Bernard, or “Bernie” Madoff is now an infamous figure in the American media, but before he became one of the most famous villains of all time, he was a well-known and well-respected investment advisor and stockbroker. He worked in the financial sector for many years, even working as the non-executive Chairman of the NASDAQ stock exchange for a time (“The Madoff Scam: Meet The Liquidator,” 2010). Madoff formed his own company in 1960, a firm he called Bernard L Madoff Investment Securities.
It is rare for individuals who are so powerful in the American financial sector to become embroiled in such large scandals because of their economic and political clout, but in 2008, Madoff was arrested for running the largest Ponzi scheme in American history. It was a scheme that was so large it shook the very foundations of most American financial institutions and bankrupted many individuals who trusted Madoff with their money, livelihood, and futures. It was a combination of greed, power, and wit that allowed Madoff to succeed for so long in his fraud.
In 1960, Bernie Madoff formed a firm called Bernard L. Madoff Investment Securities LLC. He became the chairman of this firm, and was acting chairman from the firm's inception to his arrest in 2008 (“The Madoff Scam: Meet The Liquidator,” 2010). Madoff was famous for his nepotism; his brother, Peter, was the firm’s Senior Managing Director and Chief Compliance Officer, and Madoff’s niece, Shana, was employed as the firm’s Rules and Compliance Officer and Attorney (“The Madoff Scam: Meet The Liquidator,” 2010). His sons were also involved in the business, although their positions were not so integral.
The firm has been described as a “Ponzi scheme,” which is a type of scam where a scam artist takes money from investors, promising them a high rate of return on their investment, and then uses money from new investors to pay the original ones (Strumpf, 2012). These schemes often offer investors ridiculously high rates of return on their original investment; these rates of return cannot be carried on indefinitely, however. Madoff’s firm is one of the largest Ponzi schemes in American history, stealing over 60 billion dollars from investors (Arvedlund, 2009).
Madoff’s Ponzi scheme was slightly different from the average Ponzi scheme, however. On the one hand, it was on such a massive scale that it was difficult for investors and regulators to imagine that Madoff was participating in any kind of illicit activity. In addition, Madoff utilized the complexities of the futures market to hide his tracks; indeed, investors were often told that the investment procedure that the firm utilized was too complex for anyone outside the firm to truly understand (Strumpf, 2012).
Finally, rather than the traditional high-return promise that a Ponzi scheme often gives, Madoff promised his investors (who were very exclusively chosen) a slow and steady return on their investment (“Bernard Madoff Scandal,” 2013). This effectively offset a lot of investors’ skepticism about the process, because the investment returns seemed good, but not too good to be true, as is the case in many Ponzi schemes.
According to an interview CBS News did with Harry Markopolos, the man who broke the Madoff story, “It was the performance line that Markopolos said caught his attention. "As we know, markets go up and down, and his only went up. He had very few down months. Only four percent of the months were down months. And that would be equivalent to a baseball player in the major leagues batting .960 for a year. Clearly impossible. You would suspect cheating immediately” (“The Man Who Figured Out Madoff's Scheme,” 2009). Unfortunately, no one but Markopolos suspected that Madoff was cheating; indeed, Markopolos reported Madoff three separate times to various regulatory bodies, but it was not until 2008 when his warnings were taken seriously.
Why were the warning signs ignored so readily by investors and the media? Looking back now, it is easy to see the red flags throughout the history of Madoff’s firm. However, the promises of steady returns and a long history of financial success blinded many investors to the reality of the scheme. The investors, of course, are not to blame for being sucked into the scam, but that does not negate the fact that asking how they got into the problem in the first place is an important question to ask. Asking “how” and “why” are incredibly important to ensure that this type of scam is not successful again.
Markopolos, the man who blew the whistle on Madoff’s firm, knew that something was wrong with the numbers when he looked at what Madoff was reporting for his financial statements (“The Man Who Figured Out Madoff's Scheme,” 2009). The question, then, is why did no one else know? Markopolos stated that he knew no one who had ever traded any commodity or stock with Madoff, which is an important observation to make, considering Madoff’s firm claimed to be making its money from trading stocks, commodities, and so on (“The Man Who Figured Out Madoff's Scheme,” 2009).
In fact, once the investigation was underway, authorities discovered that Madoff’s firm never made any trades-- not as far back as 1993, at least(“The Man Who Figured Out Madoff's Scheme,” 2009). No one noticed anything-- not investors, not the Security and Exchange Commission, not Wall Street--all because Madoff was a respected member of the financial community, and had been a successful individual for a number of years. It wasn’t until Markopolos began asking questions that the whole scheme began to unravel, taking with it many people’s life savings and investments (Ariely, 2012).
Bernie Madoff made incredible amounts of money from his investment scheme. Joseph Stiglitz writes, “With earning money the end-all of life, there are no limits to acceptable behavioreach episode is marked by scruples that should make us blush” (2010). In this case, Madoff participated in his scheme for so long that the actual scale of the scheme is very difficult to comprehend. The Huffington Post reported that Madoff’s client list (those investors that he scammed) was 162 pages long, single-spaced (2013).
After Madoff’s arrest in 2008, he pled guilty to the charges brought against him by the Security and Exchange Commission. He was sentenced to eleven counts of fraud, and received 150 years in prison for his crimes (“The Madoff Scam: Meet The Liquidator,” 2010). In addition to the jail time, Madoff was ordered to pay restitution to his victims. However, one mystery still remains for investigators: some of the money that Madoff was supposed to invest-- about $18 billion worth of investment money, in fact-- is still missing (“The Madoff Scam: Meet The Liquidator,” 2010).
Some of that money, according to the investigators in the case, is contained within Madoff’s physical possessions. So far, investigators have liquidated many of his assets, but have still come up far short of $18 billion, a fact that continues to frustrate them (“The Madoff Scam: Meet The Liquidator,” 2010). Sheehan and Picard, two investigators who are looking to liquidate the Madoff properties and goods, suspect that Madoff still has funds hidden away. “‘There is an assumption in this case, that there is this stash out there, whether in Swiss banks or under the mattress. Are you assuming there is?‘Yes, we are,’ Sheehan repliedPicard said, ‘We'd assume it's millions and millions of dollars’” (“The Madoff Scam: Meet The Liquidator,” 2010). These millions are incredibly important, as if they are found, they will be used to pay part of the restitution to the many victims in the Madoff scandal (“The Madoff Scam: Meet The Liquidator,” 2010).
There are many lessons to be learned from the Madoff scheme, but perhaps the most important one is not the obvious lesson. There were warning signs that Madoff’s business was a scam, but people were unwilling to see the scam, due to the veneer of culture and class that Madoff carefully cultivated through years of practice. No one who knew Madoff describes him as a sleazy salesman; perhaps it is this very believability and apparent candor that allowed him to get away with fraud for more than forty years before he was eventually caught and sent to prison.
Joseph Stiglitz, one of the premier economists in America today, writes, “I explained that Bernie Madoff’s Ponzi scheme was not all that different from the schemes of others who undertook high leverage. The financiers knew-- or should have known-- that the high returns in the short run would be followed by large lossesThese devotees of perfect markets should have known that leverage can’t deliver a free lunch-- outsized returns with no outsized downside risks” (Stiglitz, 2010). Stiglitz warns investors and financiers alike to be wary of any financial structure that offers high rates of return without any apparent downside.
More often than not, when terms are offered that sound too good to be true, something is wrong. Bernie Madoff taught America that no financial institution is too big to fail, and that the groups that are so often trusted to protect the integrity of Wall Street and other American financial institutions are not as effective as they should be.
References
Ariely, D. (2012). Three Lessons on Irrationality from the Bernie Madoff Scandal. [online] Retrieved from: http://www.linkedin.com/today/post/article/20121231052649-23667182-three-lessons-on-irrationality-from-the-bernie-madoff-scandal [Accessed: 28 Feb 2013].
Arvedlund, E. (2009). Too good to be true the rise and fall of Bernie Madoff. New York: Portfolio.
CBSNews.com (2010). The Madoff Scam: Meet The Liquidator. [online] Retrieved from: http://www.cbsnews.com/stories/2009/09/25/60minutes/main5339719_page2.shtml?tag=contentMain;contentBody [Accessed: 28 Feb 2013].
CBSNews.com (2009). The Man Who Figured Out Madoff's Scheme. [online] Retrieved from: http://www.cbsnews.com/stories/2009/02/27/60minutes/main4833667.shtml [Accessed: 1 Mar 2013].
Cohn, S. (2013). Money to Madoff Investors Tops $5 Billion. [online] Retrieved from: http://www.cnbc.com/id/100454360/Money_to_Be_Returned_to_Madoff_Investors_Tops_5_Billion [Accessed: 28 Feb 2013].
Grant, A. (2013). Bernie Madoff's Ponzi scheme, unwound, yields partial recoveries for Northeast Ohioans. [online] Retrieved from: http://www.cleveland.com/business/index.ssf/2013/02/madoffs_ponzi_scheme_unwound_y.html [Accessed: 28 Feb 2013].
Huffingtonpost.com (2013). Bernard Madoff Scandal. [online] Retrieved from: http://www.huffingtonpost.com/news/bernard-madoff-scandal [Accessed: 28 Feb 2013].
Kirtzman, A. (2010). Betrayal: the life and lies of Bernie Madoff. New York: HarperCollins Publishers.
Stiglitz, J. E. (2010). Freefall: America, free markets, and the sinking of the world economy. New York: W.W. Norton & Co.
Strumpf, D. (2012). Madoff Scandal Still Haunts Victims. [online] Retrieved from: http://online.wsj.com/article/SB10001424127887324339204578171422302043906.html [Accessed: 28 Feb 2013].
TIME.com (2013). 25 People to Blame for the Financial Crisis - TIME. [online] Retrieved from: http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877337,00.html [Accessed: 28 Feb 2013].
