Bernard Madoff, Architect of Largest Ponzi Scheme in History

For more than 50 years, Bernie Madoff was renowned on Wall Street, a big money manager who founded his own firm at age 22 and became chairman of the Nasdaq in 1990. He was credited with helping develop some of the systems and market structures that moved the stock market beyond the trading floor and gave rise to modern, electronic trading, but Bernie Madoff's life came crashing down in 2008, during the depths of the financial crisis. The scandal at Bernard L. Madoff Investment Securities shattered investor confidence, which was already damaged by the financial crisis.

Bernard Lawrence Madoff known as Bernie Madoff was born on April 29, 1938, in Queens (New York City). He graduated from Hofstra University with a Bachelor of Arts in political science and briefly attended Brooklyn Law School, but left after his first year to found the “Penny stock brokerage” in 1960, which eventually grew into “Bernard L. Madoff Investment Securities” and served as the company's chairman until his arrest on December 11, 2008, at the time his firm was the 6th largest market maker in S&P 500 stocks. Bernie Madoff invested $5,000 (equivalent to $44,000 in 2021) from working as a lifeguard and irrigation sprinkler installer and a loan of $50,000 from his father-in-law. Initially, the firm made markets (quoted bid and ask prices) via the National Quotation Bureau's Pink Sheets. In order to compete with firms that were members of the New York Stock Exchange trading on the stock exchange's floor, his firm began using innovative computer information technology to disseminate its quotes. After a trial run, the technology that the firm helped to develop became the NASDAQ. “The firm functioned as a third market trading provider, by passing exchange specialist firms by directly executing orders over the counter from retail brokers.”

At the firm, Bernie Madoff employed his brother “Peter Madoff” as senior managing director and chief compliance officer, Peter's daughter “Shana Madoff" as the firm's rules and compliance officer and attorney, and his now deceased sons Mark Madoff and Andrew Madoff.

The influences of Madoff Circuit

From 1991 to 2008, Bernie and his wife Ruth Madoff contributed about $240,000 to federal candidates, parties and committees, including $25,000 a year from 2005 through 2008 to the Democratic Senatorial Campaign Committee. Members of the Madoff family have served as leaders of the Securities Industry and Financial Markets Association (SIFMA) which allow them to enlarge their influences over the decision of the committee. Madoff's name first came up in a fraud investigation in 1992, when two people complained to the SEC “Securities and Exchange Commission” about investments they made with Avellino & Bienes, the successor to his father-in-law's accounting practice. For years “Alpern and two of his colleagues, Frank Avellino and Michael Bienes” had raised money for Bernie Madoff, a practice that continued after F.Avellino and M. Bienes took over the firm in the 1970s, then they returned the money to investors who complained and the SEC “government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception” just closed the case.

In 2004, Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance Inspections and Examinations (OCIE), informed her supervisor branch chief Mark Donohue that her review of Madoff found numerous inconsistencies, and recommended further questioning. However, she was told by Mark Donohue and his boss Eric Swanson to stop work on the Madoff investigation.

“Instead investigate the mutual fund industry. Eric Swanson, Assistant Director of the SEC's OCIE, started to date Shana Madoff in 2003 while investigating her uncle Bernie Madoff and his firm. In 2007, the two married and Swanson left the SEC “Securities and Exchange Commission”

After Bernard Madoff's arrest, the SEC was criticized for its lack of financial expertise and lack of due diligence, despite having received complaints from financial analyst Harry Markopolos and others for almost a decade. The SEC's Inspector General, H. David Kotz, found that since 1992, there had been six investigations of Madoff by the SEC, which were botched either through incompetent staff work or by neglecting allegations of financial experts and whistle-blowers. At least some of the SEC investigators doubted whether Bernard Madoff was even trading.

While awaiting sentencing, Bernard Madoff met with the SEC's Inspector General, H. David Kotz, who conducted an investigation into how regulators had failed to detect the fraud despite numerous red flags. Even Bernard Madoff himself said “he could have been caught in 2003, but that bumbling investigators had acted like 'Lt. Colombo' and never asked the right questions: I was astonished. They never even looked at my stock records. If investigators had checked with The Depository Trust Company, a central securities depository, it would've been easy for them to see. If you're looking at a Ponzi scheme, it's the first thing you do.” and added during an interview in June 17, 2009, that SEC Chairman Mary Schapiro was a "dear friend", and SEC Commissioner Elisse Walter was a "terrific lady" whom he knew "pretty well”.

After four hours of failed attempts to replicate Madoff's numbers, a financial analyst named “Harry Markopolos” believed he had mathematically proven Madoff was a fraud. He was ignored by the SEC's Boston office in 2000 and 2001, as well as by Meaghan Cheung at the SEC's New York office in 2005 and 2007 when he presented further evidence. He has since co-authored a book with Gaytri D. Kachroo, the leader of his legal team, titled “No One Would Listen” The book details the frustrating efforts he and his legal team made over a ten-year period to alert the government, the industry, and the press about Madoff's fraud.

“No one reacted until this happened, had it not been for Madoff's confessions, the fraud would have continued for several years, as Madoff had pulled off his masterstroke in the matter of illusion”

The Ponzi scheme revealed

Bernard Madoff created a front of respectability and generosity, wooing investors through his charitable work. He also defrauded a number of nonprofits, and some had their funds nearly wiped out, including the Elie Wiesel Foundation for Peace and the global women's charity Hadassah. He used his friendship with J. Ezra Merkin, an officer at Manhattan's Fifth Avenue Synagogue, to approach congregants. By various accounts, Madoff swindled between $1 billion and $2 billion from its members. When clients wished to redeem their investments, Bernie Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust. Uncle Bernie also cultivated an image of exclusivity, often initially turning clients away. This model allowed roughly half of Madoff's investors to cash out at a profit. These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money.

The Madoff's plausibility to investors was based on three several factors:

1- His principal, public portfolio appeared to stick to safe investments in blue-chip stocks.

2- His returns were high (10 to 20%) but consistent, and not outlandish. As the Wall Street Journal reported in a now-famous interview with Bernard Madoff, from 1992: "[Madoff] insists the returns were really nothing special, given that the Standard & Poor's 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992. 'I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding,' he says."

3- He claimed to be using a collar strategy, also known as a split-strike conversion. A collar is a way of minimizing risk, whereby the underlying shares are protected by the purchase of an out-of-the-money put option.

Ponzi schemes named after a notorious 1920s Italian fraudster, Charles Ponzi can only go on as long as there is enough new investment money to pay existing investors who want to withdraw their funds from the scheme.

For years, Bernie Madoff had simply deposited investors' money in his business account at JPMorgan Chase and withdrew money from that account when they requested redemptions. He had scraped together just enough money to make a redemption payment on November 19. However, despite cash infusions from several longtime investors, by the week after Thanksgiving it was apparent that there was not enough money to even begin to meet the remaining requests. "The wheels of Madoff’s scam finally started to come off in December 2008 when investors asked to redeem $7 billion and he struggled to find it".

On December 3, 2008 he told longtime assistant Frank DiPascali, who had overseen the fraudulent advisory business, that he was finished. Six days later, Bernie told his brother Peter about the fraud, and told his son Mark Madoff on the following day, that “he planned to pay out $173 million in bonuses to employees two months early” by arguing "he had recently made profits through business operations, and that now was a good time to distribute it.” and Mark responded him “how he could pay bonuses to his staff if he was having trouble paying clients.” Next day, Bernard Madoff confessed to his wife and two sons that he had "absolutely nothing" left, and that his investment fund was "just one big lie" and "basically, a giant Ponzi scheme.” and the two sons reported their father to federal authorities.

On March 12, 2009, Madoff pleaded guilty to 11 federal felonies, including "Securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, theft from an employee benefit plan, and making false filings with the SEC." The plea was the response to a criminal complaint filed two days earlier, which stated that over the past 20 years, Bernie Madoff had defrauded his clients of almost $65 billion in the largest Ponzi scheme in history. Bernie Madoff insisted he was solely responsible for the fraud. Madoff did not plea bargain with the government. Rather, he pleaded guilty to all charges. It has been speculated that Madoff pleaded guilty instead of cooperating with the authorities in order to avoid naming any associates and co-conspirators who were involved with him in the scheme.On June 29, 2009, Judge Chin sentenced Bernard Madoff to the maximum sentence of 150 years in federal prison and died on April 14, 2021 at 82 in a federal prison hospital in Butner, N.C.

Bernard Madoff apologized to his victims, saying: “I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This was something I will live in for the rest of my life. I'm sorry. I know that doesn’t help you”

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For more than 50 years, Bernie Madoff was renowned on Wall Street, a big money manager who founded his own firm at age 22 and became chairman of the Nasdaq in 1990. He was credited with helping develop some of the systems and market structures that moved the stock market beyond the trading floor and gave rise to modern, electronic trading, but Bernie Madoff's life came crashing down in 2008, during the depths of the financial crisis. The scandal at Bernard L. Madoff Investment Securities shattered investor confidence, which was already damaged by the financial crisis. And it led to sweeping changes at the Securities and Exchange Commission, which missed the fraud for years despite repeated warnings, including from independent investigator Harry Markopolos, who set out to analyze Madoff's improbable returns and pronounced them fraudulent as early as 2000. In the end, in addition to Madoff, more than a dozen individuals, including Peter Madoff, were convicted of federal crimes, but none of the others was accused of knowing about the fraud. JPMorgan Chase, Madoff's primary bank, paid $2.6 billion to the U.S. government and Madoff victims in 2014 to settle allegations that it did not maintain adequate controls. After Chase instituted some unspecified reforms, prosecutors dropped charges against the bank, and the Madoff Victim Fund has paid nearly 37,000 victims, with most recovering 80% of their losses, according to former SEC chairman Richard C. Breeden, special master of the fund. Among his star-studded client list included sports stars, film director Steven Spielberg, Zsa Zsa Gabor ($12 million) and actors Kevin Bacon and John Malkovich ($2.23 million). At least two ruined clients committed suicide, one, an aristocratic French banker who had lost $1.4 billion, reportedly slit his wrists in his office, while the second suffered a fatal heart attack. Victims went far beyond the U.S. Even Nicola Horlick, the so-called ‘superwoman’ of the City of London, was hit, her investment fund reportedly handing over nearly £21 million to Madoff. The British bank HSBC said it lost $1 billion, while Royal Bank of Scotland put its losses at around £400 million. Other victims included Bradford & Bingley and Santander.

Some were able to take their losses on the chin; others were ruined. Holocaust survivor and Nobel Peace Prize winner Elie Wiesel and his wife Marion lost their $12 million life savings along with $15 million from their charity foundation after investing with Madoff.