Bernie Madoff's $50 Billion Ponzi Scheme

Robert Lenzner, Forbes, 12.12.08

Brazen fraud ensnares well-known investors and nonprofits and gives hedge funds another black eye.

The shocking revelation that prominent investment manager Bernard Madoff's hedge fund, Ascot Partners, was a giant scam will intensify redemptions from scores of other hedge funds that will be forced to liquidate holdings and increase downward pressure on stock prices.

The arrest of the 70-year-old Madoff, widely considered to have the magic touch as an investor, is another serious black eye for the hedge fund industry and all non-transparent investment vehicles. Investors across the New York area have clamored to be in Ascot because of the stability of double-digit returns and the reports of serious wealth creation. The scandal is bound to reveal the inner workings of the hedge fund industry, whereby intermediary feeders bring in their clients and take fees for putting clients with an investment manager.

If Madoff hadn't faced $7 billion in redemptions, this Ponzi scheme might not have been discovered. What's astonishing is that he got away with it for so long with nobody discovering it. What his four family members in Ascot knew is a puzzle that everyone wants answered, but one thing is certain: It's virtually impossible to have returns like Madoff reported, and it should have been a major warning signal.

Aside from the impact on stocks overall, the exposure of fraud on a massive scale is also devastating to individuals who trusted Madoff with their fortunes and to nonprofit organizations like Yeshiva University, which counted on Madoff's purported secret trading system to help operate its institutions. Sterling Equities, the investment vehicle of the Wilpon family, which owns the New York Mets baseball team, had $300 million reportedly invested in Ascot. So did some wealthy investors who had money in related hedge funds who were never informed of ties to Ascot. Another private bank executive placed $10 million from a client just two weeks ago. He knew of another family that had $100 million with Madoff. A woman in California told us that she had lost everything with Madoff and another hedge fund.

Everyone in New York wants to know how Madoff could have pulled off this Ponzi scheme whereby these new investment funds were apparently used to pay double-digit returns to some of the older investors. A charitable account that operates institutions in Israel received a 12% return recently. Other individual investors report that they got nothing.