A former Nasdaq stock market chairman was arrested on a securities fraud charge Thursday, accused of running a fraudulent investment business that lost at least $50 billion before he confessed to senior employees it was a "giant Ponzi scheme," authorities said.
Bernard L. Madoff, his silver hair reflecting the lights of a federal courtroom, was released on $10 million bail secured by his signature and that of his wife. He declined to comment as he walked out of U.S. District Court in Manhattan.
Madoff, 70, the founder of Bernard L. Madoff Investment Securities LLC, maintained a separate and secretive investment-advising business that served between 11 and 25 clients and had a total of about $17.1 billion in assets under management, prosecutors said.
Late Thursday, the Securities and Exchange Commission announced a civil securities fraud charge against Madoff and said it was seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.
Andrew M. Calamari, associate director of enforcement in the SEC's New York office, said the SEC was alleging "a stunning fraud that appears to be of epic proportions."
A criminal complaint signed by FBI Agent Theodore Cacioppi said Madoff told at least three senior employees at his Manhattan apartment Wednesday that the investment adviser business was a fraud and had been insolvent for years, losing at least $50 billion.
To put that figure in perspective, the collapse of energy trading firm Enron in 1991--largely viewed to be the gold standard of financial fraud in modern times--involved the loss of $31.2 billion, according to the New York Post.
Cacioppi said he and another FBI agent arrived Thursday at Madoff's apartment, where Madoff invited them in and acknowledged knowing why they were there.
"After I stated, 'We're here to find out if there's an innocent explanation,' Madoff stated, 'There is no innocent explanation,'" the agent wrote.
Madoff told the employees he was "finished," that he had "absolutely nothing," that "it's all just one big lie" and it was "basically, a giant Ponzi scheme," according to the complaint filed in court.
The employees understood Madoff's admission to mean that "he had for years been paying returns to certain investors out of the principal received from other, different, investors," said the complaint, which did not identify the investors impacted by the scheme.
Cacioppi said one of the employees told him that Madoff was "cryptic" about the firm's investment advisory business and kept its financial statements locked up. The FBI agent said another employee told him that Madoff last week had said clients had asked for about $7 billion in redemptions and he was struggling to meet those obligations but thought he could do so.
Cacioppi said two senior Madoff employees told him that Madoff said during the Wednesday meeting that he planned to surrender to authorities in a week but first wanted to distribute $200 million to $300 million he had left to certain selected employees, family and friends.
"Madoff stated, in substance, that he had personally traded and lost money for institutional clients, and that it was all his fault," Cacioppi said.
The agent wrote that Madoff said he had "paid investors with money that wasn't there" and that he was broke and insolvent and had decided that "it could not go on" and that he expected to go to jail.
Defense lawyer Dan Horwitz called Madoff "a person of integrity" and said he intends to fight the charge.
If convicted, Madoff could face up to 20 years in prison and a maximum fine of $5 million.
Late Thursday, the Securities and Exchange Commission announced civil securities fraud charges against Madoff and said it was seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.
Bernard L. Madoff Investment Securities LLC ranks among the top 1 percent of U.S. securities firms, according to the company's Web site.
In 2001, Barron's reported that Madoff's firm was one of the three top market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange.
Shortly after leaving law school, Madoff founded his firm in 1960. It was one of five broker-dealers most closely involved in developing the Nasdaq Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors.
In the 1990s, Madoff was viewed as a maverick. He angered leaders of the New York and American stock exchanges by taking away some of their business by paying brokerage firms a penny a share to route orders through his system.
Prosecutors noted in a release that the company Web site boasts: "Clients know that Bernard Madoff has a personal interest in maintaining an unblemished record of value, fair-dealing and high ethical standards that has always been the firm's hallmark."
Madoff's clients were primarily other hedge funds who manage billions of dollars for wealthy individuals. Hedge funds are largely unregulated by the SEC. Firms posed to take a big hit from Madoff's scheme are the Fairfield Greenwich Group, which had $7.3 billion in assets investmed with the fraudster and Kingate Management Ltd., which had $2.8 billion invested, according to Bloomberg News.