Bernie Madoff Scandal

Scam

 The Madoff investment scandal was a major case of stock and securities fraud
discovered in late 2008. In December of that year, Bernie Madoff, the
former NASDAQ Chairman and founder of the Wall Street firm Bernard L. Madoff
Investment Securities LLC, admitted that the wealth management arm of his business
was an elaborate multi-billion-dollar Ponzi scheme.

 Madoff founded Bernard L. Madoff Investment Securities LLC in 1960, and was its
chairman until his arrest. The firm employed Madoff's brother Peter as senior
managing director and chief compliance officer, Peter's daughter Shana Madoff as
rules and compliance officer and attorney, and Madoff's sons Andrew and Mark. Peter
was sentenced to 10 years in prison.

 Alerted by his sons, federal authorities arrested Madoff on December 11, 2008. On
March 12, 2009, Madoff pleaded guilty to 11 federal crimes and admitted to operating
the largest private Ponzi scheme in history. On June 29, 2009, he was sentenced to
150 years in prison with restitution of $170 billion.

 According to the original federal charges, Madoff said that his firm had "liabilities of
approximately US$50 billion". Prosecutors estimated the size of the fraud to be $64.8
billion, based on the amounts in the accounts of Madoff's 4,800 clients as of
November 30, 2008
 Ignoring opportunity costs and taxes paid on fictitious profits, half of Madoff's direct
investors lost no money, with Madoff's repeated (and repeatedly
ignored) whistleblower, Harry Markopolos, estimating that at least $35 billion of the
money Madoff claimed to have stolen never really existed, but was simply fictional
profits he reported to his clients.

 Madoff's personal and business asset freeze created a chain reaction throughout the
world's business and philanthropic community, forcing many organizations to at least
temporarily close, including the Robert I. Lappin Charitable Foundation, the Picower
Foundation, and the JEHT Foundation.

Strategies of Promote Scam

 In his 1992 "Avellino and Bienes" interview with The Wall Street Journal, Madoff
discussed his supposed methods: In the 1970s, he had placed invested funds in
"convertible arbitrage positions in large-cap stocks, with promised investment returns
of 18% to 20%", and in 1982, he began using futures contracts on the stock index, and
then placed put options on futures during the 1987 stock market crash.
 A few analysts performing due diligence had been unable to replicate the Madoff
fund's past returns using historic price data for U.S. stocks and options on the
indexes. Barron's raised the possibility that Madoff's returns were most likely due
to front running his firm's brokerage clients.
 Mitchell Zuckoff, professor of journalism at Boston University and author of Ponzi's
Scheme: The True Story of a Financial Legend, says that "the 5% payout rule", a
federal law requiring private foundations to pay out 5% of their funds each year,
allowed Madoff's Ponzi scheme to go undetected for a long period since he managed
money mainly for charities.
 Zuckoff notes, "For every $1 billion in foundation investment, Madoff was
effectively on the hook for about $50 million in withdrawals a year. If he was not
making real investments, at that rate the principal would last 20 years. By targeting
charities, Madoff could avoid the threat of sudden or unexpected withdrawals.
 In his guilty plea, Madoff admitted that he hadn't actually traded since the early
1990s, and all of his returns since then had been fabricated. However, David Sheehan,
principal investigator for trustee Irving Picard, believes the wealth management arm
of Madoff's business had been a fraud from the start.
 Madoff's operation differed from a typical Ponzi scheme. While most Ponzi schemes
are based on non existent businesses, Madoff's brokerage operation arm was real.
 Madoff courted many prominent Jewish executives and organizations and, according
to the Associated Press, they "trusted [Madoff] because he is Jewish". One of the most
prominent promoters was J. Ezra Merkin, whose fund Ascot Partners steered $1.8
 billion towards Madoff's firm. A scheme that targets members of a particular religious
or ethnic community is a type of affinity fraud,
 Madoff was a "master marketer", and his fund was considered exclusive, giving the
appearance of a "velvet rope".He generally refused to meet directly with investors,
which gave him an "Oz" aura and increased the allure of the investment. Some
Madoff investors were wary of removing their money from his fund, in case they
could not get back in later.
 Madoff's annual returns were "unusually consistent” around 10%, and were a key
factor in perpetuating the fraud. Ponzi schemes typically pay returns of 20% or
higher, and collapse quickly. One Madoff fund, which described its "strategy" as
focusing on shares in the Standard & Poor's 100-stock index, reported a 10.5% annual
return during the previous 17 years.
 Even at the end of November 2008, amid a general market collapse, the same fund
reported that it was up 5.6%, while the same year-to-date total return on the S&P 500-
stock index had been negative 38%. An unnamed investor remarked, "The returns
were just amazing and we trusted this guy for decades — if you wanted to take money
out, you always got your check in a few days. That's why we were all so stunned."

Responsible Authority For Scam

1. Frank Dipascali:
 who referred to himself as "director of options trading" and as "chief financial
officer" at Madoff Securities, pled guilty on August 11, 2009, to 10 counts:
conspiracy, securities fraud, investment advisor fraud, mail fraud, wire
fraud, perjury, income tax evasion, international money laundering, falsifying
books and records of a broker-dealer and investment advisor. He agreed to
"connect the dots" and to "name names", with sentencing originally scheduled
for May 2010.

 Prosecutors sought more than $170 billion in forfeiture, the same amount
sought from Madoff, which represents funds deposited by investors
and later disbursed to other investors. The same day, an SEC civil
complaint[174] was filed against DiPascali.

2. David Friehling:
 the sole practitioner at Friehling & Horowitz CPAs, waived indictment and
pleaded not guilty to criminal charges on July 10, 2009. He agreed to proceed
without having the evidence in the criminal case against him reviewed by a
 grand jury at a hearing before U.S. District Judge Alvin Hellerstein in
Manhattan.

 Friehling was charged on March 18, 2009, with securities fraud, aiding and
abetting investment adviser fraud, and four counts of filing false audit reports
with the SEC.[169] On November 3, 2009, Friehling pled guilty to the charges.
 His involvement in the scheme made it the largest accounting fraud in
history. Swain suggested that Friehling be forced to pay part of the overall
$130 million forfeiture arising from the fraud.[171]

3. Daniel bonventre:

 former operations director for Bernard Madoff Investment Securities. He was

convicted on 21 counts, and sentenced to 10 years in jail.

4. Joann Crupi And Annette Bongiorno :

 Joann Crupi (Westfield, NJ; sentenced to six years in prison) and Annette
Bongiorno (Boca Raton, FL; sentenced to six years in prison), both back office
employees, were arrested in November 2010.

 "Authorities previously said Bongiorno was a staff supervisor and was

responsible for answering questions from Madoff's clients about their
purported investments. They allege she oversaw the fabrication of
documents", according to the Associated Press.

5. Jerome O'Hara And George Perez:

 Jerome O'Hara (sentenced to two and a half years in prison) and George Perez
(sentenced to two and a half years in prison), long-time employees of Bernard
L. Madoff Investment Securities LLC (BLMIS), were charged in an
indictment in November 2010, and in a 33-count superseding indictment on
October 1, 2012.

6. Ruth Madoff:
 Bernard's wife, agreed as part of his sentencing to keep from the federal
government only $2.5 million of her claim of more than $80 million in assets,
and to give up all of her possessions.

 It alleged that, in 2005, Madoff coached Fairfield staff about ways to answer
questions from SEC attorneys who were looking into Markopolos' complaint
about Madoff's operations. On May 18, 2009, the hedge fund was sued by
trustee Irving Picard, seeking a return of $3.2 billion during the period from
2002 to Madoff's arrest in December 2008.
Impact

Criminal charges against Aurelia Finance

 Criminal charges against five directors proceeded against Swiss wealth manager
Aurelia Finance, which lost an alleged $800 million of client money. The directors'
assets were frozen. In September 2015 they paid “substantial compensation” to settle
the criminal complaints.

Grupo Santander

 Clients primarily located in South America who invested with Madoff through the
Spanish bank Grupo Santander, filed a class action against Santander in Miami.

 Santander proposed a settlement that would give the clients $2 billion worth of
preferred stock in Santander based on each client's original investment. The shares
pay a 2% dividend. Seventy percent of the Madoff/Santander investors accepted the
offer.

Union Bancaire Privee

 On May 8, 2009, a lawsuit against UBP was filed on behalf of New York investor
Andrea Barron in the U.S. District Court in Manhattan. Despite being a victim of
Bernard Madoff's fraud, the bank offered in March 2009 to compensate eligible
investors 50 percent of the money they initially invested with Madoff.

 In March 2010, the US District Court for the Southern District of New York threw out
the class action against Union Bancaire Privée that had been brought under state law,
holding that private securities class actions alleging misrepresentations or omissions
must be brought under the federal securities laws.
  On December 6, 2010, Union Bancaire Privée announced it had reached a settlement
with Irving Picard, the trustee for Madoff Investment Securities. UBP agreed to pay
as much as $500 million to resolve the trustee's claims. UBP was the first bank to
settle the Madoff trustee's claim. With the settlement, the trustee agreed to discharge
his "clawback" claims against UBP, its affiliates, and clients.

Bank Medici

 Ninety percent of the bank's income was generated from Madoff investments. In
December 2008, Medici reported that two of its funds—Herald USA Fund and Herald
Luxemburg Fund—were exposed to Madoff losses.

 On January 2, 2009, FMA, the Austria banking regulator, took control of Bank
Medici and appointed a supervisor to control the bank. Bank Medici was sued by its
customers both in the U.S. and in Austria.

 The Vienna State Prosecutor launched a criminal investigation of Bank Medici and
Kohn, who had invested an estimated $2.1 billion with Madoff. On May 28, 2009,
Bank Medici lost its Austrian banking license. Kohn and the bank were under
investigation, but she was not accused of criminal wrongdoing.

The Innocence Project

 The Innocence Project was partly funded by the JEHT Foundation, a private charity
backed by a wealthy couple, Ken and Jeanne Levy-Church, financed with Madoff's
mythical money.

 Jeanne Levy-Church's losses forced her to shut down both her foundation and that of
her parents, the Betty and Norman F. Levy Foundation, which lost $244 million. JEH
helped the less fortunate, especially ex-convicts. (See Participants in the Madoff
investment scandal: Norman F. Levy)
Westport National Bank

 In April 2010, Connecticut Attorney General Richard Blumenthal sued the Westport
National Bank and Robert L. Silverman for "effectively aiding and abetting" Madoff's
fraud.

 The suit sought recovery of $16.2 million, including the fees that the bank collected as
custodian of customers' holding in Madoff investments. Silverman's 240 clients
invested about $10 million with Madoff using the bank as the custodian. The bank
denied any wrongdoing.

Thema International Fund

 In September 2017 in a case before the Irish High Court, Thema International Fund
agreed to pay $687 million to resolve a trustee lawsuit brought on behalf of the fraud
victims resulting from Madoff's frauds.

The Picower Foundation

 It was listed as the 71st-largest in the nation by the Council on Foundations. The
foundation reportedly invested $1 billion with Madoff. Jeffry Picower was a friend of
Bernard Madoff for 30 years. The Picower Foundation, along with other smaller
charities that invested with Madoff, announced in December 2008 that they would be
closing.

 Conclusion
 As a conclusion, since the internal auditor reports to board of directors and the
chairman of the board and its members are members of madoff’s relative and friends
the internal auditor was forced by Madoff to cover up the fraud by falsifying audit
reports to the securities and exchange commission.