Introduction BernardLawrence Madoff or often called as “Bernie Madoff” is an American fraudster whooperated the largest Ponzi scheme in U.S history, deceiving thousands ofinvestors for billions of dollars amount over the course of 16 years, and possiblylonger. Bernie Madoff was also a pioneer of an innovative electronic tradingwhich later made him the non-executive chairman of the NASDAQ stock market inthe early 1990s. Madoffclaimed that his investment scheme could generate high and steady returns byusing split-strike conversion strategy. He then separate the capital receivedfrom clients by depositing them into a single bank accounts. This is to make iteasy for them to pay clients who wanted to take out their funds. Basically whathe did was to take money from other investors and pay the other. In May 2000,financial analyst Henry Markopolos found financial inconsistencies in Madoff’srevenue stream.
The type of revenue stream Madoff argued simply does not exist. Henry Markopolos continued investigatingand finally send a memo to SEC entitled “The world largest hedge fund was afraud” but being ignored by the authorities. However,due to financial crisis in late 2008, Madoff failed to attract new investorsand enough capital to fund the redemption and resulted to the failure of Ponzischeme. Only then, he confessed to his brother Peter Madoff and his two sons onDec 10, 2008. Out of anger and disappointment, Mark and Andrew turned theirfather to the authorities the next day even though Bernie asked for few days tosettle his messed up before turning himself in to the authorities. Thelast accounts statements investigation has led to a conclusion that the size offraud was near to $64.8 billion. Madoff was responsible to deceivedapproximately around 4,800 clients.
In March 2009, Bernie Madoff pleaded guilty to 11 crimes whichare securities fraud, wire fraud, mail fraud, perjury and money laundering.Madoff then was sentenced to 150 years of imprisonment and ordered to pay penaltyof $170 million in assets. Since then, the Ponzischeme becomes a powerful symbol of greed and dishonest culture.
Ponzi scheme The scheme is named after CharlesPonzi, an Italian swindler whom also a con artist in United States and Canada.He became famous for using this method during the 1920s in North America where heduped thousands of his clients by guaranteeing a 50% or 100% return on investment within 45 days or 90 days respectively.He made it looked like as if his money-making scheme operated by buyingdiscounted postal reply coupons in other countries and later redeemed them atface value in United States as a form of arbitrage. Meanwhile in reality, whathe did was paying the old investors using funds invested by the laterinvestors.A Ponzi scheme is an investment fraudwhereby the Ponzi schemer often lures its investors to invest their funds whilepromising them high returns in short term with little or no risks. Basically,there is no real trading or legitimate investment activity done with theinvestment money but the fraudsters simply made the redemption payment to itsexisting investors by using capital injected by newinvestors. Therefore, in many Ponzi scheme modus operandi, the fraudsters willtry to solicit as many new investors as they can to maintain constant or muchbigger flows of money. This is to ensure that they can have more than enoughmoney to continually provide returns to older investors.
At the same time, itmakes the whole financial trading operation looks profitable and legitimate inthe eyes of their investors, even though no real profit is being made. Meanwhile the Ponzi schemer,which can be either individuals or corporations, pockets the extra money theymade or use them to expand the operation. In the beginning, the Ponzi operatorwill pay high returns on the investor’s initial investments to persuade thecurrent investors to invest more money in their accounts. When this happened,the current investors are more confident with the growing returns and oftenleave their money with the scheme.
This benefits the operator as they do nothave to pay much to the investors. Then, all they need to do is to simply send periodicallystatements to their investors showing how much theyhave earned, which maintains the deception that the scheme is an investmentwith great returns. .
Ponzischemes do not usually advertise as they do not need to. The current investorstell the new ones and the words spreadlike wildfire. (Wells,J. T., 2010).Not only that, the operatorusually will secretly keep their investing strategy as they claim to protectthe investorsHowever, the Ponzi scheme alsohas its vulnerability whereby it will falls apart when the Ponzi schemer failsto acquire new investors and the money flows run out, the operator takes allthe remaining investments and runs or when too many current investors begin torequest their returns especially in the state of financial turmoil.
In short,the Ponzi scheme will not sustain forever.Ponzi scheme “Red Flags” Redflags are defined as signals of potential problem such as peculiarcharacteristics seen by the analyst pertaining to company’s stock, securities,financial statements or bad news reports. In the other hand, U.S. Securitiesand Exchange Commission (SEC) has the responsibility to protect the investorsfrom any fraudulent or manipulative in the money market as well as facilitatecapital formation. Typically,most of the Ponzi schemes share common traits or nature hence, SEC has highlighted several warningsigns of Ponzi scheme that investors should be aware of. Firstly,the common characteristic of Ponzi scheme is that it offers high investmentreturns with little or no risk.
Therefore, investors should know that there isalways a certain degree of risks in each investment made and the higher returninvestments usually have the higher risk too. Investors must be suspicious andnot easily believe with any guaranteed investment opportunity claims by thePonzi schemer. Not only that, Ponzi scheme is also famous with its consistentreturn regardless of the overall market conditions. Hence, investors shouldsuspect on any investment that generate positive returns without any up anddowns over time.Secondly,Ponzi scheme usually is not a registered investment and its operators areunlicensed sellers.
Ponzi schemes investment commonly unregistered with the SECor any state regulators. This is because they are afraid that their scaminvestment could be traced easily. This is due to registration provideinvestors with access to main information about the company’s main modus operandi.
Therefore, investors need to ensure that investment operators are registeredand have the required license by the federal and state authorities.Besidesthat, Ponzi schemers usually are secretive when it comes to public or investorsasking them about the investment strategies. Investors also usually do not knowthe rule of thumb of the investment, or get sufficient information such asinvestments writing, prospectus and disclosure statements.
Therefore investorsshould avoid from involving in such investments that they do not thoroughlyunderstand. In addition to that, investors might face some difficulty in cashingout their investments. The operators will usually try to minimize thewithdrawals by persuading the investors to invest more in the new opportunityfunds or at times forbid the investors from taking out their money in certainperiod of time in exchange for much higher returns. Moreover, the establishment of a system thatfacilitates the total prevention (or at least early detection) of fraud isnecessity. Given that Madoff was able to grow his Ponzi scheme for nearly twodecades.
(Drew, J. M., & Drew, M. E., 2010) Bernie Madoff’s Biography Bernie Madoff was born in a Jewishfamily on 29th April 1938 in Queens, New York. His father, RalphMadoff works as plumber for many years while his mom, Sylvia Madoff is ahousewife. However, during the Korean War, his father’s sporting goods storewent out of business due to steel shortages. Madoff saw his father, whom heidolized lose everything in a blink of an eye and this made him determined toachieve a long lasting success that his father had not have.
Bernie Madoff met his wife, Ruth Alpernduring high school and began dating since then. During that time, Young Madoffinterest was to join the school swimming team. Unfortunately, Bernie did notmake it to represent his school team. Later, Young Madoff was hired by hiscoach to work as a lifeguard at Beach Club in Long Island. At times, he workedas sprinkler installers to earn money.
Upon graduating high school in 1956,Madoff pursue his studies at the University of Alabama for a year beforetransferred to Hofstra University where he received his bachelor’s degree inpolitical science. Later in 1959, he married his high school sweetheart, RuthAlpern.Bernie Madoff’s Early Career In 1960 at the age of 22, Madoffstarted his small company which is Bernard L. Madoff Investment Securities LLC.
By using the money he saved from workingas lifeguard and sprinkler installer, he started off his business by tradingpenny stocks worth $5,000.Then, his well-connected father in law referred himto family and friends to invest with him. However, due to “Kennedy Slide”dropped 20% of the market in 1963, Madoff’s prediction goes bad and hisfather-in-law bailed him out. Since then, Madoff always had a chip on hisshoulder because it is obvious that they were just a small firm and not evenpart of the Wall Street crowd.After some time, Madoff started tomake a name for himself as a scrappy market maker.
He enjoyed those timesbecause most of bigger firms would disdain small types of trades but hecompleted it. This has made many traders came to trade with him. A biggersuccess later came in when Madoff and his brother, Peter invented theelectronic trading capabilities or called as an artificial intelligence byMadoff that makes trading much easier. This has been proven when they successin attracting massive order flow and providing insights into the securitiesmarket activities. Major Banks during that time also came down to Madoff’ssecurities firm to collaborate with him. Later in 1980s, Madoff and four chiefsof Wall Street processed almost half of the New York Stock Exchange’s orderflow. During that time, Madoff was claimed to make nearly $100 million in ayear.
Madoff also benefited from the help ofhis father-in-law where he introduced investors including the A- list celebritiessuch as Steven Spielberg and Kyra Sedgwick. Due to this, Bernard L. MadoffInvestment Securities LLC grew famous for its stable annual returns of 10percent or more. One of Madoff Investment firms achievement was they were ableto control more than 5% of trading volume on New York Stock Exchange in thelate 1980s.
The willingness to adapt with changingenvironment in market industries was one of the main success contributions ofMadoff Securities firm. Their firm was pioneer in the use of electronictrading, which give huge positive impact to the National Association ofSecurities Dealers automated Quotations (NASDAQ). Due to his recognition, BernieMadoff was appointed as the chairman of NASDAQ in 1990 and served until theyear of 1993.Over the years, the business wasexpanding fast and Madoff’s family members joined him to run the business. Thisincludes his younger brother and niece, Peter Madoff and Shana Madoff.
Theirjob title in the firm was Chief Compliance Officer and rules compliance lawyerrespectively. Later, Madoff’s two sons, Mark and Andrew also worked in hisfather’s firm as traders.Bernie Madoff’s Ponzi scheme It is not certain whenMadoff began the Ponzi scheme.
This is because some said that he alreadyoperated the fraud scheme for more than 40 years. His account manager, Frank DiPascali who worked since 1975 said it has occurred for as long as heremembered. However, Madoff himself confessed that he has been keeping thesecret from his family and everyone else for 16 years. When asked by thejournalist Steve Fishman, Madoff said that he even did not know why he carriedout the fraud scheme at all because he actually already had enough money tosupport his family’s lifestyle.
Maybe, it was because of the lucrative moneyand everyone just became greedy made him continued the Ponzi scheme. Heregretted as if he should just satisfy with the respect earned from WallStreet’s elites solely as market maker and electronic trading pioneer. Bernie Madoff ran an investment advisory department in hisfirm whereby in real, it was just to cover his Ponzi scheme operation. Heperformed the fraud trading by co-operating with his account manager, Frank DiPascali, whom he appointed to take charge of the investment advisory departmenton the 17th floor. They kept the secret from everybody else andMadoff do not even let his brother, sons or wife knew about this operation.
Whenever his sons asked on the advisory business as a preparation if Madoff wasnot around, he ended up scolded them and told them to stay out of his business.Under this scheme, Madoff took his client’s capital or assetsand transferred them into a single bank account which is believed to be hispersonal account. He attracts clients by guaranteeingreturn by 1 to 2 percent a month and he does it. Thewithdrawals requested by clients were paid using the new capital acquired bynew investors.
He then mailed out the fake account statements to his clientsusing his firm’s name to hide the deception.Madoffclaimed that his investment scheme could generate incredible returns by usingsplit-strike conversion strategy. Madoff also avoid himself to meet his clientsbecause he does not want to be suspected in operating illegal trading. He alsorefused to reveal any information regarding to his incredible return strategy.
Whenlooking at the point of view of marketing, Madoff made it looks like as if itis a hedge fund and promising steady performance over time regardless of thefluctuation in market.Despite multiple reportsmade to SEC about suspicious of Madoff investment as a Ponzi scheme, Madoffmanaged to fly under the radar for so long because he was prominent investorand an active member of financial industry. This can be proven when Madoff wasonce helped NASDAQ launched the stock market, sat on the board of NASDAQ andadvised SEC on trading securities.
It was easy for investors to believe thisoutstanding industry veteran to know exactly what he was doing. Not only that, Madoff alsosolicited his investors through his charitable work which portrayed hisgenerosity. Madoff deceived a number of nonprofit organizations and several ofthem nearly had their funds wipe out including the Elie Wiesel Foundation for Peace and the global women’s charityHadassah.
Madoff also swindled around $1 to $2 billion from approaching congregantsby using his networking with J. Ezra Merkin, an officer at Manhattan’sFifth Avenue Synagogue. Due to financial turmoil in 2008, Madoff’s Ponzi scheme beganto fall after he received huge redemption request and eventually struggled tomake the repayments.
In the prior year, Madoff was able to make sure the Ponzischeme remain intact because the redemption amount were less than new capitalflows to the investment scheme. In early December 2008, Madoff’s clientsrequested $7 billion dollars amount of redemption whereby during that time, heonly had $200 million to $300 million to give. The Madoff fraud also has affected persons andcommunities who rely on philanthropic entities. These entities have shutteredtheir doors or have had to curtail significantly their activities because thefunds on which they are relied to perform their essential charitable roles intheir respective communities have been dissipated. (Smith, F., 2010). Bernie Madoff’s Confession andSentencing Madoff finally came to realizethat he could no longer continue with the Ponzi scheme and he decided to justconfess about it.
The first person he told about the fraud scheme is hisbrother, Peter Madoff on 9th December 2008.Madoff’s sudden decision togive out a quantum amount of bonuses to his entire employees on 10th December2008 has made his sons demanded to know why because it is much earlier thanprevious years.On the same day, Madoff finallyconfessed to his wife and sons, Mark and Andrew that the investment advisorybranch of his firm was actually a lie and a giant Ponzi scheme. Bernieapologized to his family that he kept in as a secret for a long time to protectthem but due to disappointment and anger, Mark and Andrew turned their fatherin to the federal authorities the next day. On 11th December 2008, the Securities and Exchange Commission(SEC) charged Bernie Madoff with securities fraud. According to SEC’scomplaint, Madoff had admitted that the investment advisory business of hisfirm, Bernard Madoff Investment Securities (BMIS), was “just one big lie” and “basically,a giant Ponzi scheme”. (Van De Bunt, H., 2010).
Afterinvestigation has been made, size of the fraud was said to be nearly $65 billion. Nevertheless,Madoff reported to investigators that he had lost $50 billion dollars of hisinvestor’s money. When asked about the Ponzi scheme operation, Madoff insistedthat he acted alone but several of his colleagues ended up sent to prison. On March 2009, Bernie Madoff pleaded guilty to 11 crimes includingsecurities fraud, wire fraud, mail fraud, perjury and money laundering. Madoffthen was sentenced to 150 years of imprisonment and ordered to forfeit $170 million in assets on June 29, 2009 by U.S. District Court Judge Denny Chin. Madoff was resides at theButner Federal Correction Complex in North Carolina to serve his sentence.
Then, U.S.Marshals auctioned off Madoff’s luxury homes, estates and yachts as an effort to reimburse investors through the sale of his assets. After two years ofMadoff’s imprisonment, his elder son Mark Madoff committed suicide while AndrewMadoff succumbed due to lymphoma cancer in 2014.