The very mention of scams brings up Bernie Madoff name.
In the world of schemes and scams, the extent of his crime was huge.
It was not just the amount he scammed, but the number of years he managed.
What is even more surprising is the number of celebrities he scammed.
So, no one was beyond his reach.
The flawless execution of his crime was the talk of the town.
The most striking element was the ease and extent of the crime.
When the scam unraveled, it took weeks and months for the reality to seep in.
Thousands of investors were sucked into this epic scam.
It has scammed billions of dollars and broken several houses.
The extent of the crime was such that 10 years down the line, people are still recouping losses.
Only a handful of people managed to recover their money.
There are innumerable who are still reeling under the losses.
In many ways, it was like a Tsunami that hit the investment world.
The gust of this wind was so strong that there are many who are still reeling under its impact.
That in many ways makes his crime one of the epic scams of the financial world.
Who Is Bernie Madoff?
The uncrowned kind of scams, Bernie Madoff served as a chairman of New York Stock Exchange.
In fact, a lot of the scam was possible only because of this credibility element.
People, in many ways, he believed the institution he represented.
Instead of exploring the mettle of the scheme, they trusted his ability to generate funds.
What was particularly worrying was the frequency and ease with which he cheated people.
The consistency of the game was often intriguing.
A stockbroker and an investment adviser, he was born in April 1938.
Bernard Lawrence Madoff was the former non-executive chairman of Nasdaq.
The Nasdaq is undeniably one of the world’s most illustrious stock exchanges.
The scam that he committed is considered to be one of the largest in American history.
In many ways, it shook the very foundation of the investment business.
His fraud amounted close to $65 billion, and it was spread across 4800 clients.
Madoff’s operation was primarily conducted via Bernard L. Madoff Investment Securities LLC.
He founded this company in 1960 and continued as Chairman till his arrest in 2008.
His arrest was a result of his son’s confessions.
In December 2008, his sons revealed that the asset management business was a Ponzi scheme.
His sons claimed that their father confessed to them that it was ‘one big lie’.
The FBI agents arrested him on the basis of this confession.
Earlier before this arrest, the US SEC conducted several rounds of investigation.
But unfortunately, they did not manage to uncover this huge scam.
In March 2009, three months after his arrest, Madoff pled guilty to 11 federal crimes.
So the fraud that may have started in the 1970s finally came to light.
Extent of Bernie Madoff’s Crime
In his admission, Bernie Madoff claimed that the fraud began in the 1990s.
But investigating officers are not very convinced.
They believe that the scam may have begun in the 1980s or as far as 1970s.
Officers who are charged with recovering the money believe that this was always a fraud.
The amount that is missing is claimed to be $65 billion, the losses to investors equaled $18 billion.
Bernie Madoff, as a result, was sentenced to 150 years in prison.
This is the maximum permissible sentence under US regulations.
In 1999, Harry Markopolos raised one of the first red flags.
He informed the US Securities Exchange that the gains that Madoff claimed were impossible.
He said that Madoff’s numbers did not add up and despite repeated attempts, he could not replicate.
As a result, this financial analyst concluded that this was a crime.
But the US SEC Boston and New York offices did not pay heed to it.
He presented further evidence in 2007, but it too fell on deaf ears.
Eventually, he co-authored a book detailing the entire scam and his frustrating initiatives.
In fact, Markopolos and his legal team continued the effort for over ten years to alert officials.
But Madoff’s business continued to grow phenomenally.
It soon turned into a multi-billion dollar initiative.
But there was a real cause for concern.
Why didn’t any of the major Wall Street firms get involved in a business with him?
Why didn’t any of the top ranking derivatives firm associate with him?
After all, if he is doing that well, does it not make business sense?
Well, this was primarily because most of these firms also smelt something fishy
Madoff’s operational ethics and numbers did not make sense to them.
The Red Flags in Bernie Madoff’s Operation
Even the size of his firm was a matter of concern.
Most major Wall Street firms contested the size of the firm and operational metrics.
Given the expansion and growth, they found it impossible to match with the staff.
A multi-billion dollar organization was run by merely 3 people and 1 active accountant.
That seemed completely unimaginable.
How can a firm with this type of gigantic growth manage only on the basis of 4 people?
That seemed just too good to be true. It was unbelievable and not practical either.
In fact, it was the Irish funds that he used led to his undoing.
The US officials missed the bus, but Irish regulators were on the ball.
Eventually, it all initiated a huge unraveling process.
Madoff confided to one of his son about the struggle in meeting $7 billion redemptions.
After years of simply depositing money and withdrawing to honor redemptions, the going was tough.
By the time it was Thanksgiving in 2008, the load of the struggle was showing.
There wasn’t enough money to honor all the redemption request.
The pressure of the scam started to affect his finances in a major way.
He resorted to telling his close associates of the dire straits.
If there is a time in the life of Ponzi scheme, when the pyramid collapses, it was this.
There was no turning back at this point.
The redemption requests were rising.
No amount of cash infusion was sufficient to address them.
What was worrying was many of the long-term investors were already overleveraged.
The worry then was what will be the next step?
It was around this period that Madoff confided to his son about the fraud.
The rest, as they say, is history.
The Too Good to Be True Bernie Madoff Story
Bernie Madoff started his investment business in the 1960s.
He continued with it quite smoothly till about mid-2008.
But even after it and despite tip-off, authorities failed to spot it.
The question is whether Madoff was a master of deception or officials really inattentive?
If you ask me, it was perhaps a mix of both these elements.
Right from the word go, if you analyze Madoff’s business model there are many loopholes.
But why it escaped the eyes of the official so easily?
After all, he continued to flourish successfully for little under 50 years.
The first thing that strikes me is the investment strategy.
Low risk and high returns seemed to be an antithesis of investment sense.
Don’t we always follow the dictum that high risk high returns?
Then how can Madoff single-handedly change the basic principles of investment?
This alone should have raised more eyebrows than it raised actually.
The concept is surely against the fundamental investment basics.
Why was it that no other investment firm managed to provide with this type of term.
The scale of returns was worrying for another important reason.
Funnily, the returns seemed shockproof.
The changes in the stock market and the investment cycles failed to make an impact.
Both when markets were up and when markets were down, Madoff gave consistent returns.
In many ways, this consistency was unnerving and surely did not make sense.
What was the secret formula that Madoff hit upon?
It surely required in-depth probing and continuous analysis.
The firm sent huge and vague financial statements as well.
But sadly, most times investors failed to make sense of it and did not pay attention.
The steady returns often made everything else unimportant.
Ponzi Par Excellence
So you cannot deny that Madoff formulated a Ponzi scheme par excellence.
He used his in-depth financial acumen to formulate one of the longest running pyramids.
This pyramid scheme displayed all the tell-tale signs of an undeniable fraud.
But the sad story is investors failed to see through it.
Was there any specific product that Madoff sold?
Can anyone say with confidence the actual financial strategy of his firm?
But one of the biggest problems with a Ponzi is it is unsustainable.
The cycle of new fund flow and redemptions finally catch up.
As a result, at some point in time, the creator of the Ponzi falls into their own trap.
It happened to Madoff as well, but in this case, the fraud continued for close to 5 decades.
In fact, in many ways, the economic turmoil in 2008 led to such a quick collapse for Madoff.
The problems in the economy forced redemptions.
That then resulted in a much higher liquidity outflow.
But it was also the time where people were preserving cash.
So your inflow did not match the outflow at all.
As a result, your pressure on the firm increased to a large extent.
They were forced to pay people despite not generating enough cash.
What was remarkable though was the time Madoff continued to be in business.
Even the man who created this, Charles Ponzi could not sustain for more than 1 year.
Perhaps a lot of that is due to the strong investment and marketing skills that Madoff had.
It clearly highlights his understanding of the market and investor sentiment.
It shows how well he understood investor’s need and knew the perfect way to address it.
This was perhaps one of the most striking factors of his business excellence.
Madoff’s Investment Acumen
Bernie Madoff is known for a deep understanding of the financial markets.
The strategy that he dealt with was not something new in the financial markets.
Though you can argue that it is not for new investors, Madoff was not a newcomer either.
The strategy that he primarily claimed to employ is called Split-strike strategy.
It is undeniably complex for retail investors, but at the same time, it is a viable option.
This strategy operates on the premise that the volatility in the market has to be reduced.
That perhaps explains the consistent returns in the market.
In many ways, it protects your losses without compromising the returns.
It is done primarily by creating a portfolio that mirrors a major Index.
So let’s say if you are mirroring S&P 500, it will follow the Index movement.
Moreover, there will also be relevant dividend payout.
Selling call options at a strike price above current rate helps in generating cash.
Now you have to buy put options close to these levels to limit losses.
This by far was the basic investment policy that Madoff employed.
Moreover, being well versed with market moves ensured that he had an edge.
So in many ways, it was not just the investment strategy alone.
Bernie Madoff also knew how to work around investor feelings and concerns.
This made sure that investors never doubted his intention.
You will generally see that Ponzi schemes are operated by a single operator.
Normally too many people do not come into play.
In many ways, that ensures that the operation runs in a smooth manner.
Redemptions are the greatest worry, but Madoff dealt with it effectively.
He encourages investors to reinvest their profit earn a higher profit.
Though the investment strategy remained vague, the returns kept the investors going.
Access to Government Establishments
Madoff’s access to financial sectors played a key role.
In many ways, that was the most important reason why he could operate so long.
He literally operated under the SEC’s nose and the regulator often turned a blind eye.
This was because Madoff was a well-respected name in financial circles.
He started his own investment firm in the 1960s.
Eventually, he also helped launch Nasdaq Stock Exchange.
He was on the board of National Association of Securities Dealers.
Moreover, Madoff even advised the US Securities and Exchange Commission.
His major advisory role was in terms of trading securities.
In that situation, could you really believe that he can do anything wrong?
He is, after all, a market veteran.
Those were extremely believable credentials, quite hard to contest.
Moreover, between 1991-2008, Bernie Madoff and his wife contributed $240,000.
This contribution included a range of committees, federal candidates and parties.
There were many members of the Madoff family who served as SIFMA leaders.
This is the US Securities Industry and Financial market Association.
It is one of the most important security industry outfits in the United States.
In fact, Bernie Madoff himself served as board of directors of Securities Industry Association.
This was even before SIFMA was created.
He was even the chairman of the key trading committee there.
Also, he was also closely associated with the International Securities Clearing Corporation.
He was the founding member of the DTCC arm established in London.
To make his claim even stronger, he donated close to $56,000 to SIFMA.
He doled out additional amount at every important industry meeting as sponsors.
If you closely study the detailed reports of the various investigations, the truth is apparent.
He blatantly used these connections to win the trust.
How Much Money Did Madoff Make?
Often the question that comes to play is how much money he made.
We all know that Bernie Madoff cheated close to $65 billion from investors.
But what was the extent of his actual profit from the entire exercise?
Well, when this scandal unfolded we have all seen photos of the huge penthouse.
These houses were right in the heart of New York.
But that apart, how much of personal wealth did he make?
Detailed analysis indicated that Madoff perhaps made only $20 billion.
Though, this cannot be any consolation to his victims.
But perhaps, it also highlights the relatively small window of leeway in this operation.
Even if you see Madoff’s sentencing, even that was more symbolic.
He is sentenced to 150 years, and in many ways, it symbolizes the enormity of the crime.
Five of his other employees too were convicted.
The highest amongst them was a 30-year imprisonment for his lawyer and accountant.
This was primarily again an indicator of the social standpoint on the entire crime.
It sought to set an example to the entire investment community.
Though Bernie Madoff was not the only Ponzi scammer since Charles Ponzi, it was the largest.
History tracks the record of many other notable scammers.
Allen Stanford’s cheated $8 billion using a Ponzi scheme.
Tom Petters’ cheated investors close to $3.7 billion.
But compare this with the sheer scale and time of Madoff’s crime.
The difference is borne out quite clearly.
This shows that how systematically and consistently Madoff scammed.
What was even more worrying was the profile of his investors.
They included people of all social and economic strata.
In many ways, he misused his credibility to create an unattainable dream.
The premise remained simple, steady returns and low risk.
Only a Small Number of Victims Recovered Money
What makes the Bernie Madoff scam really painful is the number of people swindled.
Moreover, the period they were swindled also played a significant role.
As a result of this, the rate of recovery is meager in this case.
The US Court appointed Irving Picard as trustee in the Madoff case.
So far he has recovered only $9.5 billion from the $20 billion estimated profit.
But most of these are in the form of stolen assets.
About a half of these $4.9 billion has already been distributed amongst the victims.
The victims have also got $800 million in insurance from the Securities Investor Protection Corporation.
The saddest part is a lot of the claims were rejected.
This was primarily because they were all third-party investors.
The rejected claims equaled around 11,000.
Basically, these investors had put their money in firms that invested in Madoff’s firm.
So there is no direct link, but at the same time, they have lost a huge amount of money.
The US Department of Justice has now set up a new relief fund.
Almost $2.35 billion is being allocated to help these investors.
Bernie Madoff Did Not Steal the Entire $65 Billion
That brings to light another interesting element of this scam.
Bernie Madoff alone did not steal the entire $65 billion.
The crime that he committed was huge.
But what is striking is he did not run away with the entire profit.
Apart from the principal amount of $20 billion, not much can be linked to him.
The statements that his firm generated also indicated that he paid returns.
But did these investors actually earn any profit?
There lies the master Ponzi scheme that Madoff created.
As far as the investors are concerned, they lost money worth $65 billion.
But the reality is about two-third of the money was imaginative.
These were only cooked up and did not exist in reality.
The real scenario is that all this amount was only created to continue the deception.
In reality, this amount was never generated.
This was because even the whole investment strategy was an eyewash.
Bernie Madoff’s entire business was ‘one big lie.’
The $65 billion is merely a mathematical representation of the savings.
Ideally, it should have been there if Madoff really had a strategy.
But the hard truth is there was no strategy in reality.
No Timeline for Madoff’s Scam
The uncertainty of the whole deal is borne out by the truth that no one knows when this started.
Madoff in his admission said that the scam had started in the 1990s.
But analysts and investigators feel that it may have started anytime.
Some say that it may have started in the 1970s.
Others feel that this could have started in the 1980s.
There is no surety about the entire operation module.
In fact, no one was able to prove since when this scam started.
Madoff may have begun stealing from investors right from the word go.
Even Madoff’s claims are contradictory.
Somewhere he mentioned 1987 while somewhere else he claims 1990s.
For all, you may care this scam may have begun as early as 1960s.
This was also the time he started working in Wall Street.
In fact, his account manager admitted that it was continuing for as long as he remembered.
The Celebrity Connection
Like I mentioned what was striking is the profile of investors.
Almost no one was out of Madoff’s reach.
Everyone and anyone tried to make some quick returns that he promised.
You can link as many as 11 celebrities who were affected in this scam.
Not saying that there aren’t more.
But there is a clear reference of all of these celebrities.
He is supposed to have lost an undisclosed amount.
According to 2006 data, almost 70% of his interest was from Madoff schemes.
So you can only imagine the money he lost.
However, there is no clear indication of the exact loss.
They claimed that they are not totally destroyed.
However, they maintained that they have lost hard earned money.
The stars of creations like “Footloose” and “The Closer” did not disclose the exact extent of losses.
The shock of it was surely there.
Even this author lost a huge amount of money in this scam.
Probably the entire asset went up in thin air when this scam was unraveled.
He may have been a baseball great.
This Dodger’s pitcher feature in the hall of fame but Madoff got him too.
Even he did not disclose the entire loss to the authorities.
This notable Hollywood screen write is also a Madoff victim
He suffered major losses in this scam.
Though the entire amount is not known, it was terribly large.
So, we can conclude the Bernie Madoff scam was not only one man’s saga.
It was the story of many lost dreams and massive financial losses.
The premise of this entire scam was based on the simple fact that people love easy money.
Low risk and high returns is a utopia that most investors love to believe in.
The sad truth is this is against the basic principles of investment.
Every investor needs to be mindful of this fact.
Anyone who does not pay heed to it will suffer losses.
Only an epic scam like the Bernie Madoff scam showcases it.
So, there is a lesson for every investor in the Bernie Madoff scam.