THE BERNIE MADOFF SCANDAL
Ponzi Scheme (def) A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates
returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as
there are more new investors.
The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.
A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier
backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new
investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on
how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to
all the money in the system.
For both schemes, however, eventually there isn't enough money to go around and the schemes unravel. (investopedia.com)
Feds say Bernard Madoff's $50 billion Ponzi scheme was worst ever
BY THOMAS ZAMBITO AND GREG B. SMITH
DAILY NEWS STAFF WRITERS
Saturday, December 13th 2008, 12:43 AM
The secret life of Bernard Madoff unraveled as he stood in his upper East Side apartment in pale blue
bathrobe and slippers, facing two FBI agents. "We're here to find out if there's an innocent explanation,"
Special Agent Theodore Cacioppi told him at the Thursday morning encounter. "There is no innocent
explanation," Madoff replied.
Within hours, investors who had trusted the 70-year-old Madoff for years - including the owner of the New
York Mets - were reeling at charges that one of the most trusted names on Wall Street was a full-time fraud.
Manhattan federal prosecutors disclosed a long-running scheme that may have resulted in $50 billion in
losses - perhaps the biggest scam in Wall Street history.
The one-time Nasdaq chairman, investigators charged, operated a classic Ponzi scheme, paying off early
investors with funds from subsequent clients to keep the illusion of profit alive. He tallied his deals in secret
books locked in a filing cabinet a floor away from Madoff Securities' main offices, they said. His victims
included Fred Wilpon and Saul Katz, co-owners of the Mets, who Friday acknowledged that their Sterling
Equities had invested an unknown amount with Madoff.
Spokesman Richard Auletta insisted Madoff's arrest "does not affect the day-to-day operations and long-
term plans of the Mets organization and Citi Field."
Wilpon even trusted Madoff to invest hundreds of thousands of dollars from family charities, documents
show.
In May, Madoff's wife, Marion, joined Wilpon's wife, Judy, to raise money for the United Jewish Association
Federation in a charity bridge tournament.
Since its founding in 1960, Madoff Securities won wealthy clients like the Wilpons by delivering steady profits
through markets both bull and bear.
In January, the firm claimed Madoff's investment advisory business managed $17.1 billion for 11 to 25 clients.
Madoff Securities boasted of an "unblemished record of value, fair-dealing and high ethical standards."
Last week, the truth began to emerge as investors, spooked by the battered economy, decided to pull out
their money.
Madoff told an employee clients wanted $7 billion in redemptions, court papers state. He was "struggling" to
get it, he said.
By Tuesday, Madoff announced he wanted to distribute employee bonuses, two months ahead of time. A
suspicious senior employee said Madoff was "under great stress."
On Wednesday, employees challenged Madoff's claim the firm recently made profits. He declared he
couldn't speak of the situation at the office because he "wasn't sure he would be able to hold it together."
They went to his E. 64th St. apartment, where he revealed his business was a fraud, that he was "finished,"
that he owned "absolutely nothing."
Shocked employees, including his sons Andrew and Mark, called the Securities and Exchange Commission,
which told the FBI.
When the agents showed up at his apartment, Madoff admitted he'd "paid investors with money that wasn't
there," was "broke" and knew "it could not go on."
Friday, angry investors crowded a Manhattan federal courtroom hoping to find out if the SEC would come to
their rescue. Manhattan Federal Judge Louis Stanton issued an order freezing Madoff's assets, as well as
those of his firm, and named lawyer Lee Richard to oversee the business.
The hearing was canceled, leaving investors bewildered.
"The one thing my father always told me was, 'Never sell your Madoff,'" said a Florida investor who believes
he's out $3million he'd hoped to give to his children.
"My only question is whether [the feds] will be able to salvage anything," he said. "My gut tells me no."
tzambito@nydailynews.com
With Bill Madden