It is one of the biggest financial scandals to rock the financial industry over the last century. Bernie Madoff, a highly respected figure on Wall Street, considered to be an investment genius had not invested a penny in the past 15 years. Instead of investing clients money, he ran the largest ever Ponzi scheme. Today, we took a look at his rise and fall.
Bernard Lawrence Madoff was born around 1938 in Queens, New York. His parents were the children of East European Jews who fled to the US in the early 1990’s to escape anti-Semitism. Bernie began school in 1946, he was a popular student but academically was average at best. Nor did he have any success with the women. However, he was constantly falling short of his peers academically, which affected his self-confidence.
His high school years were happier for Bernie than his primary school experiences. He joined the swim team, finally discovering something physical that he was good at. He took a couple of part time jobs. One was as a life-guard at the beach during the summer months while the other was as a laborer installing sprinkler systems in people’s yards.
The combined incomes began to nicely build his bank account. Bernie’s self confidence was lifted through his acceptance as one of the guys. He seemed to be a well-adjusted, happy young teen, though he still struggled with his grades. But he was developing a knack for deception. Bernie Madoff wasn’t book smart, he had an innate smartness that eluded all of his peers. That smartness revolved around the ability to make money.
As his bank account swelled, and those of his ‘smarter’ classmates didn’t, he came to realize that money could be the thing that brought him fulfillment. During his first year at Far Rockaway High, Bernie came across a popular, outgoing girl by the name of Ruthie Alpern and soon they were inseparable.
Bernie graduated from High School in 1956, while the rest of his classmates headed off to prestigious universities, he enrolled at the University of Alabama. He told friends he was recruited to the university’s swim team. Bu tBernie didn’t stay in Alabama for long.
He was just too far away from his beloved girlfriend, back in New York. So, he enrolled at Hofstra College in Long Island, where he studied political science. Catching the Investment Bug Bernie’s father Ralph began dabbling in
the stock market in the mid-1950’s and it was from him that Bernie’s fascination with the subject began. During his first year at Hofstra, he was already working as a stockbroker, though not holding a broker’s license.
In 1959, Bernie and Ruthie were married. The following year he graduated from the Hofstra College with a bachelor’s degree in political science. They moved into a one-bedroom apartment in Bayside, Queens. Bernie enrolled at the Brooklyn Law School but dropped out after a year. He had, with the full backing of his wife, made the decision to go out on his own and pursue his passion.
At the age of 22, he registered his business, Bernard L. Madoff Investment Securities. Madoff passed the General Securities Representative Exam to get a stockbroker’s license. On the same day he passed the far more difficult General Securities Principal exam. In just one day he gained the right to operate as a stock broker and run his own brokerage firm.
Bernie later claimed that he began the business with the aid of a $50,000 loan from his father in-law. Bernie specialized in buying and selling low priced stocks. This meant that he was dealing with very small companies, also known as penny stocks.
After a few months, Bernie added a second arm to the business – investing on behalf of individuals. Bernie’s first client Carl Shapiro handed the newbie investor $100,000 to invest on his behalf. Bernie grew this fund impressively and the two men developed a business relationship that would make them both fabulously wealthy.
On the basis of this success, Bernie set his sights higher. He designed an investment concept based on people who he called feeders who would find wealthy investors to bring in cash. He would then invest and grow that cash, keep a portion of it and disburse the rest back to the investor. Over the next three years, his three feeder’s brought in millions of dollars.
The mom and pop investors were all making money, so everyone was happy. In just one deal in the late 1960’s, Bernie made a commission of $60,000 on the sale of 100,000 shares. With the incredible success of the business, Bernie and Ruthie were able to move to suburban Long Island in 1966. By then they had a two-year-old named Mark, and Ruthie was pregnant with their second child, Andrew. Flyer Around 1970, Bernie also moved his business. He relocated to 40 Exchange Place, just one block from the New York Stock Exchange. Bernie quickly embraced computer technology, outfitting his new office with the latest equipment.
The NASDAQ changed the game, allowing brokers to see quotes from other traders all over the world. Madoff’s business, which had already been flying high, now hit the stratosphere. He quickly established a reputation as the wizard of Wall Street. As the 1980’s drew to a close, Bernie was making north of a $100 million a year. The Ponzi Scheme according to Bernie’s own court testimony, began in 1991.
However, many people believe that he had been doing it long before then. He couldn’t explain why he did it as he was amazingly successful in his legitimate business activities. The original Ponzi scheme was named after Charles Ponzi. The scheme uses income from new investors to pay promised interested rates to original investors.
Of course, the person behind the scheme rakes in a huge amount of commission off the top. Ponzi scammers encourage investors to stay in the game for as long as possible in order to maximize their profits. At some point every Ponzi scheme will collapse.
This will either occur when the scammer takes the money and does a runner, the cash flow dries up. Because of his auspicious standing in the trading world, Madoff was above suspicion for many years.
In addition to the prestige of his position, Bernie was extremely charismatic. He came across as a person that people could trust. During the 2000’s people viewed it as a privilege to invest with his firm. Bernie was also careful not to set his promised interest rate too high. He settled upon a rate of 12% which he found to be the perfect sweet spot to attract customers without raising suspicion.
In 1999. Harry Markopolos, started to study Madoff’s returns and within four minutes of looking at Bernie’s figures he knew that they were fake. There was none of the price volatility that was fundamental to financial investment. The interest rate reliability was simply too good to be true. He was convinced that Madoff was running a Ponzi scheme. He laid a formal complaint with the SEC in the spring of 2000. The SEC, however, refused to take action.
In 2001, Markopolos forwarded a second, more detailed, complaint to the SEC. But, once again the SEC failed to take action. In 2004, a lawyer for the SEC reported to her branch chief that her investigation into the actions of Bernie Madoff raised a number of red flags. However, she was told in no uncertain terms to shut down her Madoff investigation and focus on more important matters.
Madoff was able to keep the ruse going because investment kept flowing in right through the mid-2000s. But then, in 2008, with the economy constricting, the money pouring in began to dry up. With the stock market crash of September 29th, investment funds stopped up completely. People were demanding their money and returns. But Bernie did not have the funds to pay them.
He owed around $7 billion, but only had between $200 t0 $300 million to pay out. By early December, 2008, Bernie knew that the game was up. On December 9th, he revealed to his family about his fraudulent activities and that his whole life as a successful investor had been one big lie.
Bernie’s sons immediately contacted a lawyer after leaving their father’s presence. He put them in touch with the SEC. Two days later, on December 11th, 2008, Bernie Madoff was arrested and charged with securities fraud. He managed to come up with the $10 million bail and retain his freedom. However, he was confined to house arrest at his Upper East Side penthouse apartment and was under 24-hour surveillance.
On March 12, 2009, Madoff pleaded guilty to 11 federal felonies. Among them were securities fraud, money laundering and perjury. He claimed that no-one was inclined with or knew about his crime, which amounted to the
largest Ponzi scheme in history.
It is estimated that $36 billion was invested into Bernie’s Ponzi scheme. Half of that was returned to investors, with the rest going missing. At the time of his sentencing, Madoff made the following comment. “I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This is something I will live in for the rest of my life. I’m sorry.”
As of 2020, he is 82 years old and is scheduled for release on November 14, 2139, at which time he would be 201 years of age.