Page last updated at 15:24 GMT, Thursday, 12 March 2009

Madoff's road to riches ends in court

Madoff arrives at court 12/03/09

By Kabir Chibber
Business reporter, BBC News

Bernard Madoff's journey has taken him from humble beginnings to becoming a wealthy US financier, and now to a man facing the rest of his life in prison.

The shock generated by the news that Madoff had masterminded the biggest Ponzi schemes in US history shows just how much respect he had in New York and beyond.

The fraudster began his financial career at the age of 22 with $5,000 (3,600) put together from summer holiday jobs such as working as a garden sprinkler installer in the New York borough of Queens before setting up Bernard L Madoff Investment Securities in 1960.

He was well known on Wall Street as his firm became one of the biggest market-makers - matching up buyers and sellers of stocks - and eventually served as chairman of the Nasdaq stock exchange.

He seemed, by all accounts, to be one of the elite that he stole from.

Highly respected

Madoff lived in his $7m Manhattan apartment most of the time, but also owned a mansion in Florida and a 55-ft fishing boat called Bull.

Madoff's home in Palm Beach lies empty
Madoff's home in Palm Beach lies empty

Though he managed money from institutions and banks, many of Madoff's clients were wealthy individuals he met in exclusive country clubs up and down the East Coast. Many of his biggest clients came from Palm Beach Country Club in Florida.

His appeal to some of the richest men and women in the country lay in his relaxed confidence. Madoff appears to have cultivated the air of a brilliant financial mind, which won over the people into whose ears he whispered at golf clubs.

Access to his funds was considered exclusive. Madoff chose his clients, not the other way around.

He was a philanthropist as well, which helped to maintain his position in high society. The charities, in turn, trusted their money to him.

One executive interviewed by the New York Times referred to him as "the Jewish T-bill," short for the almost risk-free US Treasury bill, because "he was that safe".

Trust betrayed

A Bernie Madoff piggy bank created by sculptor Palmer Murphy
A sculptor created a Madoff-shaped piggy bank that won't give money back

Accordingly, the close-knit Jewish community in New York and Florida has felt particularly betrayed by a man who served on the board of Yeshiva University and was a former treasurer of the American Jewish Congress. The Jewish Federation of Greater Washington, for example, had $10m invested with Madoff.

His various funds promised, and delivered, annual returns of over 10%. The court filing against him said he promised certain clients up to at least 46%.

But Madoff never told his clients how he made his incredible returns, not the highest on Wall Street but some of the most consistent.

US authorities say it was a Ponzi scheme, where money from new investors is used to pay off the old investors rather than any real returns.

Among those hurt were Elie Wiesel, the Nobel Peace Prize laureate; he lost his life savings and his charity lost $15.2 million. The Wilpons, who own a large part of the New York Mets baseball team, also lost huge amounts of money.

Reports say that Steven Spielberg's charity, the Wunderkinder Foundation, invested nearly 70% of its money with Madoff.

Besides high-worth individuals, even more money came to Madoff through investment advisory firms, pouring their money into his growing collection of hedge funds over the years.

Spanish bank Banco Santander said one its Swiss subsidiaries lost $3bn, while BNP Paribas said it had 350m euros in trades and loans to hedge funds that in turn invested with Madoff's funds. British banking giant HSBC is also in the same situation.

SEC investigations

One of the key issues now is how no-one noticed what was going on. Madoff's firm was investigated eight times by the US Securities and Exchange Commission over the past 16 years.

Harry Markopoulos worked for a rival firm and tried to simulate the returns that Madoff made. He couldn't. Mr Markopoulos came to the conclusion that something was very wrong with Madoff's funds.

Mr Markopoulos complained to the SEC several times from 2001 onwards. Even after he left that firm, he devoted his energies to uncovering what was at the heart of Madoff's amazing returns.

In 2005, Mr Markopoulos gave the SEC in New York a 21-page document. He concluded that Bernard L Madoff Investment Securities "is the world's largest Ponzi scheme."

The SEC's conclusion? "The staff found no evidence of fraud," a memo said. All they concluded was that Mr Madoff violated securities regulations by operating as an unregistered adviser.

'No innocent explanation'

As it goes, the end for Madoff came swiftly last December.

Investors, hurt by the financial downturn, had asked to withdraw about $7bn from his funds and he couldn't find the money to cover it.

On 9 December, alarm bells went off when Madoff asked to pay the employee bonuses early. On 10 December, he asked two senior employees to come to his Manhattan apartment.

There, according to court filings, Madoff told them his securities firm, which had paid out billions over the years, was "all just one big lie" and "basically, a giant Ponzi scheme".

Had the financial downturn not happened last year, who knows how long the scheme would have lasted.

Madoff told the stunned employees that he planned to turn himself in in one week but would first pay some employees and his family with the $300m he had left.

It was not to be. Agents from the Federal Bureau of Investigation visited him on 11 December. The FBI agent asked him if there was a way to explain away the losses. "There is no innocent explanation," Madoff told him.

He told the FBI agent he was "broke" and expected to go to jail.

That, and Thursday's guilty plea, may turn out to be the most honest words Madoff ever said.

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