The Madoff Affair


Bernie Madoff was a financier that ran the world's largest Ponzi scheme in the world. At the time of his arrest in December 2008, he had stolen $65 billion from thousands of people worldwide. Many of the world's wealthiest people - and smartest investment managers - were his victims. No one seemed to have done any due diligence or checked on his methods.

In 1960, Bernie Madoff was working at his father-in-law's accounting firm in Manhattan. He started his own small stock trading firm, which slowly grew more prominent, into Bernard L. Madoff Investment Securities.

His reputation was that of the respectable financier. He had government contacts, gained access to leading securities industry trade groups, which added to the facade of legitimacy. He was even head of the SEC's New York office in the mid-80s and NASDAQ chairman in 1990.

His scam was a classic Ponzi scheme. Bernie would find investors and collected their money - which they thought was traded in the stock market. In reality, it was used to fund his lifestyle illegally. To pay those existing investors back, he would use funds collected from new investors. Many fell for the scam and spread the word that he was reliable. His popularity increased, and the scheme started getting bigger.

By this time, he had a network of feeders, a mix of individuals and investment firms. These feeders found investors for Madoff, including members of European royalty, big Hollywood stars and producers, some of the most prestigious financial institutions globally and of course, many regular people. They were often small investors who put savings or retirement money into funds which then, in turn, invested with Madoff. The scheme came crashing down when people began to pull out of Madoff's investments due to the 2008 global financial crisis, and he could not pay them back. When his sons discovered what he had done, they informed authorities and turned him over to the police.

During police investigations, it was discovered that there were many obvious red flags in the financial dealings of his firm. A stock trader and mathematician, Harry Markopolos, uncovered the Ponzi scheme in 2000 and spent the next eight years informing the SEC about it, highlighting over 24 red flags, but everyone ignored him.

Those who worked closely with Madoff, including employees and victims, claimed not to have known anything was amiss. Though some did feel something was off at times, they ignored their suspicions. One of the trade-offs of investing with Madoff and earning big bucks was that he didn't allow any questions. So no one asked. It seemed like a win-win for them. Madoff didn't charge any fees, the deals were legitimate, money was coming in, and so they assumed all was well.

The Madoff financial scandal is a cautionary tale of what happens when trust, complacency, greed and the very human tendency to follow and act like sheep combine. He was sentenced to 150 years in prison and died while still in custody, only after serving 13 years on April 2021. Today, only $14.5 billion (out of $65B) has been recovered and returned to the victims.

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