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What is Bernard Madoff hedge fund fraud case?

By Amarendra Bhushan for CEOWORLD Magazine Updated:December 13, 2008

I wonder where the SEC has been. From news reports it seems they know about this. The SEC is a lame organization and willl probably be swallowed up by another gvt agency. Or SEC is simply not equipped to deal with crimes of this magnitude in a proactive manner. The SEC is a reactionary agency with a nice manual who waits for complaints. They are powerful; just not engaged in anything other than fatigue analysis.

At least Mr. Madhoff took money mainly from rich people.

Here is the SEC press release:

The Securities and Exchange Commission today charged Bernard L. Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC’s complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was “finished,” that he had “absolutely nothing,” that “it’s all just one big lie,” and that it was “basically, a giant Ponzi scheme.” The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

“We are alleging a massive fraud — both in terms of scope and duration,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “We are moving quickly and decisively to stop the fraud and protect remaining assets for investors, and we are working closely with the criminal authorities to hold Mr. Madoff accountable.”

Andrew M. Calamari, Associate Director of Enforcement in the SEC’s New York Regional Office, added, “Our complaint alleges a stunning fraud that appears to be of epic proportions.”

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market’s board of governors and its executive committee and served as chairman of its trading committee.

The complaint charges the defendants with violations of the anti-fraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940. In addition to emergency and interim relief, the SEC seeks a final judgment permanently enjoining the defendants from future violations of the antifraud provisions of the federal securities laws and ordering them to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.

A hedge fund investor just sent me a letter he received from his hedge fund of fund.

Here is the letter:

As many of you are aware, yesterday evening the SEC initiated proceedings against Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC. We wish to communicate that our hedge fund of funds do not currently have nor have they ever had direct investments with any of the aforementioned entities.

We are familiar with the split-strike conversion strategy the Madoff funds employed. In our judgment, the reported returns of the Madoff funds exceeded what can be reasonably expected from the strategy. Since the return profile could not be explained to our satisfaction, we did not consider the fund for investment.

In addition, Madoff’s organization was the investment advisor, prime broker/custodian, and executed all the fund’s trades through his broker dealer. Our due diligence process precludes us from doing business with funds that are set up with the limited oversight implicit in such a structure.

The efforts of sound investment research and operational due diligence are important in
any market environment. The market environment we are currently experiencing exposes the strengths and weaknesses of those efforts. We will continue to work to protect our limited partners and their assets.

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