Madoff Ponzi Scheme Fooled Big Investors
Bernard Madoff, former NASDAQ Commissioner, ran a fraudulent investment fund that could cost investors as much as $50 billion. The money from new investors paid the returns for existing customers, a fraud known as a "Ponzi" scheme. Investors included New York Mets owner Fred Wilpon, GMAC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman. Also losing substantial sums were real-estate magnate Mortimer Zuckerman, the foundation of Nobel laureate Elie Wiesel, and a charity of movie director Steven Spielberg.Some investors had as much as $11 million, which represented 95% of their total net worth. Banks with money invested included French bank BNP Paribas, Tokyo-based Nomura Holdings and Neue Privat Bank in Zurich. Hedge fund Maxam Capital Management lost $280 million and will have to close.
What It Means to You
The Securities Investor Protection Corp. (SIPC) will only cover those who invested through Madoff's brokerage firm, not his investment advisory firm. The best protection for most investors is a well-diversified portfolio.The SIPC covers losses up to $500,000 that are related to theft and proven unauthorized trading, which could include a Ponzi scheme. However, the SIPC only has $1.5 billion, and would have to go back to Congress if it turns out it needed to cover the full $50 billion. SIPC doesn't cover hedge funds and other investments not registered with the SEC. Most likely, Maddox investors will lose their money, some of them all of their money. Therefore, it is always best to place less than 15-20% of your portfolio in any one investment. (Source: WSJ, Are Investors Safe from Fallout?, December 14, 2008; Fund Fraud Hits Big Names, December 13, 2008 )
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