Equity pros used words like “shocked,” “shaken” and “disbelief” when describing their reaction to the news that Bernard Madoff’s firm, Bernard L. Madoff Investments, bilked investors out of $50 billion. Other traders declined commenting on what might be the biggest Ponzi scheme in the history of the U.S. securities business.
“This is a major shock,” said legendary trader E. E. “Buzzy” Geduld, who served on a number of industry committees with Bernard Madoff. Geduld sold his Nasdaq market making firm — Herzog Heine Geduld — to Merrill Lynch in 2000 and now runs his own firm, Cougar Trading. Geduld said he has known Bernard Madoff for 35 years and “has the highest regard” for him and his family. Geduld was not an investor in Madoff’s hedge fund where the alleged fraud occurred and has not seen him in three years, he said.
Madoff Investments rose to fame because of its equity trading prowess as a wholesaler — making markets for the retail clients of mid-size and regional brokers. As the equity culture grew in the U.S., so did Madoff’s business. But it was a little known portion of its business that sunk the firm: managing money. The asset management was run on a separate floor from the wholesaling unit, which was operated by Bernard Madoff’s sons, Andrew and Mark, who have not been charged.
The Securities and Exchange Commission has charged Bernard Madoff and the firm with running a Ponzi scheme, a strategy that pays returns to current investors from the proceeds of new investors. The firm has ceased operation, which means wholesaling clients need to seek their executions elsewhere, while investors in the funds that Madoff managed have lost their money.
Brothers Bernard and Peter Madoff built their business trading New York Stock Exchange stocks by beating the NYSE specialists at their own game. The firm championed technology when other market makers were still in manual mode. This burnished the firm’s reputation for being progressive. In fact, Madoff championed the Securities and Exchange Commission’s 1997 Order Handling Rules, which forced dealers to post their customers’ bids and offers for public display.
Although the Madoffs were active in Nasdaq — Bernard Madoff was Nasdaq chairman for three years — the firm did not start trading the Nasdaq 100 for clients until the mid-1990s. It was also among the last of the odd-lot brokers and did a nice business in that space until 2000, according to one NYSE source. The firm exited the business when the NYSE changed the rules and put the business in the hands of the specialists.
To put the alleged fraud into context, the $50 billion that disappeared from investors accounts is 7.1 percent of the size of the government’s $750 billion bailout of the financial system.
“I am still in shock,” commented Art Pacheco, who also sat on numerous Nasdaq and Security Traders Association committees with Bernard Madoff. Pacheco, a longtime sales trader who now works for a foreign firm, Raffameel Structured Finance, says this is the last news he would have expected about the people and firm.
“I’ve always known him as a good guy–an industry leader,” Pacheco said. “I’ve known Bernie Madoff for over 30 years, and I’m just dumbfounded. I just don’t know what to say. It’s terrible.”
