What Happened To Madoff’s Money?

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Almost since the news broke that Bernard Madoff had confessed to running a “$50 billion Ponzi scheme”, one of the key unanswered questions has been, what happened to all that money?

The short answer is, we don’t know yet. “It is still too early to say with any certainty what was going on inside Madoff’s business,” said Stephen Harbeck — who heads the SIPC, which is serving as the receiver for Madoff’s now-defunct brokerage firm — at a press conference outside U.S. bankruptcy court last week.

It’s worth noting at the outset that the $50 billion figure, which came from the SEC complaint quoting Madoff’s own confession, may be inflated. The Associated Press has calculated that investors cumulatively have said they have lost $30 billion.

That’s not exactly pocket change. And despite Madoff’s lavish lifestyle, it would be virtually impossible for him to have blown through that amount, or even a significant fraction of it, on his own or his family’s personal expenses.

Madoff has promised to give an accounting of all his assets by the end of the year. But until the legions of forensic accountants with the FBI, the SEC, and other investigative bodies complete their enormous task of independently tracing the funds, we’ll likely remain largely in the dark.

Still, piecing together various reports, several possible answers are beginning to emerge, which, taken together, may go some way to explaining the mystery.

Living the High Life
Madoff may have used some small amount of client money to fund his and/or his family’s lifestyle. He owns an apartment on the Upper East Side of Manhattan, estimated at over $5 million, a $3-million beachfront mansion in the Hamptons, a $9.4-million home in Palm Beach, Florida, and a villa on the French Riviera. He also has shares in two jets, and a 55.5-foot yacht. But it bears repeating, this spending can’t have accounted for more than a small fraction of the total amount that Madoff investors lost.

Foreign Bank Accounts
Madoff may have stashed some of the money in overseas accounts. The Observer of London reported over the weekend that accountants going over Madoff’s books think he regularly directed large sums to offshore accounts in the Caribbean and Europe. But again, there probably wasn’t too much in there, or Madoff would likely have tapped it rather than allowing the whole alleged scheme to collapse when he couldn’t meet obligations to investors who wanted to withdraw money earlier this month.

Robbing Peter To Pay Paul
More substantially, Madoff’s alleged Ponzi scheme appears to have been based on using money provided by new investors to make payouts to existing investors. In other words, much of the money may have been withdrawn by investors who believed they had turned a legitimate profit. And if those gains prove to be a result of Madoff’s deception, they would likely be re-appropriated as part of the forthcoming effort to compensate the alleged victims.

Hiding His Losses
Madoff may also simply have lost some of the money through bad trades, and tried to use a Ponzi scheme to cover it up. Note that the criminal complaint filed against him earlier this month says that he confessed to having “had personally traded and lost money for institutional clients, and that it was all his fault.” (itals ours)

Still, right now, there are more questions than answers. As Robert Lenzner, a financial reporter for Forbes, who has been covering the story closely, said on CNBC this afternoon: “Nobody can figure out how this was done.”

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