Bernard Madoff - Ponzi Scheme

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Summary of the each of the 11 Counts is shown below [4]:

Count 1, Securities Fraud: Bernard L. Madoff Investment Securities Inc. (BLMIS) was a broker-dealer with three types of business: market making; proprietary trading; and investment advisory services. Madoff Securities International Ltd. (MSIL) was a U.K. affiliate engaged in proprietary trading.

From the 1980s through Dec. 11, 2008, Madoff ran a “massive Ponzi scheme” as he used false pretenses to solicit billions of dollars of funds. On Dec. 1, 2008, BLMIS issued statements to 4,800 account holders showing they had total balances of $64.8 billion. The firm held “a small fraction” of that balance.

Madoff took money from individuals, charities, trusts, pension funds and hedge funds. He did not invest the funds as he claimed and used it for his own purposes. He falsely promised to achieve high rates of return, with limited risk. He gave an impression that he ran “a legitimate investment advisory business in which client funds were actively traded as he had promised.” [4] He hired many employees who weren’t qualified for his back office. He constantly directed workers to generate false client account statements and trade confirmations that reflected fictitious returns and showed the firm bought and sold securities.

Madoff directed the transfer of $250 million from investment advisory clients’ funds to his trading businesses. Those transfers that were made through his London business gave a false impression as if he was conducting transactions in Europe on behalf of investors.

Madoff repeatedly lied to the Securities and Exchange Commission in written submissions and sworn testimony. He caused the creation of false financial statements about the business.

Count 2, Investment Adviser Fraud: From at least the 1980s through Dec. 11, 2008, [4] Madoff acted as an investment adviser for clients of BLMIS and employed devices and schemes to defraud clients and prospective clients.

Count 3, Mail Fraud: On Dec. 1, 2008, Madoff caused to be sent via the U.S. Postal Service a false and fraudulent account statement from BLMIS to a client in New York.

Count 4, Wire Fraud: On Aug. 5, 2008, as a part of a scheme to defraud, Madoff caused $2 million in investor funds to be wired from Bloomington, Minnesota, to New York.

Count 5, International Money Laundering to Promote Specified Unlawful Activity: From 2002 to December 2008, Madoff caused the transfer of funds from the BLMIS investor account in New York to MSIL accounts in London, and from those accounts to BLMIS accounts in New York. The money was derived from fraud in the sale of securities and theft from an employee benefit plan [4].

Count 6, International Money Laundering to Promote Specified Unlawful Activity: From 2006 to December 2008, Madoff caused the transfer of funds from BLMIS investor accounts in New York to MSIL accounts in London, then back to New York to give the false appearance that he was operating a legitimate investment advisory business. From 2002 to December 2008, he caused funds to be transferred from BLMIS accounts in New York to MSIL accounts in London, and from there to “purchase and maintain property and services for the personal use and benefit of Madoff, his family members and associates.” [4] The money was derived from fraud in the sale of securities and theft from an employee benefit plan.

Count 7, Money Laundering: On April 13, 2007, Madoff caused $54.5 million to be transferred from a BLMIS investor account in New York to a BLMIS account in London. The money was derived from fraud in the sale of securities and theft from an employee benefit plan.

Count 8, False Statements: On Jan. 7, 2008, Madoff caused the filing with the SEC of a Uniform Application for Investment Adviser Registration. The form falsely stated that BLMIS had custody of advisory clients’ securities.

Count 9, Perjury: On May 19, 2006, Madoff made “numerous false and misleading statements” under oath to the SEC. He falsely testified that his firm executed stock and options trades on behalf of investment advisory clients; had custody of assets managed on behalf of those clients; and used the same trading strategy for all its investment advisory clients.

Count 10, False Filing with the SEC: On Dec. 20, 2007, Madoff caused the filing of a false and misleading certified BLMIS audit report.

Count 11, Theft from an Employee Benefit Plan: On Sept. 24, 2008, Madoff stole $10 million in pension fund assets sent to BLMIS by a master trust on behalf of about 35 labor union pension plans.

Irving H. Picard is the court-appointed trustee representing Madoff’s victims in the U.S. At first he was seeking $100 billion in damages, but it had later become clear that it would be difficult to recover the originally invested $17.3 billion. It was ruled by a federal judge that Picard cannot file claims against banks or other third parties on behalf of the victims, so the $20 billion sought from JP Morgan Chase, UBS, and HSBC will not be recovered [5]. So far, around $9 billion has been recovered, but only around $330m has actually been paid to victims due to pending appeals holding up the other funds. Much of the lawsuits involve recovering funds from “net winners”, investors who came out with more than what they originally invested, and paying it to “net losers”, investors who ended up with less than they originally invested. The largest example of this was when New York Mets owners Fred Wilpon and Saul Katz settled at $162 million [5]. There had also been a 40 willful blindness claim involved, stating they knew fraud was occurring but they did not act because of the large sums they were receiving. This claim was dropped by Picard upon reaching the settlement. [5]

Among the victims of Madoff’s Ponzi scheme were: Elie Weisel, famous for surviving the Holocaust[6] and going on to win a Nobel Peace Prize; Steven Spielberg, the renowned Hollywood director; and former New York Governor Eliot Spitzer, whose real estate business was involved[7]. Much to the dismay of his victims, Madoff has failed to recognize the destruction his actions have caused. Although he pleaded guilty and has taken responsibility for his actions, he often focuses on the large banks and their role in failing to uncover the scheme when they should have been able to rather than expressing any personal sympathy or regret.

On December 20, 2012, Bernie Madoff’s brother Peter Madoff was sentenced to 10years in prison for his role in the fraud scandal. Peter Madoff had served as the senior lawyer and chief compliance officer at Bernard L. Madoff