The Owner's Name is on the Door

In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark.

Bernard L. Madoff founded the investment firm that bears his name in 1960, soon after leaving law school. His brother, Peter B. Madoff, graduated from law school and joined the firm in 1970. While building the firm into a significant force in the securities industry, they have both been deeply involved in leading the dramatic transformation that has been underway in US securities trading.

Bernard L. Madoff has been a major figure in the National Association of Securities Dealers (NASD), the major self-regulatory organization for US broker/dealer firms. The firm was one of the five broker/dealers most closely involved in developing the NASDAQ Stock Market. He has been chairman of the board of directors of the NASDAQ Stock Market as well as a member of the board of governors of the NASD and a member of numerous NASD committees.

One major US financial publication lauded Bernard Madoff for his role in "helping to make NASDAQ a faster, fairer, more efficient and more international system." He has also served as a member of the board of directors of the Securities Industry Association.

Reflecting the growing international involvement of the firm, when Madoff Securities opened a London office in 1983, it would become one of the first US members of the London Stock Exchange. Bernard Madoff was also a founding member of the board of directors of the International Securities Clearing Corporation in London.

Peter B. Madoff has also been deeply involved in the NASD and other financial services regulatory organizations. He has served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He also has been actively involved in the NASDAQ Stock Market as a member of its board of governors and its executive committee and as chairman of its trading committee. He also has been president of the Security Traders Association of New York. He is a member of the board of directors of the Depository Trust and Clearing Corp. He is a member of the board of the Securities Industry Association.

Bernard and Peter Madoff have both played instrumental roles in the development of the fully computerized National Stock Exchange. Peter Madoff has been a member of its board of governors and has served on its executive committee. They have helped make the National Exchange the fastest growing regional stock exchange in the United States.

These positions of leadership not only indicate the deep interest Madoff Securities has shown in its industry, they also reflect the respect the firm and its management have achieved in the financial community.

How about some links?

$50 billion

This is unbelievable that a ponzi scheme could be that big, If it is one.

50 Billion dollars!!!

As I understand it, he paid investors abnormally large returns with money coming in from new investors?

That's a Ponzi Scheme...yes.

It won't be $50 Billion, there is no way. His firms Assets Under Management were $18 Billion last month. Still, it might go down as the largest fraud ever.

Unbelievable. I wonder how it was marketed to people. PT Barnum has never been more accurate.

hahahaha

wanna lay odds on whether the guys standing next to investment firm dude are mafia or not in the third pic?

Actually, you would be shocked but that's how most "blue collar" Wall Street guys look. If you go down to the floor of the NYSE (at least before it was gutted and almost everyone was laid off) it looked like an episode of Sopranos. Of course, they were stealing from you but it was legal.

i work at a bank where we finance hedge funds. I've done it for 3 years and i have seen or heard of at least 200 HF's that i've worked with directly or indirectly. Never heard of these guys. $50BN is hard to get your head around. because the largest ones like citadel and soros have more than $10BN in AUM and they are considered fairly large. Obviously the asset side is bigger than the AUM side, but i don't think you consider the asset balance sheet as your loss figure. Do you, Given2trade?

and of course, there is no doubt that people will misconstrue the loss the of $50BN and make some connection to the bailouts of late.

No, you are correct. The largest hedge funds have $10-$20 Billion AUM. However, asset managers (think mutual funds etc.) can have hundreds of billions and even more. Fidelity probably has close to or more than $1 trillion.

If he used leverage the banks would know what his assets are as they would be held as collateral. You know this since it sounds like you work at a prime broker. As of right now, I call bullshit on the $50 Billion. There is a chance that almost all of the $18 Billion is gone though. That would be simply unbelievable.

Don't Ask, Don't Tell: Bernie Madoff is so secretive, he even asks his investors to keep mum
By Erin E. Arvedlund
1217 words
7 May 2001
Barron's


Two years ago, at a hedge-fund conference in New York, attendees were asked to name some of their favorite and most-respected hedge-fund managers. Neither George Soros nor Julian Robertson merited a single mention. But one manager received lavish praise: Bernard Madoff.

Folks on Wall Street know Bernie Madoff well. His brokerage firm, Madoff Securities, helped kick-start the Nasdaq Stock Market in the early 1970s and is now one of the top three market makers in Nasdaq stocks. Madoff Securities is also the third-largest firm matching buyers and sellers of New York Stock Exchange-listed securities. Charles Schwab, Fidelity Investments and a slew of discount brokerages all send trades through Madoff.

But what few on the Street know is that Bernie Madoff also manages more than $6 billion for wealthy individuals. That's enough to rank Madoff's operation among the world's five largest hedge funds, according to a May 2001 report in MAR Hedge, a trade publication.

What's more, these private accounts, have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year.

When Barron's asked Madoff how he accomplishes this, he says, "It's a proprietary strategy. I can't go into it in great detail."

Nor were the firms that market Madoff's funds forthcoming. "It's a private fund. And so our inclination has been not to discuss its returns," says Jeffrey Tucker, partner and co-founder of Fairfield Greenwich, a New York City-based hedge-fund marketer. "Why Barron's would have any interest in this fund I don't know." One of Fairfield Greenwich's most sought-after funds is Fairfield Sentry Limited. Managed by Bernie Madoff, Fairfield Sentry has assets of $3.3 billion.

One of Madoff's hedge-fund offering memorandums describes his strategy this way: "Typically, a position will consist of the ownership of 30-35 S&P 100 stocks, most correlated to that index, the sale of out-of-the-money calls on the index and the purchase of out-of-the-money puts on the index. The sale of the calls is designed to increase the rate of return, while allowing upward movement of the stock portfolio to the strike price of the calls. The puts, funded in large part by the sale of the calls, limit the portfolio's downside."

Among options traders, that's known as the "split-strike conversion" strategy. In layman's terms, it means Madoff invests primarily in the largest stocks in the S&P 100 index -- names like General Electric, Intel and Coca-Cola. At the same time, he buys and sells options against those stocks. For example, Madoff might purchase shares of GE and sell a call option on a comparable number of shares -- that is, an option to buy the shares at a fixed price at a future date. At the same time, he would buy a put option on the stock, which gives him the right to sell shares at a fixed price at a future date.

The strategy, in effect, creates a boundary on a stock, limiting its upside while at the same time protecting against a sharp decline in the share price. When done correctly, this so-called market-neutral strategy produces positive returns no matter which way the market goes.

Using this split-strike conversion strategy, the Fairfield Sentry Limited fund has had only four down months since inception in 1989. In 1990, Fairfield Sentry was up 27%. In the ensuing decade, it returned no less than 11% in any year, and sometimes as high as 18%. Last year, Fairfield Sentry returned 11.55% and so far in 2001, the fund is up 3.52%.

Those returns have been so consistent that some on the Street have begun speculating that Madoff's market-making operation subsidizes and smooths his hedge-fund returns.

Why would Madoff Securities do this? Because, in having access to such a huge capital base, it can make much larger bets -- with very little risk -- than it could otherwise. It works like this: Madoff Securities stands in the middle of a tremendous river of orders, which means that its traders have advance knowledge, if only by a few seconds, of what the big customers in the market are buying and selling. And by hopping on the bandwagon, the market maker effectively locks in profits. As such, throwing a little cash back to the hedge funds would be no big deal. And the funds' consistent returns, in turn, attract more capital.

When Barron's ran that scenario by Madoff, he dismissed it as "ridiculous."

Still, some on Wall Street remain skeptical about how Madoff achieves such stunning double-digit returns using options alone. Three option strategists for major investment banks told Barron's they couldn't understand how Madoff churns out such numbers using this strategy. Adds a former Madoff investor: "Anybody who's a seasoned hedge- fund investor knows the split-strike conversion is not the whole story. To take it at face value is a bit naive."

Madoff dismisses such skepticism. "Whoever tried to reverse-engineer [the strategy], he didn't do a good job. If he did, these numbers would not be unusual."

Adding further mystery to Madoff's motives is the fact that he charges no fees for his money management services. Indeed, while fund marketers like Fairfield Greenwich rake off a 1.5% from investors, none of that goes back to Madoff. Nor does he charge a fee on money he manages in private accounts? Why not? "We're perfectly happy to just earn commissions on the trades," he says.

The lessons of Long-Term Capital Management's collapse are that investors need, or should want, transparency in their money manager's investment strategy. But Madoff's investors rave about his performance -- even though they don't understand how he does it. "Even knowledgeable people can't really tell you what he's doing," one very satisfied investor told Barron's. "People who have all the trade confirms and statements still can't define it very well. The only thing I know is that he's often in cash" when volatility levels get extreme. This investor declined to be quoted by name. Why? Because Madoff politely requests that his investors not reveal that he runs their money.

"What Madoff told us was, `If you invest with me, you must never tell anyone that you're invested with me. It's no one's business what goes on here,'" says an investment manager who took over a pool of assets that included an investment in a Madoff fund. "When he couldn't explain [to my satisfaction] how they were up or down in a particular month," he added, "I pulled the money out."

For investors who aren't put off by such secrecy, there are a few ways to get into Madoff funds. Fairfield and Kingate Management both market funds that are managed by Madoff. Tremont Advisers, a publicly traded hedge-fund advisory firm offers Madoff-managed funds.