The Business Society: “Madoff: Why did this happen?”

The Business Society: “Madoff: Why did this happen?”


– Great to see everybody. I’m delighted that you’re all here. Those of you don’t know, my
name is Professor Kasomenakis, and I’m the faculty coordinator
of the Business Society. I also teach accounting,
if anybody’s interested in taking any of my accounting
classes next semester. By all means, you’re welcome
to take ’em, but I’m tough. (laughing) I wanted to let you know that this is the last meeting for the semester, but we will be having, we do have a lineup for
the spring semester, so do check out your Tiger
Mails for the announcement and some of the topis
that we have will include E-commerce, we’re gonna have a speaker from the Small Business
Administration talk about that. If you’re interested in
doing business online, this is a great opportunity
to come and find out how you can set yourselves up, and any other information
that you may need. We also have another meeting on the new health reform act
and how it affects students, college students, so we’re gonna have that
sometime in April, I believe. I don’t know exactly the dates. And also, we’re gonna have another meeting on
eligibility requirements, so those of you who wanna go to Borough, go to Queens College, this
is a great opportunity to come and find out
what are the requirements to transfer to those two colleges. Again, the announcements,
you will get the information, the announcements, by way of email, so check out your Tiger email addresses. It’s very very important. I wanna start the meeting, like I said, and I want to introduce
to you our speakers. We have two speakers today. Our first speaker comes from
the business department. He’s a certified public accountant, and he’s also a certified mortgage banker, and he is a licensed real estate person, and he teaches the Accounting classes, and also he teaches tax class, as well, and his name is Professor Ben Murolo. Let’s give him a nice
round hand of applause. (applauding) Our second speaker, he is an attorney, and he also teaches law, and I think finance, as well,
at the business department, so let’s hear a nice
round hand of applause to Professor Rosen.
(applauding) Let’s start. – Thank you all for coming. Bernie Madoff has made
history, unfortunately. He’s infamous. I want to start with reflecting, in my research, what happened, because the more I got into it, the less I understood, I should say, because, as you recall, in Accounting I, we talk about reasons for
fraud, and things like this, like financial pressures, rationalization, and opportunity, but Mister Madoff really didn’t, he had a successful business,
running as a broker dealer, handling more than 5%
of the volume of trading through time, so very comfortable lifestyle, and none of these were
really apparent to me, so a lot of the things
I’m gonna talk about today are going to be speculation, because nobody knows
exactly how much was lost, when he started this, and how it happened, but I need to you understand that. The first step of the talk is going to be a little about
the history of his firm. Madoff Securities started in 1960. Bernard Madoff is from Queens, he started as a broker
dealer, and he handled trades. He grew the firm handling,
like if you bought a stock, he would execute that trade. Then he got into a little niche. The niche product that he did is he handled the electronic trading. He was a pioneer in E-commerce
on the stock market, and he dealt with that so much so that he was handling, as I just said, more than 5% of the daily
trades, or order flow. What he did, and how did he do that? Normally on a trade, when it’s executed, if you handle a trade from another broker, ’cause one thing I want you to know, Mister Madoff handled
other brokers’ business, so if they had trades, they would come to him to execute them. Why did they go to him? Because normally a trade execution costs approximately 12
and a half cents a trade. He wisely reduced that
a couple of pennies, so it was let say 10, sometimes
as much as .02 a trade. He played off of other
broker’s need for profit, so those two pennies each trade would go into the hands of the other, the brokers that executed
the trade through him. So now he’s handling all this business, and one thing I wanna throw out there, because he’s handling so
much of the order flow, he kind of knew what was hot,
as far as the stock goes, and what wasn’t hot. You and I might read into that as something called insider trading. That’s never been anything
about today what he did, but he did have information
to see what the brokers were advising their clients
throughout the process. I want you to understand that. The next thing I wanted
to talk about, really, is, does anybody here know
what a Ponzi scheme is? Anybody? Yes? (student starts speaking)
Speak a little louder, please. (student starts speaking) When you rip people off of billions? No, but my question is, how did he do it? Yes, Gus?
(student starts speaking) But why is he collecting the money? Gentleman in the back there? (student starts speaking) He promised unrealistic profits. Being a Monday morning quarterback. He was saying numbers
that were much higher. Young lady, did you have a comment? Thank you.
(student starts speaking) First thing we got is he
promised unrealized profits, excuse me, high profits,
unrealistic profits. He was playing off of his clients’ hope to get a higher investment return than you would get elsewhere. That may be considered their greed. It takes two to tango. I’m not saying that these people were, he did do something illegal, but he did play into somebody wanting more than the average person. There’s a saying, but
I’ll save that for later. A Ponzi scheme, though, is this, not only is it getting
unrealistic profits, you have to gain money, feeder
money, from other people to make it continue. Why is that? Because if I get your money,
and I invest your money, and then you say you want your money back, I’m returning your money
by taking his money and giving it to you, plus the profit. The profit that Mister
Madoff promised people was 1% a month, or 12% a year. In the world of the S&P500, you can have some years where it’s 20%, and some years where it’s -3%, so 12% is in the middle, which a lot of hedge funds
and other brokers like, and say that’s okay. But the unique part about Mister Madoff is that for a seven year period, he literally only had three down months. Later, when I read the
book by Mister Markopolis, who was the whistleblower, he said, I saw a graph, everybody knows what a 45 degree angle, the graph went like this on the returns of Mister Madoff in a 10-year period. He said, I just looked at it, he’s a mathemetician,
a quantitative analyst, he said, just looking
at that graph told me that I have a fraud. This is unreal, I don’t
know how he did it, but there’s something
wrong mathematically. I have some specific numbers. I believe in 1993, the S&P500 returned 1.33%. Mister Madoff returned 14%. In 1999, the S&P500, I believe, did just over 20%, and Mister Madoff did 16.6%. He was always in the game,
and it looked okay, but the beauty of it was it was consistent up. So how did he get caught, or
why did this last so long? Let’s talk about why did he get caught. His competitors. His competitors said to
this Mister Markopolis, who was a quantitative
analyst in a company, they said, this guy, Madoff’s,
got something great going on, I wanna copy him. Make this happen. Can you make this happen? And that’s what he did,
and he looked at it. He said, there’s no way
this guy could do this. I’m trying all the numbers. It manifested into something where he was a whistleblower with the SEC, which I’ll talk about a little later, but what I’m trying to say is his competitors started to question it. Initially, unrealistic profits. Mister Madoff then made
it somewhat secretive, private. If you were inquisitive,
he would kick you out. He’d literally say, I don’t
want you asking questions, you got any questions, I
don’t want to talk to you. You’re out. So people were like, I don’t wanna do it. Then, you have to have feeders, because like I said
before, if you want out, I have to use somebody else’s money. He had a lot of feeder funds. What were the feeder funds? He used hedge funds. Other brokers would collect
money from investors, and then would come to
him with their money, so those investors were literally
paying double commissions. Technically, they were paying commission to their original broker, and then they in turn invested it with Mister Madoff and did that. You would say these funds are required to do something call due diligence. Does anybody know what due diligence is? You just look into the quality of the assets. Each firm is supposed to give out something called a prospectus, and you get this prospectus, and it tells you what we invest in, by industry, what our
returns are historically, and it tells you what’s going on, and you’re supposed to
do some due diligence to verify if these numbers make sense. If it says, Con Edison
stock, what were the returns? You just look it up on Google, and you can verify what he’s
saying on the prospectus, or the firm is. The due diligence by some
of these feeders were poor at best. One French aristocrat, who
later committed suicide, literally did a handwriting
analysis on Bernard Madoff. That was his due diligence, which I’ll ask Professor Rosen, is that
acceptable in a court of law? – Afraid not.
– Not. Graphology is not allowed
in a court of law. That was his due diligence. Another person said, they did nothing, they admit it, and they have 3.3 billion
of their clients’ money in Mister Madoff’s thing. Could you hand out the
list of investors, please? We have here a list of the investors. It’s a 163 page report of people that invested. Does anybody know what an oxymoron is? Do you ever hear the term jumbo shrimp? That’s an oxymoron, jumbo and shrimp. Mister Madoff now created
an oxymoron of his own, a sophisticated investor is the term that they’re calling an oxymoron, based on what Mister Madoff did, and that’s not really funny, but it’s sad. Give me one second. I wanna make sure… I told you that. I explained to you the
unrealistic profits, I then explained to you that
he was secretive and didn’t, he cultivated privacy in steady return, then the big thing I
wanna talk about now is, in 1990, he then became
the chairman of NASDAQ. Then whenever the SEC needed an advisor on an advisory committee, very often Mister Madoff
was asked to speak, or be on this committee. They even created a rule
called the Madoff Exception, based on his name and his ability to be able to buy certain things. I don’t wanna get into how stocks work, or the business of broker dealer, but he was allowed to sell
short in certain instances. Anyway. Now we get into a little
bit of Mister Markopolis’ mathematical analysis. Could you go to slide seven? I’m jumping around ’cause
most of this is in my head, and I want to talk about something called a split strike conversion. Basically, what I’m gonna
explain to you right now is something called a hedge fun, you’re gonna learn what a hedge fund is. This is a strategy, a
split strike conversion, and it’s explained right
on the PowerPoint up there. There’s a basket of 30
to 35 blue chip stocks that emulate the S&P100. Blue chips are the best companies. General Electric. We have statements, do you
wanna hand out the statements and let them see? This is literally a November
30th, ’08 statement. Thank Professor Rosen for
getting this on Google. No names on it, but it’ll show you the stocks that were owned, and you probably heard at least of three of the companies on there. We would get those stocks that had, usually these are companies
that had very steady returns. Then, we would protect
them with puts and calls. Does anybody know what an option is? Just a brief understanding of it, an option is the right to buy a stock. A call option is you’re
betting for the stock to go up, a put option, betting
the stock to go down. What he did is he had calls and puts as a hedge against his bet. Let me give you an analogy. You bet on the favorite on the horse, you really want the 50 to one odd horse to win, but just to cover yourself, you take the favorite on one side, and then you take one in
the middle of the road. Is that kind of a good example? I’m making this up off the top of my head, but what I’m trying to tell you is he hedged his bets. This strategy means, in all in all, the bottom line is this, is this limited his high
profits, but more importantly, what a hedge fund does
is it limits your losses on the put side. Once you reach a certain level, the put, and these are what are
called covered calls, a covered call means
you’re using the money that the people have with
you, not your own money, to do these option buys and sells. What you’re doing is, because you’re limiting
your gains and your losses, there’s only so much you can earn. That further created an inquisitiveness in Mister Markopolis’
book, No One Would Listen. He did interview several
of the feeder firms, one of them was the Fairfield
Group in Connecticut. Had billions of dollars also with them, and they too did a poor due diligence, which they’re required
to do on their statement. Everybody was moving along, people are taking money in and out him, why didn’t this get caught? Because of his prominence. Whenever he was questioned, Mister Markopolis even went to the SEC. When he went to the SEC, basically, they didn’t even know there was a 17th floor
in the Lipstick Building. The 17th floor was where all of this activity was really occurring. The 19th and 18th floor was
the normal broker dealer. It was on the 17th floor where he had about two dozen
employees and himself, and nobody knew, not
even the employees knew, what was going on on the 17th floor. I’m told, based on the book, that the SEC didn’t even
that there was a 17th floor. After two times of Mister Markopolis going to the SEC as a whistleblower, risking his life, I might add,
I don’t know if you’ve heard some stories about whistleblowers. They meet not such nice
fate during the process. He was in a very nebulous, precarious situation,
I guess would be the word, and he didn’t know what to do, ’cause he was asked to do it a third time when the chairman of the SEC switched. There was a new chairman
chosen, and they said, do it again, Harry, Mister
Markopolos’s first name, please try to represent the whole details. They gave him, he basically laid out a fingerprint of exactly
how this was done. Then, in the end, in 2007, eight, everybody knows what happened
with the mortgage crisis, and the economy as a whole, and what happened is there
was a run on the bank. I believe, at one day, it
was $20 billion called, and, unfortunately, the
feeders were so big, but not that big, and that’s how it came
about where he fell. There’s three ways a
Ponzi scheme can go down. One, the people that are
running it abscond, vanish, two, they run out of money, and three, they go to the
authorities and tell them. Does anyone know what
happened with Mister Madoff? (student speaking) No. He had his two executives, his son, go to the authorities and turn him in. He did that, probably, just before what the young lady here said, he was going to run out of money, and they apparently had
this all planned out. The rest is well documented
in the newspapers, of people, prominent people who invested. The Mets owner, Wilpon
family, other movie stars, Mort Zuckerman. Very, you would think,
sophisticated investors, but unfortunately, the bottom line for me to you is if it’s too good to be
true, it usually is. At this point, I’d like
to let Professor Rosen explain to you the
criminal aspect of this, the liquidation and
bankruptcy proceedings, and various types of litigation. Thanks, any questions,
I’m here at the end, too. Thank you, Ted. – Thank you. Thank you, Professor Murolo. I would like, as my colleague said, to describe three different aspects of the legal proceedings, can you hear me without the microphone? Maybe I’ll try it without the microphone. If you have trouble
hearing me, just leave. On June 29th, 2010, Bernard Madoff was
sentenced in federal court in Manhattan by U.S. History
Court Judge Denny Chin to the maximum 150 years for what the judge called, quote, extraordinary evil, close quote, fraud that shook the nation’s faith in the financial and legal systems and took a staggering toll
on rich and poor alike. This sentence came six months after, as Professor Murolo said,
Madoff allegedly told his sons that his entire business was
this massive Ponzi scheme. The penalty, when it was
announced in court by Judge Chin, produced applause from the audience, many of whom, I mean,
most of whom were victims. At one point in the sentencing procedure, Bernard Madoff turned
around to the victims, and he said, quote, I’m sorry. I know that doesn’t help you. Later on, he told the judge, quote, I cannot offer you an
excuse for my behavior. How do you excuse betraying
thousands of investors, who entrusted me with their life savings? How do you excuse deceiving 200 employees, who spent most of their
working life with me? How do you excuse lying
to a brother and two sons, who spent their entire lives helping to build a successful business? How do you excuse lying to a wife, who stood by you for 50 years? The same day, in the
same court proceeding, or earlier in that proceeding, Bernard Madoff, through
his attorneys, stipulated, do you know what stipulated means? Who knows what stipulated means? I see some of my former
Business Law students here. Stipulated means agreed. He agreed that the government, if it went to a hearing on its claim that Bernard Madoff’s
assets should be forfeited, he agreed that the government could prove that he, Bernard Madoff, would be liable for a
personal money judgment in the amount of $180 billion. He also agreed that the government would be able to prove
that he would be liable for a second money judgment
in the amount of only $799 million from money laundering. Based upon his agreement,
there was no hearing, the federal judge, Judge Chin, basically directed that a
money judgment be entered against Mister Madoff in
the amount of $170 billion, and the second money judgment
he entered against him, in the amount of 799 billion. He also directed that virtually all of
Mister Madoff’s assets, and there was a long list
attached to the judgment, called a schedule of assets, that virtually all of
his assets be forfeited to the United States. What does that mean, forfeited? Government takes over ownership. This is all by stipulation. He didn’t fight this. He could’ve required the government to go to a hearing to prove this. Forfeiture comes in when
a person commits a crime, especially a federal crime, the government oftentimes will go to court to start a forfeiture proceeding, to basically take title to the property that was acquired through the
truant, through the crime, on the theory that you cannot keep the fruits of your crime. If you commit a crime, and
you acquire (coughing), excuse me, an expensive boat, based upon what you
make through the crime, the government can come
in and take over the boat. As I said, Bernard Madoff was sentenced to 150 years in federal prison. You should know that there is no parole
in the federal courts, in the federal prison system. What does parole mean? Parole is when you get
out of prison early. In New York state, we have what’s called an indeterminate sentencing system. Somebody may be convicted
of armed robbery, might be sentenced from 10 to 15 years, and would be eligible
for parole after 10 years if he meets the conditions,
he was a good prisoner, he might get out early. Not so in the federal courts. If you’re sentenced to
150 years in prison, you serve 150 years, with one exception. He’s entitled, as any prisoner is, to 15% off for good behavior. That brings it down to 127 years, if he were to qualify for good behavior. In addition to that, on each of the 11 counts, there
were 11 counts against him, in addition to the sentence, there was three years supervised parole. Supervised release, it’s called. If he were to get out after 127 years, he would still be subject to supervision for the next 33 years. I wanna talk about in a
little bit more detail the criminal charges, I wanna talk about the
liquidation proceeding, and the bankruptcy proceeding, and I wanna talk briefly
about some of the lawsuits, there are many lawsuits
that have been started, a number of lawsuits
that have been started, and more will be started by the trustee in the liquidation and
bankruptcy proceeding. When Mister Madoff was
arrested in December of 2008, he was originally charged with one count of securities fraud. That was done very quickly
after he was arrested. A couple a months later, in March of 2009, after the government had a chance to investigate the matter further, they filed what’s called
a criminal information. They alleged 11 counts. First one is securities fraud,
and that’s the main one, and that goes into, basically, what Professor Murolo described what he was doing with
his investment accounts. The second one was investment advisor fraud, from at least the 1980’s
through December 11, 2008, that’s the day before he
spoke to his sons, I believe. Madoff acted as an investment advisor for clients of his firm, and employed devices and
schemes to defraud clients. Count three, mail fraud. Mail fraud is a federal crime, if you use the mail to commit fraud. That count alleges that on December One, Madoff caused to be sent
through the U.S. Postal Service a false and fraudulent account statement. Obviously, he would send out many, but the government just picked that one. That’s all they needed. False and fraudulent
statement from his firm to a client in New York. Count four, wire fraud. August 5, 2008, Madoff caused $2 million to be wired in investor funds from Bloomington, Minnesota, to New York. Across state lines,
electronic transmission. Count five, international money laundering to promote specified unlawful activity. 2002 to 2008, Madoff caused the transfer
of funds from his firm in New York to a related
firm that he had in London, and then from those accounts in his New York firm to
other accounts in New York. The money was derived from fraud
from the sale of securities and theft from an employee pension plan, employee benefit plan. This is money laundering. The claim here is he sent money from his firm in New York
to an affiliated firm that he had in London,
and then back to New York, basically, to conceal the origins of where this money was from coming from. Count six, from 2006 to 2008, related to that, similar type of activity, moving funds back and forth
from New York to London. Count seven, money laundering. April 13th, Madoff caused $54.5 million to be transferred from his firm’s investor account in New York to another account in London, and the money was derived from fraud. Count eight, false statements. Madoff caused the filing of
the SEC on January 7th, 2008. A uniform application for
investment advisory registration. He was applying to become registered as an investment advisor, and that application was false. The form falsely stated that his firm had custody of advisory client securities, why was this false? Because they had no securities, and he was applying to
become an investment advisor, saying that his firm had
custody of these securities, when, in fact, they did not. Count nine is perjury, that he lied under oath to the SEC, and that lied to federal officials. If you do so, there are
specific criminal penalties. Count 10, false filing with the SEC, and count 11, theft from
an employee benefit plan. September 24th, 2008, Madoff stole $10 million
in pension fund assets. This was a pension fund
that invested with him, which was sent to his
firm by a master trust on behalf of about 35 labor unions. This was a master trust that was formed to become the pension fund
of 35 different labor unions. They sent in $10 million to
invest in Bernard Madoff’s firm, and this was the basis for alleging theft from a pension fund. Now, Mister Madoff pled
guilty to all 11 counts. Many of you may be familiar
with the term plea bargain, what’s a plea bargain? (student answering)
What was that? (student answering) That’s right. When a person is charged
with a serious crime, like second degree homicide, maybe faces 25 years to life in prison, if he agrees to plead guilty
to first degree manslaughter, and the government recommends that he be sentenced to 15 to 25
years, to avoid going to trial. By pleading guilty to a lesser charge, he gets a reduced sentence. This was not a plea bargain. Madoff pled guilty to all 11 counts, all 11 felony counts against him. There was no agreement on
the part of the government to recommend any reduced sentence, and what happened was, Judge
Chin, the federal judge, imposed the maximum sentence on each count, and each sentence on each count was to run consecutively. Sometimes judges will impose
sentences to run concurrently, at the same time. Here, they were imposed
one after the other. I’ll go down the list. Security fraud, 20 years, count two, investment
advisor fraud, five years, mail fraud, 20 years, count four, wire fraud, 20 years, money laundering, count five, 20 years, international money laundering,
count six, 20 years, count seven, money laundering, 10 years, eight, false statements, nine, perjury, five years, 10, false filing with the SEC, 20 years, 11, stealing from the
employee pension benefit plan, five years. Each one to run consecutively. That’s the criminal proceeding. Mister Madoff is now in federal prison, and will be there for the rest of his life. Any questions on anything related to the criminal proceeding? Let’s talk about the
liquidation proceeding and the bankruptcy. In December of 2008, right
after this became public, right after Madoff went to his sons, and they went to the authorities, the Securities and Exchange
Commission, the SEC, started a civil action, civil lawsuit, against Mister Madoff, alleging various counts of
securities fraud, civil claims. In that lawsuit, the Securities Investor
Protection Corporation, S-I-P-C, which is now as SIPC, applied to have a trustee appointed. What is SIPC? SIPC, Securities Investment
Protection Corporation. How many people here know
that if you go to a bank, and you put in $5,000 in the bank account, you have an insured account? If the bank goes out,
you get your money back. How many of you know that? And what type of insurance is that called? – FDIC.
– FDIC. Federal Deposit Insurance Corporation. There’s something similar
in the securities industry. If you have an account
with a brokerage firm, and you have $25,000 worth of
stock in the brokerage firm, under the Securities Investment
Protection Corporation, which was set up by a
federal statute in 1970, the Securities Investment Protection Act, you have insurance. Let’s be very clear you understand, that does not mean that if your stock goes down in price, stocks go up and down in price, so if your $25,000 go down to $10,000, because the price of the
stock dropped from 25 to 10, you don’t have insurance for that. That’s normal losses in a market. But you do have insurance if your brokerage business, brokerage firm, goes out of business,
they go into bankruptcy, or if there’s some type of fraud, which, of course, is what
we’re dealing with here. If the broker or the firm
steals your securities, or committed some type of
fraud, steals your money, you then can file a claim under SIPC, S-I-P-C. You can get your loss back, up to a maximum, up to a maximum of $500,000 per customer. If you lose $10 million from a broker, Bernard Madoff or any other broker, you can file a claim under SIPC, and it’s approved, and it’s upheld, you can get back $500,000. This is paid through the
funds that maintained by SIPC, which all registered
brokers and broker dealers are members of and pay money into. Okay, now that was one proceeding. That was started in
federal court in Manhattan. The federal judge in Manhattan appointed a man by the
name of Irving Picard, P-I-C-A-R-D, you may have heard that name. He’s been a long time bankruptcy trustee. The federal judge in Manhattan
appointed Mister Picard to be the trustee of Bernard Madoff
Investment Securities Corp. What is a trustee? What is a trustee? A trustee is someone who is appointed, in this case, appointed
by a federal judge, to take over legal control,
legal title and legal control, of the investment corporation, all legal authority to handle,
to manage, to make decisions, on behalf of Bernard Madoff’s company is now vested in Mister Picard, based upon the federal
judge’s appointing him under the SIPC law. We’ll get to what he does in a minute. The same time that the SIPC proceeding was started, or a little bit later, I should say, Mister Madoff filed a personal bankruptcy in bankruptcy court. That bankruptcy proceeding, which is Mister Madoff’s
personal bankruptcy proceeding, also was what’s called a Chapter Seven. There are various types
of bankruptcy proceedings, Chapter Seven is when, basically, a person has more debts than they can pay, the court appoints, again,
a trustee to take over legal title and custody of
all that person’s property, and to step in the shoes of that person. The bankruptcy court
appointed the same man, Mister Picard, to be the
trustee in bankruptcy, with respect to Madoff’s
personal bankruptcy. The federal judge transferred the SIPC proceeding to bankruptcy court, so now in bankruptcy court,
you have a double proceeding, consolidated, joined together,
for certain purposes. The SIPC proceeding, with
respect to the company, and the personal
bankruptcy with respect to Mister Madoff personally. The purpose of both of these
proceedings is to do what? What is the trustee now trying to do? Yes? (student speaking) Say that again, please. – [Student] To liquidate all his assets? – To liquidate all of his assets. To what purpose? (student speaking) That’s right. To gather up all the
assets that he could get, to liquidate, to sell
them, convert them to cash, to establish a fund that then can be used to pay off claims that are
submitted to the trustee, which he then has to approve, or reject, and ultimately approve
by the bankruptcy court. If that goes according to
the way it’s supposed to go, it will be some moneys available to pay people some
portion of what they lost. In addition, this is in
addition to the $500,000 that they might qualify for under SIPC. The question becomes, how do you determine what each person’s claim is worth? Here’s what I mean. Suppose an investor with
Bernard Madoff’s company invested $10 million back in 1990, and over the next 18 years, periodically took out
money from his account. Took out $15 million. He invested 10, over the next 18 years, because they were making money on paper, this particular customer
takes out $15 million, but still has a balance. They still have a balance
of, let’s say, 12 million with the firm, and now,
in November of 2008, right before this whole thing was exposed, the last statement, the copy
of one of the statements, that was given out, the last statement
shows that this customer has 15 million, 12 million
sitting in the account. Is this person a creditor? That’s a tough question. It’s a tough question,
because you have to decide, how do you determine the terms here that’s being used in
court is in that equity? One method is cash in and cash out, meaning what? This particular person
invested $10 million, how much did he take out?
– 15 million. – 15. He’s $5 million ahead of him,
he didn’t lose any money. He made not have made
what he thought to make, but he actually received $5
million more than he invested. Got back his $10 million
and the $5 million, that’s the cash in and cash out method. If that method is employed, many of Madoff’s customers, who where customers as
of November 30th, 2008, would not have a claim, because under that method,
they did not lose money. The second method that was argued in court that should be used instead
of cash in and cash out was the last account statement balance. The last account statements that went out went out on November 30th, 2008, shortly before he turned
himself over to his sons. In our example, the investor who invested 10
million, took out 15 million, got 5 million more than he invested, might still have a $12 million balance in his account as per his last statement. The attorneys for these
investors, many investors, said that’s the correct number, and that should be the
amount of the claim. Matter was argued at bankruptcy court back in the spring, in March. The bankruptcy judge,
Judge Liflin, said no. The correct measure
here, the correct method, to determine the claim
is cash in and cash out, so our investor would not be accredited, would not be someone who’s owed money, would not be a claimant. Judge Liflin, through a procedural device, certified that question to the federal appeals court in Manhattan, obviously a very important question. Is this the correct
method, cash in cash out? Or should it be the last statement method? That question is now before the United States Court of Appeals, very high federal appeals court, second only to the U.S. Supreme Court, and they will make that determination. They have not yet decided that question, which method is used. The method is very important,
because it impacts, not only the claims in
the bankruptcy proceeding, but claims in the SIPC proceeding. It really depends on which method you use to define the class of creditors, and the trustee, trustee
Picard, has a website, and on the website, he talks about this, and he gives two examples. He says, if we use the cash
in and cash out method, he is projecting that he will recover $6 billion in assets. That’s what he’s projecting that he will be able to recover. If he used the cash in
and cash out method, he projects that the total amount of the claims will be $20 billion. However, if you use the
last statement method, he projects that the
total amount of claims will be $60 billion. Much higher. The way this works, if you file a claim, you would get a pro-rata distribution based upon the amount that they recovered over the total amount of claims. If we use the cash in and cash out method, if the trustee recovers $6 billion, you divide that by 20 billion, which is the projected
total amount of claims using cash in and cash out, that’s 30%. So if somebody lost a million dollars, they would have a valid claim for 30% of that million dollars, or $300,000, and they would be able to get paid the $300,000
under SIPD, up to $500,000. However, if you use the
last statement method, the computation’s different. Now it’s $6 billion over, not 20 billion, but the projected total of the claims under the last
statement method is 60 billion, so instead of 30% payout, it becomes six over 60, 10%, so our same claimant now
doesn’t get $300,000, he gets 100,000. This is a very important question. Question in the back? (student asking question) Financial statements were wrong, but the attorneys in court
argued, they’re the victims. They didn’t commit the wrong. This is the argument, they
had every reason to believe that this was the amount
of money they had, and they didn’t do anything wrong. The bankruptcy judge
rejected that argument. He said, look, we gotta look at the cash you put in and
the cash you took out. In the example I gave you, you’re not a claimant, because you took out $5
million more than you put in. We’ll have to wait and see when the second court of appeals
decides, could be any day, and probably, there’s a good chance that the decision will then be appealed to the U.S. Supreme Court. There’s another aspect to this, and we’ll get into this in a minute when we talk about the other
lawsuits that are pending, if you reject the notion that a person that put in $10 million
and took out $15 million is a creditor, is a claimant, the state doesn’t owe him anything, the trustee is taking the position that he could sue these people. The trustee could sue
these people for at least the $5 million they got paid over their $10 million investment, and maybe even the $15 million, on the theory that everything should be brought into the fund. Not only, if you use the
cash in and cash out method, will a number of people not be
creditors, not have a claim, they’re going to find themselves
being sued by the trustee to get, this is called
clawback proceedings, where the trustee is trying to get money back into the estate from people that should not have been paid this money. Legally, they’re known
as avoidance actions, where the trustee in bankruptcy, through various provisions
of the bankruptcy code, and under SIPC, as well, has the authority to go after people who were paid money by the bankruptcy debtor,
in this case, the firm, money that they should not have been paid. If they weren’t paid this money, that money would still be in the firm, and would now be available
to the bankruptcy trustee. It’s a very important question, defines who’s gonna be the creditor, but it also defines who’s gonna be sued. The bankruptcy proceeding
is also going on, Madoff’s personal bankruptcy proceeding, and the same Mister Picard’s the trustee, and his job is basically the same, gather up the assets, sell them, establish this fund, create this fund, which then can be used to
pay out to the creditors. What happened last weekend? Anybody remember hearing it on the news? It was much publicized. – They had an auction.
– They had an auction. All sorts of personal
property of Mister Madoff, probably many items that
belonged to Missus Madoff that I think she agreed to let go, and people paid all sorts of money. Just to give you an example, Missus Madoff’s engagement ring was bought at auction for $550,000, by somebody who was unidentified. Somebody paid $6,000 for a lot, a collection of property, that
contained Madoff’s slippers. Another lot made up of unused boxer shorts and socks sold for $1700.
(audience laughing) No comment, on any of this. But this money will go into this fund that the trustee is building
to hopefully be used to pay off the creditors pro rata. Questions? Let’s go, yes. (student asking question) – Yes.
(student asking question) Yes. There’s been no further criminal actions brought against these other people, but there are a number of lawsuits that have been brought by the trustee against various other
people, including Madoff’s, some of his relatives, and his wife, and we’ll get to that in a minute. Let’s go back to SIPC. Proceeding where people
who lost money with Madoff might be able to get $500,000
per person, per customer, in order to qualify under SIPC, you have to have had an account with a registered broker dealer. Broker dealers have to
register with the SEC. As was pointed out, many of the feeder firms that
fed money into Madoff’s firm were hedge funds and other types of funds that were not registered. You have to go back to the
days of President Clinton, the law, the securities
laws, were liberalized, and basically, there are, 1996, I believe it was,
amendments were made to the Investment Company Act of 1940, and if you invest in a firm where the investments are
held by less than 100 people, or if you invest in a fund, or a firm, where there’s no limit
to the number of people, but each investor is what’s
called, a qualified investor, meaning very wealthy, meaning individuals who have at least $5 million in net worth, if they have at least $5 million, you add up their assets,
subtract their liabilities, and they have at least $5 million, or companies that have
more than $25 million. If a fund has those types of
people for their customers, the fund can have any number of people. In either case, less than
100 or qualified people, the fund does not have to
be registered with the SEC. So let’s take somebody
who invested $20 million with a hedge fund, and the hedge fund then turns around and invested that money
with Bernard Madoff, who is Bernard Madoff’s customer? The hedge fund. Not the individual who
put up the $15 million. Can that individual now
follow a claim under SIPC to try and get back $500,000? The answer is,
– No. – No. Why not? (students answering) Who did they invest with? (student answering) Right, and they invested with this fund which was not registered. These people are out in cold. They’re not gonna be able
to recover under SIPC. They may be able to, and this
has to be determined yet, but they may, and I think
they will be able to, recover in the bankruptcy proceeding, because there’s no
similar limitation there. I mentioned, the third part
I’d like to talk about, all these lawsuits, the trustee, Mister Picard, has brought
a number of lawsuits against various people. I think it’s somewhere
in the neighborhood of, at least 17 in one category,
and various others. The purpose of these lawsuits, basically, is to get money in the hands
of the trustee’s funds, to be used eventually to
pay off the creditors. The trustee has brought, I believe, as of the end of September,
17 avoidance actions, going after various parties, trying to avoid, or set aside, payments that were made to them
by Bernard Madoff’s company within a certain amount
of time before the end, under various provisions
of the bankruptcy act. These are called avoidance,
clawback proceedings, where they are trying
to get this money back into the estate. He’s also brought actions
against four family members, Peter Madoff, Mark, Andrew, and Sherrie Madoff. I think there was his
brothers and sons, I think. There’s also a lawsuit
pending against Ruth Madoff. I know that they tried to settle it, I don’t think that’s been settled. That’s progressing. They also have various lawsuits against Madoff-related entities. Madoff had set up a number
of various companies, with different types of investments, which technically would
not be brought into the bankruptcy proceeding
or the SIPC proceeding. The trustee is suing a
number of these entities. Trustees involved in many other
different types of lawsuits, for example, some people directly, some people that lost money with Madoff, they went and they sued
feeder funds themselves. The trustee says, wait a second, if these potential creditors out there are suing the people that I wanna sue, that’s going to interfere with my ability as a trustee to conduct this bankruptcy proceeding, so the trustee goes into bankruptcy court. Bankruptcy court has tremendous power, and the bankruptcy judge
issues injunctions, what’s an injunction? (student answering) A court order, directing
someone to do something. In this case, the bankruptcy
court issues injunctions against the various people who
have brought these lawsuits against potential defendants
in avoidance actions, stopping them from going
ahead with their own lawsuits, because the trustee wants
to go against these people and get the money for
everybody, all the creditors. There are substantial number of lawsuits that the trustee is involved in. There was one lawsuit that the decision came down
in the end of October. The federal court of
Manhattan appeals court issued a decision. How’s this for bad timing? An entity called the Rosenman Family, LLC, probably set up by a wealthy family to be the vehicle for their investments, sent Mister Madoff’s company $10 million sometime after November 30th, 2008. Remember, this all came out, he confessed, he went to his sons December 12th. Days before this was exposed, this particular investment
fund from the family sent him $10 million. They didn’t even have a statement, ’cause it was after the last statement. Their attorneys went into
court, said, wait a second. We get our money back. We’re not customers. We didn’t invest in anything. We talked about possible investments. We got no statement. The money was sent in, we
talked about what we might buy. Give us our money back. We don’t have to go through
this whole proceeding with SIPC, maybe to get 500,000, or file a claim in bankruptcy
to get a certain percentage, we should get our $10 million back. He stole this money from
us, and it wasn’t invested. Bankruptcy court said, no. Said, you were customers, and this money belongs to the estate. That’s a tough pill to swallow. When up on appeal, the appeals court said, we
cannot decide at this point if you’re actually customer, we have to wait for further proceedings, but they agreed that the $10
million belongs to the estate, so these people lost. They basically are gonna be
thrown in with everyone else. This was days before this was exposed. Just the other day, they announced they sued various
employees of Madoff’s firm, that was just announced two days ago. The trustee was going after,
he named four employees that were involved in, I believe, receiving the moneys that
came in and paying out money, so he is trying to go after
as many people as he can. Professor Murolo, I think, made a point about the lessons that
we can learn from this, and I think the lesson
that Professor Murolo said was very very important, and I’d like to leave you with this, if somebody comes to
you with a proposition, an investment, and it just seems like
it’s too good to be true, the answer is it’s probably too good to be true. There’s no free lunch out there. Somebody promises enormous returns, you ask hard questions. I have been an arbitrator in Wall Street, for the New York Stock Exchange, the NSE, and now for FINRA, where people have claims against brokers, and I’ve done this for over 20 years, and many of the cases
I’ve been involved in were where customers would sue brokers, and most, in many of these cases, nothing compared with
Madoff’s case in size, but in many of these cases, the broker would promise
all sorts of great returns, and most of the time,
there’s something wrong. Somebody makes these promises, you really look at ’em hard and fast. Ask questions. Professor Murolo pointed
out, Madoff was good, because if you asked him
questions, what would he do? – He’d throw you out.
– Throw you out. And you wanna be in the club,
you don’t wanna be thrown out, you wanna get these returns. If that’s the case, quit,
take your money out. The professional that’s not willing to answer your questions,
don’t deal with it. The thing that was really, Professor Murolo and I were talking, we couldn’t understand
how this could happen, we didn’t understand what
the statements looked like. We found the statement on the
internet that was circulated. At first, I thought it
was a very summery type statement that he would use, but no, it’s a fairly detailed statement. Bottom line is, if you do an investment with a brokerage firm or some
type of investment company, and you get a statement every month, look at it, read it, study it. You have any questions, get those questions answered. I’ll tell you something else, don’t just go back to the broker, especially if you’re dealing with less than a very large, established firm, even dealing with those firms, go to somebody that
you have confidence in. Accountants, lawyers,
friends who have experience, let them answer those questions for you. It has to make sense to you. I’ve been involved in many cases where people got statements
and never looked at it, or, if they looked at it,
they looked at two things, what two things?
– Balance. – What balance?
(student answering) That’s exactly right. The starting balance
and the ending balance. As long as they were making
money, they couldn’t care less. When they started losing money, then they went to their accountants, and they went to their
lawyers, but don’t do that. Look at those statements. Make sure you understand what’s on there. Questions? Thank you.
(applauding) – I have a question for you before you go. Do you think Mister Madoff,
when he started his firm, planned to do this fraud? No. He admitted after he was convicted, and just before sentencing, he said no, it just accidentally happened. I wanted to say that, and the other thing I wanted you to know, even with the feeder firms
that gave him the money, he played off of their greed. In a commission split, he was giving them as much
as 90% of the commissions, so they were like, if I get x commission, they were getting a whole pie, so they would moreso come to him, so it further continuing
the money coming in, because of the large commission structure. I thought that there were a couple of videos. Could you put the one, I
wanna show you a video that, hold on one second. I’ll help you out here. It’s right here. I think you’re gonna like this. One second. First, play. – [Julie] It may take
months for investigators to fully understand Bernard Madoff’s $50 billion Ponzi scheme,
but friends and investors from Hollywood to Palm Beach, Florida, may never be able to
reconcile the man they knew with the scam he’s alleged to have run. – When my wife’s sister passed away, Bernie Madoff came to the funeral, that’s a type of individual
that we all thought he was. A very caring individual. – [Julie] Norman Braman, former owner of the Philadelphia Eagles, invested with Madoff, and says he never appeared
too eager to accept new money. – You had to know somebody,
a friend of a friend, who had some influence, for
Madoff to accept an account. I mean, this was a classic scam. – [Julie] Though he
socialized with a wealthy set, his own lifestyle wasn’t overly lavish. – He didn’t live a flamboyant life, he didn’t have a big, fancy yacht. It was a combination of factors, what he looked like, his
manner, his supposed record, or the fact that he was a philanthropist. – This was a huge punch in the stomach. It’s a personal punch in the stomach, ’cause this was somebody I knew and still have affection for. – [Julie] Francis Levy is the director of an educational center that had virtually all its funds
invested in Madoff Securities. He says, the deception is hard to believe. – Is it possible that he is a sociopath who cares nothing about human beings, and I can’t believe that. – [Julie] We are joined by Michael Santoli from Barron’s magazine. Michael, good morning.
– Morning. – How did he get away with it for so long? – It seems one reason he got away with it is that investors didn’t have
any losses to complain about. His returns seemed good, there was no dissatisfied investors, as folks there said,
he actually cultivated this sense of privacy and exclusivity. He made it hard for you to get in, and therefore, it wasn’t
a typical money manager, who said, give me all
your cash, I wanna run it. I do think that the SEC
oversight, certainly, there were lapses there. This was a firm that was
examined numerous times without anybody finding anything, but it seemed as if
there was no smoking gun, there was not a lot of
complaints about him. – What about the hedge fund clients? The people in the financial world. How did they get fooled? – There really is not a good excuse for those folks getting
fooled in our opinion. Barron’s, seven years ago, raised some questions about the unusual, supposed, predictability of his returns, the fact that he was so private, the fact that he insisted
on privacy from his clients, and what you’ll notice is, it was not a lot of big state
pension funds, for example, that would have a very
rigorous vetting process, it was hedge funds who were
looking for steady returns, not, by the way, mind
bogglingly high returns, just steady ones, and
consistency and no losses, and they were essentially
looking to glean fees off of their client accounts
by giving it to Madoff. It was really a convenience matter. – How much blame should the
SEC be taking in all of this? – I think plenty of blame. I mean, obviously, by the
SEC’s own apparent admission, they clearly feel like they
should’ve caught more of this, but I don’t know that it
would’ve been possible to necessarily nail him
at an early stage here. If somebody is committed
to committing fraud, and if they want to bring new investors to pay off existing investors, which is what a Ponzi scheme is, that game can go for a long
time before people notice it. – Are you telling me there is no way we can put regulations in place where future investors won’t get fooled? – I don’t think that we
need new regulations, we need the examiners to
actually be more rigorous about going in there,
making sure these accounts contain the securities that
the manager says they contain. That seems to be a very simple thing that wasn’t followed here. – In the final seconds, the
biggest takeaway message, or lesson learned in all this, is? – If it seems too good to
be true, it probably is, and his returns did seem too
good to be true for too long. – No more questions? Thank you all for coming. (applauding)
Thank you.

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9 thoughts on “The Business Society: “Madoff: Why did this happen?””

  • answer is simple; government did not do its job & hardly ever do. same as the future question; how did this happen on half human and half animal creatures & a human parts body factory. the government is doing nothing to protect the people & only supports large corporations who by the way own the government & media, judges & executive as well. financial system, banking, science etc. all have no oversite sad that his son was murdered. so many people are robbed of our $ & health. MayaBell (.com go

  • oh, come on, Madoff Bernie premeditated the global ponzi scam with the help of insider regulators, and the mafia on the 17th floor who claim to have known nothing wrong was going on! what bullshit! surely, if you try to scam frankie pascani/Annette Buongiorno with the same scam that Bernie Madoff dished out, see if they just laugh in YOUR FACE

  • Harry Markopolis should get the highest civilian award in US – Congresional Medal of Honor. He earned it. All along while SEC was asleep

  • The second guy not using a mic… the device intended to be used for the audio quality… basically ruins this otherwise excellent video. Shame, honestly. If he didnt want to hold it, he could have simply used the stand.