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Bernard Madoff, SEC Reach Agreement on Ponzi Scheme Charges

Feb 9, 2009 | Parker Waichman LLP

Accused Ponzi Schemer Bernard Madoff has agreed to settle a civil fraud case with the Securities and Exchange Commission's (SEC).   In a press release, the SEC said it had submitted the agreement to a federal judge in Manhattan for review.

Madoff was arrested on one count of securities fraud on December 11.  Madoff - once a chairman of the Nasdaq stock exchange - was the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm was primarily known for its business in market-making, or serving as the middleman between buyers and sellers of shares. However, Madoff also oversaw an investment-advisory business that managed money for high-net-worth individuals, hedge funds and other institutions.

According to the FBI complaint against Madoff, that business was largely a Ponzi scheme.  The FBI said Madoff  “deceived investors by operating a securities business in which he traded and lost investor money, and then paid certain investors purported returns on investment with the principal received from other, different investors, which resulted in losses of approximately billions of dollars.”

As we reported earlier, Madoff’s alleged securities fraud has impacted a lot of wealthy and famous investors.  They  include New York Mets owner Fred Wilpon, baseball legend Sandy Koufax, actor John Malkovich and former Miss America Phyllis George.    Several hedge funds,  including those managed by Tremont Capital Management and Fairfield Greenwich Advisors had invested heavily in Madoff’s funds. Several banks around the globe, including the Royal Bank of Scotland, France’s largest bank, BNP Paribas, Britain’s HSBC Holding PLC and Spain’s Santander have all lost billions. Several charities were also hit hard.

In addition to the rich and famous, Madoff's victims  included many everyday people, many of whom are just finding out that they are among the Ponzi scheme victims. A list released last week named housewives and retirees, a plumbers union and a high school as Madoff investors.

According to the SEC, Madoff agreed to a partial judgment in the civil lawsuit the agency filed against him on December 11 that would impose a permanent injunction and continue relief previously obtained by the agency in a preliminary injunction order on December 18.  Madoff agreed to the partial judgment without admitting or denying allegations in the SEC lawsuit.  The SEC said in its press release that the amount of penalties and disgorgement imposed on Madoff will be decided at a later time.

That SEC's  lawsuit alleged that in December, Madoff informed two senior employees  - reportedly his sons - that his investment advisory business was a fraud. Madoff told these employees 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." According to the SEC, Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

The SEC settlement with Madoff has no bearing on the criminal case against him.


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