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How'd Madoff do it? Why? 6 questions

Many of the details surrounding the Bernard Madoff scandal are still fuzzy. Here's what we need to know.

Katie Benner
Last Updated: December 19, 2008: 1:49 PM ET

(Fortune) -- Despite all that's been written about the Bernard Madoff scandal, what's remarkable is how much we don't know about the fraud allegedly committed by the respected philanthropist and former chairman of the Nasdaq.

Question 1: How much money did Bernard L. Madoff Investment Securities LLC lose?

In the Securities and Exchange Commission complaint against Madoff, the former Nasdaq chairman says the firm is liable for $50 billion in losses.

Investors who have come forward say they had given $35 billion to Madoff, according to a tally by Bloomberg. All of that money is assumed to be gone.

Question 2: How did he lose it?

No one knows. Madoff has said that he traded stocks and options through European counterparties, rather than his own trading firm, according to the Wall Street Journal. But the records that investigators have found so far are fictional.

So there are no indications that Madoff lost (or made) huge sums on bad trades - or that he traded at all. In some recent cases of spectacular losses, the causes were clear: wrong-way bets on oil prices, for instance, or mortgages that turned out to be toxic. There is no indication that Madoff made any such bets.

Nor are there signs that he simply frittered the money away on lavish living. While he enjoyed a plush lifestyle, he did own a stock-trading business that could have provided him with enough legitimate profits to fund it.

Question 3: Is there any money left to repay investors?

Since we don't know if he lost any money or how much he ever had, we don't know what might be left, or where it might be. Everyone from the SEC to the Securities Investor Protection Corp. is looking for it.

Question 4: Did the investors who withdrew money recently know something was up?

In the SEC complaint, Madoff says that a $7 billion wave of redemptions from accounts that he managed forced him to reveal the advisory business was a sham.

Did any of those investors suspect a problem at the firm? Investors may have simply needed cash in these rocky economic times. Lots of investors have been pulling money out of hedge funds, of course, but those funds were showing sharp losses; Madoff's accounts were continuing to show steady gains.

Question 5: How could Madoff have maintain his fraud for so long?

Over the years, investors said they were always able to withdraw money out on short notice. Assuming Madoff was not suffering big losses, and that he continued to attract a steady stream of fresh money, presumably he would always have enough cash to give some investors some or all of their money back.

Question 6: Why did he do it?

That's the biggest mystery of all. The scandal has devastated his family and closest friends and many of their closest friends - not to mention cherished charities, in New York, Palm Beach, Boston and Los Angeles. Bernard Madoff once had it all: trust, reputation, respect, and influence. Now all he has are his secrets. To top of page

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