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Who is Bernie Madoff?

Who is Bernie Madoff?


Good day everybody,

Welcome to CryptoGod-1's blog on all things crypto. As part of a new series I am going to be looking at some prominent names in the financial, crypto, and general world who made a name for themselves through interesting means, many of which ended up behind bars for their actions. In this instalment I will be focusing on Bernie Madoff, the man famous for one of the largest ever Ponzi schemes in United States history, worth about $64.8 billion. 

 

 

Bernie Madoff

Bernie Madoff was born in Brooklyn, New York, on April 29, 1938, to Ralph and Sylvia Madoff. He went to Hofstra University in graduated with a degree in political science in 1960. He then briefly attended law school at Brooklyn Law School and there he married his high-school sweetheart, Ruth. Together, they founded Bernard L. Madoff Investment Securities LLC in 1960 after he decided to quit law school. Madoff did so to follow in his fathers footsteps, as his parents, Ralph and Sylvia Madoff, had founded Gibraltar Securities, which was ultimately forced to close by the SEC. Prior to that his father had worked as a plumber before moving into the financial industry, and overall they had three children, of which Bernie was the second.

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Madoff and Wife Ruth

 

 

Career & Accomplishments 

Bernie and Ruth Madoff began their venture with $5,000 (equivalent to $46,000 in 2021) that Madoff had saved up while installing sprinklers and working as a lifeguard. Investing in penny stocks and broker. Soon after Madoff convinced family and friends to invest with him, getting a loan of $50,000 from his father-in-law, accountant Saul Alpern, along with more investment off a circle of friends and their families. However, part of this was due to the 'Kennedy Slide' flash crash in 1962 and Madoff needed bailing out by his father in law. 

Undeterred, they continued their practice and became known as a 'scrappy' market maker. They were a small firm and not a part of the New York Stock Exchange and therefore it was taken that they were not real players in the game. They were happy to fill small orders that larger firms would scoff at, and in doing this Madoff found his success. To compete, his firm began using innovative computer information technology to disseminate its quotes which Madoff developed along with his brother Peter. They created electronic trading capabilities, which Madoff himself described as "artificial intelligence," and these attracted massive order flow and boosted the business by providing insights into market activity. After a trial run, the technology that they helped to develop became the National Association of Securities Dealers Automated Quotations Stock Market, also known as the NASDAQ.

Around this time Madoff's firm had, along with four other Wall Street mainstays, processed half of the New York Stock Exchanges order flow. Madoff had paid for much of it but by the late 1980s he was making in the vicinity of $100 million a year. Bernie Madoff became the chairperson of the NASDAQ in 1990, and also served in 1991 and 1993. At one point, Madoff Securities was the largest market maker in the NASDAQ, and in 2008 they were the sixth-largest market maker in the S&P 500.

The Madoff's also had two sons, Mark and Andrew Madoff, both of whom worked at the firm.

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Bernie Madoff with sons Mark and Andrew

 

 

The Scheme

The crimes committed by Madoff were worth about $64.8 billion overall, and his scheme was regarded as the largest Ponzi scheme in history. This happened via Madoff attracting investors with the promise of large, steady return though an investment strategy known as split-spike conversion. This in itself is a legitimate trading strategy but was not what Madoff did. Instead he deposited his clients funds into a single bank account at Chase Manhattan Bank, which later merged to become JPMorgan Chase and Co. in 2000, and this account was then used to pay out existing clients who wanted to cash out their investments. According to some sources, this account alone may have made up to $435 million in after-tax profit from those deposits.

Clients looked the other way when it came to questioning the ultra high returns on their investments, instead delighted at their large scale returns. When they looked to withdraw their investment, Madoff was able to pay them out thanks to his reputation as an 'unbelievable' investor and this drew further investment to keep the account overflowing with capital. He was also a smooth talker and was known for earning his clients trust. Madoff also created an image of exclusivity, while creating a front of respectability and generosity by wooing his investors through charitable work. 

Some of the main factors behind Madoff's plausibility to potential investors were:

His principal, public portfolio appeared to focus on safe investments in blue chip stocks.

His strategy, the split-spike conversion, was seen as a way of minimizing risk where the underlying shares are protected by the purchase of an out of the money put option.

He made a steady return of 10-20% per annum which was consistent and believable considering the S&P 500 index generated an average annual return of 16.3% between November 1982 and November 1992.

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Madoff Returns vs the S&P 500

 

 

Investigation

An investigation into the going-on's by Madoff and his securities firm began in 1992, something which has caused much frustration as it has long been felt the initial investigations were not rigorous enough, and that much of the damage caused by Madoff could have been prevented if the authorities had acted sooner. It was not until 1999 that one of the earliest whistleblowers, a financial analyst by the name Harry Markopolos, spent an afternoon calculating the methods that Madoff had claimed to be using. Through his calculation, he discovered it was impossible for Madoff to have achieved the levels of success he was claiming. Markopolos believed he had mathematically proven Madoff was a fraud, but when he filed a complaint against Madoff in May 2000, and again in 2001, the Securities and Exchange Commission's (SEC) Boston office ignored him. Once again at the SEC's New York office in 2005 and 2007 complaints were ignored regarding Madoff. In a 2005 letter to the 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."

 

Through the use of a system known as 'Mosaic Theory,' Markopolos was able to note several irregularities in Madoff's reporting. While all of his evidence was ignored, Markopolos, along with the leader of his legal team Gaytri D. Kachroo, co-authored a book named No One Would Listen. Within the book they outlined how the frustrating the efforts made by both Markopolos and his legal team over a ten-year period to alert the government, the industry, and the press regarding the fraud committed by Madoff was ignored.                   

Based off the reports of Madoff, he was claiming to be making money even when the S&P 500 was falling. According to Madoff he had been investing in the S&P 500, so his claims of making profit was deemed pure impossible and made no mathematical sense. From all of his findings, according to Markopolos, the biggest red flag of them all was that Madoff Securities were earning "undisclosed commissions" instead of the standard hedge fund fee (1% of the total plus 20% of the profits).

Another red flag which alerted Markopolos was the fact that Bernie Madoff was applying for huge loans from European banks, which if he had been making the steady returns as claimed, would not be required. In 2005, once Madoff nearly went bankrupt due to a wave of redemptions, the regulator decided it was worth their while to look into the business of Madoff and what Markopolos had claimed to have discovered. They requested documentation of the trading accounts from Madoff, which he supplied as  a six page list. Apparently the SEC drafted letters for two of the firms, but in the end never actually sent them. According to the author of the book "The Wizard of Lies: Bernie Madoff and the Death of Trust" Diana Henriques, "The lie was simply too large to fit into the agency's limited imagination." In 2008 the SEC was excoriated once the full extent of Madoff's fraud was revealed, and for their slow response on the matter.

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Harry Markopolos

 

 

Punishment

On the 10th of December 2008, Bernie Madoff revealed to his sons, Mark and Andrew, all of his wrongdoings. Both of them were employees at the firm and were shocked to learn of the deception and fraud. From 2005, when a large scale amount of redemptions had been requested by clients at the firm, Madoff had been struggling. He had managed to attract new investors and their capital into the scheme to help cover those redemptions, but when the markets crashed in 2008 he was no longer able to maintain the fraud. One of the most notable parts of the collapse was the fact Madoff and his firm reported year-to-date returns of 5.6% during the same period when the S&P 500 had dropped a staggering 39%.

Once his sons knew of the truth, and after discussing the situation with a lawyer, they decided the best course of action was to turn their father over to the authorities. Bernie had instructed them to take large bonuses with the remaining cash within the firm, but instead the following day they turned him over to the authorities. Once in custody, Bernie maintained that his sons were innocent and were never aware of his scheme. As of the final statement of the fund, it apparently had about $64.8 billion in client assets.

The scheme had seen Madoff fund payouts to existing clients via the new capital he received from new investors. His model allowed him to ensure roughly about half of his investors saw a profit on their investment when they cashed out. However, those investors have been forced to pay into a victims fund to compensate the defrauded investors who lost money in the scheme.

Madoff was sentenced to 150 years in prison and forced to forfeit $170 billion in 2009. This included his three homes and four boats, which were auctioned off by the U.S. Marshals. These funds were used to help compensate the victims of the fraud, but it was nowhere near the required amount.

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Bernie Madoff in Prison

 

 

Aftermath & Death

Once the news broke and Madoff was arrested on the 11th of December 2008, the lives of his family were never the same again. Many of his colleagues were sent to prison as part of the crimes, and his eldest son Mark Madoff committed suicide exactly two years after his father's fraud was exposed. Sadly, many investors within the scheme also killed themselves as they were left in a situation they could never afford, nor ever expected, to be in. Madoff's other son, Andrew, died of cancer at the age of 48 in 2014.

Madoff was imprisoned in the Butner Federal Correctional Institution in North Carolina and was given the prisoner number 61727-054. On top of the prison sentence Bernie Madoff was also ordered to pay back $170 billion of investors' money. As he grew older his health deteriorated and on the 5th of February 2020, Madoff's lawyers requested that he be released early from prison as they claimed he was suffering from a terminal kidney disease that may kill him within 18 months. However, the courts ruled that he would not be released early, and Bernie Madoff died in prison on the 14th of April 2021. 

Investors victimized by Bernie Madoff managed to get help from Irving Picard, a New York lawyer, who decided to oversee the liquidation of Madoff's firm in bankruptcy court. Picard sued those who profited from the Ponzi scheme and by April 2021 had recovered nearly $14 billion. Along with that, a Madoff Victim Fund (MVF) was created in 2013 to help compensate those impacted by the fraud. Roughly $4 billion in the fund began to get paid out to the victims from 2017 onwards after the SEC had gone through each individual application to ensure they who were really impacted got the money. It is estimated that the number of investors who provided capital into the scheme over the years was north of 40,000 individuals.

 

 

 

Have a great day.

Peace. CryptoGod-1.

 

You can find the other post's in this series here:

Who Is Ross Ulbricht?

Who is Jordan Belfort?

Who is Bernie Madoff?

Who is Low Taek Jho?

 

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cryptogod-1
cryptogod-1

Writer, designer, creator, and life enthusiast. I love to read and write and enjoy sharing my passion for crypto, sports, literature and everything and anything I can enjoy in life.


CryptoGod-1 : Crypto & Blockchain
CryptoGod-1 : Crypto & Blockchain

Enthusiast here looking to share my ideas, thoughts, analysis, and experience when it comes to all things crypto

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