The Man Who Fooled The World

Introduction: The Illusion of Trust

Bernard L. Madoff, once chairman of NASDAQ, an entrepreneur, and billionaire later revealed to be the mastermind of a 65 billion dollar scandal, only revealed due to self-admission and the crisis of 2008.

?So, who is he? And what did he do? Or more importantly, how did he do it? We will cover it all.

Born in 1938, Madoff hated FAILURE and the middle-class lifestyle he was born in. He wanted to become successful and live the rest of his life in luxury.

At first, he worked small jobs like a sprinkler installer, lifeguard, etc. It wasn’t until later Bernie decided to complete his bachelor’s degree and worked in his father-in-law’s accountancy firm Gibraltar Securities. Later, established his firm Bernard L. Madoff Investment Securities in 1960.

Bernie established himself but also learned how the market works and for this, he chose the biggest financial hole in the USA, The Wall Street.

The Rise of a Wall Street Icon

Madoff wanted to make a name for himself, so he decided to trade in penny stocks(Stocks with a value of less than 5 USD). During this time Penny stocks didn’t even trade on the New York Stock Exchange but were rather communicated using Pink Slips with names and dates written on them.

Brokers would then call clients to convince them to buy the stock and in exchange earn a commission on every transaction made.

Bernie was determined and had a chip on his shoulder regarding his ability to convince people and earn a return. While some despised him for it, his trade volume was enough to prove it.

Over time, his trading business bloomed and became one of the best in town. But for Madoff, this wasn’t enough.

The Perfect Deception: Crafting a $65 Billion Ponzi Scheme

Madoff opened a new business Investment Advisory with his role being taking client investments and investing them in diversified and fund-mandated securities to earn a decent return for the investors and charged a commission for it.

Initially, he didn’t have much funds to invest but his father introduced him and asked friends and family to invest with Bernie. Bernie played a high-risk high-reward game. He wanted to be the best and give his clients high returns whatever the market conditions may be.

For which he invested in highly volatile stocks, YES! He didn’t invest in diversified securities to reduce risk but in volatile stocks to ensure high returns.

But, the 1962 Kennedy slide flash crash whipped the market and so were the investments made amounting to 30,000 USD at the time almost all of his client’s money

Bernie, to cover the losses borrowed from his father in law the losses and pay the investors. Madoff had 2 choices: Become a failure or Become a liar.

He chose the latter and started crafting his Ponzi Scheme.

The reason why Madoff failed was because of the risk taken, risk is the volatility of expected returns, so he wanted to avoid risk at all costs. But in the investment world nothing is truly riskless even treasury securities have risk, Zambia and Ghana are a couple of examples of it.

Bernie decided not to invest any money at all.

This begs the question how does he give investors the return that they want?

That’s where the FRAUD started to take shape.

A Web of Lies

Bernie Madoff, made a name for himself using 2 pioneer achievements of his life. First, was his trading and market-making business which was not only lucrative but also legitimate. Second, was the pioneer in electronic trading and the formation of NASDAQ.

Madoff wanted to facilitate and utilize computers to accelerate the trading business and communicate it with his clients. So, in 1971 he made a system to do so which later shaped itself into NASDAQ using this technology as its base. Bernie later also served as the chairman of NASDAQ in 1990.

Capitalizing on his reputation Madoff formed the fraud and understanding this fraud is quite simple.

Like any Ponzi Scheme, Madoff asked investors to invest in his firm where he would give investors returns and charge them a commission. But Madoff didn’t invest this money at all rather just let that money sit in a bank account.

So how did he give returns? And what about those who wanted a payout?

Madoff simply paid the investors the interest from the capital that they invested in the firm. He also charged a commission for himself and the scheme continued. Any investor who wanted to cash out would be paid with the money from new investors.

As long as fresh capital comes into the system, the cycle continues and everyone is happy. Madoff earns his commission, Investors get a return, Banks get to keep the capital and regulators turn a blind eye to all of it.

To back this scam Madoff also formed fake reports of where the money was invested to anyone who cared to look. If “too many questions” were asked Madoff simply asked them to leave and cash them out.

The basic premise is the same as a bank, it’s all good until and unless all investors don’t come to cash out simultaneously.

This made it seem that whatever Madoff touched turned into gold. Both his businesses were booming and his clients went from retail investors to businesses, HNIs, and even royalties around the globe.

Cracks in the Fa?ade: Madoffs Empire

The scam went on for decades, in 1987 Madoff shifted his HQ to the Lipstick Building, New York. There were 2 floors the 17th floor and the 19th Floor.

19th Floor was his legitimate business with Trading desks and hundreds of employees, while the 17th Floor was where the Fraud brewed with thousands of files scattered around with fake reports made specifically to scam investors.

The access to this floor was quite limited to a handful of individuals, all of whom were in on it with Madoff.

Cracks started to appear in Madoff’s Empire when Harry Markopolos came into the picture.

Markopolos is a forensic accounting and fraud investigator and is known for whistleblowing the Madoff scandal. Markopolos while working at an investment firm was tasked with decoding Madoff’s strategy and how he makes money for his investors so consistently.

It took Markopolos one look at the fake investment sheets that Madoff gave to the investors to understand that it was all a fraud and that Bernie’s strategy would only make money in a bull market which anyone who has been in the market is not the case.

Markopolos needed evidence for his theory, and he started gathering evidence.

By 2000, he had enough calculations and reports to file a formal report to the SEC. Which was duly ignored by the SEC. But Markopolos didn’t back down, he spent the next 5 years and wrote multiple reports outlining 29 red flags.

These included but were not limited to, Bernie’s business being not registered with the SEC even though, the client count was more than 15 (5,000) which was the requirement for all advisory firms.

Other red flags included a lack of auditing of reports, no trading relationships with market makers, trade sheet strategy only working on a paper in specific bullish condition all piled up.

Seeing, Markopolos’s efforts others followed suit, and reports kept on piling with the SEC of how Madoff was not legitimate. This led to the SEC finally starting an investigation against Madoff in 2006.

This however didn’t go as Markopolos hoped as the investigation went on for 11 months and concluded with no evidence found against Madoff.

This raises a question, how did Madoff even get caught?

Justice Served: The Downfall and Legal Reckoning

Sept 2008

The time when everything crashed and what we now call the Global Financial Crisis occurred. Every Ponzi scheme has 2 loopholes, new money keeps coming in and everyone doesn’t withdraw together.

And with the panic that the crisis struck the masses, withdrawal from Madoff’s fund started. At first, Bernie was able to ride the wave but at the peak of the crisis, even Madoff wasn’t able to sustain the outflow.

Even then Madoff didn’t get caught. He ADMITTED his crime and a formal report was filed with the FBI by December 2008. He was arrested and under the custody of the FBI.

Due to his admission and cooperation in the investigation, Madoff was sentenced in 2009 to 150 years in prison.

For a man who was 71 years old at the time, the sentence duration was nothing less than a death sentence in prison. Prosecutors and victims of the fraud praised the judge for the harsh punishment.

Madoff later died at the age of 82 in a federal prison serving one-fifteenth of his 150-year sentence. He died of kidney and cardiovascular diseases in pain and alone in prison.

Conclusion: The Enduring Impact of Madoff’s Betrayal

65 billion dollars

An unfathomable amount of money, that was lost due to the Madoff scandal. Even though the courts seized all personal assets that belonged to Madoff and his estate, it wasn’t enough to cover the losses of over 25,000 victims.

Madoff was convicted of 11 felonies of securities fraud but they didn’t link him to the suicides that people attempted and regretfully succeeded in due to their entire wealth being wiped off.

With trust running low in the financial industry, what do you think could have been done to prevent this?