The news of Bernard Madoff's alleged $50 billion Ponzi scheme sent shock waves down Wall Street this morning, but it seems enough 'red flags' had been raised by at least one due diligence firm to steer some hedge fund
managers, high net worth individuals, and institutional investors away. Yet it was also revealed today that even the owner of the Mets baseball team is among his victims.
The powerful New York financial advisor whose handful of clients routinely expected -- and received -- double digit returns, up market or down, may have instead been running a decades-long scheme that defrauded investors of $50 billion, according to a one-count criminal complaint unsealed Thursday in federal court in New York. Madoff, 70, a former chairman of NASDAQ, was an investment adviser who catered to a handful of high net worth clients, one of whom told ABC News that Madoff was so sought after that, as recently as two months ago, he was turning down potential new business.
Employees of the firm are now packing up their belongings and some have lost their life savings. But the research firm Aksia which also provides advice to pensions, endowments, foundations and insurance companies, says they were already steering clients away from Madoff's hedge fund based on a "host of red flags."
According to the letter to its clients, Aksia "published extensive reports on several of the 'feeder funds' which allocated their capital to Madoff Securities ... Our judgment was swift, given the extensive list of red flags."
Aksia said in its letter that when the firm checked the auditor of Madoff's fund they found the operation was quite small, given the amount of money being handled.
The accounting firm, says Aksia, had just three employees, "of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47-year-old accountant (and the office in Rockland County, N.Y., was only 13 ft x 18 ft large)."
In addition to Aksia, today news began to swirl around the case that raised questions as to whether the Securities and Exchange Commission had responded appropriately to other red flags raised earlier by investors.
Other investors large and small, however, appeared today to be suffering from their trust in Madoff.
Fred Wilpon, owner of the New York Mets baseball team, is chairman of the board and co-founder of Sterling Equities, a firm that invested with Madoff.
Sterling Equities today issued a statement that said, "Among our various investments, we have accounts managed by Madoff Securities. We are shocked by recent events and, like all investors, will continue to monitor the situation."
Sterling has been hurt before by funds that turned out to be frauds. The firm, which has developed 17 million square feet of commercial real estate and owns the New York Mets, also funded Sterling Stamos Capital, in which it maintained a limited partner minority interest. That fund invested in Bayou Capital, and subsequently was damaged when it turned out that Bayou, run by Sam Israel III, was something of a Ponzi scheme itself. Israel was convicted of fraud, sentenced to 20 years and subsequently tried to escape imprisonment by faking his own death earlier this year.
An individual investor with Madoff told ABC that "the only risk with Bernie Madoff was the risk that occurred -- it turned out to be a Ponzi scheme." The strategy that Madoff took, according to the statements he delivered to investors, was one in which he "collared" a stock, taking put and call positions while holding the underlying stock in the client account. If the strategy were utilized, generally speaking, if the market soared, there would be a limit on how much of the gain the investor would share. But conversely, if the market tanked, the investor would not be swimming naked at low tide, the investor's exposure would be limited.
ABCNews.com called the SEC in New York and Washington numerous times regarding earlier investigations into Madoff funds and whether or not the red flags raised by investment advisors were brought to the attention of the SEC.
A SEC spokesman responded Friday evening with this statement:
"The staff of the SEC's New York Regional Office completed two inquiries into Bernard L. Madoff Investment Securities LLC in 2005 and 2007. Staff from the Office of Compliance Inspections and Examinations completed a broker-dealer examination in 2005, finding three violations of 'best execution' rules. Staff from the Division of Enforcement in New York completed an investigation in 2007, and did not refer the matter to the Commission for enforcement action. In response to recent new evidence, the New York Regional Office recommenced its investigation of Madoff and referred the matter to the Commission for enforcement action on December 11, 2008."
The SEC had previously referred ABCNews.com to its Thursday press release in which New York Associate Director for Enforcement, Andrew Calamari said, "Our complaint alleges a stunning fraud that appears to be of epic proportions."
According to an SEC document filed in January 2008, and cited in the complaint, Madoff's firm had between 11 and 25 clients for the fiscal year ending October 2007, and managed about $17 billion in assets in 23 different accounts.
Madoff's lawyer, Dan Horwitz, a partner at Dickstein Shapiro in New York, said his client is cooperating fully with the federal investigation.
"Bernie Madoff is a long-standing leader in the financial services industry and he is cooperating fully with the government investigation into this unfortunate set of events," Horwitz said.
Bernard Madoff Investment Securities, in addition to that private client practice, is also a market maker that trades with other dealers in bonds, the S&P 500 and NASDAQ, according to Bloomberg News.
The firm was the 23rd largest market maker on NASDAQ in October, handling a daily average of about 50 million shares. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc., Bloomberg News reported.
But on Wednesday, Madoff allegedly told senior employees at his firm that his entire business was a fraud. According to the federal complaint, Madoff told those employees that he was "finished" and that "it's all one big lie." Madoff estimated "the losses from the fraud to be at least approximately $50 billion," the complaint states.
At that time, Madoff also told those employees that he intended to surrender to authorities, but before he did, he planned to use $200-300 million he had left to make payments to "selected employees, family and friends," the complaint states.
Madoff was arrested Thursday morning by FBI agents and charged with criminal securities fraud by federal prosecutors in Manhattan. The complaint states that he used "manipulative and deceptive practices." The complaint cites two senior employees describing how Madoff kept his client records "under lock and key" and how he left them in the dark about how he managed the private client funds. One of those employees, in interviews with the FBI, said that Madoff was "cryptic" in his statements. This, according to clients, is in keeping with the aura that Madoff cultivated among his clients, some of whom have kept funds under management with him for generations. ABC News has learned that the two senior employees who reported Madoff were his sons.
But by the first week of December, when clients began clamoring for redemptions -- to the tune of $7 billion -- the complaint states that Madoff began a struggle to obtain the necessary liquidity. The stress began to show, employees said.
In a meeting at their boss's Manhattan apartment -- held there following a confrontation in the office Wednesday because Madoff wasn't sure "he would be able to hold it together" if the conversation took place in the office -- the employees came away believing that Madoff was "saying, in substance that he had, for years, been paying returns to certain investors out of the principal received from other, different investors."
The next day, Dec. 11, Madoff spoke with FBI agent Theodore Cacioppi and invited the agent and another agent to his apartment. Cacioppi stated in the complaint that he told Madoff he came by to see if "there's an innocent explanation."
"There is no innocent explanation," Madoff replied, according to the sworn complaint.
Madoff started his business in 1960 with $5,000 in savings. He resides in New York City and, according to clients, also maintains a posh waterfront home. Known to his clients as Bernie, he has a long and significant history on Wall Street and has been a chairman of the board of NASDAQ and was a founding member of the board of the International Securities Clearing Corp. in London.
Madoff was also the treasurer of the board of trustees at Yeshiva University, but resigned following Thursday's announcement.
"We are shocked at this revelation," said a university spokesperson. "Bernard Madoff has tendered his resignation from all positions affiliated with the university and involvement with the university. Our lawyers and accountants are investigating all aspects of his relationship to Yeshiva University. We reserve our comments until we complete our investigation."
The Web site for Madoff's firm, in its company profile, says, "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."
Madoff was released on $10 million bond following a court appearance in Manhattan.