Saturday, December 13, 2008

Pyramid Scheme Killed the Hedge Fund Star?

Dubbed by Wall Street insiders as a scandal bigger than ENRON, will the Bernard L. Madoff hedge fund scandal forever undermine investor confidence?


By: Vanessa Uy


When the 70 year old former NASDAQ chairman Bernard L. Madoff was arrested a few days ago as the result of an on-going investigation over might be one of the largest fraud case of the 21st Century. He is suspected of being responsible for creating a pyramid / Ponzi scheme disguised as a hedge fund firm that dates back to the 1960 which resulted in the defrauding of his investors by 50 billion US dollars.

Bernard L. Madoff started a hedge fund firm called Bernard L. Madoff Securities LLC was even regarded by many Wall Street insiders as “the birthplace of modern Wall Street” due to it’s pioneering business model. Bernard L. Madoff’s business model was deemed to tempting – even to seasoned investors due to his promise of relatively high return of investment when compared to the norm despite of the risks involved or the obvious lack of transparency. During its heyday, Madoff’s hedge fund firm was trading on average of 50 million shares a day. And even during October 2008, when the global financial crisis was already in full steam, his firm was still the 23rd largest market maker on NASDAQ.

What became of Bernard L. Madoff’s undoing is by running his hedge fund firm like a pyramid or Ponzi scheme, where money is being exchanged despite of the lack of trade in goods or services being provided – the primary reason that made it illegal. First tier investors were comfortably living off from the investment funds of latter entrants of their shaky pyramid scheme, which miraculously, only recently collapsed despite dating from the 1960’s. Bernard L. Madoff’s fraudulent dealings even predated mortgage backed securities and other complex credit derivatives which are primarily blamed for the ongoing global financial crisis.

Will Bernard L. Madoff’s stunt forever undermine investor confidence? Well, given that the start of 2008 saw the audacious rogue trading antics of Société Générale junior trader Jérôme Kerviel, lack of investor confidence will be the norm – rather than the aberrant exception – which will probably worsen our ongoing global financial crisis. Those new “green technologies” being peddled by newly elected US President Barack Obama will never get of the ground due to lack of investment. The pyramid scheme did indeed killed one of NASDAQ’s leading hedge fund “stars” by sending its greedy CEO to the slammer.

29 comments:

Adolf said...

The sad thing about the Bernard "Bernie" Madoff hedge-fund-as-a-pyramid-scheme debacle is that majority of the victimized are Jewish Charities like the Chais Foundation who were planning to give free personal computers to needy kids during Hanukkah. Overall Jewish Pilantrophy losses to Madoff's scam probably total over 1 billion US dollars.

Nancy said...

Given that Hollywood, California is for all intents and purposes a one industry town. The Chais Family Foundation will surely be hard hit this Holiday Season due to the foundation's exposure to the Bernard Madoff hedge fund fraud.
The US Securities and Exchange Commission should had been more awake / more vigilant to prevent scams like these from ever happening in the first place. Stanley and Pamela Chais are gonna be pissed.

Vanessa said...

Hedge funds were primarily "created" as a price stabilizing instrument for the financial market. But since they also earn money with "criminal" ease, hedge funds became a Wall Street institution almost overnight.
Given that Bernard "Bernie" Madoff's high-profile victims of his hedge-fund-as-pyramid-scheme fraud include the who's who of Hollywood, California like Steven Spielberg for example could endanger the future prosperity of this one industry town. Not to mention the various Jewish charity / philanthropic foundations like the Chais Family Foundation ruined by Bernard Madoff's unscrupulous greed.

Hirum said...

Bernard "Bernie" Madoff's hedge-fund-firm-as-pyramid-scheme has yet turned more tragic as the CEO of Access International Advisors - Rene-Thierry Magon De La Villehuchet committed suicide after his company loses $1.4 billion to Madoff's fraudulent hedge fund company. Yet another major financial player succumbing to Madoff's "dangerous scheme".

April Rain said...

Blame the regulators - especially the US Securities and Exchange Commission - they are the ones asleep at the wheel. Rumors are abound that Bernard "Bernie" Madoff has been doing his Ponzi scheme disguised as a hedge fund firm since the 1960's.

Nadine said...

Even though the "insiders" of global finance might label me as callous for saying that the only good thing that the global economic downturn of 2008 is that it revealed the Bernard "Bernie" Madoff pyramid-scheme-as-a-hedge-fund-firm for the fraud that it really is.
As of late, Bernard L. Madoff's fraudulent hedge fund firm has "burned" Vienna, Austria-based Bank Madici AG when the bank's clients invested 2.1 billion US dollars worth of funds to Madoff's Ponzi scheme. As if Santander, HSBC, and a few other banks exposed weeks before weren't enough.
And also the tragic suicide of Thierry De La Villehuchet should not be forgotten.

Marie Carrie said...

I too agree that the only redeeming quality of our on-going global financial turmoil is that it finally unraveled Bernard "Bernie" Madoff's hedge fund shenanigans for the pyramid / Ponzi scheme that it truly is. Too bad though that the truth came in too late for Rene-Thierry Magon de la Villehuchet. Given also that the who's who of the Hollywood Movie industry also fell victim to Madoff's hedge-fund-as-Ponzi-scheme like Steven Spielberg, will this result in a loss of the "Hollywood Magic"?

Ringo said...

Given that Bernard L. Madoff is also a major contributor to Hillary Clinton's "political adventurism" could explain away why Madoff got away with his "financial shenanigans" all these years. In the hedge fund business, it's probably who you know - as opposed to what you know - that counts the most.

Gibson said...

According to the OpenSecrets.org - the Website of the Center for Responsive Politics, Bernard L. Madoff - or in actuallity his Investment Security company - hads been a major Democratic Party contributor during the past two decades. Bernard "Bernie" Madoff did contribute to Hillary Rodham-Clinton's Senate campaign, although records proving whether he contributed to the Democratic Party's presidential candidates during the 2008 US Presidential Election doesn't exist.
There's maybe a truth to the adage that it's not what you know it's who you know that counts. Bernard "Bernie" Madoff indeed has a strong social network that allowed his hedge fund firm to evade US Securities and Exchange Commission scrutiny, probably since the Reagan Administration.

Rudolph said...

Given that Bernard L. Madoff's hedge-fund-as-pyramid-scheme scandal has already claimed scores of victims , like Jewish charities - Chais Family Foundation, Banks like Santander, HSBC, and Bank Medici AG. Not to mention the suicide of Rene-Thierry Magon de la Villehuchet just to name a few. Now Bernard Madoff's scam is now poised to undermine the long-term political future of Hillary Rodham-Clinton. Especially when she is now the Secretary of State-designate.

Golda said...

Bernard "Bernie" Madoff was indeed very well-connected to get away with such an audacious hedge fund fraud. He even managed to victimize the who's who of American high-society like Steven Spielberg and Hillary Rodham Clinton. But let's not forget that it was Bernie Madoff that confessed up over his hedge-fund-as-a-pyramid-scheme business. Even then US Securities and Exchange Commission insiders like Andrew Calamari of the SEC 's New York Regional Office was stunned at the scale of Bernie Madoff's hedge fund fraud.

Heidi Gail said...

Bernie Madoff is indeed the "Destroyer of Worlds". Not only did his fraudulent hedge fund scheme ruined scores of Jewish charities like The Carl and Ruth Shapiro family Foundation and the Elie Wiesel Foundation for Humanity. But also individual long-term investors like Alexandra Penney whose been a Madoff hedge fund investor when she was only 16 years old. And a few weeks ago her lifesavings just vanished without a trace.

Anne Lynne said...

To add my own two cents on the Bernard "Bernie" Madoff hedge-fund-as-a-Ponzi-scheme debacle, the NY Times economic contributor - Utpal Bhattacharya - declares that not all Ponzi-like economic activity is illegal. As an example, he cites the US Social Security System, which involves the younger generation paying some of the retirement benefits of the older generation, is a perfectly legal Ponzi scheme whether everyone likes it or not. As is also asset pricing bubbles that started the whole subprime mortgage crisis in the first place.

Kaitlyn said...

The Bernard L. Madoff fraud case will always be remembered for the victims. Especially Rene-Thierry Magon de la Villehuchet who committed suicide after finding out that his investment company was being defrauded by Bernie Madoff of over a billion dollars. Plus individual victims like Alexandra Penney. Plus the various Jewish charities. Bernie Madoff is indeed the "destroyer of worlds" and he should rot in jail for the rest of his natural life.

Ferdinand said...

Given that Bernard L. Madoff looks like Sesame Street's Mr. Hooper's younger brother could have worked in his favor, even if his hedge fund company's earnings doesn't make sense. A US Securities and Exchange Commission investigator named Harry Markopolos has been investigating Madoff's hedge fund business for about a decade, and yet Mr. Markopolos' findings were often ignored by his SEC superiors. Citing fear of litigation from Bernard Madoff. I think the US Securities and Exchange Commission shares some of the blame over Madoff's 50 billion dollar fraud. Investor confidence won't be returning soon in the financial markets.

Jovie Jane said...

Hedge Funds are unregistered private investment funds or pools that may be traded and invested in many different markets by employing different investment, hedging, leverage, and arbitrage methodologies. They are risky by nature. Given that Bernard L. Madoff's Hedge Fund company is for intents and purposes nothing more than a Ponzi or pyramid scheme because the 50 billion dollars or so worth of funds are never reinvested, irate investors will probably never get their money back.
Investment fraudsters like Madoff - plus the recent US Securities and Exchange Commission findings on Texas billionaire and cricket sponsor Sir Allen Stanford - will probably make the recovery of our global economy less and les likely because of corporate fraudsters like these. The US SEC should employ more people like Harry Markopolos. As if the Stanford Prison Experiment is bad enough, the "Stanford Financial Experiment" is even worse.

Ian said...

While Bernard "Bernie" Madoff can sure past muster as Sesame Street's Mr. Hooper's younger brother - i.e. he does look like the archetypal honest Jewish businessman - which probably worked in Madoff's favor in making his hedge-fund-as-a-pyramid-scheme criminal enterprise lasted as long as it did. Madoff's Ponzi scheme created ripple-effect that not only victimized various Jewish charities like the Stanley and Pamela Chais Family Foundation, but also Jewish charities pertaining to various Holocaust Memorials around the world.
I too agree that the US Securities and Exchange Commission needs more dilligent investigators like Harry Markopolos.

MaBeth said...

Will the Bernard "Bernie" Madoff hedge-fund as a pyramid scheme saga ever end? Even though the new US Secretary of State Hillary Clinton seems to have escaped unscaved the scandal of the Madoff hedge fund fraud, it has forever undermined investor confidence. Given that Muhammad Yunus' Banking for the Poor / Microfinance schemes are now fully entrenched in the "modern" Wall Street-style financial system, will it be the next victim in this on-going global financial turmoil?

Yoav said...

As Bernard "Bernie" Madoff's fraudulent hedge fund scheme victimizes scores of Jewish charities, the future outcome of this could look scarry. Imagine the Elie Wiesel Foundation For Humanity unable to spread the message of "Never Again" due to lack of funds? Every anti-Semite around the world will be having their field-day.
It is also sad that the US Securities and Exchange Commission's ineptitude had been ignoring Harry Markopolos' diligent investigation on Bernard L. Madoff's hedge-fund-as-pyramid-scheme. Even Mr. Markopolos noted that Madoff's hedge fund doesn't makes sense so it must be a Ponzi scheme. Let's just hope that the compromized investor confidence won't undermine poverty alleviation schemes founded by Dr. Muhammad Yunus, which he conscienciously made congruent to our Wall Street-style global credit market.

Girlie May said...

Looks like the Bernard "Bernie" Madoff hedge-fund-as-a-Ponzi-scheme scandal never seems to end, or is the most interesting aspects of this financial saga yet to be revealed? Having watched Bernie Madoff's "Inner Circle" speaking on ABC's Good Morning America. They said that they never knew that Bernie Madoff is ever capable of such a scam because - according to them - he is too smart to resort to such pettiness.
What fascinates me about the Bernie Madoff financial saga is the irony of him being called as the "Destroyer of Worlds" even as the "Angel of Death" plus several other expletives used to be called to NAZI-era war criminals - by Jewish investors which Madoff victimized. Irony of ironies indeed.

Jacob said...

Is this a sure sign that honest Jewish hedge fund managers - together with Boron gasoline - some things now belong to the distant (1960's) past?
One good thing about the global financial downturn though is that it exposes cleverly hidden pyramid / Ponzi schemes. Remember Sir Allen Stanford whose investment company still trade shares while the global credit crunch is already in full steam?

Venus said...

Given that Bernard L. Madoff will certainly - according to the news I've heard so far - plead guilty to all counts of financial fraud charges, Madoff's "generous" contributions to the Democratic Party - especially to the "political campaign machinery - of the current US Secretary of State Hillary Clinton could be overshadowed as the most "interesting" highlights of the Bernard L. Madoff hedge fund fraud case. For better or for worse, it looks like our current global economic downturn has an uncanny ability of exposing fraudulent investment schemes. Especially those whose return on investments and share trading figures are too good to be true.
I just hope that investing in gold and other safe-haven commodities won't overshadow more altruistic - and more interesting - business schemes like those modeled after Dr. Muhammad Yunus' microcredit / microfinance programs.

Ringo said...

Looks like Bernard "Bernie" Madoff is finally going to jail after pleading guilty to starting the hedge fund fraud worth 65 billion US dollars. By pleading guilty, Madoff avoided lengthy investigations which could reveal the money trail and structure of his hedge-fund-as-a-pyramid-scheme business. Though many financial pundits think that Madoff may not have acted alone, the most interesting aspects of this case could still happen during the following weeks.

Yvette said...

Isn't it ironic that Bernard L. Madoff and his Ponzi scheme probably terrorized the American Jewish community with the same level as that of Adolph Hitler's Reign of Terror back im World War II. Looks like the degree of seperation between Kevin Bacon - which Madoff victimized - and Hitler will be much closer than six degrees.
Even though legislated laws punish white-collar criminals like Madoff too liniently for everyone's taste, I think he probably felt the guilt of his actions. After all, he confessed to his fraudulent hedge fund scheme back in December 2008.

Kaitlyn said...

Despite of the 150 year prison term, Bernard L. Madoff and the court case of his fraudulent hedge fund scheme is somewhat anti-climactic from my point of view. Maybe they should prosecute those with complicity to Madoff's "criminal enterprise. After all Bernie Madoff couldn't have acted alone.

Hera said...

Bernard "Bernie" Madoff's good reputation used to preceed him. Madoff used to be called "a very ethical man" and someone who is "good as gold" - i.e. someone you can truly trust your money to. Which just to show how high he has really fallen ever since the news about the dubiousness of his hedge fund business first came out.
Today, there's even golfballs marketed under the brand name "Sleazeballs" with Madoff's face printed on them which everyone can give a really good wack with a golf club to vent out their anger over their vanished life savings and their kid's vanished college money. A Sleazeball version of financier under financial fraud investigation Sir Allen Stanford is also in the works.

Anne Lynne said...

Even though Sir Allen Stanford's "hedge fund" probably ruined more working class people compared to Bernard l. Madoff's Ponzi scheme, history will probably remember Bernie Madoff. Today, only a few folks even remembers Sir Allen Stanford's fraudulent hedge fund scheme.

Jovie Jane said...

The Bernard l. Madoff hedge-fund-as-pyramid-scheme-saga never seems to end, although President Barack Obama's promise of cracking down on tax havens had been recently given a new lease on life thanks to Bernie Madoff's "financial shenanigans".
P.S. Has there been cases where a Dr. Muhammad Yunus' Grameen Bank-style microfinance / microcredit provider turned out to be an elaborate Ponzi or pyramid scheme?

Yvette said...

There had been some blog postings about how some Dr. Muhammad Yunus-inspired microcredit / microfinance schemes are nothing more than pyramid / Ponzi schemes. And there are even some who are "victimized" by less-than-honest clients who seek microfinancing for their business while in reality the money - once received - will be used for gambling and binge drinking.