Bernard L. Wadoff was arrested yesterday on charges of running a giant Ponzi scheme. It is a type of fraud in which earlier investors are paid off with money raised from later victims — until no money can be raised and the scheme collapses.
Mr. Madoff's investment success has been regularly questioned in the past due to his "unnaturally steady returns, his vague investment strategy and the obscure accounting firm that audited his books." He was not running an actual hedge fund, but managing accounts for investors inside his own securities firm. Hedge funds hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist.
Yet, many hedge fund companies kept promoting Mr. Madoff’s funds to other funds and individuals. The Securities and Exchange Commission investigated Mr. Madoff in 1992 but cleared him of wrongdoing.
"The collapse of Mr. Madoff’s firm is another blow in a devastating year for Wall Street and investors. While Mr. Madoff’s firm was not a hedge fund, the scope of the fraud is likely to increase pressure on hedge funds to accept greater regulation and transparency and protect their investors."
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