The scheme began to unravel in the fall of , when the general market downturn accelerated. Madoff had previously come close to collapse in the second half of after Bayou Group , a group of hedge funds, was exposed as a Ponzi scheme that used a bogus accounting firm to misrepresent its performance.
Madoff only survived by moving money from his broker-dealer's account into his Ponzi scheme account. By then, at least two major banks were no longer willing to lend money to their customers to invest it with Madoff. In June , Markopolos' team uncovered evidence that Madoff was accepting leveraged money. To Markopolos' mind, Madoff was running out of cash and needed to increase his promised returns to keep the scheme going. The trickle became a flood when Lehman Brothers was forced into bankruptcy in September, coinciding with the near-collapse of American International Group.
Unknown to them, however, Madoff had simply deposited his clients' money into his business account at Chase Manhattan Bank , and paid customers out of that account when they requested withdrawals. To pay off those investors, Madoff needed new money from other investors. However, in November, the balance in the account dropped to dangerously low levels. He had just barely enough in the account to meet his redemption payroll on November Even with a rush of new investors who believed Madoff was one of the few funds that was still doing well, it still wasn't enough to keep up with the avalanche of withdrawals.
In the weeks prior to his arrest, Madoff struggled to keep the scheme afloat. MSIL had neither customers nor clients, and there is no evidence that it conducted any trades on behalf of third parties.
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Shapiro , a year-old Boston philanthropist and entrepreneur who was one of Madoff's oldest friends and biggest financial backers. Judge Lifland ruled that Rosenman was "indistinguishable" from any other Madoff client, so there was no basis for giving him special treatment to recover funds. Madoff asked others for money in the final weeks before his arrest, including Wall Street financier Kenneth Langone , whose office was sent a page pitch book , purportedly created by the staff at the Fairfield Greenwich Group.
Langone declined. However, it was far too little and far too late. By the week after Thanksgiving , Madoff knew he was at the end of his tether. With banks having all but stopped lending to anyone, he knew he could not even begin to borrow enough money to meet the outstanding redemption requests.
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On December 4, he told Frank DiPascali , who oversaw the Ponzi scheme's operation, that he was finished. He directed DiPascali to use the remaining balance in the Chase account to cash out the accounts of relatives and favored investors. On December 9, he told his brother Peter that he was on the brink of collapse. At that point, Madoff asked his sons to follow him to his apartment, where he admitted that he was "finished", and that the asset management arm of the firm was in fact a Ponzi scheme — as he put it, "one big lie".
Mark and Andrew then reported him to the authorities. Madoff intended to take a week to wind up the firm's operations before his sons alerted authorities. Instead, Mark and Andrew immediately called lawyers. When the sons revealed their father's plan to use the remaining money to pay relatives and favored investors, their lawyers put them in touch with federal prosecutors and the SEC. Madoff was arrested the following morning. Investigators looked for others involved in the scheme, despite Madoff's assertion that he alone was responsible for the large-scale operation.
He would have had to nurture the Ponzi scheme daily.
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What happened when he was gone? Who handled it when somebody called in while he was on vacation and said, 'I need access to my money'? You would need office and support personnel, people who actually knew what the market prices were for the securities that were being traded. You would need accountants so that the internal documents reconcile with the documents being sent to customers at least on a superficial basis," said Tom Dewey, a securities lawyer.
Madoff , cv- , both U. David Kotz , who was conducting an investigation into how regulators failed to detect the fraud despite numerous red flags. Williams of the U. Postal Service was brought in to conduct an independent outside review of Kotz's actions. A violation of the ethics rules took place if their friendship was concurrent with Kotz's investigation of Madoff.
Madoff, MAG Madoff's firm reported to its customers for decades. It is unclear exactly how much investors deposited into the firm. The year-old financier paused, then said: "There is no innocent explanation. Apart from 'Bernard L. Madoff' and 'Bernard L. Up to that point, Madoff was thought to be cooperating with prosecutors. On March 10, , the U. Attorney for the Southern District of New York filed an count criminal information, or complaint,  charging Madoff  with 11 federal crimes: securities fraud , investment adviser fraud, mail fraud , wire fraud , three counts of money laundering , false statements, perjury , making false filings with the SEC, and theft from an employee benefit plan.
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Madoff pleaded guilty to three counts of money laundering. Madoff gave the appearance that he was trading in Europe for his clients. On March 12, , Madoff appeared in court in a plea proceeding, and pleaded guilty to all charges. The charges carried a maximum sentence of years in prison, as well as mandatory restitution and fines up to twice the gross gain or loss derived from the offenses.
He accepted a lifetime ban from the securities industry, and also agreed to pay an undisclosed fine. In his pleading allocution , Madoff admitted to running a Ponzi scheme and expressed regret for his "criminal acts". He wished to satisfy his clients' expectations of high returns he had promised, even though it was during an economic recession.
He admitted that he hadn't invested any of his clients' money since the inception of his scheme. Instead, he merely deposited the money into his business account at Chase Manhattan Bank.
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He admitted to false trading activities masked by foreign transfers and false SEC returns. When clients requested account withdrawals, he paid them from the Chase account, claiming the profits were the result of his own unique "split-strike conversion strategy". He said he had every intention of terminating the scheme, but it proved "difficult, and ultimately impossible" to extricate himself.
He eventually reconciled himself to being exposed as a fraud. Only two of at least 25 victims who had requested to be heard at the hearing spoke in open court against accepting Madoff's plea of guilt. Judge Denny Chin accepted his guilty plea and remanded him to incarceration at the Manhattan Metropolitan Correctional Center until sentencing.
Chin said that Madoff was now a substantial flight risk given his age, wealth, and the possibility of spending the rest of his life in prison. Madoff's attorney, Ira Sorkin , filed an appeal , to return him back to his "penthouse arrest", await sentencing, and to reinstate his bail conditions, declaring he would be more amenable to cooperate with the government's investigation,  and prosecutors filed a notice in opposition.
Prosecutors recommended a prison sentence of years, the maximum possible under federal sentencing guidelines. They informed Chin that Irving Picard , the trustee overseeing bankruptcy proceedings for the Madoff organization, had indicated that "Mr. Madoff has not provided meaningful cooperation or assistance. The judge granted Madoff permission to wear his personal clothing at sentencing.
On June 29, Judge Chin sentenced Madoff to years in prison, as recommended by the prosecution. Chin said he had not received any mitigating letters from friends or family testifying to Madoff's good deeds, saying that "the absence of such support is telling. Chin called the fraud "unprecedented" and "staggering", and stated that the sentence would deter others from committing similar frauds.
He stated, "Here the message must be sent that Mr.
Madoff's crimes were extraordinarily evil. Chin said "I have a sense Mr. Madoff has not done all that he could do or told all that he knows," noting that Madoff failed to identify accomplices, making it more difficult for prosecutors to build cases against others.