More glorious results
of the free-market system.6th largest brokerage house founder and
chairman ate it in this crash, so he (former chairman of the NASDAQ) cooked the books, and it was a $50 billion implosion.
As news spreads of Bernard Madoff's alleged $50 billion fraud, many are wondering what
exactly a Ponzi scheme is and how to avoid becoming a victim.
Ponzi or "pyramid" schemes have been around for years, with slight variations. They
"rob Peter to pay Paul": early investors - at the top of the pyramid - are paid off with money from newer victims - at the
bottom. The modern name comes from Charles Ponzi, who stole millions of dollars from thousands of New Englanders in the 1920s.
He promised that his postage stamp speculation would yield 40% returns in just 90 days, compared with the then prevailing
5% annual interest on savings accounts. Ponzi actually purchased only $30 worth of international mail coupons but, as with
all such frauds, a few early investors were paid off to make everything look legitimate until the scheme collapsed under its
own weight once new victims could no longer be found.
Reported victims of Madoff's alleged malfeasance include very sophisticated investors:
the foundation of Nobel laureate Elie Wiesel; New Jersey Senator Frank Lautenberg, one of Washington's wealthiest legislators;
and director Steven Spielberg's charity, the Wunderkinder Foundation. Worse still, some of the world's biggest financial institutions
HSBC and Royal Bank of Scotland, Spain's
Santander, France's BNP
Paribas, and Japan's Nomura Holdings - say they were taken
in. Even the Securities and Exchange Commission (SEC), the government's own watchdog, has
admitted that, although its staff had heard repeated allegations against Madoff and his firm beginning in 1999, none had been
recommended for formal action.
Despite apparently fooling such august investors, the right checks into Madoff's fund
might have revealed plenty of red flags consistent with Ponzi schemes.
Of course, simply reading a prospectus is not enough: successful fraudsters do not
reveal their scams up front. It is no surprise that SEC Chairman Christopher Cox says that
the commission's investigation "indicates that Mr. Madoff kept several sets of books and false documents, and provided false
information...to investors and to regulators." Digging deeper into public documents filed on paper, rather than electronically,
with the SEC, or others sent to Companies House - the British government's register of
corporations - would have revealed that in 2001 and 2002 Madoff made personal loans of $62.5 million to an affiliated company
of which he was the sole voting shareholder. These were ultimately converted to shareholder's equity in 2007 when Madoff's
brokerage firm was experiencing a significant outflow of cash.
Interviews of investment professionals might also have yielded useful insight. Ponzi
schemes typically promise sky-high returns over a short time or consistent ones even in economic downturns. Part of the attraction
of Madoff's fund was the latter: since 2004, annual returns ranged from 7.3 percent to 9 percent, but over the last decade
they were typically in the low-double digits according to one anonymous investor. This victim added that the fund claimed
to follow a "split strike conversion" strategy. The latter entails owning stock and buying and selling related options, which
limits upside potential as well as downside risk. Jon Najarian, an acquaintance of Madoff who has traded options for decades,
said "many of us questioned how that strategy could generate those kinds of returns so consistently."
Also unusual was how Madoff kept his hedge fund's financial statements under "lock
and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was even located on a separate
floor from the market-making one. Such a lack of transparency should have been a red flag for anyone willing to look.
Unfortunately, too many failed to do so. The moral of the story is: seek and ye shall
Ira Rennert, chairman of the synagogue's board and owner of the priciest mansion in
the Hamptons, had $200 million staked in Madoff's fund, Fortune magazine reported.
He was one of at least 10 synagogue heavy hitters fleeced in the scandal, said a prominent
The synagogue was a breeding ground for Madoff investors given that its president,
J. Ezra Merkin, reportedly served as a powerful recruiter for the alleged scamster.
Merkin is said to have given Madoff, who does not belong to the synagogue, access to
a slew of universities and Jewish organizations.
Merkin had $1.8 billion wrapped up with the shady investor through his fund, Ascot
Partners - in many cases, without his clients' knowledge.
Other prominent Fifth Avenue Synagogue members
who took a bath include Elie Wiesel, the author and Nobel Peace Prize winner, whose foundation lost $37 million, and investment
banker Michael Jesselson, whose SARAcademy,
an Orthodox Jewish school in The Bronx, took a $1.3 million hit, Fortune reported.
"Obviously, it's a black eye for the synagogue," said financial adviser and synagogue
member Joseph Sprung of the extraordinary losses members suffered in Madoff's $50 billion wipeout.
Almost a dozen prominent families of the synagogue - the favored New
York house of worship for former Israeli Prime Minister Benjamin Netanyahu - sustained heavy losses
in the Madoff madness, one congregant estimated.
"The synagogue isn't going to be wiped out, but it's an awful thing to have happened,"
said Sprung, who was not invested with Madoff.
The close-knit, 300-family congregation was dubbed by the author Herman Wouk, a member,
as a "Who's Who of World Jewry."
"Everyone at that temple is a power player," said member Moreton Binn. "It's probably
the most affluent temple in the city."
Revlon CEO Ron Perelman, a temple member, didn't invest with Madoff, his spokesman
"Ezra is a brilliant, scholarly man. He's brilliant in Judaic studies, he's just incredibly
smart," said congregant Ellen Fawer.
Others doubted Merkin would be able to stay on as president as a result of legal troubles
that will certainly ensue in coming weeks.
"Obviously, he will have to step down," said a member who asked not to be identified
by name. "He's being sued all over the place."
invested $110 million with Madoff, likely at Merkin's urging.
Billionaire Daily News owner Mort Zuckerman lost $30 million from a charitable foundation that he'd invested
with Merkin only to discover that Merkin had put it in Madoff's fund.
and New YorkLawSchool
also signed hefty checks over to Merkin, who in turn placed the money in Madoff's care.
"Mr. Merkin and his family are personally among the largest victims of the massive
fraud confessed by Bernard Madoff," said Merkin's lawyer.
The controversy didn't stop Merkin from attending yesterday's service, where he was "warmly received," said a member who asked not to be named.
Meanwhile, the FBI admitted that the Madoff scandal had grown so large that it was
forced to shift agents from counterterrorism operations to the alleged swindler's case, among other Wall Street scandals.