Financier and former chairman of the Nasdaq Stock Market Bernard Madoff was sentenced to jail on March 12th after pleading guilty to criminal charges ranging from securities, wire, and mail fraud, as well as money laundering and false SEC filing.

Madoff rose to prominence in the 1960's when he founded Bernard L. Madoff Investment Securities LLC. His firm was an early user of the National Quotation Bureau's Pink Sheet and would become one of the largest market makers in the NASDAQ. Madoff would eventually serve as Chairman of the board of Directors of the NASDAQ and on the NASD's Board of Governors.

Madoff was denied bail and is being jailed pending his sentence that will most certainly be for the remainder of his life. The penalty for the allegations against Mr. Madoff carries a maximum 150-year prison term and prosecutors are seeking restitution to the tune of $170 billion. Sentencing is set for June 16th.

Speaking before the court, Madoff said, "When I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and clients from the scheme.... However, this proved difficult, and ultimately impossible, and as the years went by I realized that my arrest and this day would inevitably come."

Madoff claims to have begun his Ponzi scheme back in the early 1990's. In December, he told federal investigators that he had 4,800 client accounts with up to $65 billion in funds, of which just $1 billion has been recuperated by trustees liquidating the firm's assets.

Madoff employed what is known as a split strike conversion in which his investing strategy tries to copy the S&P 100 index. His firm invested client funds in blue chip companies as well as purchasing calls and puts, betting on market direction. Investors began to raise questions about the legitimacy of Madoff's strategy as he was able to regularly beat the market providing abnormal rates of return.

Ponzi schemes involve offering unusually high rates of return, requiring an increasing amount of capital inflows in order to pay out the bottom tier investors. Madoff's crime resembled a pyramid scheme in this way, paying out earlier investors with new deposits. The end-game for Ponzi schemes is that at some point a slowdown in new investors cannot support the base of existing clients seeking redemptions or payouts.

Madoff's scheme was brought to light on December 10th, 2008 when he told his sons that his firm's asset management division was "one big lie". As early as the late 90's, whistle blower Harry Markopolous had brought evidence to the SEC alleging that he was engaged in fraud, but to no avail.

Victims of Madoff's ponzi scheme were far reaching. The Wall Street Journal has compiled a growing list of those affected including hedge funds, trusts, wealthy individuals, and charities.

Those with the most exposure were:

• Fairfield Greewich Advisors - $7.5 billion
• Tremont Group Holdings - $3.3 billion
• Banco Santander - $2.87 billion
• Bank Medici - $ 2.1 billion
• Ascot Partners - $1.8 billion
• Access International Advisors - $1.5 billion
• Fortis - $1.35 billion
• HSBC - $1 billion
• Union Bancaire Privee - $700 million
• Natixis SA - $554.4 million
• Carl Shapiro - $500 million
• Royal Bank of Scotland - $492.7 million
• BNP Paribas - $431.1 million
• Man Group PLC - $360 million
• Reichmuth & Co. - $327 million
• Nomura Holdings - $358.9 million
• Maxam Capital Management - $280 million
• EIM SA - $230 million

Madoff hired high-profile attorney Ira Sorkin, signaling a likely attempt to extricate his wife Ruth and brother Peter from implication in the massive fraud. Investigators are now targeting Ruth Madoff with implications that she helped hide away assets that were acquired through Madoff's ponzi scheme. It is believed that she received at least $70 million from her husband.

Madoff has reiterated several times that his sons, Andrew and Mark, played no part in any criminal activities and ran the market making branch in a "legitimate, profitable, and successful" manner.

Madoff noted that he began the Ponzi scheme during a recession in the early 90's when stock returns were proving difficult to provide. This startling admission highlights the need for investors to be even more vigilant about safeguarding where they invest their money with.

Victims of the Madoff scheme are looking into "clawback" suits to recover losses resulting from funds that were withdrawn and distributed amongst the clientele. Bankruptcy code entails that investors who withdrew funds in the 90-day window prior to Madoff's December 11th arrest would be the primary targets of such lawsuits.

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