Bernie Madoff Scam(2008)

Introduction

This article majorly focuses on the Bernie Madoff Scam committed by Bernie Madoff which was unveiled in 2008 and did not fail to shake the country. The repercussions of the scandal were also catastrophic to the economy. The article lays special emphasis on the ponzi scheme and modus operandi of the scandal and also on the repercussions faced by the company and economy thereafter. It also discusses court proceedings and punishment awarded by the Courts regarding the commission of the scandal and to the people involved. The article starts from delving briefly into the details of the company and Bernie Madoff himself.

Bernie Madoff was a former Chairman of National Association of Securities Dealers Automated Quotation (hereinafter referred as ‘NASDAQ’) and founder of the firm Bernard L. Madoff Investment Securities LLC. He founded this firm in 1960 as a penny stock trader and earned an amount up to 5000 dollars. With time the company grew and became one of the major firms in America. At one point, the securities of the firm were the largest buying and selling market maker at NASDAQ.  The major reason behind the success of the firm was given to the behaviour of adapting changes with changing times and to use computer technology for trading. The company was expanded and operated by the whole family as the all the members of the family were involved in the business in some way or another. It shall be kept in mind that though the ponzi scheme has been used by other people also for the commission of huge frauds but the fraud committed by Bernie Madoff is the biggest and has created a larger impact on investors and employees as well.

Timeline of the Events

The case got limelight when Bernie Madoff on 10th December 2008 allegedly confessed to his employees that all the asset management portion of his scheme is a huge ponzi scheme and the firm has lost 50 billion dollars of money of investors. He also confessed that he is willing to surrender before the authorities in a week. The very next day on 11th December 2008, he got arrested by the authorities for the commission of fraud by this ponzi scheme and was granted bail through the payment of 10 million dollars. On 12th December 2008, A Federal Court of Manhattan freezed the assets of the company and also appointed a receiver for the firm. On 12th March 2009, Bernie Madoff confessed to the commission of 11 crimes which included money laundering, perjury, fraud, theft, etc. on 20th March 2009, he was ordered by the Appeals Court to continue to stay in prison until he is sentenced by the appropriate Court. Following this, on 29th March 2009, an order was passed sentencing him 150 years of imprisonment.

Ponzi Scheme

The ponzi schemes are generally very complex and confusing in nature, but they tend to operate on a small scale. It is a technique under which a scam in framed and committed. Unlike the other frauds, it consists of an orchestrator or a small group of people, who are vehemently liable for commission of the whole scandal. It further includes the victims who are generally convinced and deceived by the mastermind behind the whole scandal, that they are investing in a legitimate fund which will pay off in huge returns to them. The scam is continued by increasing the number of investors by the orchestrator of the scam by making them believe in the above-mentioned scheme and then the money invested by the new investors is utilized by the person committing fraud, through paying off the existing investors. The scheme operates in a manner which generally does not raise questions over the person planning it and results in a win-win situation for all the parties. A major necessity in the whole process is for the orchestrator or the person committing fraud is to find new investors for bestowing the benefits of arrangement to everyone.

Theonly fallout of the whole scheme is that there is a continuous requirement ofthe new investors and sooner or later there comes a time where the personorchestrating the whole scandal in unable to find new investors. At thisjuncture, usually, the fraud unfolds and comes in the limelight as the fundsbegin to dry up and there are no funds left to pay off the existing investors.Generally, people committing it get out of the arrangement when they realisethat their scam will be unveiled in due course of time. The whole arrangementusually falls apart in three situations which are as follows:

1. When the operator of the fraud takes all the money from the investors and vanishes with the money;
2. Or when the new investors cannot be found, and the funds start to run out from the operator;
3. Or when a lot of existing investors withdraw their funds and begin to request their returns.

Modus Operandi of Bernie Madoff

Now at this juncture, we shall delve into the discussion on the usage of ponzi scheme by Madoff in the commission of his scandal in 2008 in the United States of America. He convinced a lot of his investors to deposit their savings with the firm and further falsely promised them to earn profits out of such deposits. It shall also be noted that while carrying out the ponzi scheme, no actual profit is incurred by the investors. The scheme used by the persons committing such frauds is vague and unreasonable, but the schemers generally contend that such strategies are necessary for the business. In the scandal committed by Bernie Madoff, the scheme worked for many years and generally, no problems or issues were faced by him during the time of conducting business. The turmoil in the business for Mr. Madoff began when his client started to deteriorate suddenly in large numbers. With the deteriorating clients, the existing ones also started claiming their returns which were worth a total of 7 billion dollars. Madoff was unable to arrange the funds to give back the money owed by the company to the investors.

Themajor reason behind the whole fraud and scheme going undetected for such a longtime is that Bernie Madoff has a good image and has been in the financialindustry for a long time. His goodwill and image in the industry made sure thathe did not face any kinds of suspicions when it comes to allegations of suchfrauds by the company. Further, the launching of NASDAQ served as one of thebiggest aids for attracting investors and for anyone to speculate thecommission of such fraud by Bernie Madoff. He has also contributed toSecurities Exchange Board through his time-to-time advice which has provenbeneficial to them. All this created an image of a person who knows theindustry in and out and was least speculated for the commission of any suchoffence.

Involvement of Family in the Bernie Madoff Scam

BernieMadoff’s younger brother Peter Madoff was also a director in the company, andwhich put him in a position where he is supposed to have adequate knowledge ofthe commission of fraud by his elder brother. Initially, he stated that he hasnothing to do with the fraud and has no knowledge regarding the same, but hepleaded guilty in 2012. Consequently, he was punished with imprisonment for tenyears and will be free by 2021. Though the real culprit Mr. Bernie Madoffinsisted that he has committed all the acts relating to the fraud alone and noone else had any knowledge regarding the same. This was hard to believe for theauthorities as such a huge fraud cannot be committed by a single person in thefirm. These speculations further drew suspicions on Frank DiPascaliwho was theChief Financial Officer of the company (hereinafter referred as “CFO”). He alsopleaded guilty to 10 felonies related to the fraud committed by Madoff in 2009and was sentenced for one hundred and twenty-five years in jail. But he died oflung cancer in 2015. Some other employees were also imprisoned in relation tocrimes related to fraud.

Impact of the Bernie Madoff Scam

Thefamily of Bernie Madoff faced many personal as well as legal problems becauseof the commission and unfolding of the fraud. Bernie Madoff’s wife Mrs. RuthMadoff was forced to leave her house in which the couple stayed. All the cashowned by the couple was also taken by her. She always denied any involvement orknowledge about the scam and was also not charged with any of the crimes committedby her husband. She also claimed that she and her husband tried to commitsuicide after the fraud was unveiled. After two years of the arrest of BernieMadoff i.e. in 2010, his elder son i.e. Mark Madoff committed suicide byhanging in his room. He was also never charged with any of the crimes relatingto fraud committed by his father.

As already discussed, his CFO was jailed for 150 years for his contribution to the crime orchestrated by Bernie Madoff. Apart from him, there was one woman named Annette Bongiorno, who had the responsibility to deal with investment-advisory business was also convicted for six years for involvement in the fraud committed by Bernie Madoff. She was imprisoned in the year 2014 and is still serving her jail term. She was made liable for creating fake trades and accounts statement and managed to earn profits for herself in the process. Then there was his operation’s director i.e. Daniel Bonverte who also got convicted for ten years and was sentenced to imprisonment in 2014. Amongst others, his account manager also played a crucial role in the commission of the scam. She was sentenced for six years in 2014 for aiding Madoff to create fake accounts and in siphoning off the funds of the investors. The list of employees also consists of his coder named George Perez who created the fake documents for Madoff and made the commission of the crime easy for him. He was sentenced for two and a half years of imprisonment in 2014. His other employees included the HR, the other coders, accountants, his controllers, and his CFO’s assistant were also under the radar and were also given punishment for their wrong-doings.

Itwas said that most of the investors gave up their life savings in the firm andlost all their money in it. In 2013, to aid and to obliterate the plight ofinvestors in the matter a Madoff Victim Fund (hereinafter referred as “MVF”)was also created and money was repaid to investors through that fund also. Thefund is still working and almost thousands of investors were paid off andendeavours are being made for recovery and disposal of the claims that arestill open and are being discussed before the Department of Justice.

The investigation by the Securities and Exchange Board

The commission has been keeping a check on the acts and transactions undertaken by the company since 1999. This fact was a little disturbing for many investors and others in the industry as they believed that the whole scandal could have been prevented if the investigations were done properly and more rigorously. A financial analyst named Harry Markopolos also pointed out that the business is fishy, and he also filed a complaint against him in 200 but the regulator shunned the case and no further actions were taken by the authority in this regard. After he turned himself in, he was imprisoned for 150 years and was also forfeited for 170 billion dollars. His three homes and a yacht were also seized by the U.S. Government and was later on auctioned to recover the money. The commission also found out that the 5 decades-long scam depicted a profit of 47 billion dollars in its books of accounts even in the last entry.

Conclusion

The whole Bernie Madoff scam came as a shock to most of the investors and theBoard. The speculators also could never fathom the commission of such a hugefraud by such a reputed person. But it highlights certain features that canmake it easy for an individual or a professional to identify a ponzi scheme.Firstly, most of the ponzi schemes have unclear business models which make iteasy for them to justify their transaction and carryingon the same. Even the business won’t make much sense, they will be alluring thepeople with just big numbers. Secondly, the orchestrator will go to any extentfor signing up of an investor as he needs their money to pay off the pendingmoney of existing investors. Thirdly, such sham companies carrying on illegalwork generally bestow their investors or at least make promises of entailinghuge profits for absolutely no efforts from the investors’ side which is alwayssuspicious prima facie. Lastly, the Ponzi schemers make sure that the investorsdo not withdraw their money as easily as possible. This is done because of theprime reason to not lose investors and their money.

Commission of such huge scams by reputed people are always disappointing and alarming for investors worldwide. This article attempts to cover every aspect of it and discusses all those aspects in a way to provide the reader overview of the same.