Four weeks ago, the alternative investment world was shocked by the arrest of Bernie Madoff after he allegedly confessed to running an investment Ponzi scheme that according to his own admission swindled investors out of close to $50 billion. In the days since, there has been daily news of this or that individual, family, foundation, organization or charity having suffered devastating losses because of Madoff's fraudulent behavior. In recent days, the receiver appointed by the courts to try to recover investor funds has sent out potential claim forms to more than 8,000 entities that had invested funds through Madoff in the last twelve months.

Before news of this scandal broke, Toomre Capital Markets LLC ("TCM") had tangentially heard of Bernard Madoff Investment Securities, primarily in connection with its market making in small illiquid NASDAQ common stocks and its early adoption of technology to support electronic trading. We had no sense, though, that Bernie Madoff was running an investment advisory business nor that he potentially had so many funds under management from such a wide and diverse group of entities.

Apparently, his annual registration statement filed in 2007 for the investment management subsidiary indicated that he had $17 plus billion under management from less than two dozen investors. While one never can be sure of what is truth with regard to what Bernie Madoff said or did, based on information that has come out since, both of these numbers appear to be wrong. TCM suspects that Madoff purposely understated both the amount of assets supposedly under management and the number of investors so as to reduce the chance of inspection from the SEC and FINRA.

The real numbers for his annual registration statement apparently should have been somewhere around $35 billion and (depending upon how one defines the term "customer") more than 5,000 investors. Had such numbers been reported to regulators on his investment advisor registration form, there is no doubt that Madoff's investment operation itself would have been subjected to a rigorous regulatory review, especially since there previously had been no review conducted and it only registered for the first time in 2006.

One of the curious items about the Madoff scandal is how there could be such a difference what he reported as customers and what the press has reported as victims of the Madoff fraud. The key lies in the various feeder funds that in essence bundled funds from multiple investors and then deposited most, if not all, of those funds with Bernie Madoff. These feeder organizations included Fairfield Greenwich, Tremont Capital, Banco Santander, Bank Medici and Ascot Partners. Most of these feeder funds have now been sued by one or more of their investors.

On Wednesday January 7th 2009, The Financial Times printed an article entitled The Pivotal ‘Rabbi’ in Madoff’s Fundraising. This article was focused on Erza Merkin and his Ascot Partners fund. Apparently his role in the well-heeled Modern Orthodox community was pivotal in enabling Madoff to tap into a lucrative web of charities, schools and wealthy synagogue members.

Jacob Ezra Merkin, known as Ezra, has not been charged with any crime. However, several investors have sued him, including New York University, which said it had lost at least $24m as a result of investing with Madoff via Mr. Merkin’s Ascot Partners fund. Mr. Merkin managed $5bn in several funds. His Gabriel Capital Group was mostly a hedge fund of funds, which invested in Madoff, and he also ran two hedge funds, Ariel and Ascot Partners, which acted as feeder funds to Madoff. He was on the boards of at least half-a-dozen major non-profit organizations, most of which also invested with his funds – a practice which contravenes conflict of interest guidelines recommended by governance experts.

Apparently investors in Mr. Merkin's funds were dismayed to discover another way that he did not adhere to best practices. "The suit filed by New York Law School against Mr Merkin, his Ascot Partners and his accountants at BDO Seidman cited the offering memo which pledged to invest in a diverse portfolio of securities, while in fact “virtually the entire investment capital of Ascot” was handed over to Mr. Madoff." A suit by New York University is even more damning. Apparently through his Ariel Fund, Mr. Merkin invested virtually all of the university's funds with Madoff. This was without the investor's knowledge and, apparently at an October 2008 meeting, he did not disclose that he had done so, even as the university investment staff explicitly rejected his recommendation to include Madoff as an approved investment manager.

Mr. Merkin's attorney, Andrew Levander, claims "Mr. Merkin is as shocked and pained as any of the investors who are his fellow victims of the Madoff fraud. Mr. Merkin’s personal losses are in the many tens of millions of dollars, and he has seen friends and charitable institutions he supports suffer terrible losses as a result of Madoff’s confessed fraud. Needless to say, Mr. Merkin shares the sorrow of all the investors who have been cheated by Madoff."

One suspects that lawyers like Mr. Levander will continue to earn their significant fees as the monstrous litigation from this scandal winds its way through the court system. One thing is for sure. A number of lawyers will be very gainfully employed for some time to come with all of the money involved and the apparent failure of due diligence on the part of many over an extended period of time.