Category: Bernie Madoff

Bernie Madoff pulled off one of the largest Ponzi schemes in history to date. Madoff figured out a way to get clients to invest money by providing false hopes of a profitable return on investment. This money then would cycle back through and he would use the money to pay existing clients when they wanted to take cash out but claimed to use a legitimate strategy to attract new clients. He also had thought it through enough to move large sums of money between accounts in the U.S. and London making it look like he was investing his client’s money all along. Throughout it all Bernie with help from hired individuals outside and inside his company defrauded his clients almost $65 billion overall all for the benefit of himself.

Within the crime what Madoff did that was illegal was overall committing investment fraud, money laundering, making false filings with the SEC, etc. In the scheme, he was unethical by lying to the public who trusted him with their investments. He became deceiving to the public when allowing them to think that their investment was growing. However, in reality they were getting the returns from the newer investor’s money.

What had allowed him to be so successful and able to sustain a large Ponzi scheme like this was mostly the ability to falsely create a successful persona of a hardworking, respected and honest businessman. He did this according to the textbook Business Ethics: A Stakeholder and Issues Management Approach “He became a notable authoritative figure by securing important roles on boards and commissions, helping him bypass securities regulations. One of the roles included serving as the chairman of the board and directors of the NASDAQ stock exchange during the early 1990s. Madoff was knowledgeable and smart enough to understand that the more involved he became with regulators, the more “you could shape regulations.” He used his reputation as a respected trader and perceived “honest” businessman to take advantage of investors and manipulate them fraudulently. Investors were hoodwinked into believing that it was a privilege to take part in Madoff’s elite investments, since Madoff never accepted many clients and used exclusively selective recruiting in order to keep this part of his business a secret” (Weiss 33). The next reason he was able to carry it on for so long was that there were always incoming clients willing to invest so there was always some money being able to be sent out to existing clients with no suspicion. Last but not least another reason is Bernie having the right people working for him and helping him falsify the documents. He paid his employees very well in order to keep their mouths shut about any activities happening inside of the company. A prime example is the three-person accounting firm, Friehling & Horowitz. Friehling confessed that for over 15 years the firm did not conduct any type of audit on Bernie Madoff’s business. In doing so it protected the company from any outside auditors needing to come in and check up on the company’s books.

The major stakeholders were some of the richest individuals at the time. Some high listed investors were Norman Braman, Larry King, and John Malkovich. Major global banks such as Royal Bank of Scotland, France’s largest bank, BNP Paribas, Britain’s HSBC Holdings PLC, and Spain’s Santander also got involved in the scheme. Bernie did not only target foreign financial institutions but ones inside the states such as Bank of America Corp., Citigroup, and JPMorgan Chase. A 162- page list was submitted to the U.S. Bankruptcy Court in Manhattan listing almost everyone affected. Individuals lost small portions to some being their whole life savings forcing them to change their daily lives. However, when most people think of who was affected they always think of the people who invested but never anyone close to Bernie Madoff himself. This scheme devastated close lives around him especially being started as a family business. After the scandal came out his family took most of the heat from everyone saying that they were involved and knew about what was happening. It devastated one of his sons, Mark, to commit suicide in December of 2010. His wife Ruth went into depression and received nonstop hate which led her into being ashamed of herself and her husband. This forced her to go into depression and hiding.

At the start of the scheme be employed several family members such as his brother, nephew, niece, and his two sons. Once the investments started to pick up he created a special area in the building on the 17th floor where about two dozen workers were authorized to be in this area. This large of a scheme could not have also been done without the help of the auditing firm who helped cover up the books making them look like there was nothing to hide. Each top member of the Bernie Madoff scheme had a special place in covering up the falsifying acts and knowing what they were doing.

Overall the Bernie Madoff Ponzi scheme started to go downhill in the year 2000. It all started when Harry Maropolos, CFE, CFA discovered the scheme. Shortly after Harry and his team presented an eight-page document of their findings to the Securities and Exchange Commission. Over the course of the following years 2001, 2005, 2007, and 2008 Harry resubmitted the documents because his findings were being highly overlooked. According to an article from business insider, “things began to deteriorate after clients requested a total of $7 billion back in returns. Unfortunately for Madoff, he only had $200 million to $300 million left to give.” (Stephanie Yang). With feeling the pressure and incoming doom, he confessed to his sons about the illegal scams his business had been running. He was finally caught and arrested on December 11, 2008, a day after his sons told the authorities of his doings. On June 29, 2009, Judge Denny Chin found Bernie guilty and sentenced him to 150 years in prison. Madoff was also made to pay a $170 billion legal judgment passed by the government (Weiss 37).

Some major lessons that can be learned from the Madoff scandal are to never judge a book by its cover or in this case personality. Just because someone is thought to be a good law biding individual does not always mean it is the case. Everything should be fact-checked out and in large companies like the company Bernie created should always be checked by several outside sources to make sure all financial aspects and inside functions are running properly. If something seems too good to be true financially, usually it is. Another lesson we can learn is how far someone will go knowing what they are doing is wrong but yet continuing for financial gain with no awareness of how it could affect people around them.

Abstract

Bernie Madoff, who began his brokerage firm in 1960, was the mastermind who executed a historical the world’s largest and longest-lasting Ponzi scheme fraud of $50 billion through his investment company, Bernard L Madoff Investment Securities LLC, shocked the global economy. As per his modality of fraud, Madoff used investments to pay off his first investors, creating the appearance of a return and prompting more people to invest with him. In reality, the company had no income and no way to pay off later investors. Madoff created falsified accounts and statements to win the trust of the investors. The Ponzi scheme consisted of tens of thousands of falsified balance sheets and client statements (Collins, n.d.). The rise of Madoff started from very small investment and family members, business friends, and acquaintances as customers. However, it grew leaps and bounds, when the business grew Madoff used the path of illegal unlicensed investment advisors to escape the scrutiny of the SEC and state securities regulators. In this way, the way followed to fraud this case was absolutely planned and calculated. Meantime, there were many people involved with the scandal, from family members put in positions of power, to SEC agents to corrupt auditors and accountants. Ultimately it took several whistle-blowing attempts to bring down the corrupt company. The handling of the audits, and whistle-blowing allowed Madoff to continue his scheme for much longer than it should have been possible. Madoff ran an intentionally corrupt business in order to profit himself and was able to go unchecked, instead, the SEC encouraged him to create a “third market”. His business creates a negative image for investment companies and accounting as a whole. This is a classic case of ambition, trust, efficiency and betrayal.

Data visualization techniques that could have detected Madoff’s Ponzi scheme

Data visualization is an analytic tool that can allow auditors to rapidly interrogate an entire transaction history or database to identify the most suspicious transactions to investigate (Mar, 2015). Analysis of data to detect transaction anomalies is an important fraud detection procedure. Interactive data visualization tools that allow the investigator to change the representation of data from text to graphics and filter out subsets of transactions for further investigation have substantial potential for making the detection of fraudulent transactions more efficient and effective (Dilla & Raschke, 2015). The fraudsters manufacture and modify data to create a realistic scene which are almost impossible to segregate from real data during normal course of audit. Since fraudulent actions are deliberate and non-random, traditional audit methods involving the use of statistical sampling are often ineffective for discovering fraud (Dilla & Raschke, 2015). In such a scenario, data visualization techniques are more supportive to detect such fraudulent data. If we closely look into Madoff fraud case, he explained about his investment strategy as he invested client money using a complicated three-part “split strike conversion” investment strategy. He told clients that first he purchased common stock from a pool of 35 to 50 Standard & Poor’s 100 Index companies whose performance paralleled overall market performance. The S&P 100 Index represents the 100 largest publicly traded companies based on market capitalization, and represented a very sound investment. Second, he bought and sold option contracts as a hedge to limit losses during sudden market downturns. Third, he left the market and purchased U.S. Treasury Bills when the market was declining, and then sold the U.S. Treasury Bills and reentered when the market was rising (Collins, n.d.), which, prime facie, seems very convincing explanation. Meantime, in the initial phase, all investors who invested in Madoff plan or gave money to Madoff to invest, got return as promised. Bernie told his father-in-law to do him a favor by collecting money from various investors and then give the total amount to Bernie as one account to invest. This also made it appear to the SEC as though he had fewer clients (Collins, n.d.). These arrangements are something that would never come into light in traditional auditing.

Cressey’s fraud triangle, Bernie and his co-conspirator’s rationalization

Much of our contemporary understanding of preventative measures of fraud center

around the Fraud Triangle in which the three must-have elements of fraud engagement are incentives, opportunities and rationalizations (Azim & Azam, 2016). Cressey’s fraud triangle is based on the hypothesis that corporate frauds are more likely to occur when a person possesses three key factors of fraud triangle namely motivation or pressure to commit fraud, opportunities to implement it and rationalizations to excuse the fraud. The presence of all three elements will stimulate people to engage in fraudulent acts in which each element plays an equally important role. (Horacek,2019)

If we analyze Madoff personal life, correlating with Cressey’s fraud triangle, he had all three components available. When comes the motivation element, the motivation is based on personal status and those needs could be determined by either the hunger to achieve or the fear of losing it (Azim & Azam, 2016). Madoff, at the age of 21 years before registering Bernard L. Madoff Investment Securities Company, decided that he, too, wanted to become rich working as a stockbroker (Collins, n.d.). This is clear indication that he had the hunger to achieve wealth at any cost. He had a pressure to earn a huge amount of money. On the other hand, Madoff faced the pressure of maintaining the reputation and profit of the firm so that the current investors continue with him as well as he can attract new investors. Similarly, the second element of the fraud triangle is opportunity, which is a perceived chance that fraud could be committed without being caught (Azim & Azam, 2016). Madoff was the head of the company, hence, had enough management power and authority to design the level of internal control and corporate governance. On the other hand, the corporate governance of the Madoff organization was compromised by having all the key players be members of Madoff’s family. His brother was the chief compliance officer. His nephew was the director of administration. His sons were directors. His niece was the general counsel and rules compliance attorney (Fuerman, 2009). Similarly, Madoff was appointed a non-executive chairman of NASDAQ and this position brought him considerable respect and trust from both investors and regulators (Azim & Azam, 2016). In this context, he could execute any plan without being questioned. When he won the trust of investors and they were investing or providing funds, Madoff was in better position (had opportunity) to use all these funds as per his decision

Now coming to the third element; rationalization. Rationalization is established to make an excuse for the fraudulent act (Azim & Azam, 2016). First of all, I think Bernie and his co-conspirators rationalized the fraud by putting a warning signs to potential investors who pursued him to invest their money. The warnings, that investing is risky and could lead to losses, were enough of a disclosure to get permission to take more money into the scheme (Pavlo, 2011). The other aspect is Madoff’s ultimate goal was to achieve his financial goal and he rationalized all his activities by acting in favor of him and his family, no matter who was paying (definitely, the investors). Further, Madoff rationalized that “it was their fault for trusting me” because not everyone was trapped by Madoff’s hedge fund and the investors who lost were the players joining the game at the very last second. Similarly, Madoff tried to justify his fraudulent engagement by persuading himself that the market was rigged anyway so if he had not done that, others would (Azim & Azam, 2016).

Probable SEC role to avoid (reduce or eliminate) financial and nonfinancial losses

Truly speaking, there was no actual investment in securities market and customer funds were never exposed to the uncertainties of price fluctuation, and account statements bore no relation to the United States securities market at any time. Bernie Madoff’s fraud resulted $65 billion financial loss which definitely paid for the perpetrators, their families, and their friends as well as a lot of people got rich during his long-running scam. Pension funds, retirement accounts, and children’s trust funds were worthless because of this scam. Philanthropic organizations had to cancel millions of dollars in promised or ongoing donations (Collins, n.d.). Many employees lost their jobs and trust of millions broken. It is also a fact that Madoff ended up in prison. In this context, if the Securities and Exchange Commission (SEC) had listened and taken necessary actions both financial and nonfinancial losses could have been avoided (reduced or eliminated, but the understaffed and underfunded SEC, which received a record 13,599 complaints in 2000, decided not to initiate an investigation of his complaint (Collins, n.d.). Markopolos explained his analysis presented in the 2000 complaint at a meeting at the SEC’s Boston office and encouraged the SEC to investigate Madoff. After the meeting, both Markopolos and an SEC staff accountant testified that it was clear that the SEC’s Boston District Office – BOD’s Assistant District Administrator did not understand the information presented. Our investigation found that this was likely the reason that the BDO decided not to pursue Markopolos’ complaint or even refer it to the SEC’s Northeast Regional Office (NERO) (Kotz, 2009). The other interesting part is most of SEC investigations, the company sent junior agents to corroborate Madoff’s earnings and verify the legitimacy of his operations (Howell, 2017) and senior officials at the SEC did not directly attempt to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staffs’ ability to perform its work. This shows SEC did not play any role to uncover Bernard Madoff’s Ponzi Scheme. If SEC had listened to Harry Markopolis the first time he informed them of his suspicions. The activities of Madoff would stop and what he did over a period of four years, like he deposited $21 million in Ruth’s account to pay for her Paris shopping sprees and a $2.8 million yacht. Bernie’s brother, Peter, purchased an expensive weekend home in the Hamptons for his daughter, and Bernie’s sons acquired a manufacturer of fly-fishing equipment, a sport they both enjoyed (Collins, n.d.), would never happened and the investors would never lose their future.

Madoff’s Ponzi scheme vis-à-vis Mr. Ponzi’s Ponzi scheme

Charles Ponzi was the originator of Ponzi scheme. Coalition of international postal services had begun selling postal reply coupons after World War I ended. Each coupon was good for one stamp in any of the affiliated countries; this allowed the mail services to continue operations smoothly despite the instability of most European currencies at the time. Ponzi reasoned that he could persuade investors to capitalize on the fluctuating currency prices by using the postal reply coupons in a series of exchanges. Instead of making legitimate trades, Charles Ponzi used money from his latest round of investors to pay those who’d purchased his ‘securities’ earlier. By convincing people to reinvest their funds he was able to postpone his financial obligations even longer (Patterson, 2009). Bernie Madoff followed almost same scheme but in different way. He deposited the client’s money in his own bank account. As more clients invested over the course of the year, the amount in Bernie’s bank account grew. If the client decided to redeem the entire investment on December 31, Bernie wrote the client a check for $1.2 million from the company’s bank account (Collins, n.d.). In this way, both Ponzi and Madoff used the same strategy, they never invested anything in real market but they used investment from later investors to pay earlier investor pretending they are earning.

If we see the differences between Mr. Ponzi and Madoff scheme, there are many differences. Madoff’s Scheme occurred right under the Securities and Exchange Commission’s nose. On multiple occasions they missed their chance to nab Madoff, even blatantly ignoring informants like Harry Markopolos. In contrast, Ponzi operated in a highly unregulated era, more than a decade before the SEC’s formation in 1934. Madoff was private about his scam, preferring to target high net worth people/institutions and to use word of mouth via a tight network of financial intermediaries to gather money. In contrast, Ponzi took money from average people and just about anyone willing to give him a chance (DeLegge, 2012). Madoff’s scheme was very secret and his methods were ‘proprietary’, he never disclosed his investment strategy. On the other hand, Ponzi was very public about his scam and even bought newspaper ads promoting it. If we talk about return on investment, Charles Ponzi promised clients a 50% profit within 45 days, or 100% profit within 90 days. On the other hand, Madoff promised modest but steady returns through up and down markets. It is true that the modus operandi of Madoff was quite different. Bernie owned a successful and legitimate brokerage firm. He used the activities of his booming brokerage business to shield his fraudulent activities. Bernie’s auditor created fraudulent records to verify trades that never occurred. The most important fact here was, Madoff was an ex-Chairman of the NASDAQ and the CEO of a successful investing company, he was the ultimate Wall Street insider whereas Charles Ponzi was never in such position.

The accounting profession failed to learn lessons from Ponzi scheme

Many Ponzi schemes rarely start as a registered business, hence avoiding detection by regulators. Consequently, it is unlikely that regulators are able to stop Ponzi schemes in their early stages. Ponzi promoters take several steps to ensure information about their scheme is not leaked to the SEC. First of all, they keep their operations small in terms of human resources. They employ people they can trust who are unlikely to denounce them even after leaving. Second, Ponzi promoters publish little information about their operations. This lack of information makes it hard to uncover their fraudulent activities. They also ask their investors not to reveal anything to regulators as the promised high returns will be impossible to achieve under a regulatory watchdog (Jory & Perry, n.d.). The investors, who agree to take risk for a higher return, as well agree to conduct their business outside the shadow of regulatory bodies. On the other hand, those schemes are conducted preparing full documentation. Coming to Charles Ponzi’s Ponzi scheme, which was operated more than a decade before the SEC’s formation in 1934, so we can say SEC never decided to implement any regulatory environment to protect from any such fraud by studying and learning from the history. SEC this attitude was also shown in Madoff’s Ponzi scheme where they never took initiations to investigate even after receiving complaints. On the other hand, other accounting bodies also might not went beyond their comfort zone to circle out how the fraudsters are using the loopholes to implement their fraud and misappropriate public money. I think this is the major reason, all regulatory bodies including accounting professional bodies waited another scam to complete.

Measures implemented to thwart financial schemes like Madoff’s Ponzi scheme

Madoff’s Ponzi scam taught many lessons to all regulatory entities. The major regulatory body who could play the major role to avoid the Ponzi scheme or might lower the losses if they would take proper steps, SEC, who ignore various complaints against Madoff and inspired Madoff dream big, definitely learnt the great lesson from this scheme. Post Madoff, they revamped the handling of complaints and tips. SEC implemented a centralized information technology system for tracking, analyzing, and reporting on the handling of the tips and complaints. In addition, the agency is working on a future system to apply data analytics to this information so the agency can be more proactive in detecting fraud. They restructured their organization to include national specialized units, focus on the key areas of Structured and New Products, Market Abuse, Municipal Securities and Public Pensions, Asset Management, and violations of the Foreign Corrupt Practices Act. In December 2009, the SEC adopted rules to better protect clients of investment advisers from theft and abuse by conducting surprise exam, third part reviews as well as encouraging registered investment advisers to place their clients’ assets in the custody of an independent firm, unlike Bernard Madoff did.

References

1. Collins, D. (n.d.), Bernie Madoff’s Ponzi Scheme: Reliable Returns from a Trustworthy Financial Adviser [PDF File]. Retrieved from https://learn.umuc.edu/d2l/le/content/424976/viewContent/16563006/View
2. Dilla, W. N. & Raschke, R. L. (2015). Data visualization for fraud detection: Practice implications and a call for future research. Retrieved from https://www-sciencedirect-com.ezproxy.umuc.edu/science/article/pii/S1467089515000020?via%3Dihub
3. Mar, S. (2015). Get a view into suspicious transactions: data visualization tools can help internal auditors dig deep to uncover potential fraud. Retrieved from https://go-gale-com.ezproxy.umuc.edu/ps/i.do?p=AONE&u=umd_umuc&id=GALE|A410140812&v=2.1&it=r&sid=ebsco.
4. Azim, M. I. & Azam, S (2016). Bernard Madoff’s ‘Ponzi scheme’: fraudulent behavior and the role of auditors. Retrieved from https://pdfs.semanticscholar.org/a036/f23f5de15488fab9d8fa43c8c31e15cdafb5.pdf
5. Horacek, B. (2019). The fraud triangle. Retrieved from https://ggfoa.org/press-releases/the-fraud-triangle
6. Fuerman, R. D. (2009), Bernard Madoff and the Solo Auditor Red Flag. Retrieved from https://ssrn.com/abstract=1434097
7. Pavlo, W. (2011). Bernard Madoff is the fraud triangle. Retrieved from https://www.forbes.com/sites/walterpavlo/2011/03/01/bernard-madoff-is-the-fraud-triangle/#67d0261f6cad
8. Howell, C. (2017). Tough life lessons from the Bernie Madoff Ponzi scheme. Retrieved from https://www.fraud-magazine.com/article.aspx?id=4294997667
9. Kotz, H. D. (2009). Report of investigation. United States Securities and Exchange Commission Office of Inspector General. Retrieved from https://www.sec.gov/files/oig-509-exec-summary.pdf
10. Patterson, S. (2009). The king of Ponzi schemes. Retrieved from https://www.acfe.com/fraud-examiner.aspx?id=2025
11. DeLegge, R. (2012). Madoff vs. Ponzi and the uncomfortable truth. Retrieved from https://finance.yahoo.com/news/madoff-vs-ponzi-uncomfortable-truth-230707928.html
12. Jory, S. R. & Perry M. J. (n.d.). Ponzi Schemes: A Critical Analysis. Retrieved from https://www.onefpa.org/journal/Pages/Ponzi%20Schemes%20A%20Critical%20Analysis.aspx
13. Kennedy, K. A. (2012). An Analysis of Fraud: Causes, Prevention, and Notable Cases. Retrieved from https://scholars.unh.edu/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1099&context=honors

The last of the red flags for Ponzi schemes are paperwork errors and trouble receiving your payments. If paperwork regarding your investment is filled with errors or misstatements it can mean that someone is trying to intentionally mislead you. If one is having trouble receiving his money from the investment manager, it could throw up a caution sign. This might occur when the Ponzi scheme is starting to fail. Since Ponzi schemes pay their past investors with future investments, this may indicate that the ringleader has been unable to land any investments, which could lead to late payments or not receiving any payments. If the promotor tries to convince you to not cash out and have your investment “gain” more value, he could be attempting to locate funds to provide to you.

As with most frauds, one can also look at the perpetrator himself. For example, it would be out of the ordinary if a low-level worker buys a brand-new Ferrari. One should reference the fraud triangle when trying to figure out why someone would want to commit fraud. If the schemers have the opportunity to steal the money, they rationalize their behavior in a way to make themselves believe what they are doing is not wrong. They might be under pressure from work or from their families. It is important to look at one’s means of living. As stated before, one should not go from driving a 1995 beat-up Toyota to a brand-new Mercedes if he did not receive any promotion.

The most prolific Ponzi scheme in history belongs to Bernie Madoff. Bernie Madoff was a stockbroker and investment advisor that was able to run his Ponzi scheme to steal 65 billion dollars away from trusted investors and pocketed around 20 billion dollars. Madoff started his company in the year 1960 when he was 20 years old. By the 1980’s he was making around $100 million a year and by 1990 he was the Chairman of the NASDAQ. As of today, no one is sure when exactly the scheme began. Based on the investigations by government authorities, the scheme began in the 1980s. Frank DiPascali, a top lieutenant to Madoff, told the judge during Madoff’s trial that the fraud began in the late ’80s but was not successful until the years between 1992 and 1993. Madoff himself said the fraud began in 1991. No matter when the fraud started Bernie Madoff was able to convince hundreds of investors to give him money.

There are also other factors to consider when trying to make sure you are not investing in a Ponzi scheme. Based on a New York Times article, “How to Avoid Being Taken in by a Ponzi Scheme,” these red flags will help avoid being taken in. Additionally, there are other factors and research one must do before investing. Thomas Ajamie is a managing partner in Houston law firm, states that it is common for these schemers to target specific groups, mostly groups of people that they can relate to. He has started to refer to fraud as affinity fraud. Bernie Madoff’s scandal included many investors that were Jewish. Ajamie states that the best way to not be scammed is to do your research and figure out who you are giving your money to.

It is interesting and important to look into who schemers target with their Ponzi Schemes. As stated in the paragraph above, the term affinity fraud has been used to explain how some schemers determine who they will target. There are also common demographics that are typically targeted with Ponzi schemes. The older demographic is usually deemed to be more trusting than the typical investor, which makes senior citizens common targets for every kind of fraud and not just Ponzi schemes

What made Madoff’s scheme so impressive was how long he was able to keep the Ponzi scheme running. Some investors were able to catch some of the red flags discussed earlier back in 2001. Harry Markopolos is a forensic accountant who studied Madoff’s financial statements and concluded there was no way that what he was doing was possible without committing fraud. He brought his findings to the SEC three times, once in 2000, another time in 2001and in 2005. He was not taken seriously because he was working for a competitor of Madoff’s at the time. Other investors were also concerned with the auditing company that Bernie Madoff hired. It was a small storefront company; investors thought it was strange considering Madoff’s success. It was also stated that Madoff was falsifying reports to his investors since the scam began.

Even though many red flags were surrounding Bernie Madoff’s business, he was able to run this scheme until it fell apart in 2008. When a group of investors asked for their $7 billion to pay for their promised 10% gain on investment, Madoff’s scheme began to fail. He didn’t have the funds to pay them. He was able to avoid detection through his connections to lawmakers and his reputation. Investors believed in him because his public portfolio showed him investing in safe stocks, and his promised returns of 10 percent were consistent but below the S&P 500 stock annual return average of 16.3 percent. Once his scheme was found out, Bernie Madoff was arrested and charged with security fraud.

After a Ponzi scheme has been unraveled and the perpetrator arrested, it might be very difficult for the investor to receive their initial investment back. The victims of Ponzi schemes suffer from the scheme long after it has been discovered. For example, out of the 65 billion dollars of the perceived losses, the victims lost to Bernie Madoff, only 11.2 billion dollars were redistributed to the victims. In another Ponzi scheme operated by Thomas Petters for 3.7 billion dollars, the victims shared a total distribution of 270 million dollars. Not only will the victims not receive their full investment, but they also will typically not receive anything until years after the perpetrator has been arrested. It is not atypical for an investor to provide their life savings to fund these schemes and to be left within ruins with nothing once the schemer is arrested.

The operator of a scheme may be charged with multiple criminal offenses and these criminal charges may vary depending on the magnitude of the Ponzi scheme. Ponzi schemes usually carry an offense of securities fraud or mail fraud, but some schemers can also be charged with wire fraud or commodities fraud. The most common charge is securities fraud which is defined by the FBI as, “wide range of illegal activity which involves using deception of investors by the manipulation of financial markets (FBI.gov)”. The length of the charge varies depending on the size of the scheme. For example, Bernie Madoff received a 150-year prison sentence and Thomas Petters was sentenced to 50 years for his Ponzi scheme of 3.7 billion dollars.

Since the arrest of Bernie Madoff, schemers have been using different strategies to enlist investors in their Ponzi schemes. In the past 10 years, there has been a 50 percent increase in prosecuted Ponzi scheme cases. These have stolen 31 billion dollars from their victims. The 31 billion dollars stolen is a steep increase from the cumulative total of 8.5 billion dollars before Madoff was caught. Before Bernie Madoff, these schemers were “pitching secretive, market-beating stock strategies” while new schemers are selling natural resource mining and cryptocurrencies. The schemers have adapted their sales strategies, but the crimes are still fraud. Perpetrators are trying to use society’s current interests to convince investors to fund their schemes. Daniel Christian Stanley Powell ran a Ponzi scheme where he promised generous returns if gold mines were invested in. The new schemes have also been promising lower returns from the investment instead of older schemes promising a much more substantial return on investment. Using the strategy of low returns helps make the investment more believable than if promised investments north of 15 percent.

One new case demonstrates how schemers are using new strategies to operate their Ponzi schemes. David Saffron has been caught stealing 11 million dollars from investors through a Ponzi scheme where he told investors that he would provide them with a 300% increase on investment. He explained that he would use bitcoin as investments. Once investors were not able to receive any of their money in return, it was discovered that he was running a Ponzi scheme and was arrested.

This scheme happened when bitcoin had an enormous increase in its price, and everyone wanted to have an opportunity to increase their investment. Bitcoin was and currently still is an unregulated market, which makes it easier for scammers to take advantage of unknowledgeable investors. This is just one example of how new schemers are trying to think of inventive ways to scam investors. Many investors became wary of investing in such funds promising consistently high returns. Ponzi schemes will continue evolving to ensure that this scheme will be successful in the future.

Ponzi schemes have been around for more than 100 years, and they are not going to go away. New schemers use previous lucrative cases, like Bernie Madoff, to structure their scheme. The smart criminal schemer uses former schemers as examples of how to run their schemes and improve upon them. New investments are available daily, and it is impossible for investors to completely understand how each company and investment works. Investors must do their research before entrusting their money to anyone. Many signs can show an investor that an investment fund might be a Ponzi scheme or an improper investment. As time goes on, schemers will be able to use new technology and new investments to try and attempt to steal investors’ money.

The Bernie Madoff Ponzi scheme was the biggest of all time, so much so that he earned himself 150 years in prison. The Madoff Ponzi scheme was so big it captured the attention of the entire world. It rivaled OJ Simpson’s case in attention which is no small feat. Bernie Madoff’s last words before he was sent off to jail were that he had left a “legacy of shame.” Honestly, I think a better description would be a legacy of unethical manipulation. Madoff knew what he was doing wrong which made everything he did worse. Eventually, he let his guilt get the worst of him and turned himself in. The worst part of Madoff’s schemes was that he left a wake of destruction behind him; he left his family with the burden he created, thousands broke, and all that chaos. This even lead multiple people to kill themselves. I want to demonstrate just how morally corrupt Bernie Madoff had to be in order to do this and how his sins are still being corrected today.

Ponzi scheme is a word that is thrown around a lot, but most people do not know what it is and how it all works. The schemer must set up a front; for example, a new business opportunity that is too good to pass up. When he does this, he must convince a first round of investors to buy into his ideas. When he does this, he can set up a front that will work as a façade to convince more investors to buy in, such as office space. Now, he would go after a second round of investors to pay off the first but now this is where he would make profit. He takes the second round of investors to pay off the first round and in some cases more since they were faithful initial investors. However, he takes a cut for himself as well. At its most basic form, this is a Ponzi scheme. All the schemer must do is keep finding new investors to pay off the last round as well as pay dividends to them (in some cases). Ponzi schemes can be compared to building a pyramid upside down: possible at first but eventually it becomes unstable, it falls apart. The illegal part, among other things, is that a Ponzi scheme must rely on securities fraud. Securities fraud is when someone gives false information, manipulates information, or has and acts on insider information. This is the very foundation of unethical action and is why no Ponzi scheme can be an ethical one. Unethical people and businesses always set up a solid base of operation where they can convince people they are legitimate, and Bernie Madoff was no different. The reason that so many people trusted Madoff with their money was because he was an experienced and well-known member of the financial industry. On top of this, he helped found the NASDAQ stock market and National Association of Securities Dealers. He also advised the Securities and Exchange Commission on trading securities. So, it is easy to see that with this body of work behind him why people would trust him with thousands if not millions of their dollars.

To better understand what happened throughout the process, we’ll go through the timeline of events during the scheme. In 1960, Bernie Madoff fresh out of college started Bernard L. Madoff Investment Securities, with $5,000 of money saved from working as lifeguard. This company grew into a massive company that at one point was the largest market maker at the NASDAQ.

“A market maker is a company that is a member of an exchange that also buys and sells securities at prices it displays in an exchange trading system for its own account which are called principal trades and for customer accounts which are called agency trades. Using these systems, a market maker can enter and adjust quotes to buy or sell, enter, and execute orders, and clear those order” (Investopedia).

It has long been debated whether these payments and how the companies operate is ethical. Madoff, who was one of the founding members of this practice, believed it was ethical because it did not affect the price that the consumer had to pay. I do not know anything anywhere close to the amount of information anyone in this field knows, but I know in everything adding a middle man to any process means another person to pay; furthermore, the extra money is pushed down the line and on to the customer. Some may believe this is a form of legal bribery because the broker must pay the market maker to make the sale. Personally, I do not think this is an ethical practice because it is practically a kickback for doing a service. I think this is the perfect example of people who are greedy and are willing to get money at any cost, even if that cost makes some brokers and some customers impossible to get into stock trading. This is where I think Madoff got his unethical start he realized he could manipulate people into paying him money when it really was not necessary for them to pay. Even though this part of his practice was legal, it does not directly mean it was ethical. I believe that this is a prime representation that Madoff’s intentions were corrupt and unethical form the beginning. In certain situations, a “money at any cost” attitude can be a great thing but as seen here with this much power, it turns into manipulative and unethical actions. In 2000, Massachusetts financial analyst Harry Markopoulos warned the Securities and Exchange Commission that Madoff’s numbers were too good to be true and borderline impossible. This is one of the few examples of good ethical decisions in the whole scam. Harry was far from the only person to know about Madoff’s scheme, many people in the financial market would not invest or do any business with Madoff because they knew there was only one explanation for why his numbers were high. It is not ethical for all these people to know about how Madoff was scamming thousands out of their money yet did nothing about it. I liken it to someone watching multiple crimes happen but never doing anything about it, never calling the cops, never stepping in to help, but just watching . In late 2008, Madoff’s scheme was starting to topple, investors were starting to pull out and they wanted seven billion dollars back, but Madoff only had around 300 million dollars. This is when Madoff knew it was over and he turned himself in to the police. A fraudulent $65 billion later, Madoff’s time was done. In 2009, Madoff was sentenced to 150 years in prison. Plans were put in place to try and repay more than sixteen thousand people who were scammed.

We can answer three major questions as we look at the full picture when it comes to the Madoff scheme. Why did he do this and what was his motivation? What did he do wrong? What could he have done different? Madoff’s motivation was a pure one at first. Just like any man, he wanted to provide for his family and live the American Dream, but that dream ended corrupt. His dream turned into a “money at any cost” attitude, when that happens you find ways to scam people out of their money at any or every opportunity. Both ethical and unethical people think about others as much as they can, the difference is that ethical people think how to help others and unethical people think about how they can manipulate them and that is exactly how Madoff thank. It is clear what Madoff did wrong but what separates him from everyone else is the scale of his scheme. Madoff took money from people like director Steven Spielberg, actor Kevin Bacon, and even would accept charitable donations with promises to provide a better future to them. I think that this is the saddest part about the whole thing: people trusted their whole livelihood and ended up broke. Lastly, Madoff was in such a good position to be setup for the rest of his life financially. He could have been a normal wall street elite and just ran a hedge fund, but he wanted more. I reflect that Madoff could have done almost anything else in the position he was in and still could have ended up as a millionaire if not a billionaire. He came from humble beginnings and got somewhere through hard work. Unfortunately, the greedy drive for money at any cost from the time he was a lifeguard turned into the biggest scam of all time.

One man about escaped from one of the biggest bank schemes in the world totaling a cash amount of $13.375 billion dollars (SIPA). The name, Bernie Madoff, was one of the most talked about person during 2008 to 2009. He was arrested in late 2008 just on, “a criminal complaint alleging one count of securities fraud” (The United States Department of Justice). Although this at first seemed like it would be tax evasion or stealing a sum of money from just one customer, it turned into many account owners coming forward making statement about how they had something happen to their accounts as well. Bernie Madoff was involved in a Ponzi scheme which is a fraudulent money transfer system where customers invest money and instead of them gaining a profit, the people who originally invested gain their investment as a profit. Bernie Madoff started as an honest investment consultant, but later on had decided to get involved with a dishonest way of investing.

Bernie Madoff started off not being as interested in financial services or wanting to work with his parents in pursuing a job in the investment business they had developed. Later on after graduating in 1960 with a bachelor’s degree in political science, he had decided to open an investment firm, also known as Bernard L. Madoff Investment Security, LLC (Biography.com Editors). He could not do this task alone and had to get some assistance from his in-laws as well as from money that he had saved up over the span of his schooling and side jobs throughout the summer. Not only did he get money from his in-laws, but his father in-law had taken the liberty of gaining a position in his business since he was a former CPA (Certified Public Accountant). The editors at Biography.com explain how influential the business was stating, “the business attracted investors through word of mouth and amassed an impressive client list, including celebrities such as Steven Spielberg, Kevin Bacon and Kyra Sedgwick” (Biography.com Editors). It is quite intriguing seeing how fast word can travel between individuals when a company goes from being a small investment firm to one of the biggest talked about companies in America. Since Steven Spielberg is such a well known director it is even more confusing as to why Bernie Madoff would gain the attention of him and his financial opportunities. Another aspect of Bernie Madoff’s life I cannot comprehend is how he graduated with a bachelor’s degree in political science but decided to make an investment firm afterwards. Also, his in-laws took a huge leap of faith in giving him, “an additional $50,000 borrowed from his in-laws” (Biography.com Editors). From my personal experiences with borrowing money from family, I do not think I would have the courage to ask for thousands of dollars to make an investment firm that I would not have any knowledge about.

As Madoff’s business gained popularity, it starts to raise some questions as to how it is so profitable to be a customer in it. According to a biography, Madoff was known for having a reliable annual return of 10%, also trading within the 5% of the NYSE (New York Stock Exchange) (Biography.com Editors). The mass amount of returns and business his firm collected can become very intriguing to the government. The more business the company had attained, the more he started to involve his family into his firm. As the popularity grew, Madoff started to get involved in fraudulent activity. “Around the early 1990s, he stopped trading and started fabricating returns” (Volker). Whenever a person lies about what they actually make in a business, this becomes an issue within government and taxing the correct amount of money. One felony, false statements, can put a person in jail for quite some time if convicted. A sentence of 5 years is common among this certain law according to Title 18 United States Code, Section 1001. Cornell Law School describes breaking this law if a person, “falsifies, conceals, or covers up by any trick, scheme, or device a material fact” (Cornell). Another issue with falsifying a statement could be that a customer who is working with the financial agency does not know where there true money or profit is standing at. Intentionally stealing a person’s money is legally and morally wrong. The section also states that: administrative matters, including a claim for payment, a matter related to the procurement of property or services, personnel or employment practices, or support services, or a document required by law, rule, or regulation to be submitted to the Congress or any office or officer within the legislative branch… (Cornell).

As listed in law, all employment practices and/or administrative matter must be kept correctly on file. If a person were to change that information, they would be lying to the government. This would cause issues with taxation of the company as well as making sure the customers get their share of their financial gains.

On December 11, 2008 Bernie Madoff was arrested for fraud within his business. The first count he was arrested for was security fraud. It is thought that Madoff had started in this scheme as early as 1980 till 2008 (United States District Court 1). The scheme involved Madoff redistributing the customer’s investments towards his personal endeavors. This was not with just a simple thousand dollar, rather, he had stolen billions of dollars. Not only were the companies investments sent to his personal endeavors, they were also sent to his close family, workers in his business, and others he closely worked with. As also stated by the United States District Court, “In connection with this Ponzi scheme, BERNARD L.MADOFF, the defendant, accepted billions of dollars of investor money, cumulatively, from individual investors, charitable organizations, trusts, pension funds, and hedge funds, among others, and established on their behalf thousands of accounts at BLMIS” (United States District Court 6). I was well aware that Madoff had stolen from customers within his business but I did not know he had profited from charities as well. This explains how Madoff was able to gain so much wealth in an estimated 20 year span. He had notified investors that the money he had received was going to be used for common stock. The common stock would have came from the S&P Pool. Along with common stock, he had also promised individuals that he would use the rest of the percentage in hedge funds, limiting losses (United States District Court 9). Although hedge stocks do limit the risk of loss, they can also take quite some time to see a profit. Common stock usually has more risk compared to hedge funds since a person’s investment depends solely on the company they had purchased stock in. If a person were to invest in Apple, and their stock goes from a price of $200 to $100 in a week, they could have the potential of losing their money if they sell the stock that day. However, if they were to keep that money in the company and the company were to profit later on within the year, they could still gain a profit but end up having time wasted waiting on the stock to profit. All of the fraudulent acts that Madoff had used were also reinstated for his second felony charge, investment advisor fraud.

Madoff was also charged with mail and wire fraud. He was charged with this because he knowing and willingly sent false statements (Felony #1). Bernard Madoff was charged for a felony for, “…obtaining money and property by means of false and fraudulent pretenses, representations, and promises, for the purpose of executing such scheme and artifice and attempting so to do, did place in post offices and authorized depositories for mail matter, matters and things to be sent and delivered by the Postal Service…” (United States District Court 10). This had surprised me that he was accused of mail fraud because I had thought that this law was only for people who were tampering with other individual’s mail or packages. Since he had falsified documents and willingly sent them through a postal service, charges for his acts have been placed. He not only sent falsified statements for customers who used his services but also lied on the BLMIS (Bernard L. Madoff Investment Securities) account statement for a client in New York, New York (United States District Court 10). As the felony charges for Madoff are being stacked up, wire fraud is found among the abundance of felony charges he was accused of. He commited wire fraud by, “means of false and fraudulent pretenses, representations and promises, did transmit and cause to be transmitted by means of wire and radio communication in interstate and foreign commerce, writings, signs, signals, pictures, and sounds” (United States District Court 11). Wire fraud can be when someone calls a bank to get a customers money or setting up an unlawful scheme/act. Wire fraud can happen in many ways. It can also happen if a person describes a scheme and tries to lure people into it by calling them via telecommunications such as on a cell phone. It was also confirmed that Bernie Madoff had wired $2 million dollars from Minnesota to New York from investor funds (United States District Court 11). Money can be wired through a medium such as a credit union where all a customer would have to do is send money to a person’s account assuming that their money would be used for investments or the intent they thought it was being used for.

Along with these charges, Madoff was charged with three different types of money laundering charges as listed: International Money Laundering To Promote Specified Unlawful Activity, International Money Laundering To Conceal And Disguise The Proceeds of Specified Unlawful Activity, and Money Laundering. Madoff had knowingly wired money from his firm to his other firm which was located in London under the company called Madoff Securities International (MSIL). He would then transfer his funds that he received in his overseas account(s) back to his company in New York (United States District Court 12-13). Even though he had transferred this money overseas to make sure his money did not look dirty as his profits increased, he made a worse mistake and had sent that money from his international account back to his U.S account. This had caused the U.S government to be curious as to how his company profited so well. Madoff attempted to conceal and disguise the proceeds from the specified unlawful activity by:

From at least in or about 2002, through on or about December 11, 2008, MADOFF caused funds to be wire transferred from BLMIS bank accounts in New York, New York, including the BLMIS Investor Account, to the MSIL Accounts in London, England, in the United Kingdom, and thereafter to be transferred from the MSIL Accounts in the United Kingdom to purchase and maintain property and services for the personal use and benefit of MADOFF, his family members and associates (United States District Court 14-15).

Both of the practices Madoff used to money launder would also fall under the felony of money laundering. In order to have a financial gain, Madoff had tried to gain a profit from using customer finances, intended for investments, be sent to his international business and then sent back disguised as a profit he would have made from his international business.

The next two felony charges that Bernie Madoff was charged with was false statements and perjury. False statements were being made by himself as well as his company in his elaborate Ponzi scheme. According to the court case, “On or about January 7, 2008, BERNARD L. MADOFF, the defendant, filed and caused to be filed an ADV with the SEC (the ‘BLMIS ADV’). The BLMIS ADV was signed by MADOFF, who certified, under penalty of perjury under the laws of the United States, that the information and statements made therein were true and correct, and that he was signing the BLMIS ADV as a free and voluntary act” (United States District Court 16). The SEC was examining his business and had sent documents to Mr. Madoff notifying him that he is not to lie about any information of his company and sign that if he were to lie there would be consequences. On account of signing the form knowing he would be tried for perjury under U.S law, he was accused of perjury as another felony charge. Perjury is when a person claims that they are telling the truth through a statement under, oathe or documentation, but in reality they are lying (England). Following Madoff falsifying documents and lying under oath, the felony charges are stacking upon each other. It seems as if when Madoff is being charged with one felony, another one seems to follow the past charge. Also, I would have that that the false statements charge would have been the same as his first charge which was security fraud. Although the charges seem similar, there is a difference. False statements could be anything from falsifying tax documents to lying to a consumer about how much money they actually profited. Security fraud would be knowing and willingly stealing a consumer’s investment by leading them on to believe false information the investor has told the client. The two charges are closely connected because most of the time when someone commits security fraud, they are probably going to falsify some sort of official document in order to hide their crime.

Count ten of Bernie’s charges is false filing with the Securities and Exchange Commision (SEC). Madoff’s goal of hiding his Ponzi scheme not only digs him a deeper hole than he can climb out of, but it makes him lie more and more. He was already too deep into his scheme that if he were to tell the truth to a judge and go to court pleading guilty, he would have received the same sentence as he would currently. Bernie Madoff unwillingly and unlawfully sent applications, reports, and documents that the SEC would posses and later review and analyze with a close eye. Not only did the laws/regulations of the SEC state that he could not lie within the documents, but he could be reprimanded for breaking the laws listed by the SEC (United States District Court 21-22).

The last felony charge Madoff received was theft from an employee benefit plan. This charge can commonly be found with embezzlement crimes such as taking money from retirement plans/401K. Madoff had: embezzled, stole, abstracted and converted to his own use, and to the use of others, moneys, funds, securities, premiums, credits, properties, and other assets of employee welfare benefit plans and employee pension benefit plans and funds connected therewith, to wit, on or about September 24, 2008, MADOFF failed to invest as promised approximately $10 million in pension fund assets sent to BLMIS by a master trust on behalf of approximately 35 labor union pension plans, and instead converted those funds to his use and the use of others (United States District Court 22).

Morally, it is wrong for someone to steal from someone, whether it be from your family or friends. It is unimaginable to know that someone had not only falsified everything his business, but to steal employees within his business taking away money from their retirement plans and pensions.

After all of the felony counts were listed, the United States proceeded to freeze all of his assets and any property he was able to purchase with the money he had made from the scheme. Forfeiting these previous purchases was provided as a consequence from the following counts: Count One, Three, Four, and Eleven (United States District Court 23).

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.

As the popular saying goes, if something is too good to be true then it probably is. This perfectly sums up the life and career of Bernie Madoff. At a point, he was one of the most sought-after investment managers in America. The cookie however crumbled in 2008 when it was discovered that he had no genuine investment plan but rather an elaborate Ponzi scheme. It left thousands of his clients devastated with the loss estimated at a whopping $65 billion.

Bernie Madoff biography

Bernard Lawrence Madoff was born on the 29th of April 1938 in New York City. He hailed from a Jewish family; his father’s name was Ralph while his mother’s name was Sylvia. He also had a brother named Peter and a sister named Sondra. Bernie Madoff attended the Far Rockaway High School and graduated in 1956. For his college education, he studied political science at Hofstra University and graduated in 1960. Upon graduation, Madoff briefly studied to be a lawyer but eventually to left set up his own investment firm. The firm was known as Bernard L Madoff Investment Securities LLC and he reportedly used the money he saved up from his lifeguard job to start the firm. He commenced trading in low priced stocks and his clientele steadily grew thanks to his father-in- law’s contacts. His business was also boosted by an ICT innovation and he helped to found the NASDAQ. This is an electronic-based stock exchange in New York. He would serve as its director for three years. Bernie Madoff attracted clients by promising handsome returns on investment. He then used the money invested by later clients to pay the earlier ones rather than making genuine investments. He soon became a well-known investment manager and his client base extended to include people such as famous Hollywood director, Steven Spielberg.

Downfall

One thing that has intrigued many is how Bernie Madoff went unnoticed for so long without any official intervention. In the year 1999, a finance expert named Harry Markopolos made a report to the Securities and Exchange Commission. He reported that it was not possible for Madoff to be making the type of his returns he was doing. This report was however not taken serious even though he continued making the complaint in 2000, 2001, 2005 and 2007. Things however came to a head in 2008. Following the global financial downturn of that year, Bernie Madoff found that he could no longer meet obligations to clients. He was supposed to pay out $7 billion but found that he only had $234 million in his business accounts. He confessed his situation to his adviser as well as his family. His sons subsequently reported him to federal authorities. This was in December 2008 and he was later arrested. It is actually hard to pinpoint when Madoff’s company turned into a full blown Ponzi scheme. Madoff himself said that it started in 1991 while investigations have revealed that it probably started in the 80s or the 70s. All in all, his clients lost $65 billion with 17.3 billion being the amount actually invested and not paid back. Till date, at least 11 billion has been recovered and paid back to his victims by government.

Dead or Still Alive

Bernie Madoff was arrested on the 11th of December 2008. He was eventually charged with 11 felonies including money laundering, perjury, false fillings and Fraud. He pleaded guilty on the 12th of March 2009. He was sentenced to 150 years in prison on the 29th of June 2009. Given the fact that he is now in his 70s, it is most likely that he will spend the remainder of his days in prison. Since being sentenced, Bernie Madoff is now serving his time at a federal prison in Butner, North Carolina. There have been reports of altercations with fellow inmates. In December 2009, he was reportedly taken to a hospital outside the prison due to serious injuries that he sustained in a fight. He however said that the report was false and that he was hospitalised for hypertension. So, Madoff is still very much alive. He has however revealed that he is suffering from a stage 4 kidney disease in addition to hypertension.

Family (Wife and Kids)

Bernie Madoff is married to a lady named Ruth. They met while in high school and got married in November 1959. Ruth actually co-founded her husband’s company and worked as a bookkeeper in his company. She denied knowing anything about his Ponzi scheme. Following the legal case against her husband, she surrendered $85 million to the government and was allowed to keep $2.5 million. Ruth Madoff has disclosed that she and her husband attempted a joint suicide when the Ponzi scheme was uncovered in 2008. The Madoffs had two children. They are sons named Mark and Andrew. They both worked for their father and were also involved in philanthropic activities. They are now late. Mark committed suicide in December 2012. He was 46 at the time. Andrew died of cancer in September 2014. He was 48 years old at the time of his demise.

Case study of Bernie Madoff

‘It was all just one great big lie’ were the words that 59-year-old Bernie Madoff said to the FBI agents when they arrested him on the 10th of December 2008 in New York City relating to Fraud charges that included Mail Fraud, investment, Wire fraud, and Money laundering offenses. Madoff had created a Ponzi scheme, an investment fraud, where the early investors are paid off with money from new investors. Investors are usually taken in by the promise of high returns with low risk but in Madoff’s case, there weren’t any investments made, it was all lying in his bank account. It is estimated that he had accrued a figure of approximately 64 billion dollars with this coming from roughly 3 million investors, To fully appreciate the full enormity of this figure, it is worth finding a comparable barometer to measure it up against. Bill Gates the Founder of Microsoft at the time, had a personal wealth of $54 billion dollars

This essay will give an understanding of the ‘One Great Big Lie’

White Collar Crime was coined by criminologist Edwin Sutherland (1939) he wanted to show that crimes could be committed by persons of a higher class, a higher social standing, and respectability in the course of their occupation. White collar crime that is committed by salaried professional workers or persons in business and that usually involves a form of financial theft or fraud (as in securities dealing) is a definition given by Merriam-Webster. Fraud is one of several white-collar crimes that include Insider Trading, Money Laundering, Bribery, and Embezzlement

Madoff certainly fit this demographic as he was well educated and previously held senior roles such as the chairman of the Nasdaq stock exchange and certainly someone who wouldn’t be seen as a criminal in the eyes of the general public.

The loss of one’s liberty as a punishment for a criminal act would in most cases be the greatest deterrent to most. There was a study published in the International Journal of Law, Crime, and Justice, that examined the differences in length of sentencing and the type of white-collar offense, This showed that white-collar criminals had significantly shorter sentences than street criminals

Are criminal sanctions a deterrent for a white-collar criminal? Ogden’s (1973) perspective gives strength to the argument that white-collar criminals are treated softly. There seems no desire to criminally prosecute the offenders with the possibility of incarceration. White Collar crimes take a considerable amount of time and skill for prosecutors to prepare evidence suitable for court. This gives further credence to the point that individuals such as Madoff feel that the criminal justice system isn’t hunting them down, so to speak and they can get away with it.

The US Securities Exchange Commission was discovered to have let him slip through their fingers on numerous occasions. Harry Markopolos the whistle-blower who initiated the investigation into Madoff, had passed over vital intelligence that could stopped Madoff, but these were ignored by SEC. It was later revealed in court that they put this down to staff shortages amongst other things. Markopoulos (2010) stated that Madoff had 3 different accountants in 3 different countries, to not have continued yearly reporting. A key element was Price Waterhouse Coopers, which he registered with, were in different countries. Thus, creating Different companies, different corporations holding independent records. It was also said that he had a small accountancy firm undertaking his audits, it beggars’ the belief that an organization that is trading in millions of dollars is having the work audited by a local accountancy firm.

Because of the scandal, the SEC undertook a series of reforms post-Maroff to stop any further frauds of this magnitude. These included a fully staffed enforcement division, this being one of the major failings of creating more specialized departments. Changing the handling of the complaints division. Working with insiders more to gain more intelligence. A complete overhaul of audits and risk assessments.

The millions that were lost due to the scandal would have caused a substantial amount of loss of revenue to the US government. The disruption in public delivery is no more evidenced by the staff shortages within the SEC, which ultimately created a vacuum for Madoff to continue with his criminal operation.

Financial Gain was certainly a key factor, but the author has garnered information from other sources to indicate psychological indicators were the dominant factor, he indicated traits of a personality disorder. He wanted people to trust him and to make them feel that they were special and that they were the winners in this situation. He was alluring and charming indicating the behaviour of a sociopath. A stereotypical con man is considered larger than life, vivacious, boasting of successes feeling that they knew everything, but this wasn’t the case with Madoff. The point is further enhanced by interviews he had with Diana Henriques (2018); he made her feel that she was special. He made her feel that she was the smartest in the room.

His victims ranged from elderly residents, people who had their life savings to people of great wealth including the owner of the New York Mets. Madoff appeared to have a personality that could be chameleon-like. For Corporations he defrauded they felt that they could trust Madoff, especially as he had been Non-Executive Chairman of NASDAQ, a man with an established history of investment. Even though he was not a household name, his previous history on Wall Street allowed him some extra allowance with clients

Madoff didn’t push for investment and didn’t seem overly disappointed that people didn’t want to invest. This would make existing clients feel special and part of the chosen few. In a sense, he was playing hard to get, which would make the proposition more attractive to new investors.

Madoff was a master at affinity fraud, where trust is valued hugely and this would have allowed him to work within communities like the church, and certain ethnic groups where references and word of mouth are a huge factor and allow people to take someone’s word for it. This point is further enhanced by the evidence presented in the Con Game where it is mentioned that Madoff did not meet any of his victims and did not see them. Not meeting the clients strengthens the view that he was in control, that he had the power to influence people, even though they were handing over thousands of dollars or in corporations’ cases millions at a time.

Madoff was charged with 11 offences and these included Mail Fraud, Wire Fraud, and Money Laundering contravening the Wire Fraud Act 1956, Mail Fraud Statue 1872, and the Money Laundering Act Control Act 1986.

The Financial Action Task Force was established in 1989 with their headquarters in France. Their aim is to have an implementation of legal, and regulatory measures for overcoming money laundering, terrorist financing, and other threats that might destabilize the international financial system. There are 37 member States and 2 regional organizations

Donald Cressey (1950) a criminologist who was being mentored at the time by Sutherland created the theory that there had to be more elements than just a financial incentive for a financial criminal offense. His model contained 3 factors. Opportunity, Motivation, and Rationalisation

To enable Madoff to perform his fraud he needed those weaknesses or in his case familiarity within the organization, this is where he had his family working within the company. This point is strengthened by the role his brother Peter played in the business.

The requirement of a motive and rationalization are needed for the triangle to be complete. Madoff had numerous motivators, his personality, and the financial wealth to be gained from the Fraud. Madoff rationalized his actions by believing that he wasn’t doing anything wrong, he didn’t mean any harm and most famously stated that that the government itself was just a big Ponzi scheme.

The model didn’t fit Madoff perfectly until Wolfe and Hermanson (2004) created the new diamond model adding capability. Madoff certainly had an ego and confidence. Their research found that being able to lie effectively and consistently and being able to maintain their lies. Madoff proved that he was a master of this for over 20 years

Bernie Madoff appeared to lie throughout his 82 years I would suspect. His sons and wife were apparently unaware of this fraud. He lied to the people who invested millions of pounds, he lied to his own Jewish faith group. He even continued to lie and boastful during his time in prison. So, it comes as no surprise that his final words when he was finally caught were ‘It’s one great big lie’