Madoff, Bernard

Bernard Madoff, founder and former chairperson of Bernard L. Madoff Investment Securities LLC, ran a Ponzi scheme that caused its investors to lose an estimated $17 billion to $20 billion. Journalists, pundits, and finance experts have called the Madoff case one of the most extensive financial frauds in the history of the United States. After pleading guilty to 11 felonies, including securities fraud and money laundering, Madoff was sentenced to 150 years in prison.

A New York native, Madoff started Bernard L. Madoff Investment Securities in 1960. The firm was not a member of the New York Stock Exchange, instead functioning as a third-market provider and investment advisor. (A third-market provider allows individual investors or institutions to trade securities over the counter, rather than within a traditional stock exchange. For example, online trading is a third-market transaction.) Madoff's firm grew in prestige when it contributed to developing technology allowing investors to buy and sell stocks electronically. This new technology later became the world's first electronic stock market, NASDAQ, which went live in 1971. Over time, Bernard L. Madoff Investment Securities became increasingly influential in the Wall Street world. Madoff himself was praised for his innovation and consistent success. Many members of his family joined the firm, including his sons, Mark and Andrew, and his younger brother, Peter.

In a Ponzi scheme like the one operated by Madoff, funds contributed by new investors are used to pay returns to previous investors, thereby making the investments appear to be profitable. As long as the operator is able to find participants, the scheme—which earns little or no money without new investors—can stay afloat. Madoff focused on attracting wealthy clientele, particularly among the upper-class, Jewish individuals and groups he encountered at New York country clubs and philanthropic events. He found many charitable organizations willing to invest—and these were attractive targets because they were unlikely to withdraw funds. Some of the charities eventually had to close when Madoff was arrested and the scheme collapsed.

While many Ponzi scheme operators win new investors by touting low-risk, high-return investment opportunities, Madoff eschewed such extremes, instead creating fake account statements showing consistent and good, rather than excellent, returns. In this way, he was able to avoid suspicion for a longer time than he might otherwise have done. When investors wanted to withdraw funds during the 2008 market downturn, they discovered Madoff's fraud. In December 2008, Madoff confessed to the scheme when he realized that he could not return a requested $7 billion in redemptions. He was arrested shortly thereafter. His clients, victims of the fraud, included individual investors, hedge funds, public pensions, universities, banks, and charities. Madoff's 162-page clientele list also featured several well-known names, such as Nobel Laureate Elie Wiesel, film director Steven Spielberg, and Hall of Fame baseball pitcher Sandy Koufax.

Some financial analysts and business journalists suspected Madoff's wrongdoing long before his [Page 636]eventual downfall, leaving many to wonder if the increasingly abstract and complex culture of Wall Street enables such frauds, and if the U.S. Securities and Exchange Commission (SEC) was too lax in enforcing existing regulations. Fraud investigator Harry Markopolos amassed nearly a decade's worth of evidence against Madoff, but his early warnings were not heeded by the SEC. Madoff's firm was investigated by regulators several times, but their findings were minor and never resulted in significant changes to the firm's business practices. Madoff's well-known secrecy—he even told investors that he would not answer questions because his methods were beyond their comprehension—may have helped him to avoid earlier exposure.

...