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Madoff’s $50 Billion Ponzi Scheme

Posted By Jim On 12/13/2008 @ 10:03 am In Investing | 11 Comments

If you haven’t read the news lately, you should because one of the biggest scams of all time was uncovered in what could see the term Ponzi scheme renamed the Madoff scheme [3]. Bernard L. Madoff was once the head of the Nasdaq (yes, the head of the Nasdaq) and started his own investment firm, Bernard L. Madoff Investment Securities. Over the course of decades, Madoff took investor’s money, lived the high life, and soon lost it all when investors started pulling out their money when the market went south this year. In classic Ponzi scheme fashion, once the money starts leaving, the scheme is discovered.

Some of the individual ensnared include J. Ezra Merkin, chaiman of GMAC; Fred Wilpon, principal owner of the New York Mets (miss the playoffs badly two years in a row and discover your money’s been lost due to fraud? That’s a rough run…); and Norman Braman, former owner of the Philadelphia Eagles. In total, it’s an estimated $50 billion in losses and some people don’t even know they’ve lost money because various funds invested with Madoff. For example, Merkin founded several hedge funds and one, Ascot Partners, had all of its $1.8 billion invested with Madoff.

Until his recent foray into Ponzi, Madoff was a well-respected member of the investment community. He was credited as being a pioneer in market-making [4], which is the act of being the middle man between buyers and sellers of stocks. It was that work that led him to become the chairman of the Nasdaq, bringing in a tremendous amount of business. However in the 1990s, he used that success to launch the asset management firm that, sometime in 2005, would turn into the largest Ponzi scheme ever.

Despite his gains, a growing number of investors began asking Madoff for their money back. In the first week of December, according to the SEC suit, Madoff told a senior executive that there had been requests from clients for $7 billion in redemptions. On Wednesday, Madoff met with his two sons to tell them the advisory business was a fraud — “a giant Ponzi scheme,” he reportedly told them — and was nearly bankrupt. The sons reportedly contacted their lawyer, who then alerted federal authorities to the fraud. Before being caught, Madoff was working on a scheme to dole out his funds’ remaining $300 million to the firm’s employees and his family members.

It’s an absolutely stunning story. How are you supposed to protect against that?

(Photo: AP)

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[3] Madoff scheme: http://www.nytimes.com/2008/12/13/business/13investors.html

[4] pioneer in market-making: http://www.time.com/time/business/article/0,8599,1866154,00.html?imw=Y

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