Former NASDAQ chairman arrested over alleged $50 billion fraud

[Naveed Yaseen]

By Edith Honan Edith Honan
NEW YORK (Reuters) – Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion Ponzi scheme in what may rank among the biggest frauds ever.

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.

Madoff told senior employees of his firm on Wednesday that "it's all just one big lie" and that it was "basically, a giant Ponzi scheme," with estimated investor losses of about $50 billion, according to the U.S. Attorney's criminal complaint against him. A Ponzi scheme is a swindle where early investors are paid off with money from later investors.

The $50 billion allegedly lost to investors would make Madoff's fund one of the biggest frauds in history. When Enron filed for bankruptcy in 2001, one of the largest at the time, it had $63.4 billion in assets.

U.S. prosecutors charged Madoff, 70, with a single count of securities fraud. They said he faces up to 20 years in prison and a fine of up to $5 million.

"Madoff stated that the business was insolvent, and that it had been for years," Lev Dassin, acting United States Attorney for the Southern District of New York, said in a statement.

The Securities and Exchange Commission filed separate civil charges against Madoff.

Authorities said that, according to a document filed by Madoff with the U.S. Securities and Exchange Commission on January 7, 2008, Madoff's investment advisory business served between 11 and 25 clients and had a total of about $17.1 billion in assets under management. Those clients may have included other funds that in turn had many investors.

The SEC said it appeared that virtually all of the assets of his hedge fund business were missing.

CONSISTENT RETURNS

An investor in the hedge fund said it generated consistent returns, which was part of the attraction. Since 2004, annual returns averaged around 8 percent and ranged from 7.3 percent to 9 percent, but last decade returns were typically in the low-double digits, the investor said.

The fund told investors it followed a "split strike conversion" strategy, which entailed owning stock and buying and selling options to limit downside risk, said the investor, who requested anonymity.

Jon Najarian, an acquaintance of Madoff who has traded options for decades, said ... "Many of us questioned how that strategy could generate those kinds of returns so consistently."

Najarian, co-founder of optionmonster.com, once tried to buy what was then the Cincinnati Stock Exchange when Madoff was a major seatholder on the exchange. Najarian met with Madoff, who rejected his bid.

"He always seemed to be a straight shooter. I was shocked by this news," Najarian said.

'UNFORTUNATE SET OF EVENTS'

"Bernard Madoff is a longstanding leader in the financial services industry," his lawyer Dan Horwitz told reporters outside a downtown Manhattan courtroom where he was charged. "We will fight to get through this unfortunate set of events."

A shaken Madoff stared at the ground as reporters peppered him with questions. He was released after posting a $10 million bond secured by his Manhattan apartment.

"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."

Madoff had long kept the financial statements for his hedge fund business under "lock and key," according to prosecutors, and was "cryptic" about the firm. The hedge fund business was located on a separate floor from the market making business.

Bernard L. Madoff Investment Securities has more than $700 million in capital, according to its website. It is a market maker for about 350 Nasdaq stocks, including Apple, EBay and Dell, according to the website.

The website also states that Madoff himself has "a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."

The company's web site may be found here: http://www.madoff.com/

(Additional reporting by Christian Plumb, Phil Wahba, Michelle Nichols and Dan Wilchins in New York and Rachelle Younglai in Washington; Editing by Andre Grenon and Bernard Orr)

http://news.yahoo.com/s/nm/20081212/bs_n...off_arrest