A Worldwide Track Record of Swindle and Deceit

American Investor Swindled Investors for 50 billion Dollars

The whole world feels the consequences of the gigantic fraud of the American investor Madoff. The respected expert misled banks and individuals.

The largest fraud case ever on Wall Street has now also made a Dutch victim. Fortis Bank Nederland is threatened to loose an amount of 850 million to maybe even 1 billion euro because it lent money to funds that invested with Bernard Madoff. This 70-year-old veteran of Wall Street was arrested last week after his sons turned him in. He appears to have scammed investors for 50 billion dollars (36.6 billion euro).

A wrong investment? Quite. And especially for Fortis, whose name has already been dragged through the mud this year. But this time the bank can plead that others were blind as well. Because Fortis is not alone. Everywhere in the world renowned banks, very rich Americans and charity institutions appear to have invested hundreds of millions or even billions in the funds of Madoff.

The New York trade was trusted by institutions and investors. For he was the former top man of the technology stock market, and an expert who was consulted when Washington wanted to draft new laws for the financial sector. In short, a man who you could trust with your money. In addition, Madoff gave investors the guarantee of a 10 percent yield. Always. Every year.

That he did not make this, he expertly hid from his customers for many years. He did this by paying the promised profits from the money that was brought in by new customers. That these customers often were old friends and that even one of his sons invested millions, did not seem to hurt him.

This method of swindling is better known as a Ponzi scheme. It can go well for a long time, but the house of cards eventually collapses. Either because there are not enough new customers, or because customers suddenly demand their money. The latter happened to Madoff beginning of this month. Some customers who apparently smelled trouble, demanded 17 billion dollars. Madoff did not have this and confessed the whole case to his sons Andrew and Mark. They consequently called the FBI. The promised stable earnings, but especially also the case of trust even more mattered for the many individuals and charity institutions that trusted Madoff with their money. Therefore, the pain is largest here. And not only in the wallet. “It is a stab in my heart,” textile magnate Carl Shapiro told the “Palm Beach Daily News.” The 95-year-old entrepreneur lost approximately 545 million dollars because of Madoff, who was a house friend of the Shapiro’s for over 50 years.

Everywhere in mundane Palm Beach, where Madoff bought a second house at the end of the sixties, stories emerge of investors who have suffered severe damage. Often they are friends of the golf club, who trusted Madoff completely with their savings.

The damage is not restricted to the ultra riches of Palm Beach. Also Fred Wilpon, owner of the baseball team New York Mets, a charity fund of director Steven Spielberg and a fund of Nobel price winner Elie Wiesel have been hit. Their losses illustrate the impact of the scandal on the charity institutions.

Some of this last group already closed their doors. This happened to the Chais Family Foundation that yearly donates 12.5 million dollar to Jewish causes in Israel and the former Soviet Union. All of the money (8 million dollars) that existed was invested with Madoff and has now disappeared. The institution is closed and the five employees are at home. In New York, the JEHT Foundation announced that it will close next month. This institution donated money to projects that work for tolerance, equality and a well-functioning judicial system. The organization depended on donations of the couple Jeanne and Kenneth Levy-Church, who established the institution in 2002.

The list with charity institutions that have been hit is long, and the effects will be noticeable for a long time. In the United States, these type of institutions often runs completely on donations of rich individuals or of companies.

The stream of money to charity institutions already faltered because of the credit crisis and now is threatened to dry up even more. The money that the wealthy Americans gave to Madoff to invest has most likely disappeared.

Now that the size of the fraud case becomes more and more clear, the question arises how Madoff has been able to hide his scam for so long, what he invested in and what his motives were.

The case of trust seems to have played a large role in the swindle of years. Madoff was very respected in the financial sector and as long as he hauled in enough customers, he could pay existing customers. Still, it is strange that no big question marks have risen about his yield all those years. Also, in bad years Madoff made a profit, something that was rather exceptional. Not everyone trusted him. “His strategy was completely illogical. I met him in the nineties and seldom heard such nonsense,” Jim Hedges, an advisor of hedge funds, said in the British business newspaper “Financial Times.”

What Madoff did is rather easy. He regularly bought stocks of large American companies. Simultaneously, he several times bought put option on the S&P 100, the index in which these companies are registered. With the purchase of these options, he speculated on a profit decrease. At the same time he sold so-called call options, with which he speculated on an increase of the index. That is what the business newspaper the “Wall Street Journal” says, which gained access to copies of customers of Madoff.

There is nothing wrong with these transactions. But Madoff seems to have executed the transaction for only one customer. If he would have done it for all his customers, the volume on the market options would have been much higher than stock data indicates. However, the customers were told that these transactions had been done.

Most questions are raised on the motive. Madoff, who faces a jail term of twenty years, has been released on a 10-million-dollar bail but keeps quiet. This possibly changes when he is being arraigned in January. The chance exists that the veteran thought to temporarily keep his customers happy after a bad year, and to make up for it later.

But if things keep on going bad, it is difficult to get out of this vicious circle. It seems to be a reasonable explanation for the actions of a man who long was a prominent man in the financial sector. A man with, until last week, a clean slate.