Ponzi scheme

Madoff was arrested on Thursday and released on bail on Friday. He is scheduled to appear in court on 19 December. If he is found guilty of the crimes he is charged with, he could go to jail for 20 years.

BLMIS is in court-ordered receivership.

The SEC says that Madoff yesterday told "two senior employees" of his firm 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." Madoff's colleagues understood these statements to be an admission by Madoff that he had for years been paying returns to certain investors out of the principal received from other investors. The BLMIS employees say Madoff estimated losses from the fraud at no less than $50 billion, according to the SEC.

It now seems that the BLMIS employees Madoff came clean to were his sons Andrew Madoff and Mark Madoff.

"We are alleging a massive fraud -- both in terms of scope and duration," says the SEC's director of enforcement Linda Chatman Thomsen. "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."

Epic proportions

Charles Ranson, CEO of Palm Beach, Fla.-based investment advisory Integritas Advisors, views Madoff's alleged malfeasance, an example of high-stakes shenanigans on the part of an independent firm rather than a gigantic institution, as worrisome in its potential impact on public confidence in the financial-service industry as.

"This is not Merrill Lynch, this is not Goldman Sachs," Ranson told the Palm Beach Daily News. "This is an individual guy." But, because of Madoff's former high standing in the financial-service community, his firm's long list of individual and institutional investors, and the case's implications of lax oversight by regulators, "this will be one of the largest legal messes of the investment advisory business in history."

Indeed, class-action suits are already being filed.

BLMIS, a firm Madoff founded in 1960, had about $17 billion in assets under management at the time of its latest ADV filing with the SEC. The SEC says that "virtually all" of the RIA's assets under management are now missing.

Thomsen's colleague Andrew Calamari, associate director of enforcement in the SEC's New York regional office, described Madoff's alleged fraud as one of "epic proportions."

Big red flag

Among investors said to be facing losses from the collapse of BLMIS are New York Mets co-owner Fred Wilpon, GMAC chairman Jacob Merkin, U.S. senator from New Jersey Frank Lautenberg, the Boston-based Carl and Ruth Shapiro Family Foundation and Swiss financial firms Union Bancaire Privee, Reichmuth, Benedict Hentsch, the EIM Group and Notz Stucki. Zurich-based UBS describes its exposure to BLMIS as "limited and insignificant."

BLMIS reported a 10.5% annual rate of return over 17 years through 2007.

Jim Vos, CEO of the new York-based hedge-fund consultancy Aksia, views this supposed track record as a red flag in itself. "No financial-trading strategy or investing strategy that we know of -- or that anyone else knows of -- can produce decades of stable, positive, low-volatility returns," he told CBS News.

Keith Whitaker, a research fellow at Boston College's Center on Wealth and Philanthropy and director of family dynamics for Wachovia's family office Calibre, says the psychic spillover of BLMIS' demise could have a negative impact on clients' faith in "trusted advisors" generally.

"If someone who was seen as a wise counselor only turns out to be misleading and even betraying those people who trusted in him, that's a real serious blow," Whitaker told the Palm Beach Daily News.

The SEC complaint charges Madoff and his firm 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-got gains. -FWR

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