Madoff Ponzi Scheme
2139 will be the year Bernie Madoff will be allowed to walk from prison after serving his prison sentence of 150 years, if at all. The proclaimed architect of a Ponzi scheme that runs into an alleged $50 billion, the Madoff case is one that reeks of greed and betrayal. That Bernie Madoff could single handedly swindle, without the knowledge of the SEC, banks and discerning investors seems next to impossible. Investors were happy with their steady returns, a steady 8-12% come economic rain or hail. It did not seem to spring any alerts.
Victims included charities, small investors, hedge funds, pension funds and the like. Despite Madoff’s repeated plea that he alone was responsible for the fraud, his accountant, his key aide Frank DiPascali and a few other employees have been indicted.
Despite concerns among several financial professionals in banks with whom Mr. Madoff did business, they worked with the principle of “don’t ask”, rather than undertaking an investigation as to how Madoff managed to give the returns he did. Concerns aside they allowed access to Madoff to client funds. Madoff conveyed to the trustee team “I am saying that the banks and funds were complicit in one form or another.”
Court appointed trustee Irving H. Picard has helped get back $10 billion in the fund to settle claims by victims.
Madoff’s scheme was shrouded in secrecy, its details never made available to investors and yet he was almost a cult figure in investment circles, renowned for his strategy that helped investors get a steady rate of return year after year. The burgeoning size of the money he managed, plus the opacity of his transactions should have had the alarm bells doing overtime. Instead for almost a decade, the SEC chose to not seriously consider alerts by Harry Markoplos (a former president of the Boston CFA Society, he worked at Boston-based Rampart Investment Management Co., 1991-2004)
Madoff said he used the split-strike conversion strategy to achieve his rate of returns. This meant he invested in diversified options to reduce volatility. In a rivulet of information that came from Madoff he stated that he traded in the S\&P index.
In retrospect there is a long list of checks that should have been undertaken from time to time, which would have greatly diminished the size and impact of the fraud.
Madoff’s firm Bernie L. Madoff Investment Securities LLC, (BMIC in short) looked like a hedge fund. He already had a large brokerage firm, and had built a reputation of being a trendsetter, with its extensive use of technology in trading. His funds came from other hedge funds, which worked as feeders. He in turn, supposedly used these funds for trades mostly abroad, which supposedly helped him hedge risk and give his smooth returns even when the S\&P index slipped.
Stock holding positions were liquidated every quarter to avoid big reporting positions. No details were made available to the feeder funds or their customers, this from a man who used technology to redefine broking. His fairly conservative returns and impeccable reputation made him an attractive source to invest in for high net worth individuals and non-profit organizations alike. His feeders themselves had an impeccable reputation with some top end accountants, unlike BMIC’s rather unknown three-man auditor firm.
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