bond.

I Knew Bernie Madoff Was Cheating, That's Why I Invested with Him

We're hearing that the smart money KNEW Bernie had to be cheating, because the returns he was generating were impossibly good. Many Wall Streeters suspected the wrong rigged game, though: They thought it was insider trading, not a Ponzi scheme. And here's the best part: That's why they invested with him.

One Madoff investor, himself a legend, told me that Madoff's performance "just doesn't make sense. The numbers can't be straight." Another sophisticated Madoff investor actually went through trade confirms in order to reverse-engineer the strategy and said, "it doesn't add up."

So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn't consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme.

Good grief. Anyone who invested with Madoff thinking he was gaining on insider trading deserves to lose it all.

Right, wrong, or indifferent, massive regulation and crackdowns on hedge funds are in store for 2009. Those crackdowns will cut the number of funds in half if not more. Unfortunately, even those who run a clean ship will be affected by the cost of the massive regulation that is without a doubt coming.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

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