Bernard Madoff tried to raise millions in the last few weeks [subscription required] before he finally confessed to his $50 billion Ponzi scheme, according to a report in the Wall Street Journal today. This story lends even more credence to my suspicion that Madoff may have acted alone in building what will likely be the world's largest Ponzi scheme. When I said that on Fox Business News on Monday, I was definitely in the minority. In fact at the end of the show, a poll taken during the hour long show indicated that 95 percent of the people watching did not believe he had acted alone.The Wall Street Journal details all the people he contacted in what appears to be a last minute, desperate attempt to raise cash and keep his dirty little secret. Carl Shapiro, a 95-year-old philanthropist and entrepreneur, which the WSJ states was one of Madoff's oldest friends and biggest financial backers, gave Madoff $250 million sometime around December 1, 2008 - just days before he confessed to the $50 billion scheme. Some believe it was a loan, others an additional investment. Either way Shapiro's friends say he was promised a quick payback with interest or gains. Shapiro did not comment for the story.
Based on details in the story, it appears that Madoff was trying to raise funds for a new "fund" and the WSJ discussed a pitch made by Madoff to New York Investor Kenneth Langone just before Thanksgiving. Langone told the WSJ that Madoff said he was raising $500 million to $1 billion for this new fund for exclusive clients. Is that the same pitch he gave to Shapiro? Possibly, but Shapiro isn't talking. Either way it's obvious he was looking for new money to keep his Ponzi scheme going.
According to the criminal complaint filed, it was the first week of December that Madoff allegedly told one of his sons that clients wanted to take out about $7 billion and he was having trouble putting together the money. Several days after admitting to this cash flow problem, Madoff confessed the Ponzi scheme to his sons.
Was that truly the first time his sons knew of the Ponzi scheme? Most people don't seem to believe that to be the case. But having been married to a son of a famous person, I can believe that it's true. A son or daughter can be in such awe of a famous father that they will never question any of his actions.
Did Madoff act alone? I still think it's possible that he did. He carefully structured his business to minimize scrutiny of the SEC by telling them he only serviced hedge funds and did not service individual investors directly. He served on at least one SEC advisory committee and knew from his insider exposure what the SEC would look for and how to respond to investigative questions. What do you think?
Lita Epstein has written more than 25 books including "Reading Financial Reports for Dummies," (second edition released this month) and "Complete Idiot's Guide to Value Investing."
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Reader Comments (Page 1 of 1)
1-07-2009 @ 9:43AM
Johnny Bulluck said...
Lita;
Mr. Madoff is a very intelligent man, but with very little time for writing and debugging financial programs and coordianting them in real time with his various funds, therefore, there must be a staff of individuals who wrote, manipulated and hid the true input values from these funds. In fact, the funds managers had to have known that these funds were not producing these clients reported values as well as the accounting and internal audit staff.
1-07-2009 @ 9:30AM
Lita Epstein said...
Johnny,
How he kept his books - and we know from press reports he kept several versions of books - is definitely one of the big questions.
He divided his business into two parts - one based on public trades and a secret part that few, if any, other than Madoff, had access to the full information. The public version of the books may have gone through traditional auditing processes, but did the secret portion of the business have the same level of scrutiny? I doubt it.
We won't know what was put on paper until the investigation is complete. While in an organization structured in the traditional way there would be an internal accounting and audit staff. Press reports indicate that there was a "secret" room where the full financial details of the ponzi scheme were kept and we don't know who had access to that "secret" room.
Lita
1-08-2009 @ 7:46AM
Rich said...
I cannot believe a man like Bernard Madoff can live with himself. My wife's grandfather had his entire life's fortune with Madoff and will loose everything because of him. Whoever is invloved in this scandal should be penalized to the fullest extent of the law and whatever monies can be recovered should be returned to investors. If Washington or the SEC knew what was going on they should be responsible for the investments people made and they should be responsible for the repayment of these investments to the investors as well. This is too big of a scandal that many people had to be a part of the cover up. It saddens me to think these types of schemes can actually goes on and people like Bernard Madoff and Tom Peters could do this to their trusted friends and associates.
1-07-2009 @ 11:41AM
Max said...
Hi Lita,
Where did the money go, and why isn't the US trying to recover it from the banks/countries where it is stashed? It is extraordinarily difficult to distribute / spend $50 billion dollars without any transactional evidence, wouldn't you agree? Personally, I find it hard to believe that Mr. Madoff acted as accounts receivable at his market-making firm. Where are the tax attorneys, and what about the IRS. How were they not involved with these enormous transfers of wealth?
1-07-2009 @ 11:51AM
Lita Epstein said...
Max,
At this point no one seems to be able to find a significant amount of the funds. In a ponzi scheme new money is paid out to longer term investors to keep up the illusion that the investment is truly earning the promised returns even though there is no underlying investment.
The big question is why didn't the SEC realize there were no underlying investments? Also how did this ponzi develop to the level it did without SEC scrutiny?
Lita