天涯孤旅

By WSJ,

The alleged fraud of Bernard Madoff roped in thousands of clients and potentially going back three decades, or longer. That has left many investors—some of whom never even met Mr. Madoff—with many questions as to what happened and how much, if any, of their assets might be recovered. Here is a primer on the Madoff case so far:

What happened?

On Dec. 11, Bernard Madoff was arrested and charged with criminal securities fraud. The criminal complaint filed against him in Manhattan states that he confessed to his two sons, both of whom were senior employees at his firm, Bernard L. Madoff Investment Securities LLC, that he had been running a "giant Ponzi scheme" in which investor money that goes into the firm gets paid out to existing investors as purported gains in order to create the appearance of a successful investment firm. He told the sons, Andrew and Mark Madoff, that client losses would be at least about $50 billion.

Did investors really lose $50 billion?

Investigators believe that figure includes sham profits reported by the 70-year-old Mr. Madoff, so it's likely that the actual amount that investors initially deposited at the firm was lower, said people familiar with the matter. After all, Mr. Madoff was reporting gains of around 10% a year for many years. Investors world-wide have collectively disclosed exposure to the firm of nearly $30 billion.

Where did all the money go? 

There is no clear answer, and it will take time before investigators complete a forensic analysis of the investment-advisory business where the fraud took place. So far, investigators believe Mr. Madoff had an account or possibly multiple accounts located in offshore tax havens or locales with robust privacy laws where he may have hidden ill-gotten gains, according to a source familiar with the situation. It's possible that much of the money investors put into the Madoff firm went to other investors who redeemed funds over the years. The Ponzi scheme could only work if Mr. Madoff kept bringing in more cash from new investors than the amount being withdrawn by existing customers, said people familiar with the investigation.

It's not clear whether Mr. Madoff used client money for personal use. He has lived a lavish lifestyle and owns several homes, including a penthouse apartment in Manhattan's Upper East Side, luxury cars and shares in two jets. Mr. Madoff agreed to hand over to authorities an accounting of all his assets and accounts by the end of 2008.

What is Bernard L. Madoff Investment Securities LLC?

Bernard Madoff is the sole owner of the firm, which he started in New York in 1960. He built it into a successful market maker, which means it facilitated securities trades by serving as a middleman between institutional investors. Mr. Madoff helped develop the Nasdaq stock market and he once served as its chairman. He also helped advise the Securities and Exchange Commission on securities-trading rules. Irving Picard, a New York lawyer who is a court-appointed trustee of the firm, which is being liquidated, is exploring a sale of the trading operation.

Was the investment-advisory business a hedge fund?

No. Hedge funds charge a management and performance fee. Mr. Madoff apparently profited not from fees on assets but from trading commissions. Secondly, hedge funds typically keep their money at custodian banks. Mr. Madoff's firm apparently kept his funds in-house, which may have made it easier to conceal the alleged fraud. Also, Mr. Madoff didn't register the business until 2006, after the Securities and Exchange Commission's enforcement arm began an investigation based on claims by a whistleblower that Mr. Madoff was running a Ponzi scheme. (The agency didn't find evidence of fraud, though it said Mr. Madoff "did not fully disclose to the examination staff either the nature of the trading conducted in the [investment-advisory business] or the number" of client accounts he had.)

 What is Madoff Securities International?

It's a Mr. Madoff's U.K.-based securities trading firm, which bought and sold European stocks with Mr. Madoff's money, said a spokesman for the firm's chief. Lee Richards, a lawyer appointed by a U.S. federal judge as the firm's receiver, is looking for buyers for the firm. The proceeds of a sale could benefit investors hurt by Mr. Madoff's alleged fraud. It currently holds about $160 million in Madoff family money, which could be distributed to alleged victims. Investigators believe the firm may have been a conduit to bring assets into and out of the U.S.

Who is investigating the alleged fraud?

The Federal Bureau of Investigation, the Securities and Exchange Commission, federal prosecutors from the U.S. attorney's office for the Southern District of New York, and the Financial Industry Regulatory Authority, a securities industry self-regulator.

How did Mr. Madoff carry out the alleged fraud?

During the period of the alleged fraud, Mr. Madoff told clients (through their account statements) that he was using a fairly common options-trading strategy to generate modest but steady returns. The strategy involved buying stocks, while also trading options -- which grant the right, but not the obligation, to buy or sell securities at pre-established prices in the future -- in a way designed to limit losses on the shares. Many investors say they were told they had gains of about 10% for many years.

People who analyzed client statements said Mr. Madoff's firm couldn't have bought and sold the options he claimed because those totals would have outstripped total trading volume those days.  

A person familiar with the situation said investigators believe Mr. Madoff initially had a trading strategy that failed, and that he had made very few, if any, stock or options trades for clients over the years. Instead, the operation consisted of taking money in from new clients and paying it out to existing clients, said people familiar with the matter.  Over the past year or so, as institutional investors and other wealthy clients were getting bruised by a sharp downturn in the stock market, the amount of redemptions probably rose too quickly to sustain the alleged Ponzi scheme, which may have begun as early as the 1970s, these people said

Why did Mr. Madoff allegedly confess to his sons about the scheme?

According to the criminal complaint, he told them that investors had collectively asked for about $7 billion in redemptions but he couldn't meet the requests because there was only $200 million to $300 million left at the firm.

What does all this mean for investors who were hurt?

Irving Picard, the Madoff firm's court-appointed trustee, has so far obtained $29 million in assets and located another $830 million in liquid assets at the Madoff firm, which may be subject to recovery and distribution among investors. Mr. Picard said he expects to locate more assets. Lawyers with experience in brokerage liquidation cases say Mr. Picard may request that investors who redeemed profits on their investment up to several years before the firm's collapse give the money back so it can be shared among all burned investors. Such "clawbacks" by the trustee, which have occurred in similar Ponzi scheme cases, are based on the logic that the redemptions were paid using other investors' money. That would make the payments fraudulent transfers, not assets.

In addition, the Securities Investor Protection Corp. was set up by Congress to pay advances of as much as $500,000 per customer for theft of securities from a brokerage, including a maximum of $100,000 on claims for cash. The accounts at Mr. Madoff's firm qualify for that coverage. But Stephen Harbeck, who runs SIPC, cautioned that Mr. Picard needs to collect information on each Madoff customer before determining whether and to what extent they qualify for relief through a combination of firm assets and funds held by SIPC.

The trustee has mailed claim forms to more than 8,000 customers who had open accounts at the firm within the past 12 months but said anyone can make a claim. Forms are available at www.sipc.org. Clients who invested through third parties such as Tremont or Fairfield Greenwich likely won't qualify for SIPC relief, experts say.

What if investors set up IRA accounts?

Some Madoff investors have held out hope that their investments may be safe because they had set up purported IRA accounts or think their money was invested differently from that of wealthy clients or institutional investors who have grabbed headlines since Mr. Madoff's arrest. But the investment-advisory arm of the Madoff firm where the alleged fraud took place is believed to have encompassed all client accounts, which number in the thousands, according to people familiar with the firm.

Who else is being investigated?  

Nobody else has been charged with any wrongdoing. Investigators are looking at Mr. Madoff's sons, his brother Peter and his niece Shana, all of whom worked for the firm's trading arm. All of these people say they had no knowledge of the fraud. Mr. Madoff's wife, Ruth, who once worked at the firm, is also being examined. Frank DiPascali, a key lieutenant in Mr. Madoff's investment-advisory business, is another a focus of investigators. He worked for the firm for more than 30 years. Friehling and Horowitz, a storefront accounting firm located in New City, N.Y., that did work for Mr. Madoff's firm, has been subpoenaed by authorities for documents going back to 2000. David Friehling currently runs the firm and has audited the Madoff firm's financial statements.

Inside the Madoff Scandal: Chapter One:

Inside the Madoff Scandal: Chapter Two:

By WSJ

SHANGHAI -- As China's stock market rebounds from last year's lows, regulators are preparing to tap investor enthusiasm for new share issues while also moving to wipe the market clean of scammers of the past.

The China Securities Regulatory Commission has given investors until Friday to comment on revised listing rules, a sign that initial public offerings of stock could resume soon.

After a surge in IPOs in 2006 and 2007, there have been no new issues since September. They were halted by the government when the market got rocky, a way to limit new supply that could hurt existing shares.

Meanwhile, the regulatory commission, along with the Shanghai and Shenzhen stock exchanges, has targeted share manipulation, corporate embezzlement, insider trading and pyramid schemes as it works to combat a widespread perception among individual or "retail" investors that the market is rigged. After gyrations in China's stock markets hammered investors' portfolios and battered their confidence in the past few years, few have been willing to invest for the long term.

The government is determined to make the capital markets a "facilitator" of the economy and is "soberly aware" of the related need to make it attractive to individual investors, Shang Fulin, chairman of the regulatory commission, known as the CSRC, said last month.

The Shanghai Composite Index, the benchmark for the domestic market, rose sixfold in just over two years, starting in mid-2005, before a yearlong drop starting in late 2007 that left it about 70% lower. It is up 52% in 2009 and is up 60% in six months, raising concern that the boom-and-bust cycle will be repeated.

While the sums lost in alleged scams are a pittance compared with the $3 trillion in market value lost in the 2007-2008 swoon, such allegations contribute to investors' uncertainty about the market's legitimacy.

The CSRC says it has helped prosecutors build a case alleging stock manipulation against an electronics tycoon who was once among China's richest men. It also helped topple heads of three brokerage firms on suspicion they engaged in unspecified share-market irregularities.

Shanghai police say they are holding a man who allegedly parlayed a single dinner with a well-known U.S. investor into a reputation as a local market "oracle" and bilked clients of $2.9 million.

In 2007, when the Shanghai Composite was powering its way skyward, the man, who called himself Jian Fan, paid $53,000 at an auction to have a private dinner with Jim Rogers, a legend among China's investors along with his former investment partner, George Soros. In an interview at the time, the Shanghai man claimed that Mr. Rogers endorsed his plan to offer investment seminars.

Now, police say the 35-year-old sitting in a Shanghai jail is really Han Jinsong. He faces allegations that the seminar program he created was a front for an unregistered money-management firm used to cheat 200 people, a police spokesman says.

One 80-year-old Shanghai investor who attended the seminars says he lost around $3,000. No specific charges have been made public, and Mr. Han couldn't be reached for comment.

Mr. Rogers said he didn't know about the allegations until a reporter called, and he hopes his role wasn't exaggerated. "I haven't seen, spoken or communicated with him since that night," Mr. Rogers said.

The electronics tycoon facing allegations of stock manipulation, Huang Guangyu, founder of retailing giant Gome Electrical Appliances Holdings Ltd., also couldn't be reached. Nor could Wang Yi, a former vice chairman of the CSRC who faces bribery allegations disclosed by the Communist Party in February when it ousted him from its ranks.

People charged with crimes in China rarely are given a chance to publicly respond, and court proceedings often are closed.

Ahead of the impending new stock offerings, regulators have told financial Web sites to eliminate any misleading advertising, and the Shanghai Stock Exchange has pledged regular reports about what it is doing to supervise the market.

As stocks moved higher in 2006 and 2007, investors piled into new offerings. More money was raised in mainland China IPOs in those two years than anywhere else in the world -- some $82.5 billion, according to Thomson Reuters. Now, 32 issuers have been approved to sell shares valued at as much as 80 billion yuan ($11.7 billion), with another 300 companies waiting for regulatory approval to sell shares, according to a tally by Bank of America Merrill Lynch.

In addition to revised listing requirements designed to alter the way IPOs are priced, Beijing has indicated it is considering other plans, such as launching a growth-enterprises market for smaller companies to raise money, adding new derivatives products and giving foreign fund managers slightly more access to Chinese shares.

But there are signs that investment fervor may already be waning.

Citigroup Inc. said inflows to mutual funds that invest in Chinese stocks slumped to $19 million in its latest weekly reading, compared with an average $484 million in each of the previous four weeks.

By WSJ

Despite rising concerns about the U.S.'s credit ratings, this week's hefty round of government debt supply is still likely to attract investors.

Last week, gripped by anxiety over rising budget deficits and soaring debt supply, investors sold long-dated Treasurys, sending yields higher. But short-term Treasurys and bills remained relatively unscathed, as they are anchored by the Federal Reserve's zero-to-0.25% federal-funds target rate.

That bodes well for the $162 billion in government debt slated for sale this week, with offerings of $61 billion in Treasury bills and $40 billion in two-year notes planned. The government will also sell $35 billion in five-year notes and $26 billion in seven-year notes. "The backup in yields will attract investors to make the auctions not a disaster," said Jeff Feigenwinter, head of U.S. government-bond trading at BNP Paribas Securities in New York. "There will be enough demand" for short-dated maturities.

Indeed, while the 10-year yield jumped above 3.4% on Friday, rising to its highest level since November, the two-year yield remained well below 1%. Friday afternoon, the 10-year note was yielding 3.455% while the two-year yield was 0.891%.

That divergence pushed the gap between two- and 10-year yields wider, a trend that gained momentum last week. The gap on Friday was 2.56 percentage points, approaching the 2.619-point gap on Nov. 13, 2008, the widest since the peak of 2.747 points on Aug. 13, 2003.

Market participants said that the gap will eventually break through the peak, because selling in long-term Treasurys will persist in coming weeks amid concerns about the U.S.'s credit ratings. The possibility of an actual downgrade remains remote, however.

Traders note that foreign central banks have increasingly cut their holdings of long-dated Treasurys and shifted to short-dated maturities in an attempt to safeguard the value of their holdings.

The declining U.S. dollar on Friday propelled foreign investors to rebalance their holdings because the dollar's weakness shrinks the value of bonds in foreign-currency terms.

James Combias, head of U.S. government bond trading at Mizuho Securities USA Inc. in New York, said the 10-year note's yield may break 3.5% in the coming week.

Higher yields could prompt the Fed to increase its Treasury purchases, particularly if the 10-year yield heads for 4%. That could jeopardize tentative improvements in the credit and mortgage markets by pushing mortgage rates back over 5%.

"The Fed wants to bring consumer rates down, not to manipulate Treasury yields," said Thomas Roth, head of U.S. government-bond trading at Dresdner Kleinwort Securities LLC in New York. "We could see slightly higher Treasury yields. But if the 10-year yield gets back to 3.5%, it will entice new buyers."

By WSJ

NEW YORK -- Investors sold Treasurys, particularly those with longer maturities, amid a steep stock rally, and the yield gap between the two-year and 10-year notes widened to levels close to their historic peak last seen in 2003.

Treasurys were hit on several fronts. For one, a report showing U.S. consumer confidence rebounded to the highest level since September boosted risk appetite and added to optimism that the economy could be finding its footing. That reduced the appeal of Treasurys as a safe haven.

Bonds also fell as investors sought to cheapen the market ahead of the $35 billion five-year note auction Wednesday and $26 billion seven-year auction Thursday. As a result, selling was the heaviest in these sectors.

The selling Tuesday extended the rout of longer-dated Treasurys that began last week, amid worries that the sharply rising deficits could lead to an eventual loss of the U.S.'s triple-A credit ratings. Tuesday, the 10-year yield broke above the closely monitored 3.5% level for the first time since mid-November.

The fear is that the aggressive fiscal and monetary policies aimed at tackling the recession will fuel inflation in the long term, which will hammer the value of the U.S. dollar and shrink the value of Treasurys for foreign investors. Foreigners, including foreign central banks, own more than half of the $6.35 trillion Treasurys outstanding.

"It is a defensive posture which is very bearish for the Treasury market," said James Combias, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York. "It shows the lack of confidence" in the policies of the Treasury and the Federal Reserve, he added.

The next level for the 10-year yield is the 3.6% to 3.63% area, said Mr. Combias, adding that he sees some stability if the yield rises to that area.

The yield on the two-year note posted the smallest gains of all maturities, partly benefiting from strong demand at Tuesday's $40 billion two-year note auction. The two-year yield is also well anchored by the zero-0.25% fed-funds target rate.

As the two-year note outperformed the 10-year note, the gap between the two widened further. The so-called benchmark yield curve steepened to as wide as 263 basis points in late-afternoon trade, from 256 basis points Friday and 249 basis points Thursday. The yield gap broke the 261.9 basis points seen Nov. 13 and is now approaching the historic peak of 274.7 basis points on Aug. 13, 2003.

In recent trading, the two-year note's price was down 2/32 at 99 29/32 to yield 0.92%, the five-year note was down 15/32 to 98 to yield 2.31%, and the 10-year note was down 27/32 at 96 14/32 to yield 3.55%. The 30-year bond was down 1 20/32 to 96 to yield 4.49%. Bond yields move inversely to prices.

There were some bright spots in Tuesday's two-year note auction, particularly the impressive 54.4% that was sold to domestic and foreign institutions, including foreign central banks. That's the highest since November 2006 and compares with 28.7% from the previous auction in April and an average of 34.61% for the last 10 auctions.

Still, market participants cautioned that the real test for the market comes with the five-year and seven-year note auctions Wednesday and Thursday.

"Don't read too much into today's result, but do take some degree of comfort in the fact that the U.S. is getting the money it needs to battle the financial and economic crisis," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.

Getting hold of investors is imperative to the U.S. government at a time when it needs to sell a record amount of debt. The recession has sharply reduced tax revenues and widened budget shortfalls, while the government also has to raise money to finance its programs to stimulate the economy and rescue the banking system.

More importantly, the U.S. has increasingly relied on foreign money to finance its obligations. Foreign investors, including governments from China, Japan and Russia. Already, traders have noted that foreign central banks have increasingly cut long-dated Treasury holdings and shifted into short-dated maturities such as Treasury bills.

That poses problems for the U.S. government because it needs sustained demand at its auctions to finance its long-dated bond supply. Weakening demand at longer-dated Treasury auctions could add to the worries that the U.S. may eventually lose its coveted triple-A credit ratings. That in turn would send longer-dated yields higher again, making it costlier for the U.S. to raise funds, and putting a dent in the nation's economic growth in the long term.

Agency mortgage-backed securities that started the day on a weaker note saw a major reversal with the Fed buying billions of mortgage bonds in the last hour.

Risk premiums on these bonds were unchanged at 134 basis points over Treasurys in late trade, after being three basis points wider this morning. Market participants say they are still worried about the rise in 10-year Treasury yields, as it can increase the mortgage rates homeowners pay from their current levels below 5%.

Swap spreads widened. The two-year spread was 4.25 basis points wider at 44.75 basis points. The 10-year spread was 5 basis points wider at 20 basis points. Swap rates were at 1.355% and 3.744%, respectively.