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The Bernard Madoff Scandal in 15 Facts

Bernard Madoff Photo By U.S. Department of Justice.

1.Madoff Started off His Career as Penny Trader

Bernie Madoff was born into a NewYork Jewish family in NewYork City. He attended Hofstra University and Brooklyn Law school but dropped before completing his law degree to found his company; Bernie Madoff LLP in 1960.
He founded Bernie Madoff LLP together with his wife Ruth Alpern who was his high school girlfriend.
Ruth had some experience working in the wall street after earning a degree in psychology from Queens College.
They started off their firm in as a penny stock trader with US dollars 5,000 earned by Bernie and loan of US dollars 50,000 from Saul Alpern his father-in-law, an accountant, who also referred the young couple to a circle of friends, acquaintances and their families as their first clients.
They fashioned their firm as a low-value securities company, an intermediary dealing with low-value stocks that didn’t generate interest from the major investors.

2. Madoff Served as Chairman of the NASDAQ Exchange in 1990

NASDAQ Headquarter Broadway by night. Photo By giggel.

NASDAQ an exchange market that was founded in 1971 by the National Association of Securities Dealers (NASD), now known as the Financial Industry Regulatory Authority (FINRA)  began operations as the world’s first electronic stock market and Bernie Madoff Securities was one of the key participants in bringing it to fruition. He served as the chairman for three years upon its founding.

3. Madoff is Credited with Automation of NASDAQ

Madoff and his brother peter developed a  computer trading software program that was eventually adopted by the NASDAQ trading exchange and laid the foundation for much of the electronic trading systems that are commonplace now. 

By this virtue he served as the chairman of the NASDAQ (National Association of Securities Dealers Automated Quotations) stock market during that time he influenced the makert to adopt his trading technology making the young makert to be the pioneers of automation.

4.Bernie Madoff Firm Run one of the Most Prestigious American Hedge Funds

Madoff cultivated close friendships with wealthy, influential businessmen in New York City and Palm Beach, Florida, signed them as investors, paid them handsome returns, and used their positive recommendations to attract more investors. He also burnished his reputation by developing relationships with financial regulators.

He exploited an air of exclusivity to attract serious, moneyed investors; not everyone was accepted into his funds, and it became a mark of prestige to be admitted as a Madoff investor.

5.The Hedge Fund Promised Abnormal Returns

Bernie Madoff Securities  promised abnormally high Returns  of 10 to 20% per annum compared to the lower than 10% industry performance.

This led to several fund managers questioning the returns offered as they felt these were red flags.

6.He Claimed to Employ a Split-Strike Conversion Strategy

He claimed to be using a collar strategy, also known as a split-strike conversion.

A collar is a way of minimizing risk, whereby the underlying shares are protected by the purchase of an out of the money put option.

His principle  appeared to be sticking to safe investments in blue-chip stocks.

He portrayed his scheme as consistent, and not outlandish. During an interview with wall street journal in 1992 Madoff indicated that the scheme longevity was  made possible through use of of feeder funds.

7.Madoff Created Third Party Funds of Funds (FOF) 

Madoff unlike other fund managers was enshrined in secrecy. Third party funds were created as feeder funds  such that the investors could  never tell who was managing the funds.

These feeder funds  involved  bundling of sums of money from other investors, poured the pooled investments into Madoff Securities for management, and thereby earned fees in the millions of dollars.

These funds were not allowed to name Bernie Madoff as the fund manager yet his agents run the fund.

This secrecy was a major concern for transparency purposes and was actually sighted as one of the red flags in one the Markopolos correspondence to the security exchange commission.

8.Harry Markopolos was the Earliest Whistleblower to the Scheme

Harry Markopolos the Whistle Blower In Madoffs’ Scheme. Photo by US Government TV.

In May 2000 Harry Markopolos a financial analyst, filed his first security exchange commission complaint against Madoff, but the regulator ignored him.
In a scathing 2005 letter to the Securities and Exchange Commission using what he called Mosaic Theory, Markopolos noted several irregularities.
Madoff’s firm claimed to be making money even when the S&P was falling, which made no mathematical sense, based on what Madoff claimed he was investing in.
The biggest red flag of all in Markopoulos observation, was that Madoff Securities was earning undisclosed commissions instead of the standard hedge fund fee  of 1% to the total plus 20% of the profits.

Markopolos was among the three early whistle blowers who had raised caution on the Madoff strike collar strategy.

9.He was Turned in By His Son 

On Dec. 10, according to the account he gave Fishman, Madoff confessed to his sons Mark and Andy, who worked at their father’s firm. “The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said, ‘You gotta turn your father in,’ they went, did that, and then I never saw them again.” Bernie Madoff was arrested on Dec. 11, 2008.

10.He was Jailed for 150 years

In March 2009 Madoff pleaded guilty to fraud, money laundering, and other crimes. Madoff’s accountant, David G. Friehling, was also charged in March with securities fraud; it was later revealed that he had been unaware of the Ponzi scheme, and, after cooperating with prosecutors, Friehling ultimately served no prison time.

The thousands of people and numerous charitable foundations who had invested with Madoff, directly or indirectly through feeder funds, thus spent the early months of 2009 assessing their often huge financial losses.

U.S. federal investigators continued to pursue suspects, including some other members of the Madoff family. Estimates of losses ranged from US dollars 50-65 billion.

In 2009 Madoff was sentenced to 150 years in prison and forced to forfeit US dollar 170 billion as restitution.

11.The Scandal Effects Was Felt Across America and Europe

 Madoff’s operations collapsed in December 2008 amid the global economic crisis, he reportedly admitted the dimensions of the scam to members of his family.

The feeder funds collapsed, and losses were reported by such international banks as Banco Santander of Spain, BNP Paribas in France, and Britain’s HSBC, often because of the huge loans that they had made to investors who were wiped out and unable to repay the debt.

12. A French Fund Manager Committed Suicide Due to the Scandal

A phot of Thierry de la Villehuchet the French Fund Manager Who committed suicide due to Madoff scandal Losses. Photo By Merachek.

René-Thierry Magon de La René-Thierry Magon de La Villehuchet the manager a and a French aristocrat, money manager, and businessman.

He was one of the founders of Access International Advisors (AIA Group), a company caught and subsumed in the Madoff investment scandal in 2008.He committed suicide after losing an estimated $1.4 billion in the Madoff scheme.[

13.Bernie Madoff Died in Prison in  2021

Madoff died  in 2021 at FMC Butner prison in North Carolina of natural causes barely serving a portion of his 150 years sentence.

This is despite having petitioned president Donald Trump to commute his sentence as he was  suffering from kidney disease and requested an early release from prison indicating that he had less than 18 months to live.

14. It Exposed Market Regulation Failure 

The Madoff scandal is widely  seen as a case of market regulator failure and is widely used as a case study.

The Security Exchange commission having  on various occasions received multiple credible complainants in a span sixteen years, had  the opportunity to investigate and uncover Madoff’s fraud.

However upon receiving the complains by various players in the Industry and the regulators conducted two investigations.

However they fell short of obtaining the evidence threshold  required to proof that Madoff was operating a Ponzi scheme since they were conducted by lawyers who lacked the depth of the complexity in trading transactions.

Further it was later discovered that the investigation teams engaged were not only incompetent but heavily doubted Markopolos intention. In one of the investigation between 2004 and 2005 the regulator is said to have used a fresh law graduate who had no prior experience in dealers investigations.

15. A  Compensation Fund Know as Madoff Victims Fund was Created

The were were approximately 16,000 victims who had never recovered even one dollar.

In the year 2013 the US  department of Justice created a  Madoff Victim Funds (MVF)  and paid its first distribution in 2017.Since then a total of over US dollars 4 billion that has been made available to victims.
The funds money was collected from various sources with US dollar2.2 billion collected as part of the historic civil forfeiture recovery from the estate of deceased Madoff investor Jeffry Picower, another  US Dollar 1.7 billion was collected from JPMorgan Chase Bank N.A. and  through civil forfeiture of majority of Madoff accomplices.