Scandal: Madoff’s Long Con

Updated June 29, 2009

The Dec. 11 arrest of legendary money manager Bernard Madoff on charges of securities fraud left Wall Street reeling in disbelief. His investment advisory business, Madoff admitted, was “all just one big lie”: He had been operating—supposedly singlehandedly—a massive and long-running Ponzi scheme.

Bernard MadoffMadoff told investigators that the losses exceeded $50 billion. His clients’ November 2008 account statements showed balances of nearly $65 billion

Madoff’s years on Wall Street earned him a reputation as a financial whiz and a run as the chairman of the Nasdaq Stock Market. His firm, Bernard L. Madoff Investment Securities, was known primarily as a brokerage business, but Madoff personally ran a nearly autonomous branch, an investment advisory business. Madoff’s golden reputation prompted private investors, hedge funds and charities to invest heavily in the advisory firm, which operated with a level of secrecy unusual even in the shadowy world of hedge funds. It is from this branch that he operated the Ponzi scheme.

Madoff’s firm was remarkably successful, generating 1 percent monthly returns like clockwork and reporting gains even as the market plummeted this year. Those returns were largely contrived, SEC officials say now, and the scheme appears to have unraveled due to the market crisis.

Having finally run out of money, Madoff confessed to his sons, who turned him in. His subsequent confession to federal authorities prompted the question, where exactly was the SEC during all of this?

Madoff registered the investment advisory business with the SEC in 2006 but it hadn’t been inspected before Madoff’s arrest, despite the SEC’s goal of scrutinizing new advisors within their first year.

In 1992 the SEC investigated Madoff as part of its lawsuit against two Florida accountants but determined that “investors’ money was all accounted for.”

The SEC opened two subsequent investigations into the company, one in 2005 and one in 2007, following years of accusations from tipsters and news reports. (One of those tipsters wrote to the SEC in 1999, “Madoff Securities is the world’s largest Ponzi Scheme.”) The SEC found three technical violations in 2005 and no evidence of wrongdoing in 2007.

Another skeptic hired a private investigator who found that the accounting firm Madoff’s company used to monitor its billions until November 2006 “had only three employees, one of whom was 78 and lived in Florida, and another was a secretary, and that it operated in a 13 foot by 18 foot office.”

The Wall Street Journal reports that Madoff’s “money-management business appears to have fallen into a regulatory gray zone for years.”

Madoff pleaded guilty to all charges on March 12. He was sentenced to 150 years in prison on June 29. Fraud charges have also been filed against: Madoff’s accounting firm; Fairfield Greenwich Group, the largest of the Madoff “feeder funds”; and J. Ezra Merkin, a money manager who also fed his clients’ money into Madoff’s business.

In June, ProPublica reported that a Madoff client, Jeffry Picower, and his family withdrew $5.1 billion more than they originally invested with Madoff’s firm, according to a lawsuit filed by the trustee who is trying to recover the money for victims of Madoff’s scheme.

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Latest Stories

Another Madoff Aide Faces Fraud Charges New York Times, 2/26

S.E.C. Enforcers Focus on Avoiding Madoff Repeat New York Times, 2/9

Meant to Be a Safety Net, Bank Custodians Tangle Investors New York Times, 1/8

Madoff Auditor Plea May Signal Other Probe Wall Steet Journal ($), 12/10

After Madoff, Few Charities Go Public With Reforms The Forward, 12/3

Madoff Trustee: Philanthropist Got $1 Billion in Fake Profit Boston Globe, 12/2

Trustee Seeks Billions for Madoff Investors New York Times, 11/10

How Technology Aided Madoff’s Scam Securities Industry News, 11/4

Picower’s Madoff Take Now Estimated to Be $7.2 Billion ProPublica, 10/1

Wells Fargo Exec Said to Use Home Lost by Madoff Victims Los Angeles Times, 9/11

The Madoff Tape: How Bernie Coached Others to Fool the SEC ABC News, 9/10

SEC’s Madoff Probe Botched by Inexperience Washington Post, 9/9

The Madoff Files: A Chronicle of SEC Failure Washington Post, 9/3

Picower: Charges of Complicity With Madoff “Baseless” ProPublica, 7/31

Madoff Gives Feeder Fund Managers’ Names to Lawyer Reuters, 7/30

Madoff Interview: I Can’t Believe I Got Away With It ABC News, 7/29

Prison Consultants Help Inmates Get Good Digs AP, 7/28

Ruth Madoff’s Passport Returned in Sign She Won’t Be Charged ABC News, 7/8

Staffer at SEC Had Warned Of Madoff Washington Post, 7/2

SEC Dines With Those it Regulates Politico, 7/1

Madoff Gets 150 Years; His Client Jeffry Picower Gets $5 Billion ProPublica, 6/29

Madoff Client Jeffry Picower Netted $5 Billion—Likely More Than Madoff Himself ProPublica, 6/23

Did the Madoff Sons Know? Vanity Fair, 6/18

Fairfield Hit With Lawsuit Over Madoff Wall Street Journal ($), 5/19

Madoff Victims Investigated Wall Street Journal ($), 5/18

The Madoff Affair: How Did He Do It? PBS Frontline, 5/13

Records Show Billions Withdrawn Before Madoff Arrest New York Times, 5/13

Auditing the Audit Firms ProPublica, 5/10

Trustee Sues Madoff Hedge Fund Investor New York Times, 5/8

Bernard Madoff’s $100,000 Monthly Amex Bills ABC News, 5/7

GAO: SEC Hindered Probes, Slowed Cases, Shrank Fines Bloomberg, 5/6

Suit: Madoff Family Got Ponzi Funds Wall Street Journal ($), 5/6

Feds Aim to Retrieve profits From Those Who Cashed Out on Madoff Deals New York Daily News, 4/27

Judge Blocks Transfer of Madoff Property New York Times, 4/21

Madoff’s Car to Be Seized New York Times, 4/15

Connecticut Town Secures Assets in Madoff Lawsuit Reuters, 4/14

Investors Push Madoff Toward Bankruptcy CNN, 4/13

Madoff Niece Contacts Prison Consultant New York Post, 4/13

This Week in Scandals: Bailout Moves Threaten to Backfire ProPublica, 4/10

Madoff Trustee Sues Investors to Recover Funds Wall Street Journal ($), 4/10

SEC Seeks to Block Bid to Force Madoff into Bankruptcy Bloomberg, 4/8

Merkin Was Warned About Madoff by a Wall Street Legend New York Times, 4/8

More Buyers Step Up to Buy Madoff Unit, Lawyer Says Reuters, 4/8

In Bernie Madoff Probe, Financial Adviser Dodges Questions New York Daily News, 4/7

Madoff Scandal Casts Light on Investment Advisers New York Times, 4/7

Ruth Madoff’s Private World The Daily Beast, 4/7

Financier Charged in Madoff Fraud Wall Street Journal ($), 4/7

Agreement Gives Madoff Brother Spending Money AP, 4/6

Peter Madoff Judge Likely to Accept Modified Freeze Bloomberg, 4/3

Bernard Madoff’s Assets in Florida Seized Miami Herald, 4/3

Madoff Feeder Is Charged in Fraud Wall Street Journal ($), 4/2

Exec at Madoff Feeder Fund Lived Large Wall Street Journal, 3/31

Madoff’s U.K. Business ‘Played Significant Role’ Wall Street Journal, 3/27

Judge Freezes Madoff Brother’s Assets New York Times, 3/26

Control of Madoff’s London Firm Shifts to Trustee New York Times, 3/25

Size of Madoff’s Fla. Home May Leave It Vulnerable to Creditors Palm Beach Post, 3/25

Senate Dems Hold on to Madoff Money Washington Times, 3/25

Couple’s Dreams of Immortality at Death’s Door, Thanks to Madoff Wall Street Journal ($), 3/24

Madoff Trustee Finds $75 Million in Gibraltar New York Times, 3/24

Madoff Employee Breaks Silence Daily Beast, 3/23

Madoff Employee Offers Window Into Firm Wall Street Journal ($), 3/23

Madoff Lawyer Presses for Bail New York Times, 3/19

Ponzi Scheme Victims All Missed an Easy Clue: Bogus Auditors Bloomberg, 3/19

Madoff’s Accountant Is Charged With Securities Fraud New York Times, 3/18

Prosecutors Target Madoff Cash, Bonds and Homes Wall Street Journal ($), 3/17

Madoffs’ Palm Beach Mansion Gets Tax Break Palm Beach Post, 3/17

IRS Plans a Deduction for Madoff Victims New York Times, 3/17

Madoff Lists $826 Million in Assets, Give or Take Wall Street Journal ($), 3/16

Madoff Had Accomplices: His Victims New York Times, 3/16

Feds Looking to Freeze Ruth Madoff’s Assets New York Post, 3/16

How Madoff Duped His Closest Friends Vanity Fair, 3/13

Madoff to Appeal Jailing Wall Street Journal ($), 3/13

This Week in Scandals: Merrill Probes and Madoff’s Plea ProPublica, 3/13

Despite Madoff Guilty Plea, Questions Swirl and Rage Boils Washington Post, 3/13

Questions Remain in Madoff Drama Financial Times, 3/12

Madoff Speaks: The Plea Allocution Wall Street Journal ($), 3/12

Madoff Is Jailed After Pleading Guilty New York Times, 3/12

Financial Fraud Is Focus of Attack by Prosecutors New York Times, 3/12

Filing: Madoff Used UK Office in Cash Ploy Wall Street Journal ($), 3/12

As ‘Clawback’ Suits Loom, Some Madoff Investors Seek Cover Wall Street Journal ($), 3/12

Prosecutors Keep Hunting for Madoff Aiders and Abettors Wall Street Journal ($), 3/11

Madoff Investors Were Told They Had a Total of $64.8 Billion Wall Street Journal ($), 3/11

The Next Targets in the Madoff Case Daily Beast, 3/11

Madoff to Plead Guilty to Fraud New York Times, 3/10

Madoff Signals Possible Guilty Plea Wall Street Journal ($), 3/9

Madoff Aide Allegedly Got Fake Trading ‘Tickets’ Wall Street Journal ($), 3/9

Ruth Madoff Gets Her Own Attorney Newsday, 3/9

NJ Gov To Give Away Madoff Donations AP, 3/6

SEC to Revamp How It Reviews Whistleblower Tips Reuters, 3/6

This Week in Scandals: AIG Anger, Madoff Moves and More ProPublica, 3/6

Doubt Cast on $50 Billion Figure in Madoff Case AP, 3/6

U.K. Expanding Its Madoff Probe Wall Street Journal ($), 3/5

Madoff Gives Up Rights to Investment Business AP, 3/4

The Family Behind Fairfield Greenwich Group Vanity Fair, 3/3

Ruth Madoff Tries to Hang on to Assets New York Times, 3/3

Members Partied With ‘Mini-Madoff’ Politico, 3/3

Fairfield Greenwich Says Madoff Provided Bad Data Wall Street Journal ($), 3/2

The Inside Story on the Breakdown at the SEC Time, 3/2

Money Was Transferred Before Madoff Arrest Wall Street Journal ($), 2/27

Conn. Lawmakers Propose Stiff Hedge Fund Oversight Hartford Business, 2/25

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