Bernard Madoff was a very well-respected individual on Wall Street, having grown his investment firm from 1960, with only $200 to a 50+ billion dollar empire by 2008 . Bernie’s firm had even become a family dynasty, employing his two sons, brother, nephew and niece. How did this family-oriented corporation pull off one of the largest investment fraud operations for almost fifty years? Several very prominent people and business investors instilled their trust into Bernie Madoff, who was leading a secret double-life for what has been argued to be his entire career.
There is a lot of history that needs to be revealed to understand how Madoff could develop such a substantial scam in the first place. Everyone trusted Bernie and his wife Ruth, as they were high school sweethearts and very likeable people. Madoff served on the boards of several non-profit organizations and donated millions of dollars to charity. He donated a large sum to the research of lymphoma, a disease that one of his sons was diagnosed with. Madoff also donated substantial amounts of money to political parties and campaigns, the majority of which went to the Democratic Party.
Beyond charities and generous contributions, Bernie Madoff was also a pioneering businessman. As previously mentioned, he founded his firm, Bernard L. Madoff Investment Securities LLC, and remained chairman until his downfall in 2008. To compete with other firms that traded on the New York Stock Exchange, Bernie started looking into the creating software that would put the stock market on computers. Madoff, along with four other firms, developed a “screen-based trading mechanism where prices would appear on a computer screen.” This became the start of NASDAQ, of which Bernie was later named Chairman, and held the position for several years.
It is easy to see how Bernie Madoff developed relationships and trust with so many investors, especially several financially prominent clients. So where did Bernie go wrong? Supposedly, right from the beginning, it was rumored that the Bernard L. Madoff Investment Securities LLC was not really a legit business, but the largest Ponzi scheme in history. A Ponzi scheme is “a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned.” Not only illegal, a ponzi scheme is considered very unethical. In the Madoff scandal, Bernie was providing his investors double the returns they should have earned, by using the money of the most recent investors. All of the investors were happy with their earnings, and continued to put in more funds, and even went as far to recommend this firm to their friends, all under false pretenses.
The face that clients were advocating this firm to their friends and associates is one of many reasons this fraud was able to go on for so long. Almost all of the marketing for the firm was word-of-mouth, which made the investors feel like they were part of a “private club." Since the clients felt elite and privileged, they were less apt to speak up when Madoff made bold investment or trading decisions because they would not want to get “kicked out” of the club.
Another factor that contributed to the long-time success of this scheme was that it was a very well-kept secret. Madoff conducted his fraudulent business on a private floor that required a special pass to get in. There were very few employees on that floor, and all of the transactions and records were kept on a very old IBM server from the 1980s. This system left less of a trail to follow, as most of the information had to be hand-keyed into the computer.
After almost 50 years, Bernie Madoff found he was in too deep and had no other choice but to confess to the crimes he had committed. After his confession, Madoff was charged with eleven federal charges which included securities fraud, mail fraud, money laundering, and filing false statements with the SEC. Madoff plead guilty to all charges and made no attempt to plea-bargain with the government (Bandler, 2009). He was not going to give up the names of any accomplices and stated that he was solely responsible for the entire fraud.
Unfortunately, Madoff is not the only guilty party in this scandal. The SEC has also come under attack due to this disturbing situation. It was discovered that there were several tips and allegations made to the SEC regarding Madoff’s business starting as far back as 1999. At the time, the SEC felt there was really no reason to investigate the investment firm and disregarded the tips. The agency is now criticized for not using their subpoena power to retrieve more information on Madoff and his secretive investment dealings. A lot of people and organizations are upset with the SEC for letting this happen, as they are supposed to be the advocate of all investor’s. It is their job to protect the investor’s money, and make sure trading firms are behaving in accordance with all laws, statutes, and regulations. Critics have commented that it was a huge mistake to have a small unknown auditor handling an account of this size and nature.
Despite the errors made by the SEC, it does not change the fact that the decisions made by Bernard Madoff were illegal, corrupt, and completely dishonorable. His scheme has destroyed businesses, charities, and many people’s personal lives. He squandered people’s life savings, and left them destitute and with nothing. He went through millions of dollars invested by very famous people, such as Kevin Bacon, Steven Spielberg, Zsa Zsa Gabor and many, many more. Large charities have even had to shut down because they lost so much of their funds in the Ponzi scheme. Bernie Madoff is now facing a potential sentence of 150 years in jail. When asked to comment Madoff stated, “I am ashamed of these criminal acts. I always knew this day would come.”
Bandler, J. (2009, April 30). How Bernie Did It. Retrieved November 30, 2009, from CNNMoney.com: http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/?postversion=2009042406
Brockman, J. (2008, December 17). Q&A: Madoff Case Puts Spotlight on SEC. Retrieved November 30, 2009, from NPR: http://www.npr.org/templates/story/story.php?storyId=98272825
Lenzner, R. (2008, December 12). Bernie Madoff's $50 Billion Ponzi Scheme. Retrieved November 30, 2009, from Forbes.com: http://www.forbes.com/2008/12/12/madoff-ponzi-hedge-pf-ii-in_rl_1212croesus_inl.html
Shultz, K. B. (2009, March 14). Bernie Madoff's Billionaire Victims. Retrieved November 30, 2009, from Forbes.com: http://abcnews.go.com/Business/Economy/story?id=7078463&page=1
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