Bernie Madoff: Did He Steal Your Money Too?

Anyone taking secret delight in watching fat cats lose their fortunes in the Bernie Madoff meltdown should put their schadenfreude on hold: you could get dragged in before the final tally is made. Pensioners, municipal workers, students on scholarship and middle-class Americans all are likely to be burned by the spectacular flare-out of Bernard L. Madoff Investment Securities. The scandal is estimated to have cost investors upward of $50 billion and may be one of the biggest Ponzi schemes on record.

"It keeps getting bigger and bigger," says New York attorney Matthew Gluck, whose law firm, Milberg LLP, is one of several representing investors who believe they were wronged by the money manager now accused of fraud. "We've been getting so many calls, we've sort of lost count." The records kept by Madoff's firm are "utterly unreliable" and will take months to sort out, Stephen Harbeck, president of the Securities Investor Protection Corp., said on Bloomberg television. SIPC, which insures brokerage accounts, is helping manage the liquidation of the firm's assets; it's now in bankruptcy court.

Direct investors in Madoff's firm number in the dozens, and you probably know who they are by now—they range from Hollywood players like Jeffrey Katzenberg and Steven Spielberg to international banks like HSBC and the Royal Bank of Scotland, as well as a slew of significant Jewish charities. But other investors may not even know that they have money invested indirectly with Madoff through private money managers, hedge funds and pension funds. Still others might become collateral damage: folks who depend on those investors for income.

"Madoff may indirectly hurt my company," writes Suffern, N.Y., Web developer Barry Schwartz on his Web page. Within hours of the scandal breaking, at least one of his clients, a Madoff account holder, had asked him to halt work on a project in progress and was uncertain if he'd be able to pay his bill. Another worried Wall Streeter, Matthew Lifshotz, was helping his parents trace the money in their teachers' pension fund to see whether any of it was involved indirectly. "My parents are retiring and counting on this money," he says. "They may be invested in this. There is no real way for them to know." Two specific pension funds—the town of Fairfield Employees Pension Fund in Connecticut and the Massachusetts State Pension Fund—have reported that they had money invested with Madoff.

Employees and beneficiaries of Jewish charities will be hard hit, too. The Jerusalem Post estimates that as much as $1.5 billion in assets held by Jewish philanthropic groups may have evaporated while under Madoff's management, not counting additional billions in the accounts of individual investors who supported those charities. Three nonprofit groups that supported a variety of civil-rights, criminal-justice and Jewish educational causes announced plans to shut down immediately after hearing about the extent of their losses. Some of the programs they funded will disappear with them. Several prominent Jewish federations, such as the ones in Los Angeles, Washington and New York, have had as much as 10 or 11 percent of their endowments invested with Madoff. "It was already a grim giving season, and the timing couldn't be worse," says Stacy Palmer, editor of the Chronicle of Philanthropy. She expects the first, most immediate cutbacks to appear in social services, such as programs that offer driving and meals to the elderly.

Then there is the Palm Beach effect. Many of Madoff's individual investors owned luxury homes, boats and golf club memberships in the Florida community, and some realtors and boat brokers reported busy weekends fielding calls from Madoff victims looking to sell yachts and mansions to raise cash in a hurry. Area officials said they are bracing for a ripple effect of laid-off household workers, slow traffic in shops and empty restaurants, though it's not clear that all of that is attributable to the Madoff meltdown rather than the generally weak economy. Not all of the immediate victims are über-rich, either. One retired Boynton Beach, Fla., couple, Joan and Arnold Sinkin, say they lost their entire $1 million nest egg and are putting their townhouse on the market.

So what happens now? Attorneys like Gluck believe some of that money is recoverable, despite Madoff's claims that he is tapped out. "Where did that money go?" says Gluck. "He didn't buy a small country. It doesn't sound like all that money went to old investors. And $50 billion doesn't just disappear." Irving Picard, the court-appointed trustee is trying to follow Madoff's tracks and decipher his records, as well as a host of individual attorneys, SIPC and the Securities and Exchange Commission.

Worried investors can start to do their own investigating. If you know you had money with Madoff or strongly suspect that you did, you can call a special FBI hotline, 212-384-2359; check the latest from Picard (now at www.madoff.com); and trade stories and hints with other victims at a new information blog for families affected by Bernie Madoff. One tip: you may be able to go back and file amended tax returns for previous years when you were claiming investment returns that may not have been real. Some investors may get money back from SIPC, but that's unlikely to provide much help to wiped-out millionaires—its insurance program maxes out at $500,000 per account.

Those third-party victims, the people collaterally damaged by decimated foundations, have fewer avenues of comfort. Some other charitable groups are trying to pick up the slack and donate more to cover Madoff-related losses, but not every program or employee will receive the funding they expected.

And even if you think you're immune from the scandal, it's a good idea to take a close look at all your holdings anyway. Find out exactly where your money is invested, make sure that company is using a third-party brokerage to hold funds and securities (Madoff was using his own) and confirm that your wealth manager is audited regularly by an independent and reputable auditor. Workers and retirees in big pension funds should take the time to find out whether their fund invests in funds of funds, hedge funds or private wealth managers and inquire into the due-diligence practices of the pension managers.

Savers shouldn't keep all of their money in any one investment or invest in any strategy they can't get their brain around, says Bradley Alford of Alpha Capital Management, an Atlanta firm that researches hedge funds for potential investors. He adds, with some irony, that another red flag is any investment manager who hasn't admitted to losing some money this year. In a time of wobbly stock and bond markets, Madoff's claims of year-in and year-out earnings of 10 percent may turn out to have been the most blatant red flag of all.