Traders Magazine
January 01, 1997
The Madoff Mystery
BYLINE: John A. Byrne
Bernard L. Madoff Investment Securities spent four years and millions
preparing for the months ahead. One word sums up growth expectation:
unprecedented
They shake their heads in disbelief. Why is Bernard L. Madoff Investment
Securities one of the few trading firms on Wall Street enthralled with
the SEC's order handling rules? That is the question some puzzled rivals
ask.
Astonishment, jealously. These are the reactions of those out of touch
with the privately-owned family firm that occupies the 17th and 18th
floors of the midtown Manhattan skyscraper nicknamed the lipstick building.
But there's no question here: Madoff is a firm in a hurry. A pioneer and
leader in third market trading of retail-size New York Stock Exchange
issues, soaked in capital of $175 million, the firm said its overall
business has been growing at an annual rate of 20 percent.
That growth is propelled in part by new products, including the 'time
slicing' of large orders, a promising London operation, Web site access
and more off-board executions of listed order flow than any of its
estimated 80 competitors: 10 percent of NYSE transaction volume. On
Nasdaq, Madoff executes roughly 40,000 trades daily.
More dramatically, Madoff is confident business is on the verge of an
important expansion phase - driven by the new rules - especially in
third market trading. Some Wall Street experts expect the cost of doing
business to force some Nasdaq and third market firms out of the
business. At Madoff, one word sums up the firms growth expectation:
unprecedented.
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NY Times, December 15, 2008
Fraud Inquiry Centers on Investment Firm’s Sanctum
By DIANA B. HENRIQUES and ALEX BERENSON
The epicenter of what may be the largest Ponzi scheme in history was the
17th floor of the Lipstick Building, an oval red-granite building rising
34 floors above Third Avenue in Midtown Manhattan.
A busy stock-trading operation occupied the 19th floor, and the
computers and paperwork of Bernard L. Madoff Investment Securities
filled the 18th floor.
But the 17th floor was Bernie Madoff’s sanctum, occupied by fewer than
two dozen staff members and rarely visited by other employees. It was
called the “hedge fund” floor, but federal prosecutors now say the work
Mr. Madoff did there was actually a fraud scheme whose losses Mr. Madoff
himself estimates at $50 billion.
The tally of reported losses climbed through the weekend to nearly $20
billion, with a giant Spanish bank, Banco Santander, reporting on Sunday
that clients of one of its Swiss subsidiaries have lost $3 billion. Some
of the biggest losers were members of the Palm Beach Country Club, where
many of Mr. Madoff’s wealthy clients were recruited.
The list of prominent fraud victims grew as well. According to a person
familiar with the business of the real estate and publishing magnate
Mort Zuckerman, he is also on a list of victims that already included
the owners of the New York Mets, a former owner of the Philadelphia
Eagles and the chairman of GMAC.
And the 17th floor is now an occupied zone, as investigators and
forensic auditors try to piece together what Mr. Madoff did with the
billions entrusted to him by individuals, banks and hedge funds around
the world.
So far, only Mr. Madoff, the firm’s 70-year-old founder, has been
arrested in the scandal. He is free on a $10 million bond and cannot
travel far outside the New York area.
According to charges against Mr. Madoff, his firm paid off earlier
investors with money from new investors, fitting the classic definition
of a Ponzi scheme. It unraveled as markets declined and many investors
who lost money elsewhere sought to withdraw money from their investments
with Mr. Madoff.
But a question still dominates the investigation: how one person could
have pulled off such a far-reaching, long-running fraud, carrying out
all the simple practical chores the scheme required, like producing
monthly statements, annual tax statements, trade confirmations and bank
transfers.
Firms managing money on Mr. Madoff’s scale would typically have hundreds
of people involved in these administrative tasks. Prosecutors say he
claims to have acted entirely alone.
“Our task is to find the records and follow the money,” said Alexander
Vasilescu, a lawyer in the New York office of the Securities and
Exchange Commission. As of Sunday night, he said, investigators could
not shed much light on the fraud or its scale. “We do not dispute his
number — we just have not calculated how he made it,” he said.
Scrutiny is also falling on the many banks and money managers who helped
steer clients to Mr. Madoff and now say they are among his victims.
Mr. Madoff was not running an actual hedge fund, but instead managing
accounts for investors inside his own securities firm.
While many investors were friends or met Mr. Madoff at country clubs or
on charitable boards, even more had entrusted their money to
professional advisory firms that, in turn, handed it to Mr. Madoff — for
a fee. Investors are now questioning whether these paid advisers were
diligent enough in investigating Mr. Madoff to ensure that their money
was safe. Where those advisers work for big institutions like Banco
Santander, investors will most likely look to them, rather than to the
remnants of Mr. Madoff’s firm, for restitution.
Santander may face $3.1 billion in losses through its Optimal Investment
Services, a Geneva-based fund of hedge funds that is owned by the bank.
At the end of 2007, Optimal had 6 billion euros, or $8 billion, under
management, according to the bank’s annual report — which would mean
that its Madoff investments were a substantial part of Optimal’s portfolio.
A spokesman for Santander declined to comment on the case.
Other Swiss institutions, including Banque Bénédict Hentsch and Neue
Privat Bank, acknowledged being at risk, with Hentsch confirming about
$48 million in exposure.
BNP Paribas said it had not invested directly in the Madoff funds but
had 350 million euros, or about $500 million, at risk through trades and
loans to hedge funds. And the private Swiss bank Reichmuth said it had
385 million Swiss francs, or $327 million, in potential losses. HSBC,
one of the world’s largest banks, also said it had made loans to
institutions that invested in Madoff but did not disclose the size of
its potential losses.
Calls to Mr. Zuckerman and his representatives were not returned on
Sunday night.
Losses of this scale simply do not seem to fit into the intimate
business that Mr. Madoff operated in New York.By the elevated standards
of Wall Street, the Madoff firm did not pay exceptionally well, but it
was loyal to employees even in bad times. Mr. Madoff’s family filled the
senior positions, but his was not the only family at the firm —
generations of employees had worked for Madoff and invested their
savings there.
Even before Madoff collapsed, some employees were mystified by the 17th
floor. In recent regulatory filings, Mr. Madoff claimed to manage $17
billion for clients — a number that would normally occupy far more than
the 20 or so people who worked on 17.
One Madoff employee said he and other workers assumed that Mr. Madoff
must have a separate office elsewhere to oversee his client accounts.
Nevertheless, Mr. Madoff attracted and held the trust of companies that
prided themselves on their diligent investigation of investment managers.
One of them was Walter M. Noel Jr., who struck up a business
relationship with Mr. Madoff 20 years ago that helped earn his
investment firm, the Fairfield Greenwich Group, millions of dollars in
fees. Indeed, over time, one of Fairfield’s strongest selling points for
its largest fund was its access to Mr. Madoff.
But now, Mr. Noel and Fairfield are the biggest known losers in the
scandal, facing potential losses of $7.5 billion, more than half the
firm’s assets.
Jeffrey Tucker, a Fairfield co-founder and former federal regulator,
said in a statement posted on the firm’s Web site: “We have worked with
Madoff for nearly 20 years, investing alongside our clients. We had no
indication that we and many other firms and private investors were the
victims of such a highly sophisticated, massive fraudulent scheme.”
The huge loss comes at a time when the hedge fund industry has already
been wounded by the volatile markets. Several weeks ago, Fairfield had
halted investor redemptions at two of its other funds, citing the tough
market conditions as dozens of hedge funds have done. The firm reported
a drop of $2 billion in assets between September and November.
Fairfield was founded in 1983 by Mr. Noel, the former head of
international private banking at Chemical Bank, and Mr. Tucker, a former
Securities and Exchange Commission official. It grew sharply over the
years, attracting investors in Europe, Latin America and Asia.
Mr. Noel first met Mr. Madoff in the 1980s, and Fairfield’s fortunes
grew along with the returns Mr. Madoff reported. The two men were very
different: Mr. Madoff hailed from eastern Queens and was tied closely to
the Jewish community, while Mr. Noel, a native of Tennessee, moved in
the Greenwich social scene with his wife, Monica.
“He was a person of superb ethics, and this has to cut him to the
quick,” said George L. Ball, a former executive at E. F. Hutton and
Prudential-Bache Securities who knows Mr. Noel.
Fairfield boasted about its investigative skills. On its Web site, the
firm claimed to investigate hedge fund managers for 6 to 12 months
before investing. As part of the process, a team of examiners conducted
personal background checks, audited brokerage records and trading
reports and interviewed hedge fund executives and compliance officials.
In 2001, Mr. Madoff called Fairfield and invited the firm to inspect his
books after two news reports questioned the validity of his returns,
according to a person close to Fairfield. Outside auditors hired to
inspect Mr. Madoff’s operations concluded that “everything checked out,”
this person said.
The Fairfield Greenwich Group “performed comprehensive and conscientious
due diligence and risk monitoring,” Marc Kasowitz, a lawyer for
Fairfield, said in a statement. “FGG, like so many other Madoff clients,
was a victim of a highly sophisticated massive fraud that escaped the
detection of top institutional and private investors, industry
organizations, auditors, examiners and regulatory authorities.”
Now, Fairfield is seeking to recover what it can from Mr. Madoff.
“It is our intention to aggressively pursue the recovery of all assets
related to Bernard L. Madoff Investment Securities,” Mr. Tucker said in
a statement. “We are also committed to the operation of our continuing
funds. We hope to have a better idea of the entire situation as the
facts develop.”
Working alongside the federal investigators on Madoff’s 17th floor,
staff workers for Lee S. Richards 3d, the court-appointed receiver for
the firm, are trying to determine what parts of the firm can keep
operating to preserve assets for investors.
“We don’t have anything to report to investors at this time,” he said.
“We are doing everything we can to protect the assets of the Madoff
entities that are subject to the receivership, and to learn what we can
about the operations of those entities.”
Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced and
Nelson D. Schwartz contributed reporting.
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