The Big Bad Madoff Ponzi Scheme

[Mulboyne]

[quote="nottu"]...Well, guess what - there are winners on that list –]

Not necessarily. The only "winner" would be someone who invested with Madoff and cashed in their investment. There may be some in that category but it seems that most investors kept their funds with Bernie and may even have increased them over time. Potential winners would be people who were paid introduction fees by Madoff, or management fees by investors they introduced to Madoff, provided they didn't have their own funds with the guy. Anyone in that position, however, is likely to find themselves sued. Indeed, lawyers are hunting high and low to find people who might have come out ahead in dealings with Madoff in order to put in a claim against them.

[omae mona]

Not necessarily. The only "winner" would be someone who invested with Madoff and cashed in their investment. There may be some in that category but it seems that most investors kept their funds with Bernie and may even have increased them over time. Potential winners would be people who were paid introduction fees by Madoff, or management fees by investors they introduced to Madoff, provided they didn't have their own funds with the guy. Anyone in that position, however, is likely to find themselves sued. Indeed, lawyers are hunting high and low to find people who might have come out ahead in dealings with Madoff in order to put in a claim against them.

Mulboyne is exactly right. For example, in the case of blown up Ponzi-scheme hedge fund Bayou, some investors who terminated their relationship with Bayou two years before the blowup found themselves having to give back money, and they were quite surprised. So there is precedent for going after people who were the beneficiary of fake gains.

It's a valid question to say 'where is the money now?' but there was not just $50 billion shuffled from one person to the next. Presumably the reason Madoff started running this as a ponzi scheme instead of a legitimate operation is because there was a massive loss for some reason, and he wanted to cover it up. Either the investment was losing money, or he siphoned the capital off to his personal accounts or some other part of his business. Investigators are right now spending most of their efforts trying to figure out where the money went. I doubt the full 50 billion was lost, and there will be some small amount of recovery. But it's probable that a large chunk of it is unrecoverable.

[nottu]

[nottu]

[omae mona]

Mulboyne is exactly wrong and everyone will find out as this fiasco proceeds. You used Bayou as an example with a look back of two years - which only reinforces the criminality of people like Madoff and associates. Going back two years will not get you to who you need to get to. Are you aware of how far back they will be able and allowed to go?
Lets see the time line and the names.

nottu, I'm not sure exactly what your point is. If you're claiming that the entire missing $50B was disbursed as gains, above and beyond the principal, to early investors, that's just mathematically impossible.

Articles show they only had $6-7B under management as late as 2001. Even if you assume he somehow raised $43B and grew to $50B in 2002 (which is absurd), then assume fake 10% gains annually, it would take until the end of 2010 before he generated $50B in phony profits to be passed on to earlier investors, and it only would be gone if they had redeemed all their profits.

You're off by at least an order of magnitude on your theory. The vast majority of the $50B is not in the hands of early investors - it's somewhere else.

[nottu]

[IkemenTommy]

Nottu, if the funds were transferred from one possession to another, then can't you just retrace back to the origin and retransfer them back?

[omae mona]

nottu, you are clearly very emotional about this. Did you have money tied up directly or indirectly with Madoff, by any chance (if it's ok to ask)?

I'm not sure I understand who you think Mulboyne or I are defending, or why. Certainly not Bernie Madoff! Can you clarify?

[Mulboyne]

Nottu, I think you are assuming that all investors received their investment return in the form of annual dividend cheques from Madoff which is why you say there would have been no need for an investor to cash in their investment to receive their return. It also would explain why you draw the dichotomy you do between early and late stage investors. I'm assuming instead that Madoff was operating as an investment fund where you can only get access to the reported return by cashing in.

I suppose it is possible that Madoff did pay his fictitious returns as annual dividends but it would be very odd not least because investors would incur income tax instead of capital gains tax. I'd be interested if you have strong reasons to assume that this was the way Madoff operated because it isn't apparent in the reports so far.

[gkanai]

Aozora announced on Tuesday that they've lost $137 million to the Madoff ponzi.

http://www.google.com/hostednews/ap/article/ALeqM5gkXchic_aV-Bk7IUzr4kFq8TM_UwD953QSL00

[nottu]

[Mulboyne]

Nottu, I think you've badly misunderstood what I've been saying and what omae mona has pointed out. There's no defence of Madoff here or blind acceptance of any story. I also find it almost impossible to believe that his sons only discovered the true nature of the fraud when their father allegedly confessed.

You seem to think the media is sitting by idly when the truth is that the race is on to discover what happened and who, if anyone, has profited from Madoff whether legally or illegally. I think you have unreasonable expectations for how soon the facts about what happened should come out and are mistaking the current lack of clarity for a lack of interest in discovering the truth.

What I responded to in your original post, as did omae mona, was the potential problem with the mathematics of your earlier claim. To understand who lost money, it does very much matter whether an investor received their returns on paper or whether they cashed in their investment and it's too simplistic to say all early investors made out like bandits at the expense of later investors.

From press reports, we hear of people like Fred Wilpon who had a "twenty year relationship" with Madoff and who allegedly had "hundreds of millions" with the firm at the death. On the other hand, we know that anyone who asked for their money back from Madoff at any point before the collapse must have received it along with the fictitious profits otherwise the fraud would have come to light much earlier. However, this would be as true of any late stage investor as of any early investor. Consequently, its easy to conceive of winners who invested late and losers who invested early. As we follow the money trail, we'll find out.

When we see the headline "$50 billion" fraud, we don't yet know how that number breaks down. Say, for example, that someone had invested $100 million with Madoff 20 years ago and was told they had made around 10% a year which they rolled over every time. On paper, that investor would believe they had an investment with the firm near $700 million. If Madoff's returns were entirely fictitious, however, the investment was never worth that so the additional $600 million, in a sense, never existed. That's obviously not how the investor would see it, however.

On the other hand, If someone gave Madoff $600 million last year and now discovers that the fund has no assets then that is very definitely $600 million which has gone missing. Of the losses announced so far, we don't yet know how much was original capital and how much was fake returns. Nevertheless, it ought to be straightforward to work out.

However it eventually breaks down, we know there's a lot of original capital which has evaporated so lets think what could have happened to it. It would have been paid out to investors who redeemed because we know there were redemptions even if we don't yet know who they were. It would also have been spent by Madoff and family and some may yet be found in Madoff business and personal accounts. Some was probably also lost in the market. This will need close investigation to see whether funds were "deliberately" lost, with the sole purpose of enriching another market participant, or whether they were genuinely bad investments.

Whichever way it pans out, I have no sympathy for Madoff and no sympathy for supposedly sophisticated investors who couldn't see through him.

[omae mona]

What Mulboyne said

nottu, also, I am curious what makes you think Madoff will get off easy. Sammy Israel is serving a 20 year sentence for the Bayou fraud, which was only 1% the size of Madoff's apparent fraud. Bernie Ebbers of Worldcom is doing 25 years for a mere $11 billion fraud. Madoff has supposedly confessed to everything in front of witnesses (his sons).

I think most people expect Madoff will be in jail for the rest of his life; I haven't heard any suggestions otherwise.

[nottu]

[Mulboyne]

Its not the amount, its the charges.

Again, you are expecting too much too soon. No-one knows exactly what has happened so the final charge sheet against Madoff hasn't been drawn up yet. On top of that, prosecutors don't yet know who else they will need to indict but most observers seem sceptical that Madoff could have orchestrated a fraud without help from others. He only turned himself in on the 11th December so it's simply not realistic to expect investigators to know exactly who did what before even a week has passed.

[Mulboyne]

Here's one Reuters article which covers some of the same territory;

Madoff fraud could burn those who pulled out early

Disgraced money manager Bernard Madoff's suspected $50 billion fraud scheme looks set to burn even those who pulled their investments out long before the scandal rippled into the global financial system. Such investors may have counted themselves fortunate, withdrawing their money years ago to buy a house or to pay for a daughter's education, and may have even sighed with relief because they ended ties with Madoff long before the scandal erupted late last week. But they, too, could face trouble, lawyers say. Because of a legal concept known as "fraudulent conveyance," they could be forced to return their profits and even some of their initial investments to help offset losses incurred by others entangled in the long-running Ponzi scheme..."There were no profits. It was just other people's money," said Brad Alford, who runs investment adviser Alpha Capital Management LLC in Atlanta. Alford is well versed in fraudulent conveyance after one of his clients withdrew money from a $450 million scheme by Connecticut hedge-fund company Bayou Group LLC a year before it collapsed in scandal. "We ended up settling with the estate, giving back all the profits and half of our principal"...Philip Bentley, a lawyer at Kramer, Levin, Naftalis & Frankel LLP, who defended investors sued in 2006 by lawyers representing the Bayou estate, said he expected the court-appointed trustee now in control of Madoff's U.S. operations to look hard at who withdrew money from Madoff. "The trustee is going to look very closely at redemptions and seriously consider bringing suits just because the trustee's job is to bring in assets any way he can," Bentley said. "Potentially the numbers are enormous"...Alford said he expects several types of lawsuits, including one focused on fraudulent conveyance and another against so-called feeder funds, or hedge funds set up by outside investment advisory firms that marketed Madoff's investments to high net-worth individuals and pension funds. And he expects a third group of lawsuits to focus on litigation against advisers for entrusting 50 to 100 percent of their money with one manager. He said this could defy the "prudent man rule" that enjoins money managers to handle investors' money as they would their own. "I think the lawsuits are going to be staggering. This is going to go on for years and years," he said...more...

[nottu]

[GuyJean]

.. Are you a "journalist"?

You're sounding like one. Why don't you do all the proper research, then report back to us?

GJ

[nottu]

[GuyJean]

[omae mona]

Mulboyne - you're as deceitful as the media is with this. In your paraphrasing quote, you carefully cut out what the article mentions but does not go into detail on - the same question I posed to Omae earlier -
How far legally you are allowed to go back? The answer is max 6 years, maybe less at the discretion of the court.

Are you a lawyer with expertise in this field? I think you're taking a fund manager's educated guess (your first quote) and taking it as legal fact. By contrast, the actual lawyer you quoted is saying "it's up to the judge". Note that all of this is also through the filter of the Reuters reporter who has paraphrased as he felt appropriate. Google for "fraudulent conveyance" and "statute of limitations". I think you will find rules vary from state to state and there is a lot of complicated case law that points to the conclusion "it depends".

Why do you need closure on this, less than a week after the fraud became apparent? It's going to take months, if not years, to iron this out. It's the biggest financial fraud ever. Could it be that the bulk of the losses were transfered to early investors? Sure. Could it be that those transfers are not recoverable due to a statute of limitations? Sure. While I think they're both very unlikely, they're certainly only one out of many possible outcomes. Hold your horses. You will find out what the deal is once they are able to investigate. Knowing the answer today instead of next week is not going to change the horrible outcome of this fraud.

P.S. if I were quoting the article, I would not have included the 6-year figure either, because it is just some random fund manager's guess. Mulboyne, far from being deceitful, is attempting to give you some useful information about the case (the little that's known).

[gkanai]

Mulboyne - you're as deceitful as the media is with this.

I think your ad hominem attacks need to stop.

No one is trying to deceit anyone else here. What benefit would Mulboyne get by being deceitful? You're seeing things that are not there and accusing people of actions that are not relevant or deserved.

[nottu]

[nottu]

[FG Lurker]

I think both Mulboyne and Nottu have interesting things to contribute, and I don't think either is really attacking the other.

I have seen people interviewed on news networks who were living off "profits" from money they had invested with Madoff. One of the people I saw interviewed had his entire net worth with Madoff ($8mil) and had been living off the "profit" of that for the past 10 years. There were also a lot of charities who had money with Madoff, sometimes their entire portfolio. They were using the "profits" from Madoff to fund their charitable works.

So it seems clear that at least some of the investors were withdrawing "profits" regularly to make use of. I assume that others reinvested their "profits" to fuel future growth.

[omae mona]

[omae mona]

nottu, I think I may have suddenly realized what point you are trying to make. Are you implying that Madoff is going to get to keep gains HE (and or co-conspirators) made because a statute of limitations has elapsed?

For heavens' sake, no! All the fraudulent conveyance discussion is about 3rd parties (creditors/debitors) who were not knowing parties to the scheme. The perpetrators of the scheme are in no way protected by these rules (2, 4, 6 years or whatever you think it is). Madoff, and anybody who cannot prove they believed their gains were "bona fide", will not get to keep any money they made.

If that's what you're worried about, you can calm down.

[nottu]

[nottu]

[Mulboyne]

Nottu, I think you believe I am being deceitful because you haven't understood what I have been telling you. When you used the term "velocity of the investment rate" earlier, it occurred to me that you weren't familiar with investment terminology so I tried to be as plain as possible. Finance is not an easy subject to understand. However, if we want to hold to account the people who have misused the laws and system of transactions upon which we rely, then then we owe it to ourselves to have a thorough understanding of what has taken place.

Initially, my problem was that you argued all early stage Madoff investors had won at the expense of late stage investors. I didn't care either way but I knew, mathematically, that your conclusion was unlikely so I showed you why that might not be true. I haven't seen anything from you to counter my argument. That was the only reason I replied to you and you might note I used the words "not necessarily". I then went on to show you how anyone who had redeemed funds from Madoff might still be liable for claims and yet, somehow, you are now arguing that this is an example of me being "deceitful" rather than me expanding the terms of discussion beyond those which you had acknowledged. The accusation of deceit is even more bizarre when you consider that I provided a link encouraging you to read the rest of the article. I would like to come back to you on equal terms but I note that you have provided no evidence for your assertions so I don't know where you think I should begin.

Let's be even clearer, then. You started by suggesting that the list we have seen so far of Madoff "losers" contains many winners. My own view is that the Madoff "winners" are more likely to be people not on that "loser" list because they would not have had funds with him at the end. I happen to believe that you are right to be scornful of some of those on the "loser" list for several reasons. However, they might not have been the greatest financial beneficiaries precisely because they were still around to incur substantial losses. Perhaps other "winners" were members of his family and I hope that the money trail can show their culpability. I don't believe it necessarily will, however, because I well remember how Robert Maxwell's sons were able to escape charges for their father's crimes. If we have any point of agreement, I think it is here.

You were also very dismissive about my suggestion that the fund of funds might have been winners. When I posted earlier, I chose not to link to an article about the relationship between the Fairfield Group and Madoff. You think such fees were "trivial compared to the billions of dollars that got siphoned out to the original investors" but I would argue that you have badly underestimated those fees and so I now provide the link.

Here's the point. You are angry that such a fraud has taken place. I think you are right to be angry and I hope that everybody is angry. However, the reason someone like Madoff got away with his scam for so long is because people didn't understand what he was doing. Surely we owe it to ourselves to understand what on earth went on and to attribute blame where it is appropriate.