How to make $65 billion disappear.
That’s $65,000,000,000.
This is the very puzzling story of
Bernard Madoff. How did he do it?
Prepared by Gary Simon, December 2008 – January 2009
Last update 29 JUNE 2009.
The events were described as a Ponzi scheme.
This scheme pays off claims by old investors with the
money from new investors. It works as long as there are
plenty of new investors.
But where did the name “Ponzi scheme”
come from?
The scheme is named for Carlo (Charles) Ponzi.
He was born in Italy in 1882 and came to the United
States in 1903. He worked as a dishwasher in Boston,
and he came up with his scheme in 1919.
Businesses often ask for SASEs, self-addressed stamped
envelopes, to mail things back to you.
But. . . what if the correspondence goes to another
country? How can you get your letter back from (say)
England if you don’t have English postage stamps?
You could send your envelope with an international reply
coupon good for postage in the target country.
This was at a fixed cost in the United States and was
aimed at the first class postage category. Other countries
did the same thing.
Ponzi realized that the postage rates varied by country.
Thus, a coupon could be purchased in another country at
less than its value in the United States.
This presented an arbitrage opportunity!
Here is a modern version of these coupons.
The Universal Postal Union of 1874 is an arrangement in
which the countries of the world agree to carry each
other’s mail. The coupons are a byproduct of that
agreement.
Here are more.
Yes…. people collect these things.
Ponzi started a company called Securities Exchange
Company to trade in these coupons.
Yes…. that’s S.E.C.
He promised high rates of return to investors. Early
investors were paid with money from new investors. No
investment ever took place.
For all we know, Ponzi never purchased more than a
handful of international reply coupons.
He may have generated as much as $15M in investments
from thousands of investors in 1919 and 1920.
This fell apart after about eight months, when the
redemptions ran ahead of the new investments.
Ponzi served several years in jail.
He was deported back to Italy in 1934.
He eventually ended up in Brasil,
where he died in poverty in
1949.
It was absurd to believe that anyone would have the
patience and organizational structure to convert a few
cents of arbitrage advantage into a large functioning
investment scheme. This was especially absurd in 1919!
Madoff’s scheme was much more credible.
The list of losers from the Madoff scheme is long. It
includes
J. Ezra Merkin (chairman of GMAC)
Fred Wilpon (Sterling Equities, principal owner of the
New York Mets); $500M
Norman Braman (once owned Philadelphia Eagles)
Fairfield Greenwich Group (hedge fun advisory firm); $7.5B
Yeshiva University; $100M to $110M
Stephen J. Helfman (Miami lawyer whose father opened account
thirty years ago, now dealing with aging grandmother)
Sam Englebardt (media investor in Los Angeles with several
relatives giving all to Madoff)
New York Times, 13 DEC 2008, Alex Berenson, Diana B.
Henriques, Zachery Kouwe, Stephanie Strom and New York
Times, 13 DEC 2008, Stephanie Strom, Javier C. Hernandez,
Eric Konigsberg, Christine Haughney, Glenn Collins.
Other sources supply this information as well.
. . . and more . . .
Many losers from the world of sports. . .
Wilpon and Braman (just mentioned)
Tim Teufel, former infielder with the New York
Mets
Sandy Koufax, Hall of Fame pitcher of the Los
Angeles Dodgers
Bob Nystrom, New York Islanders hockey team
(and he had three accounts with Madoff)
Ray Floyd, professional golfer (who also lost in a
Ponzi scheme by K.L. Financial of Florida in
2006)
Sports Illustrated, 16 FEB 2009, page 18.
. . . and more . . .
A woman in Brooklyn (father just died and much of stepmother’s
money was with Madoff)
Law school official in Massachusetts (lost millions)
Bramdean Alternatives (London asset manager run by Nicola
Horlick had stock drop 36% after announcing that it
had 10% of its money with Madoff)
New York Times, 13 DEC 2008, Alex Berenson, Diana B.
Henriques, Zachery Kouwe, Stephanie Strom. Other sources
supply this information as well.
. . . and more . . .
Irwin Kellner had $2M in an IRA and another account with Madoff.
He’s the chief economist for MarketWatch.com, and he is an
economics scholar at Dowling College. He is a lead
plaintiff in a lawsuit.
Newsday, 13 DEC 2008, Carrie Mason-Draffen, James Bernstein,
Patricia Kitchen. Other sources report this information as well.
Senator Frank Lautenberg of New Jersey; undisclosed amount
Arvam and Carol Goldberg, former owners of Stop&Shop;
portion of their $29M charitable trust
Lawrence Velvel, dean of Mass. School of Law; millions
Stephen A. Fine, president of Biltrite; undisclosed
Jerome Fisher, founder of Nine West; $150M
New York Post, 14 DEC 2008, sidebar. Other sources report
this information as well.
. . . and
more . . .
Joyce Greenberg of Houston. In 1987 she and her husband Jacob sent $1M
to Madoff to invest. Jacob died in1995, but Joyce continued to
dip into money for charitable causes. Now she and her 96-year-old
mother-in-law are out tens of millions. (Madoff sent statements
replete with details of blue-chip transactions. )
This shows the canceled
original $1,000,000 check.
New York Post, 14 DEC 2008, Todd Venezia.
This information appears in other media as well.
. . . and more . . .
Carl Shapiro, founder of Kay Windsor; $400M
Robert Jaffe, son-in-law of Carl Shapiro; undisclosed
Carl and Ruth Shapiro Family Foundation; $145M
Richard Spring, Boca Raton, former security analyst; $11M
Ira Roth, New Jersey; $1M
Stephen Abbott, San Francisco lawyer; several hundred thousand
Loeb family; undisclosed
Town of Fairfield CT pension fund; $42M
Massachusetts state pension fund; $12M
Robert I. Lappin charitable foundation; $8M and forced to close
Maxam Capital Management; $280M and forced to close
New York Post, 14 DEC 2008, sidebar. Other sources report
this information as well.
. . . and more . . .
Kingate Management; $2.8B
Ascot Partners; $1.8B
Pioneer Alternative Investments of Italy; nearly all of their $835M assets
Fix Asset Management of Greece; $400M
Tremont Capital Management; hundreds of millions
Bramdean Alternatives Limited of England; 9% of its portfolio
Nomura Holdings of Japan; $302M
Banque Benedict Hentsch, Geneva; $47.5M
Neue Privat Bank, Zurich; undisclosed
BNP Paribas, France; undisclosed
New York Post, 14 DEC 2008, sidebar. Other sources report this
information as well, including Newsday, 16 DEC 2008, James
Bernstein, Tom Incantalupo, Karla Schuster
. . . and more . . .
Kingate Management of Bermuda; part of its $2.8B
North Shore-Long Island Jewish Health System ; $5.7M
Julian J. Levitt Foundation of Texas
New York-based Access International; undisclosed amount
New York Post, 14 DEC 2008, Lukas I. Alpert, James Fanelli and
Newsday,16 DEC 2008, James Bernstein, Tom Incantalupo, Karla
Schuster.
. . . and more . . .
Banco Santander of Spain; Geneva subsidiary Optimal Investment Services
lost $3.1B; this is identified as a fund of hedge funds ( ! )
Various members of the Palm Beach Country Club
Mort Zuckerman, publishing of the Daily News and real estate magnate;
$30M
Other Swiss institutions, including Banque Bénédict Hentsch (about $48M)
and Neue Privat Bank
New York Times, 15 DEC 2008, Diana B. Henriques, Alex
Berenson, Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J.
de la Merced. Nelson D. Schwartz and Newsday, 16 DEC 2008,
James Bernstein, Tom Incantalupo, Karla Schuster.
But there’s a nice afternote for Banco Santander. On January 28,
2009, Emilio Botin, the president of Santander, offered to
reimburse $1.82B that its private investment clients lost.
Newsday, 30 JAN 2009
. . . and more . . .
Elie Wiesel Foundation for Humanity; $37M
Steven Spielberg Wunderkind Foundation (supports Cedars-Sinai Medical
Center and the Chabad charity Children of Chernobyl)
Royal Bank of Scotland; $600M
Newsday, 16 DEC 2008, James Bernstein, Tom Incantalupo, Karla
Schuster and New York Times, Stephanie Strom, Javier C.
Hernandez, Eric Konigsberg, Christine Haughney , Glenn Collins
and Bloomberg News, Suzanne Plunkett.
JEHT Foundation (to promote justice, equality, human dignity, tolerance),
Started in 2002 by Jeanne Levy-Church, but based on investments
made 30 years ago by her father Norman Levy. Gave away
$75M over these years. Will close by the end of January, 2009.
Innocence Project
Supported by JEHT to use DNA evidence to exonerate
innocent prisoners.
New York Times, 16 DEC 2008. Stephanie Strom, Javier C. Hernandez, Eric
Konigsberg, Christine Haughney, Glenn Collins.
. . . and more . . .
Ramaz School, a Jewish modern Orthodox prep school in Manhattan; $6M
Jewish Federation of Greater Washington; $10M
Jewish Community Centers Association of North America; undetermined
Brigham and Women’s Hospital of Boston and Jewish Federation of
Palm Beach (through Carl and Ruth Shapiro Foundation); $145M,
about 45% of its assets
SAR Academy, a Jewish school in the Bronx; $1.2M, a third of its assets
Chais Family Foundation in Encino, California
BNP Paribas; did not invest directly in Madoff funds but still
had $500M at risk in trades and loans with hedge funds
Swiss bank Reichmuth; $327M potential losses
HSBC made loans to institutions that invested with Madoff; $1B
New York Times, 15 DEC 2008, Diana B. Henriques, Alex Berenson,
Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced.
Nelson D. Schwartz and Newsday, 16 DEC 2008, James Bernstein,
Tom Incantalupo, Karla Schuster.
. . . and more . . .
The Picower Foundation, established by Barbara and Jeffrey Picower in
Palm Beach, Florida, in 1989, will be closing down. It had about
$1B in assets. It supported
Picower Institute for Memory and Learning at M.I.T.
Human Rights First
New York Public Library
Children’s Health Fund
City Parks Foundation
School District of Palm Beach County
Jewish Outreach Institute
Metropolitan Museum of Art
New York Times, Saturday, 20 DEC 2008, Geraldine Fabrikant
. . . and more . . .
Actor Kevin Bacon; amount unspecified
He has been in more than 60 movies, going all the
way back to Animal House in 1978. You may
remember him in movies like Footloose, Mystic
River, Quicksilver, A Few Good Men, and many
others.
www.marketwatch.com, 31 DEC 2008, reported earlier in New
York Magazine.
He is also famous for the “degrees of Kevin Bacon” party
game. We don’t know if he met Madoff face-to-face, but
the degree of separation number is almost certainly two or
less.
Henry Kaufman; several million dollars
He is a former chief economist of Salamon
Brothers.
Kaufman claims that this is just a small percent
of his worth.
He received his BA in economics from New York
University in 1948.
www.marketwatch.com, 31 DEC 2008, Alistair Barr and Michelle
Donley.
Mr. Kaufman has a long association with New York
University. He is a major donor to the Stern School of
Business, and the Kaufman Management Center, 44 West
Fourth Street, was constructed from his very generous
gift.
NYU Picture Bank, photo by
Deb Rothenberg
These stories are getting too close for comfort. . .
Sonja Kohn of Bank Medici in Vienna, amount unknown
Mrs. Kohn was a channel for
eastern European investors .
Many of her clients were
wealthy Russians.
New York Times, 6 JAN 2009, Nelson D. Schwartz and
Julia Werdigier.
. . . and more . . .
Walter M. Noel Jr., Fairfield Greenwich Group; about $7.5B, half the
firm’s assets
Noel’s relationship with
Madoff earned his firm
millions of dollars in fees.
One of FGG’s strongest
selling points for its largest
fund was its access to Mr.
Madoff.
Photo from New York Times, 17
NOV 2008.
New York Times, 15 DEC 2008, Diana B. Henriques, Alex Berenson,
Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced.
Nelson D. Schwartz and Newsday, 16 DEC 2008, James Bernstein,
Tom Incantalupo, Karla Schuster.
. . . That’s all for now. But there will be more!
Of course there will be more!
$10,000,000
Just note that
6,500 = $65,000,000,000
If we’re thinking of individual investors losing around
$10M, then there could be 6,500 of them.
Some lost more than $10M, but quite a few lost smaller
amounts.
By early February 2009, the investigation
had gone far enough to give us a list of
names.
The list ran to about 160 pages, with
13,567 names in all.
Diana B. Henriques, New York Times, 5 FEB 2009.
Some of the big players were feeders that channeled
money from other investors to Madoff’s fund.
The Fairfield Greenwich Group charged clients
annual fee of 1 percent of assets, invested
20 percent on investment gains each year
J. Ezra Merkin and his Ascot Partners
annual fee of 1.5 percent of assets invested
Gerald Breslauer, financial adviser in Los Angeles
invested on behalf of Steven Spielberg
and Jeffrey Katzenberg
Sonja Kohn, Bank Medici in Vienna
Walter Noel, 78, ran the Fairfield Greenwich Group. He
has a master’s degree in economics and a law degree, both
from Harvard.
Noel and Madoff met in the early 1980s.
Walter Noel was a charming salesman. He directed
clients’ money to Madoff’s fund.
Mr. Noel’s largest fund, the $7.3 billion Fairfield Sentry
fund, invested exclusively with Mr. Madoff.
Mr. Noel has not disclosed how much of that was his own or
belonged to family members and how much was his investors’. One
of his daughters said, through a spokeswoman at Rubenstein Public
Relations, that “a very substantial part of each family member’s
personal assets was invested with Bernard Madoff alongside those of
our investors.”
The Fairfield Greenwich Group promised due diligence. Michael Markov, a
hedge fund consultant, looked into Fairfield Sentry’s investments with
Madoff and found that it was “statistically impossible to replicate them.”
Mr. Markov said that he found only one hedge fund
whose returns correlated to Mr. Madoff’s. That was the
Bayou fund, which was prosecuted by the government
for fraud in 2006.
New York Times, 17 DEC 2008, Eric Konigsberg, William K. Rashbaum, Steven
Labaton.
Another channel to Madoff was J. Ezra Merkin, 54.
Both Madoff and Merkin were trustees at
New York’s Yeshiva University. Both have
now stepped down from the board.
Yeshiva University lost $110M, which was 8%
of its endowment, through Merkin and his Ascot
Partners.
What’s Yeshiva University? This is a good analogy:
Jewish : Yeshiva
: : Catholic : Notre Dame
The other members of Yeshiva’s board did not know that
Merkin had moved Ascot’s entire share of the endowment
to Madoff’s fund.
Why would Merkin not spread the
investment money around?
According to acquaintances, “Ezra
would ask, ‘Why would you reduce
your concentration in your best
performing fund?’ ”
Both Madoff and Merkin are now off the Yeshiva board.
Merkin also served as chair of the investment committee
of UJA, the United Jewish Appeal.
The UJA, however, has a policy that prohibits committee
members from directing funds. Thus, they had no money
in Merkin’s Ascot Partners.
It’s good to know that someone
understands conflict of interest.
The New York Jewish Week, 19 Dec 2008, Gary Rosenblatt.
On 29 December 2008, the Federal government moved
five billion dollars to help GMAC (General Motors
Acceptance Corporation) remain solvent. The chairman
of GMAC is . . . .
J. Ezra Merkin
www.thecuttingedgenews.com, www.reuters.com, www.thestreet.com,
and other sites, 31 DEC 2008
An unfortunate casualty of the affair is Rene-Thierry
Magon de la Villehuchet, who commited suicide.
Rene-Thierry, 65, was found dead at his desk in the New
York office of Access International Advisors on Tuesday,
23 DEC 2008. Both of his wrists slashed. A box cutter
and a bottle of sleeping pills lay nearby.
news.yahoo.com, 26 DEC 2008, from GREG KELLER, AP
Business Writer
Another suicide is from Britain. William Foxton, age 65,
killed himself with a single bullet to the head on 10 FEB
2009.
Foxton was a former British Army major who had
previously served in the French Foreign Legion.
His life savings had been invested in Herald USA Fund
and Herald Luxemburg Fund. Each of these lost heavily
through Madoff connections.
Newsday, 15 FEB 2009, page A31, Associated
Press.
So how did Madoff do it?
There were suspicious signs, but people kept investing
anyhow. How did this go on for so long?
Here are some suspicious signs.
There was an SEC investigation in 1992.
Madoff was cleared.
A Boston whistleblower tried to alert the SEC
in 1999. Nothing happened.
Barron’s asked questions in 2001 about his
operation.
Returns were relatively high, at about 10%
per year, but they were way too steady.
Madoff managed accounts inside his own firm.
Hedge funds, by comparison, use banks
and brokerage firms.
Only auditing firm was Friehling and Horowitz
of New City, a small firm.
New York Times, 13 DEC 2008, Alex Berenson, Diana B. Henriques,
Zachery Kouwe, Stephanie Strom.
Was Madoff’s family involved?
Madoff is 70 years old. He worked with his sons
Andrew, 42, and Mark, 44, and also his 62-year-old
brother Peter.
Could they really have known nothing about the scheme?
On Wednesday, December 10, Bernard Madoff told two
of his senior associated about the fraud. It is believed
that those two senior associates are his sons. Andrew and
Mark reported the fraud to the FBI the next day.
This makes it easy to believe that Bernard Madoff set up
the details in this way to protect his sons.
His sons are not targets of the investigation.
As an added complication, Madoff’s niece Shana Madoff
(the daughter of his brother Peter) married Eric Swanson
in 2007.
This is a big deal because Swanson worked as an SEC
attorney and had some familiarity with the Madoff
operation.
Swanson was not active with the SEC when he married
Shana.
Every good story needs a romantic subplot.
Barbara Kollmeyer, www.marketwatch.com, 16 DEC 2008.
The story will continue.
How long did this go on?
Who knew?
If Bernard himself ran the scheme, how many of
his associates and twenty-plus employees knew
about it?
By what accounting trickery was he able to send
out monthly statements to all his clients?
What made this fall apart? Were people starting
to redeem accounts in 2008 when the market
went south?
Did we all move away from good sense? Did we
believe that the real masters of the universe were
not those who provided good and services, but
rather those who shuffled around financial
papers?
Don is retired, but he wants to keep working. He
operates a Manhattan street cart, selling scarves and hats.
“I’m a little different than those guys in the papers. I
only try to sell you what you can see.”
New York Daily News, Monday, 15 DEC 2008, Mike Lupica.
Madoff is scheduled to be sentenced June 29, 2009.
His attorneys believe that an appropriate sentence would
be 12 years.
The sentence will likely be longer, perhaps 150 years.
Bernard Madoff is now 71 years old. . .