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Bernard Madoff, swindler of the century

Former chairman of Nasdaq is accused of having set up a fraudulent operation which would have cost its clients, individual investors, pension funds and banks more than 50 billion dollars. The blow could have been fatal to the world of investment advisors...

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At 70 years of age, this legendary stock broker and former chairman of Nasdaq nevertheless attracted positive press. A pioneer of “electronic finance”, he was a pillar in the New York financial system and appeared among the circle of great American philanthropic donators.

According to an FBI document revealed by the Wall Street Journal, Madoff made an announcement to the employees of his brokerage firm Bernard L. Madoff Investment Securities LLC created in 1960, saying that he had founded a fraudulent company. He declared that he had lost about 50 billion dollars, that he had nothing and that it was all over.

He admitted to having established a fraudulent pyramid similar to a Ponzi Scheme which collapsed when its clients, began demanding, en masse, the withdrawal of their funds during the financial crisis,.

Basically, his fraudulent investment consulting firm guaranteed astonishing returns to its investors every year. The system worked well for thirty years! Indeed, the new investors, who were always more numerous from one year to the next and were attracted by word of mouth, obliviously paid guaranteed interests to the previous investors thanks to their contribution of fresh money.

They themselves were afterwards paid by the capital contribution from investors who followed.

Continuity was assured by the very low capital withdrawals of investors owed partially to Madoff?s thirty-year track record, which always managed to keep its promises of high returns (more than 15 % a year).

Yet sfrom 1999, journalists and investors began to question the infallible returns of Madoff?s company which was audited by an unknown firm. “Trade secret of the big wizard” and “legendary intuition” were the pompous answers to their enquiries.

Five investigations by the SEC were carried out, in 1995, 1997, 2001, 2005 and 2007 respectively, but no answers were revealed.

Another question often asked is, did Madoff act alone? Difficult to believe... Even though he indicated that he would use the 200 or 300 million dollars available to him from a different firm to settle his debts to certain employees, members his family and friends, he risks up to 20 years in prison and a fine of 5 million dollars.

The repercussions threaten to be painful for the realm of fund raising, investment advisors and the fund management, etc.... According to statements made by Madoff to the SEC (the New York stock exchange watchdog), his fraudulent investment and consulting firm managed the assets of about 25 clients, wealthy individual investors, pension funds and banks, for a total amount of 17 billion dollars.

Huge personal fortunes such as those of the Wilpon family, owner of the New York Mets (New York baseball team); Norman Braman, former owner of the american football team of Philadelphia, the Philadelphia Eagles; the billionnaire Ira Rennert, chairman of holding company Renco; publishing and real estate magnate Mort Zuckerman, the Glodberg family, former owner of the Stop and Shop supermarket chain; Carl Shapiro, founder of the textile company Kay Windsor, and his son-in-law; the philanthropist Robert Jaffe; Leonard Feinstein, founder of the domestic merchandise chain Bed Bath & Beyond; Hollywood producer Sam Englebardt and director Steven Spielberg are among Madoff?s clients.

A number of Jewish non-profit organizations could also be affected!

The California-based Chais Family Foundation, which gives about 9 million euros to Jewish causes each year has admitted defeat and dismissed five employees.

In Boston, the Robert I. Lappin Charitable Foundation which finances travels to Israel for young Jews filed for bankruptcy and lost 7 million dollars.

Finally, the JEHT Foundation, which supports criminal justice reform for minors declared its closure because their donators Jeanne Levy-Church and Kenneth Levy-Church had invested in Madoff?s firm.

The Elie Wiesel Foundation for Humanity as well as that of New Jersey senator, Frank Lautenberg, were also affected.

In Israel, several companies made huge investments in the pyramid: insurance firms such as Harel, Clal and Phoenix were directly exposed by the Madoff affaire.

According to a New York lawyer, “There are people who were very fortunate a few days ago but today, are virtually destitute. They have only their apartments or their houses, which they will have to sell in order to live."

But the Madoff swindle also affects Europe and Asia. And the consequences for the victims could be more serious than the Lehman Brothers bankruptcy.

In France, BNP Paribas is the bank most exposed to the fraud. It could lose up to 350 million euros. Natixis revealed that its customers were exposed to 450 million euros.

The Credit Mutuel-CIC could lose up to 90 million.

In Japan, Nomura?s exposure is 250 million euros.

In London, RBS is exposed to an amount of 800 million euros and HSBC to a billion euros.

In Switzerland, according to The Time, Helvetian banks among whom Neue Privat Bank, could lose up to five billion dollars.

In Spain, the investment fund Optimal-Santander, subsidiary of Santander bank would be exposed to three billion dollars.

But is it not true that the most concerning part is that Bernard Madoff was a member of the committee in charge of new finance regulation measures?

Yann Olivier , December 2008

Article also available in : English EN | français FR

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