Introduction it easy for them to pay clients who



Lawrence Madoff or often called as “Bernie Madoff” is an American fraudster who
operated the largest Ponzi scheme in U.S history, deceiving thousands of
investors for billions of dollars amount over the course of 16 years, and possibly
longer. Bernie Madoff was also a pioneer of an innovative electronic trading
which later made him the non-executive chairman of the NASDAQ stock market in
the early 1990s.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now


claimed that his investment scheme could generate high and steady returns by
using split-strike conversion strategy. He then separate the capital received
from clients by depositing them into a single bank accounts. This is to make it
easy for them to pay clients who wanted to take out their funds. Basically what
he did was to take money from other investors and pay the other. In May 2000,
financial analyst Henry Markopolos found financial inconsistencies in Madoff’s
revenue stream. The type of revenue stream Madoff argued simply does not exist.
 Henry Markopolos continued investigating
and finally send a memo to SEC entitled “The world largest hedge fund was a
fraud” but being ignored by the authorities.


due to financial crisis in late 2008, Madoff failed to attract new investors
and enough capital to fund the redemption and resulted to the failure of Ponzi
scheme. Only then, he confessed to his brother Peter Madoff and his two sons on
Dec 10, 2008. Out of anger and disappointment, Mark and Andrew turned their
father to the authorities the next day even though Bernie asked for few days to
settle his messed up before turning himself in to the authorities.


last accounts statements investigation has led to a conclusion that the size of
fraud was near to $64.8 billion. Madoff was responsible to deceived
approximately around 4,800 clients. In March 2009, Bernie Madoff pleaded guilty to 11 crimes which
are securities fraud, wire fraud, mail fraud, perjury and money laundering.
Madoff then was sentenced to 150 years of imprisonment and ordered to pay penalty
of $170 million in assets. Since then, the Ponzi
scheme becomes a powerful symbol of greed and dishonest culture.




Ponzi scheme


The scheme is named after Charles
Ponzi, an Italian swindler whom also a con artist in United States and Canada.
He became famous for using this method during the 1920s in North America where he
duped thousands of his clients by guaranteeing a 50% or 100% return on investment within 45 days or 90 days respectively.
He made it looked like as if his money-making scheme operated by buying
discounted postal reply coupons in other countries and later redeemed them at
face value in United States as a form of arbitrage. Meanwhile in reality, what
he did was paying the old investors using funds invested by the later

A Ponzi scheme is an investment fraud
whereby the Ponzi schemer often lures its investors to invest their funds while
promising them high returns in short term with little or no risks. Basically,
there is no real trading or legitimate investment activity done with the
investment money but the fraudsters simply made the redemption payment to its
existing investors by using capital injected by new
investors. Therefore, in many Ponzi scheme modus operandi, the fraudsters will
try to solicit as many new investors as they can to maintain constant or much
bigger flows of money. This is to ensure that they can have more than enough
money to continually provide returns to older investors. At the same time, it
makes the whole financial trading operation looks profitable and legitimate in
the eyes of their investors, even though no real profit is being made.

Meanwhile the Ponzi schemer,
which can be either individuals or corporations, pockets the extra money they
made or use them to expand the operation. In the beginning, the Ponzi operator
will pay high returns on the investor’s initial investments to persuade the
current investors to invest more money in their accounts. When this happened,
the current investors are more confident with the growing returns and often
leave their money with the scheme. This benefits the operator as they do not
have to pay much to the investors. Then, all they need to do is to simply send periodically
statements to their investors showing how much they
have earned, which maintains the deception that the scheme is an investment
with great returns. . Ponzi
schemes do not usually advertise as they do not need to. The current investors
tell the new ones and the words spread
like wildfire. (Wells,
J. T., 2010).Not only that, the operator
usually will secretly keep their investing strategy as they claim to protect
the investors

However, the Ponzi scheme also
has its vulnerability whereby it will falls apart when the Ponzi schemer fails
to acquire new investors and the money flows run out, the operator takes all
the remaining investments and runs or when too many current investors begin to
request their returns especially in the state of financial turmoil. In short,
the Ponzi scheme will not sustain forever.

Ponzi scheme “Red Flags”


flags are defined as signals of potential problem such as peculiar
characteristics seen by the analyst pertaining to company’s stock, securities,
financial statements or bad news reports. In the other hand, U.S. Securities
and Exchange Commission (SEC) has the responsibility to protect the investors
from any fraudulent or manipulative in the money market as well as facilitate
capital formation. Typically,
most of the Ponzi schemes share common traits or nature hence, SEC has highlighted several warning
signs of Ponzi scheme that investors should be aware of.

the common characteristic of Ponzi scheme is that it offers high investment
returns with little or no risk. Therefore, investors should know that there is
always a certain degree of risks in each investment made and the higher return
investments usually have the higher risk too. Investors must be suspicious and
not easily believe with any guaranteed investment opportunity claims by the
Ponzi schemer. Not only that, Ponzi scheme is also famous with its consistent
return regardless of the overall market conditions. Hence, investors should
suspect on any investment that generate positive returns without any up and
downs over time.

Ponzi scheme usually is not a registered investment and its operators are
unlicensed sellers. Ponzi schemes investment commonly unregistered with the SEC
or any state regulators. This is because they are afraid that their scam
investment could be traced easily. This is due to registration provide
investors with access to main information about the company’s main modus operandi.
Therefore, investors need to ensure that investment operators are registered
and have the required license by the federal and state authorities.

that, Ponzi schemers usually are secretive when it comes to public or investors
asking them about the investment strategies. Investors also usually do not know
the rule of thumb of the investment, or get sufficient information such as
investments writing, prospectus and disclosure statements. Therefore investors
should avoid from involving in such investments that they do not thoroughly
understand. In addition to that, investors might face some difficulty in cashing
out their investments. The operators will usually try to minimize the
withdrawals by persuading the investors to invest more in the new opportunity
funds or at times forbid the investors from taking out their money in certain
period of time in exchange for much higher returns. Moreover, the establishment of a system that
facilitates the total prevention (or at least early detection) of fraud is
necessity. Given that Madoff was able to grow his Ponzi scheme for nearly two
decades. (Drew, J. M., & Drew, M. E., 2010)

Bernie Madoff’s Biography


Bernie Madoff was born in a Jewish
family on 29th April 1938 in Queens, New York. His father, Ralph
Madoff works as plumber for many years while his mom, Sylvia Madoff is a
housewife. However, during the Korean War, his father’s sporting goods store
went out of business due to steel shortages. Madoff saw his father, whom he
idolized lose everything in a blink of an eye and this made him determined to
achieve a long lasting success that his father had not have.

Bernie Madoff met his wife, Ruth Alpern
during high school and began dating since then. During that time, Young Madoff
interest was to join the school swimming team. Unfortunately, Bernie did not
make it to represent his school team. Later, Young Madoff was hired by his
coach to work as a lifeguard at Beach Club in Long Island. At times, he worked
as sprinkler installers to earn money.

Upon graduating high school in 1956,
Madoff pursue his studies at the University of Alabama for a year before
transferred to Hofstra University where he received his bachelor’s degree in
political science. Later in 1959, he married his high school sweetheart, Ruth

Bernie Madoff’s Early Career


In 1960 at the age of 22, Madoff
started his small company which is Bernard L. Madoff Investment Securities LLC.
 By using the money he saved from working
as lifeguard and sprinkler installer, he started off his business by trading
penny stocks worth $5,000.Then, his well-connected father in law referred him
to family and friends to invest with him. However, due to “Kennedy Slide”
dropped 20% of the market in 1963, Madoff’s prediction goes bad and his
father-in-law bailed him out. Since then, Madoff always had a chip on his
shoulder because it is obvious that they were just a small firm and not even
part of the Wall Street crowd.

After some time, Madoff started to
make a name for himself as a scrappy market maker. He enjoyed those times
because most of bigger firms would disdain small types of trades but he
completed it. This has made many traders came to trade with him. A bigger
success later came in when Madoff and his brother, Peter invented the
electronic trading capabilities or called as an artificial intelligence by
Madoff that makes trading much easier. This has been proven when they success
in attracting massive order flow and providing insights into the securities
market activities. Major Banks during that time also came down to Madoff’s
securities firm to collaborate with him. Later in 1980s, Madoff and four chiefs
of Wall Street processed almost half of the New York Stock Exchange’s order
flow. During that time, Madoff was claimed to make nearly $100 million in a

Madoff also benefited from the help of
his father-in-law where he introduced investors including the A- list celebrities
such as Steven Spielberg and Kyra Sedgwick. Due to this, Bernard L. Madoff
Investment Securities LLC grew famous for its stable annual returns of 10
percent or more. One of Madoff Investment firms achievement was they were able
to control more than 5% of trading volume on New York Stock Exchange in the
late 1980s.

The willingness to adapt with changing
environment in market industries was one of the main success contributions of
Madoff Securities firm. Their firm was pioneer in the use of electronic
trading, which give huge positive impact to the National Association of
Securities Dealers automated Quotations (NASDAQ). Due to his recognition, Bernie
Madoff was appointed as the chairman of NASDAQ in 1990 and served until the
year of 1993.

Over the years, the business was
expanding fast and Madoff’s family members joined him to run the business. This
includes his younger brother and niece, Peter Madoff and Shana Madoff. Their
job title in the firm was Chief Compliance Officer and rules compliance lawyer
respectively. Later, Madoff’s two sons, Mark and Andrew also worked in his
father’s firm as traders.

Bernie Madoff’s Ponzi scheme


It is not certain when
Madoff began the Ponzi scheme. This is because some said that he already
operated the fraud scheme for more than 40 years. His account manager, Frank Di
Pascali who worked since 1975 said it has occurred for as long as he
remembered. However, Madoff himself confessed that he has been keeping the
secret from his family and everyone else for 16 years. When asked by the
journalist Steve Fishman, Madoff said that he even did not know why he carried
out the fraud scheme at all because he actually already had enough money to
support his family’s lifestyle. Maybe, it was because of the lucrative money
and everyone just became greedy made him continued the Ponzi scheme. He
regretted as if he should just satisfy with the respect earned from Wall
Street’s elites solely as market maker and electronic trading pioneer.



Bernie Madoff ran an investment advisory department in his
firm whereby in real, it was just to cover his Ponzi scheme operation. He
performed the fraud trading by co-operating with his account manager, Frank Di
Pascali, whom he appointed to take charge of the investment advisory department
on the 17th floor. They kept the secret from everybody else and
Madoff do not even let his brother, sons or wife knew about this operation.
Whenever his sons asked on the advisory business as a preparation if Madoff was
not around, he ended up scolded them and told them to stay out of his business.

Under this scheme, Madoff took his client’s capital or assets
and transferred them into a single bank account which is believed to be his
personal account. He attracts clients by guaranteeing
return by 1 to 2 percent a month and he does it. The
withdrawals requested by clients were paid using the new capital acquired by
new investors. He then mailed out the fake account statements to his clients
using his firm’s name to hide the deception.

claimed that his investment scheme could generate incredible returns by using
split-strike conversion strategy. Madoff also avoid himself to meet his clients
because he does not want to be suspected in operating illegal trading. He also
refused to reveal any information regarding to his incredible return strategy. When
looking at the point of view of marketing, Madoff made it looks like as if it
is a hedge fund and promising steady performance over time regardless of the
fluctuation in market.

Despite multiple reports
made to SEC about suspicious of Madoff investment as a Ponzi scheme, Madoff
managed to fly under the radar for so long because he was prominent investor
and an active member of financial industry. This can be proven when Madoff was
once helped NASDAQ launched the stock market, sat on the board of NASDAQ and
advised SEC on trading securities. It was easy for investors to believe this
outstanding industry veteran to know exactly what he was doing.

Not only that, Madoff also
solicited his investors through his charitable work which portrayed his
generosity. Madoff deceived a number of nonprofit organizations and several of
them nearly had their funds wipe out including the Elie Wiesel Foundation for Peace and the global women’s charity
Hadassah. Madoff also swindled around $1 to $2 billion from approaching congregants
by using his networking with J. Ezra Merkin, an officer at Manhattan’s
Fifth Avenue Synagogue.


Due to financial turmoil in 2008, Madoff’s Ponzi scheme began
to fall after he received huge redemption request and eventually struggled to
make the repayments. In the prior year, Madoff was able to make sure the Ponzi
scheme remain intact because the redemption amount were less than new capital
flows to the investment scheme. In early December 2008, Madoff’s clients
requested $7 billion dollars amount of redemption whereby during that time, he
only had $200 million to $300 million to give. The Madoff fraud also has affected persons and
communities who rely on philanthropic entities. These entities have shuttered
their doors or have had to curtail significantly their activities because the
funds on which they are relied to perform their essential charitable roles in
their respective communities have been dissipated. (Smith, F., 2010).


Bernie Madoff’s Confession and


Madoff finally came to realize
that he could no longer continue with the Ponzi scheme and he decided to just
confess about it. The first person he told about the fraud scheme is his
brother, Peter Madoff on 9th December 2008.Madoff’s sudden decision to
give out a quantum amount of bonuses to his entire employees on 10th December
2008 has made his sons demanded to know why because it is much earlier than
previous years.

On the same day, Madoff finally
confessed to his wife and sons, Mark and Andrew that the investment advisory
branch of his firm was actually a lie and a giant Ponzi scheme. Bernie
apologized to his family that he kept in as a secret for a long time to protect
them but due to disappointment and anger, Mark and Andrew turned their father
in to the federal authorities the next day.

On 11th December 2008, the Securities and Exchange Commission
(SEC) charged Bernie Madoff with securities fraud. According to SEC’s
complaint, Madoff had admitted that the investment advisory business of his
firm, Bernard Madoff Investment Securities (BMIS), was “just one big lie” and “basically,
a giant Ponzi scheme”. (Van De Bunt, H., 2010). After
investigation has been made, size of the fraud was said to be nearly $65 billion. Nevertheless,
Madoff reported to investigators that he had lost $50 billion dollars of his
investor’s money. When asked about the Ponzi scheme operation, Madoff insisted
that he acted alone but several of his colleagues ended up sent to prison.


On March 2009, Bernie Madoff pleaded guilty to 11 crimes including
securities fraud, wire fraud, mail fraud, perjury and money laundering. Madoff
then was sentenced to 150 years of imprisonment and ordered to forfeit $170 million in assets on June 29, 2009 by U.S. District Court Judge Denny Chin. Madoff was resides at the
Butner Federal Correction Complex in North Carolina to serve his sentence.
Then, U.S.
Marshals auctioned off Madoff’s luxury homes, estates and yachts as an effort to reimburse investors through the sale of his assets. After two years of
Madoff’s imprisonment, his elder son Mark Madoff committed suicide while Andrew
Madoff succumbed due to lymphoma cancer in 2014.