Fraudster Bernard Madoff may be behind bars but he leaves investors asking who helped him with his scam and what he did with the cash

Published on Saturday 14 March 2009 13:16

'MADOFF with all the money' was one rather droll pun doing the rounds last week as the world tuned in to watch the final demise of its largest ever fraudster.

In the end it wasn't the sheer numbers involved in the fraud – some put it as high as 46bn – the size of the media circus surrounding the court appearance – larger than the 9/11 terrorism prosecutions – or the potential length of his prison sentence, 150 years. But the sheer ordinariness of Bernard Lawrence Madoff, known to his family and friends as "Bernie", that surprised onlookers.

• In pictures: Bernard Madoff fraud case

As he appeared in court, dressed in a charcoal grey suit, the softly spoken 70-year-old offered little in explanation as to the extent of his fraud or where all the money had gone. The former Nasdaq chairman, told US District Judge Denny Chin that he had turned to fraud when his investment business did badly in the recession of the early 1990s.

"I cannot adequately express how sorry I am for what I have done," he said. "I am painfully aware that I have deeply hurt many, many people, including family, friends and associates. When I began my Ponzi scheme I believed it would end shortly and I would be able to extricate myself and my clients from the scheme. As the years went by, I realised that my arrest and this day would inevitably come."

Before leaving the courtroom in handcuffs, ahead of his sentencing on June 16, Madoff said the giant Ponzi scheme was confined to his investment business. The larger market-making and proprietary-trading arms run by his sons Mark and Andrew and brother Peter, "were legitimate, profitable and successful".

But if his family knew nothing of his fraudulent activities and the trustee charged with finding money to repay the victims has so far come up with just $1bn (716m), one big question still remains answered: "Where has all the money gone?"

This week as Madoff swaps his 6m Manhattan apartment in the Upper East Side for a solitary cell, investigators will continue their trawl to find out who else may have been involved in this 46bn scam.

Among other things, prosecutors must determine what role, if any, Madoff's wife, brother, two sons and employees played in perhaps the largest Ponzi, or pyramid, scheme in history.

"A lot of resources and effort are being expended, both to find assets and to find anyone else who may be responsible for this fraud," federal prosecutor Marc Litt said after Madoff pleaded guilty to 11 felony counts and was ordered to jail.

Authorities also will have to reconcile Madoff's statement to the judge that "to the best of my recollection, my fraud began in the early 1990s". Prosecutors have alleged that the swindle began in the 1980s.

Despite Madoff's statement that his other businesses were legitimate, assistant US attorney Marc Litt told Chin that the government "does not entirely agree". He said: "At times, his firm would have been unable to operate but for the cash generated from this Ponzi scheme."

Madoff's wife Ruth, brother Peter and sons Mark and Andrew have not been accused of any wrongdoing. But investors who lost their fortunes with Madoff believe others were involved. George Nierenberg, who was one of three investors who spoke at the hearing, told the judge he believed that Madoff "didn't commit these crimes alone". He said: "Just to produce the reams of documents that were received and the elaborate data that went into them must have required an army of people to produce," he said. "And we all know that Madoff wasn't around a lot at his operation."

The list of Madoff's victims is eye watering in terms of its scale and the number of household names it contains. According to the Wall Street Journal, which has published a list of the thousands of organisations and individuals who have lost money, the numbers involved continue to grow day by day. His thousands of victims included individuals, trusts, pension funds, hedge funds and non-profit organisations. The scheme wiped out people's fortunes, ruined charities and apparently pushed at least two investors to commit suicide.

Investors big and small were swindled, from Florida retirees to celebrities such as Steven Spielberg, actor Kevin Bacon and Hall of Fame pitcher Sandy Koufax. Many of Madoff's victims were Jews and Jewish charities, which trusted him because he is Jewish. Those cheated included Nobel Peace Prize winner and Holocaust survivor Elie Wiesel. Among UK companies to have declared themselves potential victims include hedge funds Man Group, RAB Capital and Nicola Horlick's Bramdean Alternatives.

Amid such names as John Malkovich and Larry King stands HSBC which has reportedly lost 716m, Banco Santander which has written down 1.3bn and, closer to home, Royal Bank of Scotland that has lost 400m.

In Palm Beach, the tiny island off the coast of Florida inhabited by America's millionaires, they refer to it as Hurricane Bernie. Palm Beach was one of Madoff's favourite hunting grounds for investors.

Because Madoff pleaded guilty without a deal with prosecutors, he is under no obligation to cooperate. Some legal experts have speculated that he is sacrificing himself to protect his wife, his family and friends.

In court documents, prosecutors said Madoff reported he oversaw 35bn. However, experts said that the actual loss was probably much less and that the higher number reflects the false profits Madoff told investors they were making.

In the country clubs of Palm Beach and the bars of Wall Street several theories are emerging as to what has happened to the missing millions. Among those is that Madoff spent a large portion on his extravagant lifestyle. As well as three homes in the US – a Manhattan penthouse, a beach front mansion in the Hamptons and a home in Palm Beach – the office rented by his firm was in New York City's Lipstick Building, where rents are more than 2m to 3m a year. Speculation is also rife that the money has been buried in offshore bank accounts, in family members' names or elsewhere.

Another theory is that some investors benefited. While many of his investors lost everything, some of them must have received payouts from Madoff over the years. Madoff had to keep up his credibility by allowing people to tap their cash when they wanted. There is also the possibility that it was traded away.

Some analysts suggest that a large chunk of the money could have been lost in the financial meltdown. With Madoff promising returns of 10%, he would have been paying out while investments were being virtually wiped out in other sectors.

What has emerged in recent days is the role London played in helping Madoff launder clients' money and siphon off cash. The capital's light-touch regulation helped Madoff build a pivotal hub for his scheme amid the hedge fund industry in London's Mayfair where he is alleged to have funnelled at least 182m of his victims' money. The Serious Fraud Office continues to investigate his Mayfair-based Madoff Securities International.

As Madoff prepares for a lifetime behind bars, attention is likely to focus on his family. His wife Ruth regularly entertained clients at their three luxury homes and at the six golf clubs of which they were members. It is also likely New York investigators are keen to find out exactly how much Madoff's sons knew.

Mark, 44, and Andrew, 42, have worked at the firm since their 20s. Since they brought in their father after his confession the authorities have prevented them from speaking to him. A lawyer for the brothers has stated they had no knowledge of any alleged fraud before their father's full revelation.

And then there is Madoff's niece Shana, his firm's compliance attorney. Embarrassingly for the regulators, Shana is married to a former officer of the US Securities and Exchange Commission.

This is just one of the many unanswered questions asked by Madoff's victims, who in the coming months are likely to demand some conclusive answers.

"Is there a Hell painful enough for him? A place where, say, he can listen to Bush economic theorists espouse the joys of toothless regulation while looking at pictures of the Holocaust survivors who are among Madoff's victims?"

Timothy Egan on Bernard Madoff www.egan.blogs.nytimes.com

"We can't rely on the regulator alone to protect us from a repetition of the debacle. Reform has to extend to the attitude of executive directors, non-executive directors and owners."

BBC business editor Robert Peston. www.bbc.co.uk/blogs