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<DIV><FONT size=2>And we're bailing the ilk of these SOBs out?</FONT></DIV>
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<DIV class=timestamp>December 12, 2008</DIV>
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<H1><NYT_HEADLINE type=" " version="1.0">Prominent Trader Accused of Defrauding
Clients </NYT_HEADLINE></H1><NYT_BYLINE type=" " version="1.0">
<DIV class=byline>By <A title="More Articles by Diana B. Henriques"
href="http://topics.nytimes.com/top/reference/timestopics/people/h/diana_b_henriques/index.html?inline=nyt-per">DIANA
B. HENRIQUES</A> and ZACHERY KOUWE</DIV></NYT_BYLINE><NYT_TEXT>
<DIV id=articleBody>
<P>On Wall Street, his name is legendary. With money he had made as a lifeguard
on the beaches of Long Island, he built a trading powerhouse that had prospered
for more than four decades. At age 70, he had become an influential spokesman
for the traders who are the hidden gears of the marketplace.</P>
<P>But on Thursday morning, this consummate trader, Bernard L. Madoff, was
arrested at his Manhattan home by federal agents who accused him of running a
multibillion-dollar fraud scheme — perhaps the largest in Wall Street’s
history.</P>
<P>Regulators have not yet verified the scale of the fraud. But the criminal
complaint filed against Mr. Madoff on Thursday in federal court in Manhattan
reports that <STRONG><FONT color=#ff0000 size=3>he estimated the losses at $50
billion.</FONT></STRONG> “We are alleging a massive fraud — both in terms of
scope and duration,” said Linda Chatman Thomsen, director of the enforcement
division at the Securities and Exchange Commission. “We are moving quickly and
decisively to stop the fraud and protect remaining assets for investors.”</P>
<P>Andrew M. Calamari, an associate director for enforcement in the S.E.C.’s
regional office in New York, said the case involved “a stunning fraud that
appears to be of epic proportions.”</P>
<P>According to his lawyers, Mr. Madoff was released on a $10 million bond.
“Bernie Madoff is a longstanding leader in the financial services industry,”
said Daniel Horwitz, one of his lawyers. “He will fight to get through this
unfortunate set of events.”</P>
<P>Mr. Madoff’s brother and business colleague, Peter Madoff, declined to
comment on the case or discuss its implications for the Madoff firm, which at
one point was the largest market maker on the electronic Nasdaq market,
regularly operating as both a buyer and seller of a host of widely traded
securities. The firm employed hundreds of traders. </P>
<P>There was some worry on Wall Street that Mr. Madoff’s fall would shake more
foundations than his own.</P>
<P>According to the most recent federal filings, Bernard L. Madoff Investment
Securities, the firm he founded in 1960, operated more than two dozen funds
overseeing $17 billion.</P>
<P>These funds have been widely marketed to wealthy investors, hedge funds and
other institutional customers for more than a decade, although an S.E.C. filing
in the case said the firm reported having 11 to 23 clients at the beginning of
this year.</P>
<P>At the request of the Securities and Exchange Commission, a federal judge
appointed a receiver on Thursday evening to secure the Madoff firm’s overseas
accounts and warned the firm not to move any assets until he had ruled on
whether to freeze the assets. </P>
<P>A hearing on that request is scheduled for Friday.</P>
<P>Regulators said they hoped to have a clearer picture of the losses facing
investors by that court hearing. </P>
<P>“We have 16 examiners on site all day and through the night poring over the
records,” said Mr. Calamari of the S.E.C.</P>
<P>The Madoff funds attracted investors with the promise of high returns and low
fees. One of Mr. Madoff’s more prominent funds, the Fairfield Sentry fund,
reported having $7.3 billion in assets in October and claimed to have paid more
than 11 percent interest each year through its 15-year track record.</P>
<P>Competing hedge fund managers have wondered privately for years how Mr.
Madoff generated such high returns, in bull markets and bear, given the
generally low-yielding investment strategies he described to his clients. </P>
<P>“The numbers were too good to be true, for too long,” said Girish Reddy, a
managing director at Prisma Partners, an investment firm that invests in hedge
funds. “And the supporting infrastructure was weak.” Mr. Reddy said his firm had
looked at the Madoff funds but decided against investing in them because their
performance was too consistently positive, even in times when the market was
incredibly volatile.</P>
<P>But the essential drama is a personal one — one laid out in the dry language
of a criminal complaint by Lev L. Dassin, the acting United States attorney in
Manhattan, and a regulatory lawsuit filed by the S.E.C. According to those
documents, the first alarm bells rang at the firm on Tuesday, when Mr. Madoff
told a senior executive he wanted to pay his employees their annual bonuses in
December, two months early.</P>
<P>Just days earlier, Mr. Madoff had told another senior executive he was
struggling to raise cash to cover about $7 billion in requested withdrawals from
his clients, and he had appeared “to have been under great stress in the prior
weeks,” according to the S.E.C. complaint.</P>
<P>So on Wednesday, the senior executive visited Mr. Madoff’s office, maintained
on a separate floor with records kept under lock and key, and asked for an
explanation.</P>
<P>Instead, Mr. Madoff invited the two executives to his Manhattan apartment
that evening. When they joined him there, he told them that his money-management
business was “all just one big lie” and “basically, a giant Ponzi scheme.”</P>
<P>The senior employees understood him to be saying that he had for years been
paying returns to certain investors out of the cash received from other
investors.</P>
<P>In that conversation, according to the criminal complaint, Mr. Madoff “stated
that he was ‘finished,’ that he had ‘absolutely nothing.’ ” </P>
<P>By this account, Mr. Madoff told the executives he intended to surrender to
the authorities in about a week but first wanted to distribute approximately
$200 million to $300 million to “certain selected employees, family and
friends.”</P>
<P>On Thursday morning, however, he was arrested on a single count of securities
fraud, which carries a maximum penalty of 20 years in prison and a maximum fine
of $5 million.</P>
<P>According to the S.E.C., Mr. Madoff confessed to an <A
title="More articles about the Federal Bureau of Investigation."
href="http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_bureau_of_investigation/index.html?inline=nyt-org">F.B.I.</A>
agent that there was “no innocent explanation” for his behavior and he expected
to go to jail. He had lost money on his trades, he told the agent, and had “paid
investors with money that wasn’t there.”</P>
<P>Although not a household name, Mr. Madoff’s firm has played a significant
role in the structure of Wall Street for decades, both in traditional stock
trading and in the development of newer electronic networks for trading equities
and <A title="More articles about derviatives."
href="http://topics.nytimes.com/top/reference/timestopics/subjects/d/derivatives/index.html?inline=nyt-classifier">derivatives</A>.</P>
<P>In building those new trading networks, his firm had formed partnerships with
some of the largest brokerage businesses on Wall Street, including <A
title="More information about Goldman Sachs Group Incorporated"
href="http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/index.html?inline=nyt-org">Goldman
Sachs</A> and <A title="More information about Merrill Lynch & Co"
href="http://topics.nytimes.com/top/news/business/companies/merrill_lynch_and_company/index.html?inline=nyt-org">Merrill
Lynch</A>.</P>
<P>Mr. Madoff founded Bernard L. Madoff Investment Securities in 1960 and liked
to tell interviewers about earning his initial stake by working as a lifeguard
at city beaches and installing underground sprinkler systems.</P>
<P>By the early 1980s, his firm was one of the largest independent trading
operations in the securities industry. The company had around $300 million in
assets in 2000 at the height of the Internet bubble and ranked among the top
trading and securities firms in the nation.</P>
<P>Mr. Madoff ran the business with several family members, including his
brother Peter, his nephew Charles, his niece Shana and his sons Mark and
Andrew.</P><NYT_AUTHOR_ID>
<DIV id=authorId>
<P>Vikas Bajaj and Gretchen Morgenson contributed
reporting.</P></DIV></NYT_AUTHOR_ID></DIV></NYT_TEXT></FONT></BODY></HTML>