How to make $65 billion disappear.

That’s $65,000,000,000.

This is the very puzzling story of Bernard Madoff. How did he do it?

Prepared by Gary Simon, December 2008 – January 2009Last update 29 JUNE 2009.

The events were described as a Ponzi scheme.

This scheme pays off claims by old investors with the money from new investors. It works as long as there are plenty of new investors.

But where did the name “Ponzi scheme” come from?

The scheme is named for Carlo (Charles) Ponzi.

He was born in Italy in 1882 and came to the United States in 1903. He worked as a dishwasher in Boston, and he came up with his scheme in 1919.

Businesses often ask for SASEs, self-addressed stamped envelopes, to mail things back to you.

But. . . what if the correspondence goes to another country? How can you get your letter back from (say) England if you don’t have English postage stamps?

You could send your envelope with an international reply coupon good for postage in the target country.

This was at a fixed cost in the United States and was aimed at the first class postage category. Other countries did the same thing.

Ponzi realized that the postage rates varied by country. Thus, a coupon could be purchased in another country at less than its value in the United States.

This presented an arbitrage opportunity!

Here is a modern version of these coupons.

The Universal Postal Union of 1874 is an arrangement in which the countries of the world agree to carry each other’s mail. The coupons are a byproduct of that agreement.

Here are more.

Yes…. people collect these things.

Ponzi started a company called Securities Exchange Company to trade in these coupons.

Yes…. that’s S.E.C.

He promised high rates of return to investors. Early investors were paid with money from new investors. No investment ever took place.

For all we know, Ponzi never purchased more than a handful of international reply coupons.

He may have generated as much as $15M in investments from thousands of investors in 1919 and 1920.

This fell apart after about eight months, when the redemptions ran ahead of the new investments.

Ponzi served several years in jail.

He was deported back to Italy in 1934.

He eventually ended up in Brasil, where he died in poverty in 1949.

It was absurd to believe that anyone would have the patience and organizational structure to convert a few cents of arbitrage advantage into a large functioning investment scheme. This was especially absurd in 1919!

Madoff’s scheme was much more credible.

The list of losers from the Madoff scheme is long. It includes

J. Ezra Merkin (chairman of GMAC)Fred Wilpon (Sterling Equities, principal owner of the

New York Mets); $500MNorman Braman (once owned Philadelphia Eagles)Fairfield Greenwich Group (hedge fun advisory firm); $7.5BYeshiva University; $100M to $110MStephen J. Helfman (Miami lawyer whose father opened account

thirty years ago, now dealing with aging grandmother)Sam Englebardt (media investor in Los Angeles with several

relatives giving all to Madoff)

New York Times, 13 DEC 2008, Alex Berenson, Diana B. Henriques, Zachery Kouwe, Stephanie Strom and New York Times, 13 DEC 2008, Stephanie Strom, Javier C. Hernandez, Eric Konigsberg, Christine Haughney, Glenn Collins. Other sources supply this information as well.

. . . and more . . .

Many losers from the world of sports. . .

Wilpon and Braman (just mentioned)Tim Teufel, former infielder with the New York

MetsSandy Koufax, Hall of Fame pitcher of the Los

Angeles DodgersBob Nystrom, New York Islanders hockey team

(and he had three accounts with Madoff)Ray Floyd, professional golfer (who also lost in a

Ponzi scheme by K.L. Financial of Florida in 2006)

Sports Illustrated, 16 FEB 2009, page 18.

. . . and more . . .

A woman in Brooklyn (father just died and much of stepmother’s money was with Madoff)

Law school official in Massachusetts (lost millions)Bramdean Alternatives (London asset manager run by Nicola

Horlick had stock drop 36% after announcing that it had 10% of its money with Madoff)

New York Times, 13 DEC 2008, Alex Berenson, Diana B. Henriques, Zachery Kouwe, Stephanie Strom. Other sources supply this information as well.

. . . and more . . .

Irwin Kellner had $2M in an IRA and another account with Madoff. He’s the chief economist for MarketWatch.com, and he is aneconomics scholar at Dowling College. He is a lead plaintiff in a lawsuit.

Newsday, 13 DEC 2008, Carrie Mason-Draffen, James Bernstein, Patricia Kitchen. Other sources report this information as well.

Senator Frank Lautenberg of New Jersey; undisclosed amountArvam and Carol Goldberg, former owners of Stop&Shop;

portion of their $29M charitable trustLawrence Velvel, dean of Mass. School of Law; millionsStephen A. Fine, president of Biltrite; undisclosedJerome Fisher, founder of Nine West; $150M

New York Post, 14 DEC 2008, sidebar. Other sources report this information as well.

. . . and more . . .

Joyce Greenberg of Houston. In 1987 she and her husband Jacob sent $1M to Madoff to invest. Jacob died in1995, but Joyce continued to dip into money for charitable causes. Now she and her 96‑year‑old mother‑in‑law are out tens of millions. (Madoff sent statements replete with details of blue-chip transactions. )

This shows the canceled original $1,000,000 check.

New York Post, 14 DEC 2008, Todd Venezia. This information appears in other media as well.

. . . and more . . .

Carl Shapiro, founder of Kay Windsor; $400MRobert Jaffe, son-in-law of Carl Shapiro; undisclosedCarl and Ruth Shapiro Family Foundation; $145MRichard Spring, Boca Raton, former security analyst; $11MIra Roth, New Jersey; $1MStephen Abbott, San Francisco lawyer; several hundred thousandLoeb family; undisclosedTown of Fairfield CT pension fund; $42MMassachusetts state pension fund; $12MRobert I. Lappin charitable foundation; $8M and forced to closeMaxam Capital Management; $280M and forced to close

New York Post, 14 DEC 2008, sidebar. Other sources report this information as well.

. . . and more . . .

Kingate Management; $2.8BAscot Partners; $1.8BPioneer Alternative Investments of Italy; nearly all of their $835M assetsFix Asset Management of Greece; $400MTremont Capital Management; hundreds of millionsBramdean Alternatives Limited of England; 9% of its portfolioNomura Holdings of Japan; $302MBanque Benedict Hentsch, Geneva; $47.5MNeue Privat Bank, Zurich; undisclosedBNP Paribas, France; undisclosed

New York Post, 14 DEC 2008, sidebar. Other sources report this information as well, including Newsday, 16 DEC 2008, James Bernstein, Tom Incantalupo, Karla Schuster

. . . and more . . .

Kingate Management of Bermuda; part of its $2.8BNorth Shore-Long Island Jewish Health System ; $5.7MJulian J. Levitt Foundation of Texas New York-based Access International; undisclosed amount

New York Post, 14 DEC 2008, Lukas I. Alpert, James Fanelli and Newsday,16 DEC 2008, James Bernstein, Tom Incantalupo, Karla Schuster.

. . . and more . . .

Banco Santander of Spain; Geneva subsidiary Optimal Investment Services lost $3.1B; this is identified as a fund of hedge funds ( ! )

Various members of the Palm Beach Country ClubMort Zuckerman, publishing of the Daily News and real estate magnate;

$30MOther Swiss institutions, including Banque Bénédict Hentsch (about $48M)

and Neue Privat Bank

New York Times, 15 DEC 2008, Diana B. Henriques, Alex Berenson, Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced. Nelson D. Schwartz and Newsday, 16 DEC 2008, James Bernstein, Tom Incantalupo, Karla Schuster.

. . . and more . . .

But there’s a nice afternote for Banco Santander. On January 28, 2009, Emilio Botin, the president of Santander, offered to reimburse $1.82B that its private investment clients lost.

Newsday, 30 JAN 2009

Elie Wiesel Foundation for Humanity; $37MSteven Spielberg Wunderkind Foundation (supports Cedars-Sinai Medical

Center and the Chabad charity Children of Chernobyl)Royal Bank of Scotland; $600M

Newsday, 16 DEC 2008, James Bernstein, Tom Incantalupo, Karla Schuster and New York Times, Stephanie Strom, Javier C. Hernandez, Eric Konigsberg, Christine Haughney , Glenn Collins and Bloomberg News, Suzanne Plunkett.

JEHT Foundation (to promote justice, equality, human dignity, tolerance), Started in 2002 by Jeanne Levy-Church, but based on investmentsmade 30 years ago by her father Norman Levy. Gave away $75M over these years. Will close by the end of January, 2009.

Innocence ProjectSupported by JEHT to use DNA evidence to exonerate innocent prisoners.

New York Times, 16 DEC 2008. Stephanie Strom, Javier C. Hernandez, Eric Konigsberg, Christine Haughney, Glenn Collins.

. . . and more . . .

Ramaz School, a Jewish modern Orthodox prep school in Manhattan; $6MJewish Federation of Greater Washington; $10MJewish Community Centers Association of North America; undeterminedBrigham and Women’s Hospital of Boston and Jewish Federation of

Palm Beach (through Carl and Ruth Shapiro Foundation); $145M, about 45% of its assets

SAR Academy, a Jewish school in the Bronx; $1.2M, a third of its assetsChais Family Foundation in Encino, CaliforniaBNP Paribas; did not invest directly in Madoff funds but still

had $500M at risk in trades and loans with hedge fundsSwiss bank Reichmuth; $327M potential lossesHSBC made loans to institutions that invested with Madoff; $1B

. . . and more . . .

New York Times, 15 DEC 2008, Diana B. Henriques, Alex Berenson, Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced. Nelson D. Schwartz and Newsday, 16 DEC 2008, James Bernstein, Tom Incantalupo, Karla Schuster.

The Picower Foundation, established by Barbara and Jeffrey Picower in Palm Beach, Florida, in 1989, will be closing down. It had about $1B in assets. It supported

Picower Institute for Memory and Learning at M.I.T.Human Rights FirstNew York Public LibraryChildren’s Health Fund City Parks FoundationSchool District of Palm Beach CountyJewish Outreach InstituteMetropolitan Museum of Art

New York Times, Saturday, 20 DEC 2008, Geraldine Fabrikant

. . . and more . . .

Actor Kevin Bacon; amount unspecifiedHe has been in more than 60 movies, going all the way back to Animal House in 1978. You may remember him in movies like Footloose, Mystic River, Quicksilver, A Few Good Men, and many others.

www.marketwatch.com, 31 DEC 2008, reported earlier in New York Magazine.

He is also famous for the “degrees of Kevin Bacon” party game. We don’t know if he met Madoff face-to-face, but the degree of separation number is almost certainly two or less.

Henry Kaufman; several million dollars

He is a former chief economist of Salamon Brothers.

Kaufman claims that this is just a small percent of his worth.

He received his BA in economics from New YorkUniversity in 1948.

www.marketwatch.com, 31 DEC 2008, Alistair Barr and Michelle Donley.

Mr. Kaufman has a long association with New York University. He is a major donor to the Stern School of Business, and the Kaufman Management Center, 44 West Fourth Street, was constructed from his very generous gift.

These stories are getting too close for comfort. . .

NYU Picture Bank, photo by Deb Rothenberg

Sonja Kohn of Bank Medici in Vienna, amount unknown

Mrs. Kohn was a channel for eastern European investors . Many of her clients were wealthy Russians.

. . . and more . . .

New York Times, 6 JAN 2009, Nelson D. Schwartz and Julia Werdigier.

Walter M. Noel Jr., Fairfield Greenwich Group; about $7.5B, half thefirm’s assets

Noel’s relationship with Madoff earned his firm millions of dollars in fees. One of FGG’s strongest selling points for its largest fund was its access to Mr. Madoff.

New York Times, 15 DEC 2008, Diana B. Henriques, Alex Berenson, Eric Dash, Jennifer 8. Lee, Zachery Kouwe, Michael J. de la Merced. Nelson D. Schwartz and Newsday, 16 DEC 2008, James Bernstein, Tom Incantalupo, Karla Schuster.

. . . That’s all for now. But there will be more!

Photo from New York Times, 17 NOV 2008.

Of course there will be more! Just note that

$10,000,000 6,500 = $65,000,000,000

If we’re thinking of individual investors losing around $10M, then there could be 6,500 of them.

Some lost more than $10M, but quite a few lost smaller amounts.

By early February 2009, the investigation had gone far enough to give us a list of names.

The list ran to about 160 pages, with 13,567 names in all.

Diana B. Henriques, New York Times, 5 FEB 2009.

Some of the big players were feeders that channeled money from other investors to Madoff’s fund.

The Fairfield Greenwich Group charged clients annual fee of 1 percent of assets, invested 20 percent on investment gains each year

J. Ezra Merkin and his Ascot Partnersannual fee of 1.5 percent of assets invested

Gerald Breslauer, financial adviser in Los Angeles invested on behalf of Steven Spielbergand Jeffrey Katzenberg

Sonja Kohn, Bank Medici in Vienna

Walter Noel, 78, ran the Fairfield Greenwich Group. He has a master’s degree in economics and a law degree, both from Harvard.

Noel and Madoff met in the early 1980s.

Walter Noel was a charming salesman. He directed clients’ money to Madoff’s fund.

Mr. Noel’s largest fund, the $7.3 billion Fairfield Sentry fund, invested exclusively with Mr. Madoff.

The Fairfield Greenwich Group promised due diligence. Michael Markov, a hedge fund consultant, looked into Fairfield Sentry’s investments with Madoff and found that it was “statistically impossible to replicate them.”

Mr. Markov said that he found only one hedge fund whose returns correlated to Mr. Madoff’s. That was the Bayou fund, which was prosecuted by the government for fraud in 2006.

New York Times, 17 DEC 2008, Eric Konigsberg, William K. Rashbaum, Steven Labaton.

Mr. Noel has not disclosed how much of that was his own or belonged to family members and how much was his investors’. One of his daughters said, through a spokeswoman at Rubenstein Public Relations, that “a very substantial part of each family member’s personal assets was invested with Bernard Madoff alongside those of our investors.”

Another channel to Madoff was J. Ezra Merkin, 54.

Both Madoff and Merkin were trustees at New York’s Yeshiva University. Both havenow stepped down from the board.

Yeshiva University lost $110M, which was 8%of its endowment, through Merkin and his Ascot Partners.

What’s Yeshiva University? This is a good analogy:

Jewish : Yeshiva : : Catholic : Notre Dame

The other members of Yeshiva’s board did not know that Merkin had moved Ascot’s entire share of the endowment to Madoff’s fund.

Why would Merkin not spread the investment money around? According to acquaintances, “Ezra would ask, ‘Why would you reduce your concentration in your best performing fund?’ ”

Both Madoff and Merkin are now off the Yeshiva board.

Merkin also served as chair of the investment committee of UJA, the United Jewish Appeal.

The UJA, however, has a policy that prohibits committee members from directing funds. Thus, they had no money in Merkin’s Ascot Partners.

It’s good to know that someone understands conflict of interest.

The New York Jewish Week, 19 Dec 2008, Gary Rosenblatt.

On 29 December 2008, the Federal government moved five billion dollars to help GMAC (General Motors Acceptance Corporation) remain solvent. The chairman of GMAC is . . . .

J. Ezra Merkin

www.thecuttingedgenews.com, www.reuters.com, www.thestreet.com, and other sites, 31 DEC 2008

An unfortunate casualty of the affair is Rene-Thierry Magon de la Villehuchet, who commited suicide.

Rene-Thierry, 65, was found dead at his desk in the New York office of Access International Advisors on Tuesday, 23 DEC 2008. Both of his wrists slashed. A box cutter and a bottle of sleeping pills lay nearby.

news.yahoo.com, 26 DEC 2008, from GREG KELLER, AP Business Writer

Another suicide is from Britain. William Foxton, age 65, killed himself with a single bullet to the head on 10 FEB 2009.

Foxton was a former British Army major who had previously served in the French Foreign Legion.

His life savings had been invested in Herald USA Fund and Herald Luxemburg Fund. Each of these lost heavily through Madoff connections.

Newsday, 15 FEB 2009, page A31, Associated Press.

So how did Madoff do it?

There were suspicious signs, but people kept investing anyhow. How did this go on for so long?

Here are some suspicious signs.

There was an SEC investigation in 1992. Madoff was cleared.

A Boston whistleblower tried to alert the SEC in 1999. Nothing happened.

Barron’s asked questions in 2001 about his operation.

Returns were relatively high, at about 10% per year, but they were way too steady.

Madoff managed accounts inside his own firm. Hedge funds, by comparison, use banks

and brokerage firms.    Only auditing firm was Friehling and Horowitz

of New City, a small firm.New York Times, 13 DEC 2008, Alex Berenson, Diana B. Henriques, Zachery Kouwe, Stephanie Strom.

Was Madoff’s family involved?

Madoff is 70 years old. He worked with his sons Andrew, 42, and Mark, 44, and also his 62-year-old brother Peter.

Could they really have known nothing about the scheme?

On Wednesday, December 10, Bernard Madoff told two of his senior associated about the fraud. It is believed that those two senior associates are his sons. Andrew and Mark reported the fraud to the FBI the next day.

This makes it easy to believe that Bernard Madoff set up the details in this way to protect his sons.

His sons are not targets of the investigation.

As an added complication, Madoff’s niece Shana Madoff (the daughter of his brother Peter) married Eric Swanson in 2007.

This is a big deal because Swanson worked as an SEC attorney and had some familiarity with the Madoff operation.

Swanson was not active with the SEC when he married Shana.

Every good story needs a romantic subplot.

Barbara Kollmeyer, www.marketwatch.com, 16 DEC 2008.

The story will continue.

How long did this go on?

Who knew?

If Bernard himself ran the scheme, how many of his associates and twenty-plus employees knewabout it?

By what accounting trickery was he able to send out monthly statements to all his clients?

What made this fall apart? Were people starting to redeem accounts in 2008 when the market went south?

Did we all move away from good sense? Did we believe that the real masters of the universe were not those who provided good and services, but rather those who shuffled around financial papers?

Don is retired, but he wants to keep working. He operates a Manhattan street cart, selling scarves and hats. “I’m a little different than those guys in the papers. I only try to sell you what you can see.”

New York Daily News, Monday, 15 DEC 2008, Mike Lupica.

Madoff is scheduled to be sentenced June 29, 2009.

His attorneys believe that an appropriate sentence would be 12 years.

The sentence will likely be longer, perhaps 150 years.

Bernard Madoff is now 71 years old. . .