Prominent Trader Accused of Defrauding Clients
By DIANA B. HENRIQUES and ZACHERY KOUWE
Bernard L. Madoff, a legend among Wall Street traders, was arrested on Thursday morning by federal agents and charged with criminal securities fraud stemming from his company’s money management business.
The arrest and criminal complaint were confirmed just before 6 p.m. Thursday by Lev L. Dassin, the acting U.S. attorney in Manhattan, and Mark Mershon, the assistant director of the Federal Bureau of Investigation.
According to the complaint, Mr. Madoff advised colleagues at the firm on Wednesday that his investment advisory business was “all just one big lie” that was “basically, a giant Ponzi scheme” that, by his estimate, had lost $50 billion over many years.
Related accusations were made in a lawsuit filed by the Securities and Exchange Commission in federal court in Manhattan. That complaint accuses Mr. Madoff of defrauding advisory clients of his firm and seeks emergency relief to protect potential victims, including an asset freeze and the appointment of a receiver for the firm.
“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, director of the S.E.C. enforcement division. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors.”
Another regulator, Andrew M. Calamari, the associate director of enforcement in the New York Regional S.E.C. Office, said the case involved “a stunning fraud that appears to be of epic proportions.”
Although not a household name among consumers, Mr. Madoff’s firm has played a significant role in the structure of Wall Street for decades, both in traditional stock trading and in the development of newer electronic networks for trading equities and derivatives.
The S.E.C.’s complaint, filed in federal court in Manhattan, alleges that Mr. Madoff informed two senior employees on Wednesday that his investment advisory business was a fraud. Mr. Madoff told these employees that he was “finished,” that he had “absolutely nothing .”
The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Mr. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion, according to the regulatory complaint.
Mr. Madoff, 70, founded Bernard L. Madoff Investment Securities in 1960 and liked to recount how he had earned his initial stake by working as a life guard at city beaches and installing underground sprinkler systems. By the early 1980s, his firm was one of the largest independent trading operations in the securities industry.
The company had around $300 million in assets in 2000 at the height of the Internet bubble and ranked among the top trading and securities firms in the nation. Mr. Madoff ran the business with several family-members including his brother Peter, his nephew Charles, his niece, Shana and his sons Mark and Andrew.
Reached at his office, Peter Madoff declined to comment.
The alleged scheme apparently involved an asset-management unit of Madoff Securities, which Mr. Madoff started after the market-making business became difficult once stocks started being quoted in decimals instead of fractions
Mr. Madoff is currently on the board of Nasdaq OMX Group, formerly the Nasdaq Stock Market, and serves as the chairman of the Sy Syms School of Business at Yeshiva University. His son Mark Madoff served as the vice chairman of the Board of Directors of the National Association of Securities Dealers Inc., from 1993 to 1994 and was also an board member of brokerage firm A.G. Edwards.
His firm, which at one point was the largest market maker on the electronic Nasdaq Stock Market, employed hundreds of traders.
[Hat Tip; A Fan.]