Market maker Bernard L. Madoff arrested in $50B 'giant Ponzi scheme'

December 12, 2008

Top broker and Wall Street adviser Bernard L. Madoff, aged 70, was arrested and charged by the FBI on Thursday with a single count of, also known as stock fraud and investment fraud. He allegedly told senior employees of his firm on Wednesday that his $50 billion business "is all just one big lie" and that it was "basically, a giant (since at least 2005)." Mr. Madoff faces up to 20 years and a fine of up to $5 million. FBI 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 investors' losses of approximately $50 billion dollars."

The former chairman of the is also the founder and primary owner of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. The firm is one of the top firms on Wall Street. He founded his family firm with an initial investment of $5,000, after attending Law School. He saved the money earned from a job at  and a part time job installing.

A force in trading for nearly 50 years, he has been active in the  (NASD), a self-regulatory organization for the U.S. securities industry. His firm was one of the five most active firms in the development of the, having been known for "paying for order flow," in other word paying a broker to execute a customer's order through Madoff. He argued that the payment to the broker did not alter the price that the customer received. He ran the investment advisory as a secretive business, however.

Dan Horwitz, counsel of Mr. Madoff, in an interview, said that "he is a longstanding leader in the financial-services industry with an unblemished record; he is a person of integrity; he intends to fight to get through this unfortunate event." Mr. Madoff was released on his own on the same day of his arrest, after his 2 sons turned him in, and posting $10 million bail secured by his Manhattan apartment. Without entering any plea, the Court set the preliminary hearing for January 12.

Madoff's scheme may rank among the biggest fraud in history. When former energy trading giant filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets. The scheme would dwarf past Ponzis, and it would further be nearly five times the telecommunication company  in 2002.

The Securities and Exchange Commission filed a separate civil on Thursday against Bernard L. Madoff Investment Securities and its eponymous founder Mr. Madoff. It was docketed as "U.S. v. Madoff," 08-MAG-02735, by the. SEC, New York associate director of enforcement, Andrew M. Calamari, asked the judge to issue on the firm and its assets, and appoint a. The SEC pleads, among others, that "it was an ongoing $50 billion swindle; our complaint alleges a stunning fraud that appears to be of epic proportions." It further accused the defendant of "paying returns to certain investors out of the principal received from other, different investors" for years. Madoff's hedge fund business had previously claimed to have served between 11 and 25 clients and had $17.1 billion in assets under management. But virtually all of the assets were missing.

on Thursday appointed Lee Richards, a Manhattan lawyer, as the firm's receiver. A hearing is set for Friday, for a ruling on the SEC's petition to grant plenary powers to the receiver over the entire firm, and an absolute asset sequestration.

Doug Kass, president of hedge fund Seabreeze Partners Management said that "this is a major blow to confidence that is already shattered -- anyone on the fence will probably try to take their money out."