Final Weeks
The scheme began to unravel in December 2008, when the general market downturn accelerated. However, Markopolos later wrote Madoff was on the brink of insolvency as early as June 2005, when his team learned he was seeking loans from banks. At least two major banks were no longer willing to lend money to their customers to invest it with Madoff. In June 2008--six months before the scheme imploded--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.
As the market's decline accelerated, investors tried to withdraw $7 billion from the firm. To pay off those investors, Madoff needed new money from other investors. 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. In November 2008, Madoff Securities International (MSIL) in London, made two fund transfers to Bernard Madoff Investment Securities of approximately $164 million. MSIL had neither customers nor clients, and there is no evidence that it conducted any trades on behalf of third parties.
Madoff received $250 million around December 1 from Carl J. Shapiro, a 95-year-old Boston philanthropist and entrepreneur who was one of Madoff's oldest friends and biggest financial backers. On December 5, he accepted $10 million from Martin Rosenman, president of Rosenman Family LLC, who wanted to recover a never-invested $10 million, deposited in a Madoff account at JPMorgan, wired six days before Madoff's arrest. Bankruptcy 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. The judge separately declined to dismiss a lawsuit brought by Hadleigh Holdings, which claims it entrusted $1 million to the Madoff firm three days before his arrest.
Madoff asked others for money in the final weeks before his arrest, including Wall Street financier Kenneth Langone, whose office was sent a 19-page pitch book, allegedly created by the staff at the Fairfield Greenwich Group. Madoff said he was raising money for a new investment vehicle, between $500 million and $1 billion for exclusive clients, was moving quickly on the venture, and wanted an answer by the following week. Langone declined. In November, Fairfield announced the creation of a new feeder fund. However, it was far too little and far too late.
On December 10, 2008, he suggested to his sons, Mark and Andrew, that the firm pay out over $170 million in bonuses two months ahead of schedule, from $200 million in assets that the firm still had. According to the complaint, Mark and Andrew, reportedly unaware of the firm's pending insolvency, confronted their father, asking him how the firm could pay bonuses to employees if it could not pay investors. Madoff then 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.
Read more about this topic: Madoff Investment Scandal
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