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Bernard L. Madoff, a former chairman of the Nasdaq Stock Market, 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 M. Calamari, director of enforcement in the SEC's New York office. In a separate criminal complaint, Federal Bureau of Investigation agent Theodore Cacioppi said Mr. Madoff's investment advisory business had "deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars."
Dan Horwitz, a lawyer for Mr. Madoff, declined to elaborate on the allegations. "Bernard Madoff is a longstanding leader in the financial-services industry with an unblemished record," Mr. Horwitz said in an interview. "He is a person of integrity. He intends to fight to get through this unfortunate event."
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.
According to the complaints, Mr. Madoff ran the investment advisory as a secretive business, independent from the firm's proprietary trading and market-making operations. The SEC complaint said that the alleged fraud was run through this arm of Mr. Madoff's company.
The FBI complaint quotes two senior Madoff employees as saying Mr. Madoff ran the investment arm on a separate floor of the firm's offices. The two employees said Mr. Madoff kept the financial statements from the firm under lock and key and was "cryptic" about the firm's investment business.
The complaint did not name the two senior employees. But according to people familiar with the matter, they are Mr. Madoff's sons, Andrew and Mark. Mark Madoff is the firm's senior managing director and chief compliance officer. Andrew Madoff is its director of trading.
A call to the sons' attorney was not returned.
Both complaints say Mr. Madoff told his sons he believed losses from his fraud exceeded $50 billion. That figure couldn't be confirmed. But such a loss is plausible, had money been flowing in and out for years: At the beginning of 2008, according to the SEC filing, his operation had more than $17 billion under management.
Such a scheme would dwarf past Ponzi schemes. It would also be nearly five times larger than the accounting fraud that drove telecom company WorldCom into bankruptcy proceedings in 2002.
The criminal complaint said that when Mr. Cacioppi and another agent went to Mr. Madoff's apartment Thursday, Mr. Madoff told them: "There is no innocent explanation." Mr. Madoff told the agents that "he paid investors with money that wasn't there," adding that he was "broke" and had decided "it could not go on." He said he expected to go to jail.
After his arrest, federal prosecutors in Manhattan charged Mr. Madoff with criminal securities fraud.
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. A preliminary hearing was scheduled for Jan. 12. He declined to comment after the hearing.
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 and 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, according to the complaint.
Mr. Madoff told them he planned to surrender to authorities, but first, he wanted to pay certain employees portions of the $200 million to $300 million dollars that was left.
According to a person familiar with the firm, the sons brought the matter to the attention of their attorney, who notified federal officials Wednesday night.
Since its inception almost a half-century ago, the Madoff firm has been a family affair. Mr. Madoff started his company with $5,000 he saved from a lifeguarding at Rockaway Beach in Queens and a job installing underground sprinkler systems, according to a 2000 report in a trade magazine, "Wall Street + Technology."
Mr. Madoff's brother, Peter Madoff, joined the firm around 1970 and is the senior managing director. Peter Madoff did not return calls for comment.
The two sons, Andrew and Mark, have worked for the securities firm since graduating from college 20 or so years ago. Neither is involved in the asset-management business that their father runs, according to a person familiar with the situation.
"All of his family members grew up with this being our lives. When it is a family operated business you don't go home at night and shut everything off. So you take things home with you, which is how all of us grew up," Mark Madoff told "Wall Street + Technology."
According to a 1986 report in a monthly financial magazine, Financial World, titled "The Highest Paid People on Wall Street," Mr. Madoff owned three homes and kept a yacht moored in the Bahamas. The report said he earned $6 million in 1985. Property records show at one point he owned a home in Montauk, N.Y., and paid more than a $1 million in annual taxes. He has made major donations to Democratic candidates and organizations.
Mr. Madoff's asset-management business appealed to investors for its remarkably steady returns for investing in the stock market. His investors consistently enjoyed small monthly gains, usually between zero and 2%. Mr. Madoff told investors his strategy was to trade in and out of large-cap stocks and buy options on those shares to help smooth the ups and downs. When he failed to see opportunities in the market, he would shift to U.S. Treasurys, according to fund marketing documents and people familiar with his strategy.
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 a 10.5% annual return, according to fund documents.
Such returns sparked widespread 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 filled 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 on Thursday, and according to documents he sent to the SEC that 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.
The SEC declined to comment on the matter.
Mr. Madoff's investors described their shock and panic on Thursday. Susan Leavitt of Tampa Bay, Fla., said she had several million dollars of inherited money invested in the firm and added $500,000 earlier this year. A stay-at-home mother with two children, the 46-year-old Ms. Leavitt says she is considering going back to work. "That was my nest egg for the children, and my future. I'll never see much back, I'm sure," she said.
Ms. Leavitt said she recently discussed her investment with a friend who told her he was suspicious about the firm's ability to generate such profits amid the economic crisis. "I thought, 'He's probably just jealous,' " said Ms. Leavitt. "We've been with [Mr. Madoff] for 15 years, and it's grown every year at 10%."
U.S. District Judge Louis Stanton, who is overseeing the SEC's case against Mr. Madoff and his firm, on Thursday appointed Lee Richards as the firm's receiver in order to preserve its assets and accounts outside the U.S. The judge also ordered Mr. Madoff and his firm not to move assets. At a hearing set for Friday, the judge will consider the SEC's request to grant powers to the receiver over the entire firm, and a complete asset freeze.