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Originally published December 13, 2008 at 12:00 AM | Page modified December 13, 2008 at 1:31 AM

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A trusted man, $50B, a "giant Ponzi scheme"

Many began investing with Bernard Madoff, 70, decades ago, often after being referred by a friend or relative who had known the Wall Street veteran and onetime Nasdaq chairman even longer.

The Associated Press

NEW YORK — They knew him for years as a golf partner, a family friend. Some were neighbors or fellow members of country clubs on Long Island and in Florida.

Many began investing with Bernard Madoff, 70, decades ago, often after being referred by a friend or relative who had known the Wall Street veteran and onetime Nasdaq chairman even longer.

But according to a criminal complaint filed Thursday, Madoff estimates he lost as much as $50 billion over many years. If true, it could be one of the largest fraud schemes in Wall Street history.

There had been some warnings: Financial consultants had been suspicious for years about his astounding run of success.

They couldn't figure out how he managed to produce steady returns, month after month, even when everyone else was losing money, and leave almost no footprint while moving billions of dollars in and out of the markets.

"People would come to me with their statements and I couldn't make heads or tails of them," said Charles Gradante, co-founder of the Hennessee Group and adviser to hedge-fund investors.

"He only had five down months since 1996," Gradante said. "There's no strategy in the world that can generate that kind of performance. But when people would come to him and say, 'How did I make money this month?' he didn't like it. He would get upset with people who probed too much."

Those investors were scrambling Friday to learn whether they had been wiped out by what prosecutors described as a multibillion-dollar Ponzi scheme. The assets of Madoff's investment company were frozen Friday in a deal with federal regulators and a receiver was appointed to manage the firm's financial affairs.

The deal, agreed to separately by Madoff and his company, was approved late Friday by a federal judge, said Alexander Vasilescu, trial chief of the federal Securities and Exchange Commission (SEC).

Vasilescu said the receiver would try to locate and secure Madoff's businesses to preserve assets and "determine the scope of the misconduct."

Vasilescu said it was "premature" to assess how much money investors might get back. He said a central job of the receiver would be to assess claims and to plan how assets can be distributed.

The collapse of Bernard L. Madoff Investment Securities came just hours before his arrest Thursday on a single securities-fraud count. Madoff, who allegedly told his employees he was running a "giant Ponzi scheme," was freed on $10 million bail.

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Lawyers for distraught investors worried they had lost all their savings packed a courtroom in the federal building Friday, awaiting a hearing on the disposition of Madoff's remaining assets. The hearing was canceled after the agreement was reached.

Stephen Weiss, who said he had spoken to at least 30 investors, said many were devastated.

One investor, Lawrence Velvel, 69, dean of the Massachusetts School of Law, said he and a friend may have lost millions of dollars between them.

"This is a major disaster for a lot of people," Velvel said. "You work all your life, you finally manage to save up something, and somebody who's entrusted with it, it turns out suddenly he's a crook. Lots of people are getting fully or partially wiped out."

Velvel said he wants to know where government regulators, as well as accountants and others at Madoff's company, were when the money was being lost.

Turned in by his sons

According to the criminal complaint, Madoff told senior employees of his firm Wednesday that he had blown more than $50 billion with fraudulent financial moves, that he was "finished" and that he had "absolutely nothing."

The FBI said Friday that Madoff's two sons, Andrew and Mark, called authorities after he confessed, according to Martin Flumbenbaum, an attorney for the brothers.

"Mark and Andrew Madoff are not involved in the firm's asset management business, and neither had any knowledge of the fraud before their father informed them of it on Wednesday," according to a statement from the lawyer.

Two FBI agents arrived at Madoff door Thursday morning. "We're here to find out if there's an innocent explanation," Agent Theodore Cacioppi told Madoff.

"There is no innocent explanation," Madoff, told the agents, saying he traded and lost money for institutional clients. He said he "paid investors with money that wasn't there" and expected to go to jail. With that, agents arrested Madoff, according to the FBI complaint.

The complaint said Madoff handled investments for as many as 25 clients in his private investment business, but lawyers for investors Friday said the number likely runs much higher. Some estimates ran into the hundreds.

Sterling Equities, an investment firm run by New York Mets owner Fred Wilpon, acknowledged that it had investments with Madoff's firm.

"We are shocked by recent events and, like all investors, will continue to monitor the situation," it said.

Madoff's lawyer, Dan Horwitz, said his client was "a long-standing leader in the financial-services industry with an unblemished record" and would "fight to get through this unfortunate event."

Sterling reputation

Madoff founded his firm in 1960, using $5,000 he earned in part as a lifeguard on Long Island beaches. In the industry, he had a reputation for safe investments and steady returns that made individual investors eager to place their money with him and made competitors suspicious of his success.

Marc Powers, head of the securities practice at Baker Hostetler, said Madoff was "a very well-respected, highly regarded person" on Wall Street.

"Everybody heard of him," he said, noting his firm had received calls from investors Friday worried about their future. "There's a shell shock that's going on now. This ruins people's lives. It destroys whatever they built up over 40 years at the hands of a person they trusted."

Velvel said he listened to Madoff's employees explain how the firm made profits in good times and bad through computerized trading on blue-chip stocks and options, enabling small and steady profits on scores of trades.

"It made all the bloody sense in the world," he said.

Brad Friedman, an attorney representing several people who had invested at least $1 million with Madoff, said most had been with him for decades.

"They know him socially, through the Palm Beach Country Club or the Glen Oaks Country Club (on Long Island). They played golf with him," Friedman said.

Other funds that announced investments in Bernard L. Madoff Investment Securities included Fairfield Greenwich Group, Bramdean Alternatives Limited and Pioneer Alternative Investments.

Suspicions

There had been warning bells for years about Madoff's company.

Jake Walthour, a principal at the hedge-fund consulting firm Aksia, said his firm was hired to investigate Madoff's business dealings by a potential investor several years ago.

The investigation raised several red flags, he said. Madoff's returns were "abnormally smooth" from month to month and had none of the volatility usually associated with stock investments.

It seemed impossible to replicate his investment strategy or verify his track record.

Madoff claimed to be moving as much as $13 billion in and out of the market every month but "no one on the street could verify it or even see his footprints," Walthour said.

He only issued simple paper reports to investors, not detailed electronic data streams that indicate how those investments are doing.

There were few if any outsiders involved in his business. His auditor was a tiny accounting firm in Rockland County that no one had ever heard of.

"We decided there are several scenarios here, one of which is, this could be a Ponzi scheme," Walthour said. "None of our clients invested."

Information from Bloomberg News

is included in this report.

Copyright © 2008 The Seattle Times Company

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