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Prominent Trader Charged With Multi-billion-dollar Fraud

December 12, 2008 at 6:45 PM EST
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A prominent Wall Street trader was arrested on charges of massive fraud that may cost investors $50 billion. Wall Street Journal reporter Tom Lauricella discusses what may be the largest fraud scheme in the history of Wall Street.
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JUDY WOODRUFF: Bernard Madoff came to be known as something of a powerhouse in the world of hedge funds and investments. Madoff’s asset management firm was known for the promise of high returns, but federal authorities arrested and charged him yesterday, saying those returns were a fiction.

Investigators say Madoff was allegedly paying out new money that he took in from other investors. The scheme may have totaled tens of billions of dollars, perhaps as high as $50 billion.

Tom Lauricella has been covering this story for the Wall Street Journal, and he joins us from New York.

Tom Lauricella, this is a fascinating rags-to-riches story. First, give us some background of where he came from and what he built up.

TOM LAURICELLA, the Wall Street Journal: Sure. Bernie Madoff is probably not a household name for most investors, but on Wall Street and among sort of elite, moneyed investors in New York, and sort of in Florida, Palm Beach area, he’s a legend, almost a hero.

He was a pioneer in trading stocks outside the exchanges, helped build up what became the trading platform that became the Nasdaq stock market.

And while he’s mainly known for sort of his work on the nuts and bolts, inner workings of the stock market, he also had another business where he was managing money for very wealthy clients, for hedge funds, institutions.

And what he was known for was putting out these incredibly steady, reliable returns, earning people a little bit of money month after month and, most importantly, never losing money.

Madoff engaged in 'massive fraud'

JUDY WOODRUFF: And built this thing up over 50 years. Now, the SEC is calling this a massive fraud. How did it work?

TOM LAURICELLA: Well, we still don't know the exact details. The SEC and federal investigators are going through the books right now. They're looking to try and figure out exactly what it was that Bernie Madoff was doing.

It appears to have been sort of a classic Ponzi scheme, where he took money from one set of investors and used it to pay off others, pretending that he was actually investing it and making the returns.

It's very much still unclear where all the money went, what happened to any profits he made, but, as far as we know right now, it appears that literally billions of dollars seem to have evaporated.

JUDY WOODRUFF: Now, the figure $50 billion was thrown around. So you're saying there's no way to know yet?

TOM LAURICELLA: We don't know yet. Apparently, the investigators are starting to sort of look at this and get a better handle on it. The $50 billion figure actually came from Bernie Madoff when he confessed this in what we're being told at this point, anyway, was a sort of fairly dramatic fashion to his sons who are a part of the business but operate a different part of the company.

It doesn't appear at this point that his sons, in what had been very much a family-run business, had anything to do with this, but that $50 billion number is something that Bernie apparently told them.

Suspicions raised a decade ago

JUDY WOODRUFF: So many questions unanswered. The sons, I read, actually were part of turning him in.

I also read, Tom Lauricella, that there were complaints about Bernard Madoff going back for 9 or 10 years. Were those not followed up?

TOM LAURICELLA: Well, even further back than that. Bernie Madoff's operation, his main business was -- he was essentially a broker between big Wall Street trading firms. He was an intermediary. And he had this money management business on the side.

And the allegation was that he was taking this very valuable information about what these big traders were doing and that he was front-running it. He was stepping in front of their trades. And that was what was enabling him to make all these remarkable returns over the years.

So even going back 20 years or so ago, there were allegations that perhaps he was doing something improper.

And then, as he became better known for these returns in his hedge funds, people began to say, how could you possibly be investing in the stock market? Even the best, you know, most successful strategy over any time period has months where things go wrong. And people said, "This just simply cannot be."

And there were people who contacted the SEC and others, and other regulators, saying, "Go take a look at this guy." At this point, it's still not entirely clear how he was able to hide whatever he was doing from regulators.

Elite, anonymous client list

JUDY WOODRUFF: But there were still prominent people, prominent firms that were putting their money with him, right?

TOM LAURICELLA: Yes. And this is -- you know, we're just beginning to sort of find out who the investors were. This is a very sort of elite world where you don't sort of tell people who your clients are. There's no lists.

But, you know, for example, the Wilpons who are, you know, part-owners of the Mets, other very sort of wealthy families, many, many wealthy families in Palm Beach. He would use his connections at the Palm Beach social scene to get investors.

So it's, you know -- but we're also hearing from people who are saying this was their life savings that their mom or dad had, you know, after working their lifetime, had given him $500,000 or $1 million, and it appears that that money's gone.

JUDY WOODRUFF: So just quickly, as you're saying, they don't get their money back and right now his firm is shut down? Madoff's firm?

TOM LAURICELLA: Well, it's unclear what exactly is going to happen with the entire firm. It's looking likely that the stock-trading business is going to be shut down. They're just beginning the legal proceedings that it takes to do something like that. But chances are the entire company is going to go.

JUDY WOODRUFF: Sounds like the investigation just getting started. Tom Lauricella with the Wall Street Journal, thank you.