Amazing story about Madoff and all that money that may have evaporated. 
I know $50B may not seem like much anymore (as we keep hearing about trillions in bailouts!) but the last few months may have warped our perspective. The Financial Ninja, Ben, discusses the Madoff operation with a general introduction to the Ponzi way of life.
Ponzi Schemes, Madoff and Falling For It Everytime
Courtesy of Ben, The Financial Ninja
Greed makes you do stupid stupid things…
This story has been well covered by other bloggers so I won’t get into it except to say that Ponzi schemes are so simple I’m always amazed at how people get sucked into one. Sometimes whole countries get sucked into massive Ponzi schemes.
For example, in 1997 Albanians actually rebelled when a giant Ponzi scheme imploded in The Lottery Uprising.
Now you may think to yourself, "Ha! But I’m way smarter than the smartest Albanian. I would never get sucked into a giant Ponzi scheme."
You’d be wrong off course. What did you think these were:
1) The Internet Bubble?
2) The Real Estate Bubble?
3) The Commodities / Oil Bubble?
4) The Credit Bubble?
5) The Emerging Market Bubble?
You see, these were all gigantic Ponzi schemes. The definition of a Ponzi scheme is: “A fraudulent investment operation that involves promising or paying abnormally high returns ("profits") to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. It is named after Charles Ponzi.[1] A Ponzi scheme has similarities with a pyramid scheme though the two types of fraud are different.”
That also pretty much describes the Anglo-Saxon way of life to me.
Madoff Securities’ Auditor Generated ‘Red Flags’ (Update1): “Aksia LLC, an adviser to hedge fund investors, warned clients not to put their money with Bernard Madoff after learning of “red flags” at his company, including that its books were audited by a three-person accounting firm.
Bernard L. Madoff Investment Securities LLC used Friehling & Horowitz, an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs. Madoff was charged by federal prosecutors yesterday with running what he said was a $50 billion Ponzi scheme. The auditor signed off on Madoff’s annual financial statement through Oct. 31, 2006, according to a copy obtained by Bloomberg News.
New York-based Aksia urged clients last year not to invest with Madoff’s firm after learning the identity of the New City, New York-based auditor, according to Jake Walthour, head of advisory services at Aksia. Friehling & Horowitz included one partner in his late 70s who lives in Florida, a secretary, and one active accountant, Aksia said.
“Our judgment was swift given the extensive list of red flags,” Aksia wrote yesterday in a letter to clients.
The copy of the four-page report, dated Dec. 18, 2006, attested that the financial statements of Madoff’s securities firm were “in conformity with accounting principles generally accepted in the United States.”
Four-Page
The financial analysis said Madoff Securities had $1.3 billion in assets, including $711 million in marketable securities and $67 million in U.S. debt. Member’s equity, the firm’s net worth, was $604 million, according to the document.
Aksia’s Jim Vos said he spent several months probing Madoff’s firm on behalf of clients, only to recommend against investing in it. Vos, who had an investigator stake out the New City office, said eight “feeder funds” invested about $15 billion with Madoff. Vos declined to name the clients.
“I’m shocked by how investors turned a blind eye to returns that were too good to be true, constant steady small positive monthly returns,” Vos said. “When something is too good to be true, it probably is.”
Madoff, the founder and namesake of his firm, was arrested yesterday in New York on federal charges that he defrauded investors of what he said was $50 billion. Madoff, 70, was released on $10 million bond by a judge in Manhattan federal court. Charged with one count of securities fraud, he faces as much as 10 years in prison and a $5 million fine if convicted.
Madoff’s Lawyer
Dan Horwitz, a lawyer for Madoff, didn’t return a call seeking comment. Janice Oh, a spokeswoman for Interim Manhattan U.S. Attorney Lev Dassin, declined to comment. David Friehling of the auditing firm didn’t return a call left at his office.
Many questions remain unanswered, including whether Madoff’s clients actually lost $50 billion and who audited his firm’s books. Madoff told senior employees that the firm was insolvent and “had been for years,” prosecutors said in a criminal complaint.
Among the other “red flags” cited by Aksia was the “high degree of secrecy” surrounding the trading of the feeder fund accounts, which provided capital to Madoff Securities, and its use of a trading strategy that appeared “remarkably simple,” yet “could not be nearly replicated by our quant analyst.”
Tight Pants, Tye-Dyed
Friehling & Horowitz operates from a storefront office in the Georgetown Office Plaza in New City, sandwiched between a pediatrician’s office and another medical office. An office for the Rockland County Bar Association is also in the building.
A woman who works in a nearby office, who didn’t want to be identified, said Friehling doesn’t come to the office regularly. When he does, he is the only person there.
Another woman in a nearby office, Leslie Cousar, said the man who comes to the auditor’s office does so for 10-to-15 minute periods, and wears tight pants and tie-dyed shirts. Cousar said she never saw anyone else going to the office during the day, but at about 5:30 p.m., another man would show up and use the location.
“He’s in and out of there,” Cousar said.”
