Bernie Madoff Scheme

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Now what actually happened was that in the very first week of December 2008, Bernie Madoff discussed his dilemma over having to pay his clients an amount of almost $7 billion as he didn’t have that much funds. He was borrowing money and couldn’t keep up with all of the investors who were desperate to liquidate their assets as the market continued to deteriorate. Now within the very next two days Bernie told his sons that he made a huge profit and had decided to give away an early bonus, amounting up to $173 million. This confused the sons and they called for an explanation from their father. This is when their father confessed that his whole company worked through a “giant Ponzi scheme”. On December 11th 2008, Bernie Madoff was taken into house arrest. Had the stock market not had been in a sharp decline in 2008, who knows how much longer the fraud could have continued.

What Is a Ponzi Scheme – Bernie Madoff Ponzi Scheme & Scandal Explained

Background on Ponzi Schemes

Ponzi schemes are fairly complex, even when they operate on a small scale. 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.

Sooner or later, the pool of new participants runs out and funds dry up. Sometimes, this trouble starts earlier than the Ponzi schemers expected because of outside factors like sudden changes in the economy. When the scheme starts running low on victims, it starts to fall apart and investors lose everything they put into it. Often, the person behind the scheme vanishes before anyone figures it out, since if they’re caught they’ll face the impossible situation of needing to return all of the lost money to all of the participants. While the government may help pay restitution, victims will have trouble recovering everything they lost.

How Madoff Stole from Thousands of Investors

Madoff set up his portfolios to look like he was matching the returns of the S&P 500. This strategy prevented him from needing to pay too much to existing investors, but it still made his purported holdings appeal to new targets. And he remained under the radar by doing everything he could to keep his scheme low key. He targeted specific, elite groups of investors, keeping his victims close and the SEC off his back. He also stayed off the grid by keeping his paperwork up to date and consistent. While most other Ponzi schemes operate by giving out large returns and then collapsing, Madoff was able to tread water with his smaller returns and keep his scam going for years.

Madoff did very little to arouse suspicion among his victims. As investors, they believed they could withdraw their money almost immediately, so they had no reason to think anything was wrong. Some analysts, however, felt that something was off when they tried to replicate his performance. Tracking the funds, one of them argued to the SEC that his firm couldn’t possibly have boasted the returns Madoff claimed. The SEC ignored these claims, even though Bernard Madoff Securities had already been investigated.

What are the impacts of the scheme to Bernie Madoff and to his investors?

SEC Charges

Bernie was charged of federal offences like securities fraud, mail fraud, wire fraud, perjury, and money laundering, false statement making only to name a few. He pleaded guilty and was banned from security investment business for a lifetime. He was sentenced to the highest degree of punishment possible under this act; an imprisonment of 150 years. He was sent to the Federal Prisons of North Carolina where he is registered as inmate number #61727-054 and his release from prison is dated November 14, 2134, a day he shall never see keeping in mind that he is now aged 71 years.

Aftermath

So Bernie Madoff went on to become the greatest crook in the history of the security investment business. Mr. Madoff became a multi-millionaire by pulling off a very clever Ponzi scheme cheating upon thousands of clients and investors. What surprises investors even more is that he did it right under the nose of the federal organizations such as the SEC who never guessed anything before a long time had passed. Madoff’s fraud did affect a lot of people all around the world. Not only did his company manage the investment of lots of multi-millionaire clients ranging from famous media personnel to giant business tycoons, the company also looked after many charitable organizations. These charitable organizations too weren’t saved from the greed and dishonesty of this fraud and suffered heavy losses along with the rich investors. Investigators believe throughout his whole career Madoff had moved around $170 million of his investors’ money to his private accounts. The total fraud is estimated between $35 to $65 billion dollars. Because of the nature of the fraud, it will never be know just how much was stolen during the entire fraud.

Final Word

Madoff orchestrated the most high-profile Ponzi scheme in history. The destruction he caused sent a rippling effect that affected everyone he ever worked with. After his scheme fell apart, investors realized they had lost billions of dollars. Some former employees and associates were investigated or arrested for their involvement. At least three committed suicide, including Madoff’s oldest son Mark.

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, you should look at the holdings of a fund and make sure that their performance is consistent with the activity of the stock market.

Though an unclear business model is a primary sign of a scam, the scheme itself is very carefully thought out. You really need to pay attention to what you are getting yourself into so that you don’t fall victim to one of these scams. What warning signs do you look for before you commit to an investment