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B
ernie Madoff’s elaborate
Ponzi scheme evaded US
financial regulators for
decades. It delivered irresistible
financial gains to thousands of
investors before bankrupting
people on five continents, leaving
behind a trail of financial and
emotional despair. Variously
labelled a monster, a fraud, and a
traitor, Madoff is seeing out the
rest of his life with a 150-year
sentence in jail.
It began like similar swindles- an individual or organization lures
investors by promising unusually
high returns. However, where most
Ponzi schemes lure investors by
offering high rates of returns, and
then proceed to collapse quickly,
Madoff’s annual returns were
incredibly consistent.
As news of the miracle
investments spread, the enticing
regularity of the scheme was a key
factor in perpetuating the fraud,
and Madoff could pick and choose
from the scores of wealthy investors
desperate for a piece of the action.Humble beginnings
Madoff founded his Wall Street firm- Bernard L. Madoff Investment
Securities LLC – in 1960 after
leaving college. He had saved up
$5,000 (£25,000) from jobs as a
lifeguard and a sprinkler installer,
and his accountant father-in-law,
Saul Alpern, provided a $50,000
(£250,000) loan to help get the firm
up and running.
The company initially dealt in
penny stocks, which were traded
outside of the New York Stock
Exchange (NYSE) and American
Stock Exchange (AMEX), so that
Madoff could avoid their hefty fees.
BERNIE MADOFF
Madoff is escorted into court in New
York on 10 March 2009, where he was
charged with eleven felonies, including
securities fraud, mail fraud, wire fraud,
money laundering, and perjury.Madoff’s firm took off. His first
major investor – Carl Shapiro, the
owner of a successful women’s
clothing company – gave Madoff
$100,000 (£500,000) in 1960. This
signalled both the start of their
relationship as friends and business
partners, and the first opportunity
that Madoff could exploit. Over the
next 50 years, Shapiro would come
to see Madoff as a son, provide him
with access to circles of wealthy
investors, and eventually lose over
half a billion dollars through his
investments in Madoff’s firm.
The firm was able to avoid
scrutiny from the Securities and
Exchange Commission (SEC)
because Madoff seemingly had so
few clients – it relied on an elite
pool of wealthy investors.
Saul Alpern initially helped
Madoff recruit these clients for a
commission, but later also acted as
a conduit, investing money fromIN CONTEXT
LOCATION
New York City, USTHEME
Ponzi schemeBEFORE
6 April 2007 Syed Sibtul
Hassan, also known as the
“Double Shah”, is exposed by
an investigative reporter for
running a Ponzi scheme in
Pakistan, which promised
a 100 per cent return on
investments in only 15 days.21 May 2008 Lou Pearlman,
the American record producer
and band manager, is jailed for
25 years for running a Ponzi
scheme worth more than $300
million (£185 million today).AFTER
7 June 2011 Nevin Shapiro is
sentenced to 20 years in prison
and ordered to pay more than
$82 million (£65 million) in
restitution for operating a huge
Miami-based Ponzi scheme.116-121_Bernie_Madoff.indd 118 13/01/2017 15:10
119
several clients under his own name
to make it appear that Madoff had
fewer investors.Family business
Madoff’s firm continued to grow.
By 2008, it was a multibillion-dollar
family business: his niece was
employed as a compliance officer,
and his two sons, Andrew and
Mark, were placed in charge of the
company’s legitimate operations
outside of the private investment
division. This division was a
secret even within the company,
and was highly illegal – clients’
investments were deposited into
Madoff’s private accounts rather
than being invested.
When investors asked for their
money back, Madoff’s firm would
return their investment with
interest, along with a fabricated list
of trades based on real data. The
money actually came from other
investors’ contributions. Perhaps
because of the aura that developed
around Madoff and his magic
investments, most saw no reason to
doubt the returns. One Madoff fundfor his investors’ money focused on
shares in the S&P 100-stock index.
It reported a 10.5 per cent annual
return for 17 years. Even when the
US stock market collapsed in 2008,
the fund was up.
For decades, people trusted in
Madoff’s consistency – and not just
the wealthy. Thousands of working
people gave him responsibility for
their life savings. His firm seemed
legitimate, and he was, by all
appearances, a trustworthy and
credible businessman, who hadSee also: Charles Ponzi 102–07 ■ Jérôme Kerviel 124–25WHITE COLLAR CRIMES
I certainly wouldn’t invest in
the stock market. I never
believed in it.
Bernie Madoffserved on an SEC advisory
committee and as nonexecutive
chairman of the world’s second-
largest stock exchange.
When the scale of Madoff’s
deception was revealed, his
hundreds of thousands of victims
included Hollywood stars Kevin
Bacon, John Malkovich, and Steven
Spielberg, the French aristocrat and
financier René-Thierry Magon de la
Villehuchet, and the UK army
veteran William Foxton. Tragically,
de la Villehuchet and Foxton were
driven to suicide as a result of their
financial losses.Investigations commence
The point at which Madoff began
his Ponzi scheme is unclear. When
he finally confessed in 2008, Madoff
insisted that the fraud had started
in the early 1990s, but federal
investigators believe that it may
have begun as early as the 1970s
or mid-1980s. In fact, Madoff’s
investment operation may never
have been legitimate – his financial
operations were always highly
secretive, to the extent that his ❯❯Whistleblowers
Whistleblowers are an important
but controversial factor in the
detection of crimes that might
otherwise continue unchecked by
bureaucratic processes. Despite
the harassment and intimidation
whistleblowers often experience,
they are protected by the law.
After noting the due diligence
of whistleblowers during Madoff’s
case, the SEC set up a specific
whistleblowing fund intended
to encourage financiers to come
forward with vital information on
financial crimes.Whistleblowers, however, are
also important in other fields,
including education and
healthcare, where workers are
encouraged to speak up against
negligence and poor conduct. In
matters of state, whistleblowers
can be extremely controversial.
Former CIA employee Edward
Snowden has been alternatively
celebrated as a patriot and
criticized as a traitor, while
former US Army soldier Chelsea
Manning was court-martialled
and jailed for leaking
confidential documents to
condemn US foreign policy.Edward Snowden leaked classified
information in 2013, which revealed
details about secret US-led global
surveillance programmes.116-121_Bernie_Madoff.indd 119 02/12/2016 16:17