Saturday, December 13, 2008
Fund Fraud Hits Big Names - Ponzi scheme
By ROBERT FRANK, PETER LATTMAN, DIONNE SEARCEY and AARON LUCCHETTI New potential victims emerged of Wall Street veteran Bernard Madoff's alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses. New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history's largest financial scam. View Interactive Read more about previous Ponzi schemes. More Complete Coverage: Bernard MadoffHow Madoff Makes People Look DumbHow Safe Are Investors From Fallout?SEC Press Release on Madoff's CaseSEC ComplaintPress Release on Madoff's ArrestCriminal ComplaintArchives Bernie Madoff Asks Investors To Keep Mum 5/7/2001Wall Street Mystery Features a Big Board Rival 12/16/1992Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter. And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff. "I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said. Mr. Madoff, the founder and primary owner of Bernard L. Madoff Investment Securities LLC in New York, was arrested and charged Thursday. Prosecutors allege that the 70-year-old Mr. Madoff hid losses, paying certain investors returns using principal he received from other investors. Prosecutors and regulators have yet to determine how much has been lost, or the amount in assets still held by Mr. Madoff's business. The alleged fraud has "swept up some of the most prominent and wealthy Americans, along with many people who thought they were embarking on a comfortable retirement and have now been left destitute," says Brad Friedman, a lawyer at Milberg LLP, which with Seeger Weiss LLP represents more than 30 investors with losses they believe could total more than $1 billion. In criminal and civil complaints, Mr. Madoff is quoted as saying the losses could amount to $50 billion. "This is a real tragedy," Mr. Madoff's attorney, Ike Sorkin, said Friday. "We're going to fight through these events and do what we can to minimize the loss." View Full Image Splash News Bernard Madoff leaving court after his arrest late Thursday. Details emerged Friday of how Mr. Madoff ran the alleged scam, fostering a veneer of exclusivity and creating an A-list of investors that became his most powerful marketing tool. From New York and Florida to Minnesota and Texas, the money manager became an insider's choice among well-heeled investors seeking steady returns. By hiring unofficial agents, tapping into elite country clubs and creating "invitation only" policies for investors, he recruited a steady stream of new clients. During golf-course and cocktail-party banter, Mr. Madoff's name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff " 'the Jewish bond,' " says Ken Phillips, head of a Boulder, Colo., investment firm. "It paid 8% to 12%, every year, no matter what." As his reputation grew, Mr. Madoff gained the trust of prominent businessmen, including ex-Eagles owner Mr. Braman, who owns a chain of Florida auto dealers. A voicemail message left with Mr. Braman's office was not immediately returned. Mets owner Mr. Wilpon, who also owns real-estate investor Sterling Equities, often raved about Mr. Madoff's investment prowess and invested tens of millions of dollars of both his own money and the team's with his company, say financiers who have worked with him. Mr. Madoff handled investments for the Judy & Fred Wilpon Family Foundation, which distributed about $1 million a year in 2005 and 2006 to charities, according to its most recent federal tax returns.. View Full Image Associated Press People flocked to the lobby of Mr. Madoff's office building Friday. Mets spokesman Jay Horowitz declined to comment Friday. Mr. Wilpon's Sterling Equities said in a statement: "We are shocked by recent events and, like all investors, will continue to monitor the situation." Mr. Merkin, the chairman of former General Motors Corp. financing arm GMAC, is also a money manager at Ascot Partners LLC in New York. Ascot, which had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff, according to a letter to Mr. Merkin sent to clients Thursday night. Mr. Merkin said as one of the largest investors in Ascot, he believed he had personally "suffered major losses from this catastrophe." Mr. Merkin could not be reached for comment. Mr. Madoff tapped social networks in Dallas, Chicago, Boston and Minneapolis. In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say. One of them estimated that investors from the two clubs may have invested more than $100 million combined. One of the largest clusters of Madoff investors was in Florida, where losses could be substantial. Mr. Madoff relied on a network of friends, family and business colleagues to attract investors. According to investors and agents, some of these agents were paid commissions for harvesting investors. Others had separate, lucrative business relationships with Mr. Madoff. "If you were eating lunch at the club or golfing, everyone was always talking about how Madoff was making them all this money," one investor says. "Everyone wanted to sign up." Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff's clients. "Every big divorce that came through my office had portfolio positions with Madoff," he says. Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he'd take down half the world with him. Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million -- or 95% of his net worth -- invested with Mr. Madoff. "That's how much I believed in him," Mr. Spring said. Inside Wall Street's Madoff Scandal 3:55 Another large-scale scandal rocks Wall Street as Bernard Madoff, a Wall Street titan and investment advisor was arrested for an alleged $50 billion dollar fraud against investors, WSJ's Kelsey Hubbard and Amir Efrati discuss. Mr. Spring said he was also one of the unofficial agents who connected Mr. Madoff with dozens of investors, from a teacher who put in $50,000 to entrepreneurs and executives who would put in millions. Mr. Spring said Mr. Madoff didn't want people to put in large amounts right away. "Bernie would tell me, 'Let them start small, and if they're happy the first year or two, they can put it more.' " Mr. Spring says he never was paid a commission, but he received fees from a small investment-research firm that counted Mr. Madoff as a client; he declined to say how much he received. He said investors would always come to him asking to invest with Mr. Madoff. "I never solicited anyone," he says. Mr. Spring says he never detected signs of impropriety with Mr. Madoff's investing, but he concedes that he may receive some blame from some investors. "I can understand where people who lost money are looking for a scapegoat," he says. "I'm heartbroken that so many people have been hurt so badly." Mr. Madoff's main go-between in Palm Beach was Robert Jaffe, say several investors. Mr. Jaffe is the son-in-law of Carl Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Mr. Madoff's. Mr. Jaffe, a philanthropist in Palm Beach, attracted many investors from the Palm Beach Country Club in Palm Beach, Fla. A spokeswoman for Mr. Jaffe's family said several family members were investors with Mr. Madoff and were "significantly adversely impacted" by recent events. There are no indications that Mr. Jaffe or Mr. Spring are implicated in the alleged fraud. Mr. Jaffe didn't return messages yesterday. Other investors stand to lose through their investments with the likes of Fairfield Greenwich Group and Tremont Capital Management, funds of hedge funds that invested their cash with Mr. Madoff. "Needless to say, our level of anger and dismay over the apparent betrayal by Mr. Madoff and his organization of his 14-year relationship with Tremont is immeasurable," Tremont told clients in a letter Friday. Fairfield Greenwich said in a statement late Friday that it is trying to assess the extent of potential losses. The firm said that on Nov. 1, it had $7.5 billion in investments connected to Mr. Madoff's firm, slightly more than half of its total assets. Founding partner Jeffrey Tucker said the firm had no indication of any potential wrongdoing. "We are shocked an appalled by this news," he said. Ms. Manzke, 60, of Maxam Capital Management, said she met Mr. Madoff through investors in the mid-1980s and introduced him to Tremont, where she was then chief executive. That introduction led to Tremont's decision to market Mr. Madoff as a money manager to its own investors, she adds. In November, she says, Maxam asked to pull $30 million from Mr. Madoff, and he returned the money. "He was a low-key guy," Ms. Manzke says. "He would say, 'Look, I'm a market-maker, and I don't want anyone to know I'm running money.' It was always for select people. He was always closed, he wasn't taking new money." Several European investors were also apparent victims. Bramdean Alternatives in the U.K. said it had more than 9% of its portfolio invested in Madoff funds. Geneva-based Banque Benedict Hentsch, a white-glove private bank, said it is exposed for $47.5 million. BNP Paribas's exposure, the extent of which is not clear, may stem from BNP's lending relationship with a fund of funds that was a big Madoff client, said people familiar with the matter. A BNP spokeswoman declined to comment. Nomura and Neue Privat Bank, meanwhile, together marketed access to Fairfield Sentry Ltd., a fund overseen by Mr. Madoff and sold through Fairfield Greenwich. The shares offered by Neue Privat and Nomura were leveraged three times -- meaning $3 of borrowed money was added to every $1 of capital invested in order to magnify returns, greatly increasing the potential losses for those investors. A Nomura spokesman declined to comment. A message left with Neue Privat was not returned. The federal complaints against Mr. Madoff allege his fraudulent activities came through a secretive private wealth-management wing of Bernard L. Madoff Investment Securities, the investment firm he founded in 1960. On Wall Street, his company was perhaps better known for its operations in market-making -- the business of serving as a middleman between buyers and sellers -- and proprietary trading. Through those higher-profile parts of his operation, Mr. Madoff was a pioneer in trading New York Stock Exchange shares away from the exchange. He is a past chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the National Association of Securities Dealers and a member of numerous committees of the organization, according to his firm's Web site. Mr. Madoff owns a home in Roslyn, N.Y., records show, and an elaborate beachfront home and grounds in Montauk on Long Island. Mr. Madoff and his wife live in an apartment building on Manhattan's Upper East Side where property records list individual apartments valued at more than $5 million. One property database estimated the 2008 market value of Mr. Madoff's two-floor unit to be roughly $9 million. For years he has served as president of the building's co-op board, according to a tenant. Tenants say he appeared down-to-earth, friendly and always greeted everyone by their first name. Colleagues of Mr. Madoff said he was fair to those he dealt with and generous to charities including the Special Olympics. Mr. Madoff treated employees well and loved to take friends and colleagues on his 55-foot fishing boat, called Bull, said Frank Christensen, a retired New York Stock Exchange broker. "I really think very highly of him," said Mr. Christensen. "People make mistakes." —Matthew Futterman, Jenny Strasburg, David Enrich, and Craig Karmin contributed to this article.