The Implications of the Madoff Scandal

by James & Miel on December 13, 2008 · 0 comments


By now you’ve heard about Bernie Madoff. Madoff was recently indicted on fraud charges by the Securities and Exchange Commission after admitting to a nearly $50 billion dollar “ponzi scheme”. The charges have shocked the financial community. Madoff was a pillar of the Wall Street community. His firm, Madoff Investment Securities, LLC was a major player in promoting the growth of the NASDAQ. Madoff himself was prominent member of the Manhattan and Hamptons country club scene(1).

The story is that around about 2005, Madoffs business started to take a turn for the worse. Rather than fess up, Bernie started to pay his older investors out of money from his newer investors – a classic fraud. According to the FBI’s initial investigation, Madoff’s confessed the wrongdoing to his family after the downturn caused his investors to try to withdrawn 7 billion dollars.

The initial reports are the fraud was conducted through Madoff’s wealth management businesses, not his trading desk. On paper, Madoff’s asset management had $17 billion dollars and 11 to 23 major clients. But his statements also suggests that the fraud encompassed up to $50 billion, indicating that his entire business was probably heavily involved in the wrongdoing. Click here for the statement of fact from the FBI agent investigating. This has all been well reported.

Whats less understood is the scale of Madoff’s crimes. His victims include: several large Spanish investors, a number of banks in Geneva, the Dean of the Massacussets school of law, a ton of charities, Yeshiva University, the pension fund for an entire town in Connecticut, Tokyo’s Numura Holdings, New York Mets Owner Fred Wilpton, millionaire Normal Braman, a number of Korean firms (1, 2, 3, 4, 5, 6, 7, 8) and numerous wealthy individuals – even Madoff’s own son was victimized (1). Just to give you some perspective on the damage – the Enron scandal cost America over $47 billion. Madoff stole $50 billion. Most of which is gone forever.

So, what are the implications of all this?

1) Very tough penalty for Madoff. The sheer amount stolen and number of people ripped off means there will be tremendous pressure on the judicial system to award Madoff the maximum punishment. In short, he’ll probably spend the rest of his life in prison.

2) Hedge fund regulation. Wall Street hates regulation, especially of cash cows like hedge funds. However, given the role of hedge funds in causing the financial collapse and the titanic scandal of Madoff’s crimes, its possible that congress or the SEC will consider real oversight of hedge funds.

Best,

James

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