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Would anyone assume that a young man who grew up from humble beginnings in a small Jewish middle-class family be responsible for the largest Ponzi schemes in American history? A young Hofstra graduate with a bachelor’s degree in Political Science and hopes and aspirations to work on Wall Street. Bernie Lawrence Madoff was born on April 29, 1938, in Queens, New York. Madoff’s Family originated from Poland and was heavily affiliated with the Jewish religion and community. Madoff was never wealthy but was exposed to wealth numerous times. Most kids and young teenagers aren’t knowledgeable of stocks or Wall Street, but Madoff was. Madoff’s mother ran a broker-dealer firm out of their household where Bernie learned the in’s and out’s of the Stock Market at a young age.
The stock market is a peculiar place. In the Stock Market, some people can make millions and some people can lose millions, it just depends on how you invest. Buying stock is simple terms is buying a piece of a company and the company profits. The hope of investing in stocks is for the company to have long term success. If a company is thriving your stock will rise, while company’s that are tanking wouldn’t be the best to invest in. The great thing about the stock market is you can sell your stock at any time.
The term “Ponzi Scheme” originated from a man named Carlo Ponzi a successful con man who was responsible for multiple illegal schemes in the 1920s. Ponzi schemes have been around since the 1800’s some of the largest being Enron or the Bit-connect schemes, but none compared to Madoff’s. After receiving a fifty thousand dollar loan from his then father-in-law, Bernie Madoff officially kicked off his investment firm. The company’s name was pretty straight forward “Bernie Madoff Investment Securities LLC”. Madoff’s company offered a sense of hope and the idea of profit. Madoff originally started his company off investing in penny stocks, where he convinced family and friends to let him invest their money. The investment methods he used were considered to be pioneer-Esque, he used a very up to date and computerized style. This technology he developed later became the National Association of Securities Dealers Automated Questions (NASDAQ) a computerized technology that allows investors to buy and sell stock within seconds. Bernie served as the Non-Executive Chairman at NASDAQ which further improved his resume and level of respect. With the credentials that Madoff obtained and his investment firm thriving many people had nothing but respect and even looked up to him. Madoff’s scheme was simple, but his execution was unique and genius. He used a social feedback loop, he would have people invest thousands if not millions at a time and reeled people in by promising one percent gains every month as well as ten to twelve percent a year. Madoff had a reasonable ten percent upfront fee, but the catch was he would have current investors be paid unreal returns by investments of previous investors. He used genius marketing skills and made his business seem exclusive. To invest in his firm you needed to know someone just to get in contact with the firm, which only enticed investors.
Madoff made a majority of the sixty-five billion through Hedge funds and had fund managers set up investment pools known as “feeder funds”. The Feeder fund managers such as Ezra Merkin or Walter Knoll would feed billions to Madoff and in return would get 20 percent profits. A majority of the Fund Managers knew of the scheme Madoff was pulling off but turned a blind eye to continue to get their twenty percent. A greater part of the Feeder fund managers had a mass amount of their assets tied into the funds, so any sort of suspicion of Madoff’s actions were never questioned. Investors never forced Madoff’s hand because none of them knew he had their money, most believed that their money was invested into stocks in a bank. The sickening thing was Madoff never bought or sold a single stock and pocketed every penny of investor’s money.
When over sixty-five billion dollars is stolen, you could imagine that many people were affected. Pak (2019) found that the total number was around 37,000 people. The victims affected ranged from celebrities, banks, universities, charities, and civilians. Some of the biggest celebrity names effected were Larry King, Kevin Bacon, & John Malkovich. Large corporations and banks that were invested into Madoff such as The New York Times, Wall Street Journal, And BBVA Bank all took big hits from investing with Madoff as well. Many people had a majority of their assets tied up with Madoff simply because they believed and trusted in him. Possibly one of the worst stories from the Madoff scheme came from a man named Thierry De La Villehuchet who was one of the feeder fund managers. Every asset Villehuchet could have was tied up with Madoff. After Madoff confessed Villehuchet couldn’t handle the reality of the lives he affected as well as losing everything he owned. He killed himself shortly after Madoff’s confession. Only 19 Billion Dollars has been retrieved since Madoff’s arrest (Steve Stroth & Yue Qiu, Bloomberg 2018).
While Madoff seemed to have all his investors in his control, Harry Markopolos seemed to differ. A Boston investment manager named Frank Kasey meets with some of Madoff’s investment managers who told him about the steady returns they were getting. Kasey found these returns to be quite unreal, so he brought it back to one of his associates Harry Markopolos a forensic accountant at the time. After going over their numbers for several hours Markopolos realized Bernie Madoff was either running on of two things a Ponzi scheme or insider trading. Markopolos brought his case to the U.S. Securities and Exchange Commission (SEC) several times and eventually, they began to investigate. They only investigated the insider trading option which was eventually ruled out, but never investigated whether it was a Ponzi scheme or not. The SEC dismissed the idea that Madoff was running a Ponzi Scheme, but many people believed there was more to it. Madoff sat on previous SEC committees and had family that served on other regulatory panels, which possibly influenced the SEC’s feelings towards Madoff.
After the 2008 financial crisis, people started losing a lot of money as well as jobs, Thus leading to people asking Madoff for their investments back. After Madoff couldn’t cough up the money, Investors began to speculate and become furious. Madoff knew he couldn’t keep the lies going so he eventually confessed to his family about the scheme he had been running for the past 15 years. Madoff’s sons Mark and Andrew turned him in to authorities. Bernie Madoff was found guilty on 11 federal felonies including money laundering, securities fraud, wire fraud, perjury, etc. Bernie Madoff ultimately admitting to stealing fifty billion dollars, but authorities have speculated it to possibly be around sixty-five. Madoff took sole responsibility and was sentenced to the maximum one hundred and fifty years in prison. The judge also forced Madoff to give up one hundred and seventy billion dollars in assets.
Ranking Madoff’s scheme is fairly easy due to the other top 5 Ponzi Schemes of an all-time only accounting for fifteen billion dollars. The general conclusion would rank Madoff’s scheme as the worst in American history. Bernie Madoff who once was a loved and trusted man turned out to be the devil himself. Though many regulations and rules have been set into place to possibly avoid another Ponzi scheme or fraud case, We as a country should still learn from these mistakes. Some of the three big takeaways from this case First never leave your money with one investment manager. Second, do not invest your money with someone of something you’re unfamiliar with and third understand that some things are too good to be true regardless of who’s offering.
Many individuals would find Madoff’s Crimes quite disheartening. I feel like regardless of whom he stole from it was wrong and he should pay for what he did. The biggest problem I’ve had with the aftermath of Madoff’s story is not everyone recovered or got their money back. Two men killed themselves due to Madoff’s actions and yet he is considered a celebrity in prison and looked up to. He doesn’t have any worries and quite enjoys his time in prison. In an article written by Steve Fishman of New York Magazine about Madoff’s life in prison one quote caught my attention. According to Fishman during a conversation with another inmate about the people Madoff affected, Madoff quoted “F**k my victims”, he said, loud enough for other inmates to hear. “I carried them for twenty years, and now I’m doing 150 years”. It’s just quite sickening, to be honest. It was hard for me to know that a man who responsible for ruining almost if not all of 37,000 people’s lives can not feel any remorse. I guess that just shows there are truly evil people in this world.
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