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Tuesday, October 13, 2009

Madoff Money

Erin Arvedlund

Where did all the money go?

After I wrote “Madoff: The Man Who Stole $65 Billion” this was probably the first question I received from almost everyone. And I am forced to tell the bizarre truth: there’s probably no money left.

This is the nature of what are known as “Ponzi” schemes, or a classic pyramid scheme–Bernard Madoff constantly had to raise money from new investors to cash out the old investors, or “redeem” them, as a traditional hedge fund or mutual fund would.

But Madoff was not running a traditional hedge fund–not at all. He was running a cash-in/cash-out fraud, using the London branch of his brokerage firm as the piggy bank where he would wire money to and fro to make it look like he was trading for the hedge fund.

But there was no hedge fund, and there was no $65 billion at the end. Madoff lied about the amount of assets he was overseeing.

So where did the money go?

Remember, the $65 billion was a phantom number: that included all the phony profits from over the decades (in my book, I write that the scam probably began in the early 1960s!).

Working backwards, let’s assume Madoff promised average returns of 10 percent a year, over a period of 35 to 40 years, and the true dollars invested–and therefore lost–is likely closer to between $10 billion-$20 billion.

That’s still a shocking amount–but at least it’s one that U.S. prosecutors and the Madoff trustee charged with cleaning up the mess and paying back investors can get their arms around.

Assume Fairfield Greenwich Group, one of Madoff’s infamous “feeder” funds, took out roughly $7 billion; Jeffrey Picower, Madoff’s favorite investor, took out $5 billion, and Stanley Chais, who raised money in Hollywood for Madoff, took over roughly $1 billion, and suddenly, $13 billion is accounted for.

So where is the rest?

It’s possible Madoff spirited away a few percent of the billions he stole, but even whistleblower Harry Markopolos, who stalked Madoff for nearly a decade and warned the U.S. Securities & Exchange Commission multiple times, has estimated Madoff likely only kept perhaps $350 million for himself.

In short, it would have been easier for Madoff to run a true, bona fide hedge fund than to create the millions of pages of phony statements, using an antiquated computer and old letterhead.

With the guilty plea of his lieutenant Frank DiPascali, we now know Madoff did not act alone. He lied about that just as he lied for so many decades. the question is: who else will be charged?

Erin Arvedlund is a journalist who has worked for Dow Jones, The Moscow Times,, Barron’s and the New York Times. She is author of “Too Good to be True: The Rise and Fall of Bernie Madoff“. The opinions expressed are her own. -


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