Who Is Bernie Madoff?
Bernard Lawrence "Bernie" Madoff is an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, and possibly longer. He was also a pioneer in electronic trading and chairman of the Nasdaq in the early 1990s.
Despite claiming to generate large, steady returns through an investing strategy called split-strike conversion, which is an actual trading strategy, Madoff simply deposited client funds into a single bank account that he used to pay existing clients who wanted to cash out. He funded redemptions by attracting new investors and their capital, but was unable to maintain the fraud when the market turned sharply lower in late 2008. He confessed to his sons鈥攚ho worked at his firm but, he claims, were not aware of the scheme鈥攐n Dec. 10, 2008. They turned him in to the authorities the next day. The fund's last statements indicated it had $64.8 billion in client assets.
In 2009, at age 71, Madoff pleaded guilty to 11 federal felony counts, including securities fraud, wire fraud, mail fraud, perjury, and money laundering. The Ponzi scheme became a potent symbol of the culture of greed and dishonesty that, to critics, pervaded Wall Street in the run-up to the financial crisis. Madoff was sentenced to 150 years in prison and ordered to forfeit $170 million in assets, but no other prominent Wall Street figures faced legal ramifications in the wake of the crisis.
Madoff has been the subject of numerous articles, books, movies, and an ABC biopic miniseries.
What Is A Ponzi Scheme?
Understanding Bernie Madoff
Bernie Madoff was born in Queens, New York, on April 29, 1938, and began dating his future wife, Ruth (n茅e Alpern), when both were in their early teens. Speaking by phone from prison, Madoff told journalist Steve Fishman that his father, who had run a sporting goods store, went out of business due to steel shortages during the Korean War: "You watch that happen and you see your father, who you idolize, build a big business and then lose everything." Fishman says that Madoff was determined to achieve the "lasting success" his father hadn't, "whatever it took," but Madoff's career had its ups and downs.
- Bernie Madoff's Ponzi scheme, which likely ran for decades, defrauded thousands of investors out of tens of billions of dollars.
- Investors put their trust in Madoff because he created a front of respectability, his returns were high but not outlandish, and he claimed to use a legitimate strategy.
- In 2009 Madoff was sentenced to 150 years in prison and forced to forfeit $170 billion.
- As of December 2018, the Madoff Victims Fund had distributed more than $2.7 billion to 37,011 victimized investors in the U.S. and around the world.
Madoff's Early Days of Investing
He started his company, Bernard L. Madoff Investment Securities LLC, in 1960, at age 22. At first, he traded penny stocks with $5,000 (worth around $41,000 in 2017) he had earned installing sprinklers and working as a lifeguard. He soon persuaded family friends and others to invest with him. When the "Kennedy Slide" lopped 20% off the market in 1962, Madoff's bets soured and his father-in-law had to bail him out.
Madoff had a chip on his shoulder and felt constantly reminded that he was not part of the Wall Street in-crowd. "We were a small firm, we weren't a member of the New York Stock Exchange," he told Fishman. "It was very obvious." According to Madoff, he began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he told Fishman, giving the example of a client who wanted to sell eight bonds; a bigger firm would disdain that kind of order, but Madoff's would complete it.
Success finally came when he and his brother Peter began to build electronic trading capabilities鈥?#34;artificial intelligence" in Madoff's words鈥攖hat attracted massive order flow and boosted the business by providing insights into market activity. "I had all these major banks coming down, entertaining me," Madoff told Fishman. "It was a head trip."
He and four other Wall Street mainstays processed half of the New York Stock Exchange's order flow鈥攃ontroversially, he paid for much of it鈥攁nd by the late 1980s, Madoff was making in the vicinity of $100 million a year. He would become chairman of the Nasdaq in 1990, and also served in 1991 and 1993.
Bernie Madoff's Ponzi Scheme
It is not certain exactly when Madoff's Ponzi scheme began. He testified in court that it started in 1991, but his account manager, Frank DiPascali, who had been working at the firm since 1975, said the fraud had been occurring "for as long as I remember."
Even less clear is why Madoff carried out the scheme at all. "I had more than enough money to support any of my lifestyle and my family's lifestyle. I didn't need to do this for that," he told Fishman, adding, "I don't know why." The legitimate wings of the business were extremely lucrative, and Madoff could have earned the Wall Street elites' respect solely as a market maker and electronic trading pioneer.
Madoff repeatedly suggested to Fishman that he was not entirely to blame for the fraud. "I just allowed myself to be talked into something and that's my fault," he said, without making it clear who talked him into it. "I thought I could extricate myself after a period of time. I thought it would be a very short period of time, but I just couldn't."
The so-called Big Four鈥 Carl Shapiro, Jeffry Picower, Stanley Chais, and Norm Levy鈥攈ave attracted attention for their long and profitable involvement with Bernard L. Madoff Investment Securities LLC. Madoff's relationships with these men go back to the 1960s and 1970s, and his scheme netted them hundreds of millions of dollars each.
"Everybody was greedy, everybody wanted to go on and I just went along with it," Madoff told Fishman. He has indicated that the Big Four and others鈥攁 number of feeder funds pumped client funds to him, some all but outsourcing their management of clients' assets鈥攎ust have suspected the returns he produced or at least should have. "How can you be making 15 or 18% when everyone is making less money?" Madoff said.
How Madoff Got Away with It for So Long
Madoff's apparently ultra-high returns persuaded clients to look the other way. In fact, he simply deposited their funds in an account at Chase Manhattan Bank鈥攚hich merged to become JPMorgan Chase & Co. in 2000鈥攁nd let them sit. The bank, according to one estimate, may have made as much as $483 million from those deposits, so it, too, was not inclined to inquire.
When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust. Madoff 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.
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.
Madoff's plausibility to investors was based on several factors:
- His principal, public portfolio appeared to stick to safe investments in blue-chip stocks.
- His returns were high (10 to 20% per annum) but consistent, and not outlandish. As the Wall Street Journal reported in a now-famous interview with 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."
- 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.
The Securities and Exchange Commission Investigation
The SEC had been investigating Madoff and his securities firm on and off since 1999鈥攁 fact that frustrated many after he was finally prosecuted, since it was felt that the biggest damage could have been prevented if the initial investigations had been rigorous enough.
Financial analyst Harry Markopolos was one of the earliest whistleblowers. In 1999, he calculated in the space of an afternoon that Madoff had to be lying. He filed his first SEC complaint against Madoff in 2000, but the regulator ignored him.
In a scathing 2005 letter to the Securities and Exchange Commission (SEC), Markopolos wrote, "Madoff Securities is the world's largest Ponzi Scheme. In this case, there is no SEC reward payment due to the whistle-blower so basically I'm turning this case in because it's the right thing to do."
Many felt that Madoff's worst damage could have been prevented if the SEC had been more rigorous in its initial investigations.
Using what he called a "Mosaic Method," Markopolos noted a number of irregularities. Madoff's firm claimed to be making money even when the S&P was falling, which made no mathematical sense, based on what Madoff claimed he was investing in. The biggest red flag of all, in Markopolos's words, was that Madoff Securities was earning "undisclosed commissions" instead of the standard hedge fund fee (1% of the total plus 20% of the profits).
The bottom line, concluded by Markopolos, was that "the investors that pony up the money don't know that BM [Bernie Madoff] is managing their money." Markopolos also learned Madoff was applying for huge loans from European banks (seemingly unnecessary if Madoff's returns were as high as he said).
It was not until 2005鈥攕hortly after Madoff nearly went belly-up due to a wave of redemptions鈥攖hat the regulator asked Madoff for documentation on his trading accounts. He made up a six-page list, the SEC drafted letters to two of the firms listed but didn't send them, and that was that. "The lie was simply too large to fit into the agency's limited imagination," writes Diana Henriques, author of the book "The Wizard of Lies: Bernie Madoff and the Death of Trust," which documents the episode.
Bernie Madoff Confession and Sentencing
In November 2008, Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6%; the S&P 500 had dropped 39% percent over the same period. As the selling continued, Madoff became unable to keep up with a cascade of client redemption requests and, on Dec. 10, according to the account he gave Fishman, Madoff confessed to his sons Mark and Andy, who worked at their father's firm. "The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said, 'You gotta turn your father in,' they went, did that, and then I never saw them again." Bernie Madoff was arrested Dec. 11, 2008.
Madoff has insisted he acted alone, though several of his colleagues were sent to prison. His elder son Mark Madoff committed suicide exactly two years after his father's fraud was exposed. Several of Madoff's investors also killed themselves. Andy Madoff died of cancer in 2014.
Madoff was sentenced to 150 years in prison and forced to forfeit $170 billion in 2009. His three homes and yacht were auctioned off by the U.S. Marshals. He resides at the Butner Federal Correctional Institution in North Carolina, where he is prisoner No. 61727-054.
On February 5th, 2020, Madoff's lawyers requested that Madoff be released early from prison claiming that he is suffering from a terminal kidney disease that may kill him within 18 months. Madoff is ten years into his 150 year sentence.
Aftermath of the Bernie Madoff Ponzi Scheme
The paper trail of victims' claims displays the complexity and sheer size of Madoff's betrayal of investors. According to documents, Madoff's scam ran more than five decades, beginning in the 1960s. His final account statements, which include millions of pages of fake trades and shady accounting, show that the firm had $47 billion in "profit."
While Madoff pleaded guilty in 2009 and will spend the rest of his life in prison, thousands of investors lost their life savings, and multiple tales detail the harrowing sense of loss victims endured.
Investors victimized by Madoff have been helped by Irving Picard, a New York lawyer overseeing the liquidation of Madoff's firm in bankruptcy court. Picard has sued those who profited from the Ponzi scheme; by December 2018 he had recovered $13.3 billion.
In addition, a Madoff Victim Fund (MVF) was created in 2013 to help compensate those Madoff defrauded, but the Department of Justice didn't start paying out any of the roughly $4 billion in the fund until late 2017. Richard Breeden, a former SEC chairman who is overseeing the fund, noted that thousands of the claims were from "indirect investors"鈥攎eaning people who put money into funds that Madoff had invested in during his scheme.
Since they were not direct victims, Breeden and his team had to sift through thousands and thousands of claims, only to reject many of them. Breeden said he based most of his decisions on one simple rule: Did the person in question put more money into Madoff's funds than they took out? Breeden estimated that the number of "feeder" investors was north of 11,000 individuals.
In a November 2018 update for the Madoff Victim Fund, Breeden wrote, "We have now paid over 27,300 victims an aggregate recovery of 56.65% of their losses, with thousands more set to recover the same amount in the future." With the completion of a third distribution of funds in December 2018, in excess of $2.7 billion had been distributed to 37,011 Madoff victims in the U.S. and around the world. Breeden noted that the fund expected to make "at least one more significant distribution in 2019" and hoped to resolve all open claims.