Corporate & Securities Law

SNSFE Investigates Entities That Sold Investors Bernard Madoff's Investment Funds, Including Tremont Capital Management and Greenwich Advisors, In View of Epic Ponzi Scheme Alleged By SEC

By James Eccleston

A top broker has been accused of a $50 billion fraud. 

Bernard Madoff, a former chairman of the Nasdaq Stock Market and a force in Wall Street trading for nearly 50 years, was arrested by federal agents Thursday, a day after his sons turned him in for running what they said their father called "a giant Ponzi scheme."

The Securities and Exchange Commission, in a civil complaint, said it was an ongoing $50 billion swindle, and asked a judge to seize the firm and its assets.  "Our complaint alleges a stunning fraud that appears to be of epic proportions," said Andrew Calamari, associate director of enforcement in the SEC's New York office.

The 70-year old Mr. Madoff is the founder and primary owner of Bernard L. Madoff Investment Securities LLC.  The firm is primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares.  But Mr. Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

Mr. Madoff didn't enter a plea during a court hearing Thursday evening.  He was released after agreeing to post a $10 million bond secured by his Manhattan apartment. 

Earlier this month, the criminal complaint says, Mr. Madoff told one of his sons that "clients had requested approximately $7 billion in redemptions, that he was struggling to obtain the liquidity necessary to meet those obligations."  On Tuesday, the complaint alleges, Mr. Madoff added that he wanted to pay bonuses to employees this month, which was earlier than usual.

The next day, the sons met with Mr. Madoff at his office to ask about the bonus situation because he had appeared to be under "great stress" in prior weeks, they told the FBI.  Mr. Madoff refused to answer their questions and arranged to meet them at his Manhattan apartment, the complaint says.

Mr. Madoff "wasn't sure he would be able to hold it together" if they continued to discuss the issue at the office, the complaint quotes one of the sons as saying.  At the apartment, Mr. Madoff confessed that his business was a fraud that that he was "finished."  He said he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme."  He told them the firm was insolvent.

Mr. Madoff told them he planned to surrender to authorities, but before he did so, he wanted to pay certain employees portions of the $200 million to $300 million that was left. 

Mr. Madoff's Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor's 500-stock index was down 37.65%.  In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%.  Since its inception in December 1990, the fund averaged 10.5% annual return, according to fund documents.

Such returns sparked wide-spread skepticism for years on Wall Street.  News stories raised questions about his approach.  A number of traders suggested his firm could be buying shares for its own account just before it filed orders for customers, an illegal act called front-running.  In 2001, Mr. Madoff told Barron's that charges of front-running were "ridiculous."

An executive in the securities industry, Harry Markopolos, contacted the SEC's Boston office in May, 1999 urging regulators to investigate Mr. Madoff.  Mr. Markopolos continued to pursue his accusations over the past nine years, he said in an interview and according to documents he sent to the SEC, which were reviewed by The Wall Street Journal.

"Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC," Mr. Markopolos wrote to the SEC in November 2005.

SNSFE attorneys are investigating.  Specifically, many investors gained exposure to Mr. Madoff through hedge fund of funds, including Tremont Capital Management, a major distributor of Mr. Madoff's fund, according to people familiar with the situation.  New York-based fund of funds Fairfield Greenwich Advisors, L.L.C., with $14 billion in assets under management according to its Web site, also had substantial funds with him and were big promoters of the fund.  A spokesman at Fairfield Greenwich declined to comment.  Likewise, a Tremont spokesman declined to comment.

None-the-less, SNSFE will be quite interested to investigate the roles and responsibilities and failure to monitor that might have occurred at both Tremont and Fairfield Greenwich.  Those investors who invested with Madoff through those entities should feel free to contact attorneys at SNSFE.

Source:  The Wall Street Journal

Full post as published by FinancialCounsel on December 15, 2008 (boomark / email).