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* DECEMBER 12, 2008
Top Broker Accused of Fraud
<http://online.wsj.com/article/SB122903010173099377.html>http://online.wsj.com/article/SB122903010173099377.<http://online.wsj.com/article/SB122903010173099377.html>html
Madoff, Money Manager for the Wealthy, Said to Have Run '$50 Billion
Ponzi Scheme'
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."
[Bernard Madoff]
Image from Madoff.com
Bernard Madoff
More
* <http://online.wsj.com/documents/SECrelease.doc>SEC Press
Release on Madoff's Case
* <http://online.wsj.com/documents/SECcomplaint.pdf>SEC Complaint
* <http://online.wsj.com/documents/MadoffArrest.pdf>Press Release
on Madoff's Arrest
* <http://online.wsj.com/documents/madoffcomplaint.pdf>Criminal Complaint
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."
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 70-year-old Mr. Madoff is the founder and primary owner of
Bernard L. Madoff Investment Securities LLC. The firm is primarily
known for its business in market-making, or 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.
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.
According a person familiar with the firm, the two unnamed senior
employees in the complaint are Mr. Madoff's sons, Andrew and Mark.
Mark Madoff is the firm's senior managing director and chief
compliance officer. Andrew Madoff is its director of trading.
A call to the sons' attorney was not returned.
The firm's trading arm, where the sons work, does not appear to be
implicated in the complaints. But because all of its businesses were
under the same umbrella, it threatens the solvency of the entire firm.
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.
After his arrest by FBI officers, federal prosecutors in Manhattan
charged Mr. Madoff with criminal securities fraud. 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 to comment after the hearing.
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."
On Tuesday, the complaint alleges, Mr. Madoff told one of the
employees he wanted to pay bonuses to employees this month, which was
earlier than usual.
The next day, the pair met with Mr. Madoff at his office to ask about
the bonus situation because he had been under "great stress" in prior
weeks, they told the FBI. Mr. Madoff refused to answer their
questions and arranged to meet at his Manhattan apartment, the complaint says.
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 quotes
one of them as saying. 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 Mr. Madoff used was the Palm Beach
Country Club -- the exclusive golf and beach club in Palm Beach that
counts some of the area'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.
Since its inception almost a half-century ago, the Madoff firm has
been a family affair. Mr. Madoff's brother, Peter Madoff, joined the
firm around 1970 and is the senior managing director. Peter Madoff
did not return calls for comment.
The two sons, Andrew and Mark, have worked for the securities firm
since graduating from college 20 or so years ago. Neither is involved
in the asset management business that their father runs, according to
a person familiar with the situation.
Mr. Madoff started his firm with $5,000 saved from a lifeguard job at
Rockaway Beach in Queens and a job installing underground sprinkler
systems, according to a report in a trade magazine, "Wall Street + Technology."
"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.
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.
U.S. District Judge Louis Stanton, who is overseeing the SEC's case
against Mr. Madoff and his firm, appointed Lee Richards, a Manhattan
lawyer, as the firm's receiver in order to preserve its assets and
accounts outside the U.S. The judge also ordered the defendants not
to move assets. At a hearing on Friday the judge will consider the
SEC's request to grant powers to the receiver over the entire firm,
and a complete asset freeze.
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Lord, may everything we do begin with Your inspiration and continue
with Your help,
so that all our prayers and works may begin in You and by You be happily ended.
We ask this through Christ our Lord.
Amen.
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