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| Bernard Madoff - - possibly the biggest fraudster of all time
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Former Nasdaq Stock Exchange chairman Bernard Madoff is expected to plead guilty on Thursday, for operating a vast Ponzi scheme and will die in prison. The massive fraud began at least 20 years ago and the last statement to investors, claimed that investments were valued at $64.8 billion, even though no trades had been executed for at least 13 years.
The US Securities and Exchange Commission (SEC) says, that Ponzi schemes are a type of illegal pyramid scheme named for Charles Ponzi (March 3, 1882 – January 18, 1949), who duped thousands of New England residents into investing in a postage stamp speculation scheme back in the 1920s. Ponzi thought he could take advantage of differences between US and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40% return in just 90 days compared with 5% for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1 million during one three-hour period—and this was 1921! Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30 worth of the international mail coupons.
The SEC, which ignored warnings, that Madoff's consistent returns were not credible, says decades later, the Ponzi scheme continues to work on the "rob-Peter-to-pay-Paul" principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.
The Office of the United States Attorney for the Southern District of New York, said on Tuesday, that eleven felony charges included securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the SEC and theft from an employee benefit plan. There is no plea agreement between the government and Madoff, 70, who if found guilty of all counts, faces a statutory maximum sentence of 150 years' incarceration.
From at least the 1980s until his arrest on December 11, 2008, Madoff perpetrated a scheme to defraud the clients of BLMIS (Bernard L. Madoff Investment Securities) by soliciting billions of dollars of funds under false pretenses, failing to invest investors' funds as promised, and misappropriating and converting investors' funds to Madoff's own benefit and the benefit of others without the knowledge or authorization of the investors.
To execute the scheme, Madoff solicited and caused others to solicit prospective clients to open trading accounts with BLMIS, based upon his promise to use investor funds to purchase shares of common stock, options, and other securities of large, well-known corporations, and representations that he would achieve high rates of return for clients, with limited risk. However, as Madoff operated a massive Ponzi scheme in which client funds were misappropriated and converted for his own use, BLMIS, and others.
Bernard Madoff as an established Wall Street operator, built his credibility by giving potential clients, that he was reluctant to enlist them. He had a large network of feeder funds and used it to meet any withdrawals his investors requested. Madoff also maintained a legitimate brokerage business, run by members of his family.
Annual returns were typically in the range of 10% to 15% annually - - steady and attractive at a time of low interest rates.
Madoff marketed an investment strategy referred to as a "split strike conversion" strategy. Clients were promised that BLMIS would invest their funds in a basket of approximately 35-50 common stocks within the Standard & Poor's 100 Index, a collection of the 100 largest publicly traded companies in terms of their market capitalisation. He claimed that he would select a basket of stocks that would closely mimic the price movements of the S&P 100 and would opportunistically time those purchases, and would be "out of the market" intermittently, investing clients' funds in these periods in United States Government-issued securities such as United States Treasury bills. Madoff also claimed that he would hedge the investments that he made in the basket of common stocks by using investor funds to buy and sell option contracts related to those stocks, thereby limiting potential losses caused by unpredictable changes in stock prices.
Madoff hired inexperienced clerical staff and a three-person auditing firm, apparently certified the books of BLMIS.
Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants. The auditing firm has been telling the AICPA for 15 years that it doesn't conduct audits.
Bloomberg said the auditors operated from a 13-by-18 foot location in an office park in New York City’s northern suburbs.
A four-page report, dated Dec. 18, 2006, attested that the financial statements of Madoff’s securities firm were “in conformity with accounting principles generally accepted in the United States.”
From the phantom $64.8 billion comprising 4,800 client accounts, the government said, the scam business “held only a small fraction of that balance.”
In his 2007 letter to shareholders, America's most famous investor Warren Buffett, wrote:"You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight."
"The charges reflect an extraordinary array of crimes committed by Bernard Madoff for over twenty years. While the alleged crimes are not novel, the size and scope of Mr. Madoff's fraud are unprecedented. As a result, Mr. Madoff faces one hundred fifty years in prison, mandatory restitution to the victims of his crimes, forfeiture of his ill-gotten gains, and criminal fines. The Government has not entered into any agreement with Mr. Madoff about his plea or sentencing," said Acting United States Attorney Lev. Dassin on Tuesday."The filing of these charges does not end the matter. Our investigation is continuing."
