The biggest, the baddest, Bernard, or Bernie, Madoff topped everything in modern times. Not only did he create the biggest Ponzi scheme the Western World had seen to that date created by one single person, he also had some of the biggest names in showbiz on his client list, from Kevin Bacon and his wife Kyra Sedgwick to Steven Spielberg, whose foundation reportedly lost 70% of its income due to the Madoff scheme, talk show host Larry King to Elie Wiesel, whose foundation lost all of its $15.2 million. The big stars wanted a piece of what seemed like a too-good-to-be-true opportunity. Indeed it was. But Madoff's Ponzi scheme went smoothly for so many years, that for all we know, he might still be at it if things hadn't happened the way they did.
Ever more intriguing, only weeks before his house of cards fell apart Madoff spoke about the important role of the SEC - the Security Exchange Commission – the organization that was to bring his “empire”, Madoff, and his entire family to a screeching halt, resulting not only in a number of arrests, but also multiple suicides. Madoff now serves multiple life sentences, an incredible 150 years in prison for embezzlement, various types of fraud, and perjury. Unless he's Methuselah, Madoff will not see the outside world again; he is, as of writing, nine years into his sentence and incarcerated in North Carolina.
Let's start at the beginning.
Who was Bernie Madoff
Bernie Madoff was a financial insider, well connected, knowledgeable, and at one point even the chairman of NASDAQ, the second largest stock exchange in the world, only trailing the New York Stock Exchange. At the top of his game, or rather at the peak of his Ponzi scheme, he had billions under management - if you want to refer to it as such. It was estimated that he defrauded his investors out of almost $ 65 billion, an incredible sum, particularly if one imagines that this money was never put to productive use.
He started out as a penny stock broker with the equivalent of $ 41,000 in today's dollars. Growing his business through acquaintances and with help from family members, he was one of the first to adopt the NASDAQ technology that would allow to settle trades within seconds. He started out rather humble, working as a lifeguard – rather ironic when you think about it – and saved his earnings to build the necessary capital for his later business. According to reports by people who knew him from a young age, Madoff always hustled and was set on making money. Some described him as very persistent and aggressive in the endeavor to make money.
One rather ironic turn in the story of Madoff was that he once served as “locker guard” in high school. A role in which he was responsible for the oversight of any mishaps and rule breaking by other students. In fact, he continued to work in roles that were designed to minimize any illegal activities and in which he was required to oversee the actions of companies and financial institutions. He even spoke on the importance of oversight and regulation in financial markets. Not only that, he also served as a board member and chairman of Nasdaq.
What allowed Bernie Madoff to pull off his stunt?
Arguably, Madoff had the ability to suck others into his world. He was, according to reports, highly charismatic. In fact, if you watch any of the interviews and speeches he gave, it becomes clear that he had the personality and abilities to draw people in, to convince them of his abilities and their enormous luck to be able to do business with him. This is, in fact, what so many who dealt with him stated in the aftermath of the collapse of his Ponzi scheme. His charisma and extraordinary personality. Madoff sold them on the idea that he was exclusive and only accepted select clients as investors. Imagine this situation: You are sitting across the table of someone who you are willing to entrust with your money only for the person to tell you that for him or her to manage your money, you have to convince them of how special you are. Ridiculous if you think about it. You are trusting that the other person will manage your money reliably and that they have the expertise to grow your investment. It should be for them to prove to you that they are worthy of your hard-earned cash and your trust.
It is incredible that a man, a public figure, who was considered a genius by so many, his opinion trusted, a man that was always in the spotlight, managed to pull off such a horrific plot that left so many broke and desperate. As humans we sometimes are blinded by a big name, an assumed status preventing us from questioning a person's credentials, the substance to their claims, their actual level of expertise. Who does not like to believe in the genius of a person, a genius so extraordinary? Who does not want to be part of their fabulous world, partake in some of their riches? It is probably a combination of hope, greed, the urging for financial security, and being part of something successful, bigger than life, that occasionally leaves humans vulnerable to these scams.
Madoff promised double-digit returns. While it may not be extraordinary to achieve a 12 percent return occasionally, it was the frequency with which Madoff accomplished such high returns. Even during the biggest market downturns, he and his firm paid investors high returns. To give this further context, even when other firms were losing money or barely scratched positive territory, Madoff's firm would pay astonishingly high returns on investors' money.
Some investors were even promised returns of 46 percent and more. Not for a ten or five-year period, but on an annual basis.
In case you are now thinking that his firm was probably a hub for highly advanced technology in order to pull off and manage such a massive Pyramid Ponzi scheme, you may be surprised to hear that the entire operation was almost all done by paper. According to reports, the only thing slightly resembling modern technology that FBI agents found when raiding Madoff's premises was an antiquated IBM server. The rest were piles of paper statements.
Who was involved in the Financial Scandal?
His Ponzi scheme was a family affair. Many of the main figures were from Madoff's close family, including his sons, his brother, and his niece. As incredible as it may seem, many of those involved were ruled to only have limited knowledge of the entire scam. His sons, for instance, were never charged with any crime and it was them who brought down the entire “empire” when reporting his wrongdoings to the authorities. Even more astonishing the fact that the man who had build the biggest Ponzi scheme of the century was also the one who ended it. It was Madoff himself who confessed his wrongdoings to his sons and wife. An action that would serve as the beginning of the end of the Madoff Ponzi scheme.
His right hand man and most trusted deputy was Frank DiPascali. DiPascali had been with the firm for 33 years. He didn't hold any financial credentials, merely a high-school diploma. His only other “assets” were his rough nature, a Queens accent, and his ability to stay under the radar. Apparently even those within the firm had no real idea about what his role or responsibilities were.
Many of those involved, including Madoff and his brother Peter went to prison for the scheme. Others, such as DiPascali, avoided prison merely because he passed away during the trial.
Victims of the Financial Scandal
Numerous people were affected by his Ponzi scheme. Investors, savers, financial institutions, and even employees from all over the globe were defrauded by Madoff.
Why even seasoned investors suffered substantial losses in Madoff's scheme may be more intriguing, given that any investment firm or financial institution will conduct their proper due diligence.
The fact that many private investors fell for Madoff's scheme is explained by his track record and stellar reputation. Why not trust a man who has achieved great returns regularly and over a prolonged period? He was a trusted person whose role on many boards gave him an aura of professionalism and expertise. His confidence and demeanor only strengthened his appearance and status of a top-notch financial guru.
If something is too good to be true, it usually is. Thus we conclude our second case in our Biggest Financial Scandals series.
*Image Source: U.S. Department of Justice / Public domain