Where did the Madoff money go?

Reuters:

Everyone caught up in the scandal of accused Wall Street swindler Bernard Madoff wants to know where the money is.

Madoff, who authorities say confessed to losing $50 billion in "a giant Ponzi scheme," has given a list of his assets, liabilities and property to U.S. regulators.

But the thousands duped, from the beach cities of Florida to yacht clubs of the Mediterranean to Hollywood and Manhattan, may never see it. And judging by the scandals involving Bayou Group hedge fund, WorldCom and Adelphia Communications, any money they may see down the road will likely be a fraction of what they invested.

"We have received many calls from people and everyone is saying 'where did the money go?' because he obviously didn't use it all," said Craig Stein, an attorney in Boca Raton, Florida.

"If you add up all of the firms and entities and brokers that were making commissions and compensation off of the promotion or facilitation of the money to Madoff, I bet you will find a very large number there, an economy of its own," Stein said.

Stein said he is investigating on behalf of two clients whose money in Westport National Bank of Connecticut ended up with Madoff. The bank said it provided only custodial services and did not invest any of its own money with Madoff or introduce anybody to Madoff.

The U.S. Securities and Exchange Commission, which received the assets list from Madoff's lawyers on Wednesday under a court order, will not publicly disclose the information. It will become part of its investigation following Madoff's December 11 arrest in New York.

U.S. prosecutors are conducting a parallel criminal investigation after charging Madoff with securities fraud.

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The nature of a Ponzi scheme tends to exaggerate the losses. As the money comes in it is sent right back out to investors. So much of the money went back to investors in the form of phony interest or dividend payments with a portion kept by the perps as their profit. Longtime investors may receive more than a return of their capital if the scam has as long a life as Madoff pulled off.

In someways the Ponzi scheme exaggerates the scope of the operation in much the same way a check kiting scam does. If you just look at the checks you might think it was a huge deal, but since most of the checks are written to cover previous checks, the scam artist usually gets only a fraction of the total amount.

I recall one case where I was trying to find what some promoters had done with the money and came across thousands of dollars in chasiers checks. It turns out they were using the chasiers checks like a savings acount of sorts cashing them when they needed a few thousand and buying another for the remainder. If you just looked at all the cashiers checks it looked like a lot of money, but when you realized they were in ever shrinking amounts the first check represented their net proceeds.

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