Top Investment Advisor Arrested in $50 Billion Fraud Scheme

Posted on December 11, 2008

As the recession deepens, investors are pulling out of all but the safest investments. That fact has apparently led to the downfall of one of Wall Street's best known investment advisors, Bernard Madoff, 70. Madoff is a former chairman of NASDAQ. He paid high returns and clients loved him. But when clients wanted out of the market because of the uncertain financial climate, Madoff couldn't come up with the money. That's because for years he's been running a Ponzi scheme: he paid fake returns to some investors, using new investors' money. Madoff admitted this fact to two employees who went to the authorities. Now Madoff has been arrested, and is out on a $10 million bail.

According to a Securities and Exchange Commission document filed in Jan. 2008, and cited in the complaint, the firm had between 11 and 25 clients for the fiscal year ending Oct. 2007 and managed about $17 billion in assets in 23 different accounts.
Bernard Madoff Investment Securities, in addition to that private client practice, is also a market maker that trades with other dealers in bonds, the S&P 500 and NASDAQ, according to Bloomberg News. The firm was the 23rd largest market maker on NASDAQ in October, handling a daily average of about 50 million shares a day. The firm specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc., Bloomberg News reported.
But on Wednesday, Madoff allegedly told senior employees at his firm that his entire business was a fraud. According to the federal complaint, Madoff told those employees that he was "finished" and that "it's all one big lie." Madoff estimated "the losses from the fraud to be at least approximately $50 billion," the complaint states. At that time Madoff also told those employees that he intended to surrender to authorities, but before he did he planned to use $200-300 million he had left to make payments to "selected employees, family and friends," the complaint states.

His arrest has sent shudders through the investment community. Losses are expected to be in the $50 billion+ range. Madoff's arrest is most likely going to panic other investors who will also withdraw funds. It's a total disaster.