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Impact of Madoff Securities Fraud Widespread

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Banks, charities and ordinary investors stand to lose billions because of the investment fraud allegedly committed by Bernard Madoff.  The Wall Street Journal reported today that the Securities Investor Protection Corp., a nonprofit funded by the securities industry to aid investors affected by failed firms, could start the process of liquidating the Madoff brokerage firm. SIPC covers some losses up to $500,000 per customer in limited cases, but it is unclear the extent to which SIPC will cover the investment adviser accounts, the Journal said.

According to media reports, the Madoff securities fraud has impacted a lot of wealthy investors.  They reportedly include Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services, among others, the Associated Press said.

But the rich are by far the only investors impacted by the Madoff implosion. Several investment-management firms, including Tremont Capital Management and Fairfield Greenwich Advisors, which were heavily invested in Madoff’s funds, The Wall Street Journal said.

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 all stand to lose billions, the Associated Press said.

Several charities were also hit hard by the news. Among them, a charitable foundation funded by the family of New Jersey Sen. Frank Lautenberg also said most of its investments were handled by Madoff, the Wall Street Journal reported. The Lautenberg foundation has donated to the Breast Cancer Research Foundation, Catholic Relief Services and the New Jersey Performing Arts Center.

Boston’s Robert I. Lappin Charitable Foundation, a charity that financed trips for Jewish youth to Israel, said on its website that its staff was being terminated because of its Madoff losses.

The Associated Press also said ordinary investors would be impacted by the Madoff fraud.  According to the report, losses for individuals ranged from $40,000 to an entire nest egg worth well over $1 million.Madoff – once a chairman of the Nasdaq stock exchange – is the founder and primary owner of Bernard L. Madoff Investment Securities LLC. The firm is 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.” The 70-year-old Madoff was arrested on one count of securities fraud late last week.

Madoff reportedly told employees that his fraud could cost investors as much as $50 billion.  According to The Wall Street Journal, if initial estimates prove true, the Madoff securities fraud would be nearly five times larger than the accounting fraud that drove telecom company WorldCom into bankruptcy proceedings in 2002.

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