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The Fraud of the Century: The Case of Bernard Madoff


Bernard Lawrence “Bernie” Madoff is a former stockbroker, investment advisor, and

financier. He is of Jewish descent. He founded in 1960 the Wall Street firm Bernard L. Madoff
Investment Securities LLC. The firm is buying and selling over-the-counter stocks that were not
listed on the New York Stock Exchange (NYSE). In order to compete with firms that were
members of the New York Stock Exchange trading on the stock exchange's floor, his firm began
using innovative computer information technology to disseminate its quotes. After a trial run,
the technology that the firm helped to develop became the NASDAQ (National Association of
Securities Dealers Automated Quotations). Madoff became the Chairman of NASDAQ in 1990,
1991, and 1993. As the business grew and became more successful, the firm was one of the top
market maker businesses on Wall Street.

Bernie’s several family members worked for his firm. His brother Peter was the Senior
Managing Director and Chief Compliance Officer. Peter’s daughter Shana was a rules and
compliance officer who worked under her father. Bernie’s wife, Ruth, worked for the firm at a
time, and often functioned as a friendly face of the companies. Bernie and Ruth’s sons, Andrew
and Mark, worked in the trading section of the firm.

On December 10, 2008, Madoff's sons told authorities that their father had confessed to
them that the asset management unit of his firm was a massive Ponzi scheme, and quoted him
as describing it as "one big lie". The following day, FBI agents arrested Madoff and charged him
with one count of securities fraud. The U.S. Securities and Exchange Commission (SEC) had
previously conducted multiple investigations into Madoff's business practices, but had not
uncovered the massive fraud.

On March 12, 2009, Madoff pleaded guilty to 11 federal felonies and admitted to
turning his wealth management business into a massive Ponzi scheme. The Madoff investment
scandal defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi
scheme in the early 1990s. However, federal investigators believe the fraud began as early as
the mid-1980s and may have begun as far back as the 1970s. Those charged with recovering the
missing money believe the investment operation may never have been legitimate. The amount
missing from client accounts, including fabricated gains, was almost $65 billion. The SIPC
trustee estimated actual losses to investors of $18 billion. On June 29, 2009, Madoff was
sentenced to 150 years in prison, the maximum allowed.

The Madoff family has long-standing, high-level ties to the government. From 1991 to
2008, Bernie and Ruth Madoff contributed about $240,000 to federal candidates, parties and
committees, including $25,000 a year from 2005 through 2008 to the Democratic Senatorial
Campaign Committee. The Committee returned $100,000 of the Madoffs' contributions to
Irving Picard, the bankruptcy trustee who oversees all claims, and Senator Charles E. Schumer
returned almost $30,000 received from Madoff and his relatives to the trustee. Senator
Christopher J. Dodd donated $1,500 to the Elie Wiesel Foundation for Humanity, a Madoff

Members of the Madoff family have served as leaders of the Securities Industry and
Financial Markets Association (SIFMA), the primary securities industry organization. Bernard
Madoff served on the Board of Directors of the Securities Industry Association, a precursor of
SIFMA, and was Chairman of its Trading Committee. He was a founding board member of the
DTCC subsidiary in London, the International Securities Clearing Corporation.


Madoff's name first came up in a fraud investigation in 1992, when two people
complained to the SEC about investments they made with a firm called Avellino &Bienes.
Madoff returned the money to investors and the SEC closed the case.

In 1999, a financial analyst in the name of Harry Markopolos had informed the SEC that
he believed it was legally and mathematically impossible to achieve the gains Madoff claimed
to deliver. According to Markopolos, he knew within five minutes that Madoff's numbers did
not add up, and it took him four hours of failed attempts to replicate them to conclude that
Madoff was a fraud.He was ignored by the SEC's Boston office in 2000 and 2001, as well as by
Meaghan Cheung at the SEC's New York office in 2005 and 2007 when he presented further

In 2004, Genevievette Walker-Lightfoot, a lawyer in the SEC's Office of Compliance

Inspections and Examinations (OCIE), informed her supervisor branch chief Mark Donohue that
her review of Madoff found numerous inconsistencies, and recommended further questioning.
However, she was told by Donohue and his boss Eric Swanson to stop work on the Madoff
investigation, send them her work results, and instead investigate the mutual fund industry.
Swanson, Assistant Director of the SEC's OCIE, had met Shana Madoff in 2003 while
investigating her uncle Bernie Madoff and his firm. The investigation was concluded in 2005. In
2006 Swanson left the SEC and became engaged to Shana Madoff, and in 2007 the two married.
A spokesman for Swanson said he "did not participate in any inquiry of Bernard Madoff
Securities or its affiliates while involved in a relationship" with Shana Madoff.

In 2004, SEC cleared Madoff but in 2005 found three violations including operating as an
unregistered investment adviser. Madoff was registered as a broker-dealer, but doing business
as an asset manager. SEC did not found any evidence of fraud. Madoff agreed to register his
business in 2005 but the SEC kept its findings confidential.

In 2007, SEC completed an investigation which began on January 6, 2006, into a Ponzi
scheme allegation which resulted in neither a finding of fraud, nor a referral to the SEC
Commissioners for legal action.

While awaiting sentencing, Madoff met with the SEC's Inspector General, H. David Kotz,
who conducted an investigation into how regulators had failed to detect the fraud despite
numerous red flags. Madoff said he could have been caught in 2003, but that bumbling
investigators had acted like "Lt. Colombo" and never asked the right questions:

“I was astonished. They never even looked at my stock records. If investigators had
checked with The Depository Trust Company, a central securities depository, it would've
been easy for them to see. If you're looking at a Ponzi scheme, it's the first thing you
do.Madoff said in the June 17, 2009, interview that SEC Chairman Mary Schapiro was a
"dear friend", and SEC Commissioner Elisse Walter was a "terrific lady" whom he knew
"pretty well".”

After Madoff's arrest, the SEC was criticized for its lack of financial expertise and lack of
due diligence, despite having received complaints from Harry Markopolos and others for almost
a decade. The SEC's Inspector General, Kotz, found that since 1992, there had been six
investigations of Madoff by the SEC, which were botched either through incompetent staff
work or by neglecting allegations of financial experts and whistle-blowers. At least some of the
SEC investigators doubted whether Madoff was even trading.

Because of these, some investors are suing SEC for negligence for its regulatory
responsibility and not detecting the fraud. Many believed that because of Madoff’s vast
connection in the government especially in SEC and SIFMA, his Ponzi scheme was swept under
the rug all these years. There were also speculations that many of the SEC’s employees have
ended up working in the Wall Street so there is a subjectivity element in the investigations.

Ponzi scheme is a fraudulent investment operation, where the operator, an individual or

an organization, pays returns to its investors from new capital generated from new investors,
rather than from profit earned through legitimate sources. It was named after Charles Ponzi,
who used the strategy in the 1920s using the international reply coupons.

Unlike pyramid schemes, in which victims unknowingly rope in more targets, Ponzi
schemes rely on a single person or group to coordinate every aspect of the fraud. To keep the
scam going, the masterminds behind the plan convince numerous victims that they’re investing
in a legitimate fund that promises great returns. Then the scam artists take money from new
“investors” and use it to pay off existing investors. But for the scam to truly work to everyone’s
benefit, the orchestrators would need access to an infinite supply of new victims.

Figure 1: Ponzi Scheme Diagram


In the early 1990’s, Bernie Madoff had been an image of legitimate success. He used this
high visibility to start his second business of managing money. He promised consistent returns
of 10% to 12%. Because of these stable returns, he attracted billions of dollars from investors.
The said investors were some of his wealthy friends from the Palm Beach Country Club,
investment managers (feeders), Jewish charities, non-profit institutions and foundations, and
New York elite. Part of the appeal of investing with Madoff was the appeal of “exclusivity”. He
made every client feel like he or she was his only client. His inaccessibility and “invitation only”
approach to new investors created an air of exclusivity and desire to be involved.

Madoff’s investment strategy was to buy stocks, while also trading options on those
stocks as a way to limit the potential losses. His market timing strategy was called “the split
strike-conversion”. This strategy involves buying shares of companies to create a portfolio that
represents a major index, selling call options at a strike price above the current index and
buying put options at the current index value or very close to it using the call option premium

To broaden his clientele, Madoff developed relationships with intermediaries or

middlepersons, also known as “feeders”, to the investment fund. These feeders are investment
managers who trusted Madoff to take care of their clients’ money and it does not appear that
they were integrated in the fraud. The feeders receive fees as their profit for ensuring that cash
is flowing into the operation.

But Madoff confessed in his “Plea Allocution” that he never invested any of his clients’
money. Madoff admitted during his March 2009 guilty plea that the essence of his scheme was
to deposit client money into a Chase Manhattan Bank account and Madoff Securities
International, Ltd., rather than invest it and generate steady returns as clients had believed.
When clients wanted their money, "I used the money in the Chase Manhattan bank account
that belonged to them or other clients to pay the requested funds," he told the court. In effect,
he was operating a Ponzi scheme.

According to the U.S. Securities and Exchange Commission, there seven common
characteristics of a Ponzi scheme:

1) High investment returns with little or no risk;

2) Overly consistent returns;
3) Unregistered investments;
4) Unlicensed sellers;
5) Secretive and/or complex strategies;
6) Issues with paperwork;
7) Difficulty receiving payments.

These are all present in Madoff’s investment scam.


In a 162-page list filed in a New York court, there are over 13,000 Madoff victims . The
map below shows the spread of the scam in the United States of America:

Figure 2: Madoff Scam’s extend based on location

Investment houses, asset management firms and banks like the Fairfield Greenwich
Advisors which invested $7.5 billion and Tremont Group Holdings with $3.3 billion in
investment were among the big investors impacted with the scam. They serve as Madoff’s large
feeder funds. Investors of these feeders never heard of Madoff before and were shock and
surprised that their investments, life savings were lose due to the scam. This shows how
extensive the effect of Madoff’s Ponzi Scheme.

The Madoff scheme also spread to the Jewish charities, non-profit and educational
institutions. Madoff being Jewish used this to penetrate the Jewish community. Among its
victims were the Elie Wiesel Foundation (of Elie Wiesel, the famed author, Nobel Laureate and
Holocaust survivor), Yeshiva University (Jewish private university in New York) and
Wunderkinder Foundation (of the famous director Steven Spielberg).

The scam also reached Europe. Banks like Banco Santander (Spain), Bank Medici
(Austria), Fortis (Netherlands), Union BancairePrivee (Switzerland) and HSBC (UK) were among
the top banks included in the list who invested from $2.87 billion to $700 million.


Many were convinced that bulk of the money invested with Madoff went either to
offset losses incurred in his legal business or to supply his family’s lavish lifestyle.

Madoff owned an apartment in the posh Upper East Side New York estimated to worth
$5 million . He also owned a private yacht. He also has two private planes on call registered
under BLM Air Charter, a company registered at the same address as his Bernard Madoff
Investment Securities firm. The Madoffs also own a $9.4 million home in Palm Beach, Florida,
that's under Ruth Madoff's name. The two-story, 8,753-square-foot house features five
bedrooms, seven bathrooms, and a pool. The property also includes a boat dock on the
Intracoastal Waterway where Madoff can park his yacht. He also owned a $3 million oceanfront
mansion in Montauk, New York, a Long Island hamlet.

Madoff’s credit card bills revealed a lot about their lifestyle. The said bills were among
the pile of exhibits that were under investigation. It was revealed that majority of the charges
were from his family and associates. The bill includes, among others, purchases of Ruth Madoff
on designer shops, limousine service availed by his son Mark, eating out at lavish restaurants,
and extravagant trips with his associates.


On December 10, 2008 , Bernie Madoff confessed to his two sons, Andrew and Mark,
that the asset management unit of his firm was a massive Ponzi scheme, and quoted him as
describing it as "one big lie". The next day, December 11, 2008, the FBI arrested Bernie Madoff
with the charge of criminal securities fraud.
According to investigations, as the economy collapsed in 2008, many clients requested
for their deposits including feeder funds with a total withdrawal of $12 billion. He resorted to
soliciting and sometimes subtlety threatening clients for additional deposits. He made them
feel guilty for not being better clients of such a “distinguished” investment firm. Among who
provide additional funds barely two weeks before Madoff confessed, were Carl Shapiro
(philanthropist/entrepreneur)who gave $250 million and $100 million from his charitable
organization and Martin Rosenman (president of a fuel company in NY) who funded additional
$10 million. Thinking that additional funds will not be enough to cover the huge number of
return deposits, Bernie Madoff, admitted to his sons.


On March 12, 2009, Bernie Madoff pleaded guilty to 11 federal felonies, including
securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury,
theft from an employee benefit plan, and making false filings with the SEC. He was sentenced
to 150 years in prison.

In July 2009 Ruth Madoff was sued for $44.8 million by Irving Picard, the trustee
recovering assets for her husband's victims, who charged that she had capitalized on her
husband's fraud to lead a "life of splendor." The following month she agreed to report
purchases over $100 to Picard. Since then Ruth Madoff has largely faded from the spotlight.

Mark Madoff, the older son, committed suicide by hanging himself in his Manhattan
apartment on December 11, 2011, the second anniversary of his father’s arrest. A close friend
of Mark said Mark had expressed both continuing bitterness toward his father and anxiety
about a series of lawsuits that were filed against him, his brother Andrew and other family

Andrew Madoff, the second son, also died on September 3, 2014, after his long battle to
mantle cell lymphoma.

The assets of Bernie Madoff were gathered by the Marshals Service to be sold and
auctioned off. The proceeds were for the victims of Madoff's $65 billion scheme.

There was a serious lack of ethics with what Bernie Madoff did or there were none at all.
It is out of greed and general disregard of others and the law. In his own words according to his
two sons, the investment was "one big lie".

What Madoff did was an example of White-collar crime. It is perpetrated by a rogue

individual who knowingly steals, cheats, or manipulates in order to damage others. It creates
victims by establishing trust and respectability. Madoff also committed affinity fraud. It is a
form of investment fraud in which the fraudster preys upon members of identifiable groups,
such as religious or ethnic communities, language minorities, the elderly, or professional
groups. Him being a Jewish used his heritage and religious affiliation to defraud Jewish
individuals and organizations that identified with his background.



Utilitarianism basically states that by doing what is morally right will benefit the most
amount of people and generate the greatest amount of happiness. The greatest happiness of
the greatest number should be the guiding principle of conduct. So in other words doing what is
right should be placed above all else.

We think it is safe to say that Bernie Madoff stood for everything that utilitarianism is
against. For example, by running his massive Ponzi scheme he was not thinking about how the
people he was taking money from were feeling he just wanted it all for himself no matter how
many people he had to step on to get it. As you can see Madoff was not interested in doing the
right thing at all and because of this he let a lot of people down and caused a lot of unhappiness
because of it. If he were to do the right thing he would not be in jail right now and even if he
couldn't make the amount he was making illegally he would still be making a good amount and
it would all be clean instead of taken unwillingly from others.

In the utilitarian perspective, investment fraud is unethical because its end or ultimate
consequence, i.e. the loss of billions of dollars at the expense of investors, does not provide any
benefit to the investors.

One of the biggest lessons that the Madoff scheme taught investors was that Ponzi
schemes can seem legitimate, so buyers should always be on the lookout for scams. Madoff’s
practice seemed legitimate and was even praised by many Wall Street investors, despite the
fact that his numbers simply didn’t add up.

Before investing, we should look at the holdings of a fund and make sure that their
performance is consistent with the activity of the stock market.Here are some signs on how you
can spot a ponzi scheme.

1. Unclear business models. Crafters of Ponzi schemes will try to distract you with big
numbers, hoping that you don’t notice that the business doesn’t make sense. In
hedge funds or investment pools like Madoff’s, the numbers won’t add up if you
take the time to look at them. Schemers will often discourage you from asking
questions or run around them every time you do.
2. Aggressive sales techniques. Have you noticed how scam artists will go to any
length to get someone to sign up with them? If they were for real, they would just
let their results speak for themselves.
3. Promises of high returns for no work. Anyone who tells you that you can get rich
quick is probably doing something illegal. If someone promises you “easy money,”
don’t give them a moment of your time.
4. Difficulty withdrawing funds. Madoff’s scheme was unusual, because he made it
easy for investors to withdraw their money fairly easily. Generally, a Ponzi scheme
discourages its investors from withdrawing and creates delays for dispensing funds.

Though an unclear business model is a primary sign of a scam, the scheme itself is very
carefully thought out. We really need to pay attention to what we are getting ourselves into so
that we don’t fall victim to one of these scams.