Madoff Confessed $50 Billion Fraud to Workers Before FBI Arrest
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By David Voreacos and David Glovin
Dec. 12 (Bloomberg) -- Bernard Madoff had confessed to employees this week that his investment advisory business was “a giant Ponzi scheme” that cost clients $50 billion before two FBI agents showed up yesterday morning at his Manhattan apartment.
“We’re here to find out if there’s an innocent explanation,” Agent Theodore Cacioppi told Madoff, 70, who is considered a pioneer of modern Wall Street.
“There is no innocent explanation,” Madoff told the agents, saying he personally traded and lost money for institutional clients. He said he “paid investors with money that wasn’t there” and expected to go to jail. With that, agents arrested Madoff, according to an FBI complaint.
The 8:30 a.m. arrest capped the stunningly swift downfall of Madoff and businesses bearing his name that specialized in trading securities, making markets and advising wealthy clients. Many questions remain unanswered, including whether Madoff’s clients actually lost $50 billion. The complaint and a civil lawsuit by regulators describe a man spinning out of control.
Madoff, a white-haired man, appeared in federal court in downtown Manhattan at 6 p.m., wearing a white-striped shirt and dark-colored pants. U.S. Magistrate Judge Douglas Eaton described the securities-fraud charge against him and set a $10 million bond at a hearing where Madoff said nothing. Madoff later posted the bond, secured by his apartment and guaranteed by his wife.
Madoff’s firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.
The firm was the 23rd-largest market maker on Nasdaq in October, handling an average of about 50 million shares a day, exchange data show. It handled orders from online brokers for some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.
Scrambling to Unravel
Prosecutors are joining regulators at the Securities and Exchange Commission, which filed a civil lawsuit, in scrambling to unravel the collapse of Bernard L. Madoff Investment Securities LLC. The broker-dealer and investment adviser was housed in a lipstick-shaped building at 885 Third Ave.
A rapid series of events in early December preceded the firm’s demise, according to the arrest complaint and SEC lawsuit.
In the first week of December, Madoff told a worker identified as Senior Employee No. 2 that clients had requested $7 billion in redemptions, he was struggling to find liquidity, and he thought he could do so, according to the FBI and SEC.
Senior employees “previously understood” that the investment advisory business managed between $8 billion and $15 billion in assets, according to the documents.
‘Under Great Stress’
On Dec. 9, Madoff told a colleague identified as Senior Employee No. 1 that he wanted to pay bonuses in December, or two months earlier than usual. The next day, Madoff got a visit at his offices from the employees. They said he appeared “under great stress” in prior weeks, according to the documents.
Madoff told his visitors that “he had recently made profits through business operations, and that now was a good time to distribute it,” according to the FBI complaint.
When the workers challenged that explanation, Madoff said he “wasn’t sure he would be able to hold it together” at the office and preferred to meet at his apartment, Senior Employee No. 2 told investigators.
At Madoff’s apartment, he told the employees that his investment advisory business was a “fraud” and he was “finished,” according to the FBI complaint.
‘One Big Lie’
He said he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme,” Agent Cacioppi wrote in the complaint. The senior employees understood Madoff to be saying he had paid investors for years out of principal from other investors, the agent wrote.
The business had been insolvent for years, said Madoff, who then made a stunning disclosure -- he estimated losses at more than $50 billion. Madoff said he had $200 million to $300 million left, and he planned to pay employees, family, and friends.
Madoff, who had also confessed to a third senior employee, said he planned to surrender to authorities within a week, according to the complaint.
Cacioppi and another agent beat Madoff to the punch.
After saying he had no “innocent explanation,” Madoff confessed “it was all his fault,” Cacioppi wrote.
“Madoff also said that he was ‘broke’ and ‘insolvent’ and that he had decided that ‘it could not go on,’ and that he expected to go to jail,” the agent wrote. “Madoff also stated that he had recently admitted what he had done to Senior Employee Nos. 1, 2, and 3.”
Law School
Madoff founded the firm in 1960 after leaving law school, according to the company’s Web site. His brother, Peter, joined the firm in 1970 after graduating from law school, it said.
Bernard Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two listed on regulatory records as “direct owners and executive officers.”
Bernard Madoff was influential with the Nasdaq Stock Market, serving as chairman of the board of directors, according to the FBI complaint.
He was chief of the Securities Industry Association’s trading committee in the 1990s and earlier this decade. He represented brokerages in talks with regulators about new stock- market rules as electronic-trading systems and networks grew.
He was an early advocate for electronic trading, joining roundtable discussions with SEC regulators considering trading stocks in penny increments. His firm was among the first to make markets in New York Stock Exchange listed stocks outside of the Big Board, relying instead on Nasdaq.
Madoff’s Web site advertises the “high ethical standards” of his firm.
“In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.”
The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan).
To contact the reporter on this story: David Voreacos in New York at [email protected] and David Glovin in U.S. District Court in New York at [email protected].
Email | Print | A A A
By David Voreacos and David Glovin
Dec. 12 (Bloomberg) -- Bernard Madoff had confessed to employees this week that his investment advisory business was “a giant Ponzi scheme” that cost clients $50 billion before two FBI agents showed up yesterday morning at his Manhattan apartment.
“We’re here to find out if there’s an innocent explanation,” Agent Theodore Cacioppi told Madoff, 70, who is considered a pioneer of modern Wall Street.
“There is no innocent explanation,” Madoff told the agents, saying he personally traded and lost money for institutional clients. He said he “paid investors with money that wasn’t there” and expected to go to jail. With that, agents arrested Madoff, according to an FBI complaint.
The 8:30 a.m. arrest capped the stunningly swift downfall of Madoff and businesses bearing his name that specialized in trading securities, making markets and advising wealthy clients. Many questions remain unanswered, including whether Madoff’s clients actually lost $50 billion. The complaint and a civil lawsuit by regulators describe a man spinning out of control.
Madoff, a white-haired man, appeared in federal court in downtown Manhattan at 6 p.m., wearing a white-striped shirt and dark-colored pants. U.S. Magistrate Judge Douglas Eaton described the securities-fraud charge against him and set a $10 million bond at a hearing where Madoff said nothing. Madoff later posted the bond, secured by his apartment and guaranteed by his wife.
Madoff’s firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.
The firm was the 23rd-largest market maker on Nasdaq in October, handling an average of about 50 million shares a day, exchange data show. It handled orders from online brokers for some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.
Scrambling to Unravel
Prosecutors are joining regulators at the Securities and Exchange Commission, which filed a civil lawsuit, in scrambling to unravel the collapse of Bernard L. Madoff Investment Securities LLC. The broker-dealer and investment adviser was housed in a lipstick-shaped building at 885 Third Ave.
A rapid series of events in early December preceded the firm’s demise, according to the arrest complaint and SEC lawsuit.
In the first week of December, Madoff told a worker identified as Senior Employee No. 2 that clients had requested $7 billion in redemptions, he was struggling to find liquidity, and he thought he could do so, according to the FBI and SEC.
Senior employees “previously understood” that the investment advisory business managed between $8 billion and $15 billion in assets, according to the documents.
‘Under Great Stress’
On Dec. 9, Madoff told a colleague identified as Senior Employee No. 1 that he wanted to pay bonuses in December, or two months earlier than usual. The next day, Madoff got a visit at his offices from the employees. They said he appeared “under great stress” in prior weeks, according to the documents.
Madoff told his visitors that “he had recently made profits through business operations, and that now was a good time to distribute it,” according to the FBI complaint.
When the workers challenged that explanation, Madoff said he “wasn’t sure he would be able to hold it together” at the office and preferred to meet at his apartment, Senior Employee No. 2 told investigators.
At Madoff’s apartment, he told the employees that his investment advisory business was a “fraud” and he was “finished,” according to the FBI complaint.
‘One Big Lie’
He said he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme,” Agent Cacioppi wrote in the complaint. The senior employees understood Madoff to be saying he had paid investors for years out of principal from other investors, the agent wrote.
The business had been insolvent for years, said Madoff, who then made a stunning disclosure -- he estimated losses at more than $50 billion. Madoff said he had $200 million to $300 million left, and he planned to pay employees, family, and friends.
Madoff, who had also confessed to a third senior employee, said he planned to surrender to authorities within a week, according to the complaint.
Cacioppi and another agent beat Madoff to the punch.
After saying he had no “innocent explanation,” Madoff confessed “it was all his fault,” Cacioppi wrote.
“Madoff also said that he was ‘broke’ and ‘insolvent’ and that he had decided that ‘it could not go on,’ and that he expected to go to jail,” the agent wrote. “Madoff also stated that he had recently admitted what he had done to Senior Employee Nos. 1, 2, and 3.”
Law School
Madoff founded the firm in 1960 after leaving law school, according to the company’s Web site. His brother, Peter, joined the firm in 1970 after graduating from law school, it said.
Bernard Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two listed on regulatory records as “direct owners and executive officers.”
Bernard Madoff was influential with the Nasdaq Stock Market, serving as chairman of the board of directors, according to the FBI complaint.
He was chief of the Securities Industry Association’s trading committee in the 1990s and earlier this decade. He represented brokerages in talks with regulators about new stock- market rules as electronic-trading systems and networks grew.
He was an early advocate for electronic trading, joining roundtable discussions with SEC regulators considering trading stocks in penny increments. His firm was among the first to make markets in New York Stock Exchange listed stocks outside of the Big Board, relying instead on Nasdaq.
Madoff’s Web site advertises the “high ethical standards” of his firm.
“In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.”
The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan).
To contact the reporter on this story: David Voreacos in New York at [email protected] and David Glovin in U.S. District Court in New York at [email protected].
