Giant Wall Street ‘Ponzi Scheme’ Collapses; Potential Losses In Madoff Fraud Pegged at $50 Billion Amid ‘One Big Lie’

And you thought AdSurfDaily members had problems, having been told their money was part of a $100 million Ponzi scheme.

Former Nasdaq Chairman Bernard Madoff has been accused of running a monumental Ponzi scheme that sustained itself for years based on his reputation. Socialites from Palm Beach, New York’s celebrity elite, endowments, European banks and investment houses and others may sustain $50 billion — that’s billion, with a “b” — in losses.

Madoff acknowledged he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically a giant Ponzi scheme,” the SEC said.

“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable.”

The FBI charged Madoff, 70, criminally. He faces up to 20 years in prison and a fine of $5 million.

“Madoff stated that the business was insolvent, and that it had been for years,” the Justice Department said. “Madoff also stated that he estimated the losses from this fraud to be at least approximately $50 billion.”

One of the interesting things about this case is that people raised questions about Madoff’s investment-advisory business years ago, saying the company’s bountiful returns regardless of the market environment were inexplicable.

An employee, however, told investigators Madoff shielded the company’s true financial picture from clients and employees, a common theme in Ponzi schemes.

“Madoff kept the financial statements for the firm under lock and key, and Madoff was ‘cryptic’ about the firm’s investment-advisory business,” the Justice Department said.

It all collapsed this week, when Madoff ran out of shells to move. He had been a fixture on Wall Street for decades.

In a bizarre move, Madoff further informed the senior employees that, “in approximately one week, he planned to surrender to authorities, but before he did that, he had approximately $200-300 million left, and he planned to use that money to make payments to certain selected employees, family and friends.”

Financiers described the alleged Ponzi scheme as one of epic proportions. The ripple effect could be considerable because at least some of the money was tied to hedge funds managed by investment companies.

“The Madoff firm had more than $17 billion in assets under management as of the beginning of 2008,” the Justice Department said. “It appears that virtually all assets of the advisory business are missing.”

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4 Responses to “Giant Wall Street ‘Ponzi Scheme’ Collapses; Potential Losses In Madoff Fraud Pegged at $50 Billion Amid ‘One Big Lie’”

  1. Patrick;

    I have recently become acquainted with Liane Leedom, M.D., a psychiatrist who married and had a child with a con man whom she later determined to be a sociopath. She’s been doing research on the connection between sociopathy and con men, and on a blog post at http://www.lovefraud.com/blog/2008/12/12/lifeguard-to-wall-street-vanguard-the-accomplishment-of-an-entrapreneur-or-a-psychopath she comments on the Madoff situation.

    Leedom’s own story is rather bizarre, but interesting, and can be found at a site called LoveFraud.com. The link is:
    http://www.lovefraud.com/03_trueLovefraudStories/Barry_Lichtenthal_ruins_career_of_Dr_Liane_Leedom.html

    What I’ve begun to understand is that there appears to be a link between sociopathy and what I’ve observed in watching the ASD saga unfold. Things that make no sense otherwise now start to have an explanation once I bring sociopathy into the equation.

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  2. Hi Pat,

    I read the “lifeguard-to-wall-street-vanguard” post above. Thanks for sharing. It’s a pleasure to read good, interesting writing.

    The Madoff news was stunning on a number of fronts. First, it demonstrates — as Dr. Leedom points out — that a snake in a suit is still a snake.

    Beyond that, however, the most stunning thing to me is that corruption of this scale went undetected for years and years. People saw the suit and not the snake perhaps.

    Madoff had to know a day of reckoning was coming — just as so many autosurf operators enter the business knowing the model is foundationally corrupt. Regardless, the wink-nod nature of autosurfs permits the myth to proliferate. People dress them up as though they’re harmless, perhaps structuring the Terms of Service to insulate themselves from claims.

    Veteran participants are complicit. They know the model is unsustainable. This week I read a number of forum posts from MegaLido members complaining about other MegaLido members for panicking — as though their duty was to sustain the myth. Some of these things have an “Alice In Wonderland” feel, a reverse logic that makes rationality the enemy.

    The Madoff story only now is beginning to unfold. Some of the best reporters in the world are working on the story, which means more stunning revelations will follow.

    Thanks for the note and the links, Pat.

    Patrick

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  3. Hi Patrick,

    I hope the collateral damage is not too great. I can easily see a few hedge funds or other “counter parties” that will need to liquidate their portfolios or default on some counter party agreements.

    I think there will be significant fall out. Hopefully regulators will go after these clowns in suits, starting with the CEOs who raked hundreds of millions in bonuses each in the housing and finance sectors when pushing those markets higher. It’s been obvious for the past few years that that the housing bubble was just that. Where were the regulators?

    dB

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