Rich investors 'wiped out' by Wall Street fraud

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Rich investors 'wiped out' by Wall Street fraud

Broker who delivered huge returns is charged with $50bn swindle carried out over decades

By David Randall
Sunday, 14 December 2008

Some victims of Wall Street's biggest fraud – planned and carried out over decades by one of its most respected figures – are as yet unaware that their entire savings have been wiped out, financial experts in New York said yesterday. Such is the extent of Bernard Madoff's alleged $50bn (£34bn) swindle, and so convoluted its paper trail of derivatives, that this weekend there will be Americans under the impression they are rich who are oblivious that their wealth had been placed in Mr Madoff's apparently criminal hands, and is therefore now lost.


Enough details of the fallout were emerging yesterday to begin to judge the mayhem this one-time chairman of Nasdaq, and Democratic Party and Jewish charity benefactor, has wreaked. Those likely to have lost everything include a Jewish charity that had its $7m assets lodged with Mr Madoff's firm, and had to lay off its staff on Friday, and Manhattan and Florida socialites. Many, in the words of an investigator, are now "destitute". Corporate losers include Nicola Horlick (pictured, inset), the British hedge-fund manager known as "Superwoman" for her hectic private and business lives, whose Bramdean Alternatives seems to have lost at least £10m; and, reportedly, the Japanese brokerage house Nomura.

Meanwhile, Mr Madoff, who until a few days ago was courted by investors desperate to be allowed to join his select client list, is out on bail, seemingly resigned to the penal fate that awaits. He appears to be co-operating fully with investigators from the FBI and the Securities and Exchange Commission (SEC), and a court-appointed receiver is trying to "secure the assets, funds and location" of his businesses and "determine the scope of the misconduct". It may take some time.

What, essentially, Mr Madoff operated was a pyramid scam, whereby investors were paid a good return (10-12 per cent a year) out of funds they and new clients were putting in. It worked as long as the chips being cashed did not exceed those coming in.

The countdown to Mr Madoff's endgame began a few weeks ago when he started, in the opinion of senior colleagues (two of whom are his sons), to show visible signs of stress. About a week ago, he told a colleague that withdrawals requested by clients totalled $7bn – a sum he was "struggling" to find. Last Tuesday, he said he wanted staff bonuses paid two months early (presumably so the staff could walk from the wreckage with something), and the next day, an alarmed executive went to Mr Madoff and demanded an explanation. Nemesis had arrived.

On Thursday, Mr Madoff called two of the firm's senior officers to his apartment and confessed. He told them he was "finished", that he had "absolutely nothing", that the firm was "all just one big lie". They contacted the authorities, and his arrest on a single fraud charge followed.

Alexander Vasilescu, trial chief of the SEC, said it was "way too premature" to assess how much money investors in Bernard L Madoff Investment Securities might get back. Stephen Weiss, a lawyer representing a number of investors, said he had spoken to at least 30 of them, and some had entrusted all their savings to Mr Madoff. He said: "These people are panicked. These people are sorrowful. These people are angry. And many are now destitute."

One investor, Lawrence Velvel, 69, dean of the Massachusetts School of Law, said he and a friend may have lost millions of dollars. "This is a major disaster for a lot of people," he said. "You work all your life, you finally manage to save up something, and somebody who's entrusted with it, it turns out suddenly he's a crook. Lots of people are getting fully or partially wiped out."

According to a criminal complaint filed with the court, Mr Madoff told senior employees he had blown more than £33bn with fraudulent financial moves. The complaint said he handled investments for about 25 clients, but lawyers for investors said the number probably ran much higher. Some estimates ran into the hundreds.

Mr Madoff founded his firm in 1960, using £3,300 he earned in part as a lifeguard on Long Island beaches. Some financial insiders have been suspicious for years about the steady monthly returns he paid, even when the markets were in freefall.

Madoff's double life: 'He wouldn't talk about how he made money'

Bernard Madoff, it now turns out, led a double life for years. In public, he was the discreet golfing socialite, member of exclusive clubs in Long Island and Florida, and giving generously to Democrat and Jewish causes. But, in his Manhattan office, he operated behind a wall of secrecy. Although he gave detailed trading statements to clients, the vital books at the centre of the alleged scam were kept under lock and key in his office. A Wall Street professional who once worked with a firm that did business with Mr Madoff's empire said yesterday: "He did not have a reputable auditor... He wouldn't talk to you about how he made money. He met with very, very few people, and, if you did meet him, you got 20 minutes." SEC investigators said he was rather more forthcoming with the FBI on Friday, telling them there was "no innocent explanation" and that he had "paid investors with money that wasn't there."