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SEC charges Bernard L Madoff for multi-billion dollar Ponzi scheme

The Securities and Exchange Commission has charged Bernard L Madoff and his investment firm, Bernard L Madoff Investment Securities, with securities fraud for a multi-billion dollar Ponzi scheme that he allegedly perpetrated on advisory clients of his firm.

The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff informed two senior employees that his investment advisory business was a fraud. 

Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme."

The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors.

Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least USD50bn.

Linda Chatman Thomsen, director of the SEC's division of enforcement, says: "We are alleging a massive fraud - both in terms of scope and duration. We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Madoff accountable."

Andrew M Calamari, associate director of enforcement in the SEC's New York regional office, adds: "Our complaint alleges a stunning fraud that appears to be of epic proportions."

According to regulatory filings, the Madoff firm had more than USD17bn in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career.

Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of Nasdaq Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.

In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.
The SEC's investigation is continuing.

A number of large hedge funds have been linked in recent reports as investors in Madoff's feeder funds, but few have yet to officially confirm any links.

Geneva-based hedge fund manager Peak Partners SA, noting that its Mont Blanc Funds have no Madoff exposure, says: 'Today the world learned that Bernard Madoff, founder and chief executive officer of Bernard L Madoff Investment Securities, has been arrested by the FBI on fraud charges. Madoff apparently confessed that his investment advisory business, in which billions of dollars of hedge fund money was invested, was a giant Ponzi scheme in which, basically, cash from new investors was used to pay the returns to the existing investors.'

The firm adds: 'Peak Partners' senior investment managers have been closely watching the Madoff saga for years and have been highly skeptical all along. Due diligence on the Madoff investment advisory business was impossible to perform because there was a total lack of transparency even for the feeder's sponsors - the ultimate 'black box'.

'This is obviously bad news for the hedge fund industry that comes on top of an already very difficult year. Peak Partners believes that the current shake-out in the alternative management world was overdue and that it will eventually end in a much cleaner and stronger hedge fund industry as well as stronger returns.'

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