Question

Who is Bernie Madoff? How did he bilk investors out of so much money? Describe how you think the elements of fraud were present in this scandal.

Answer 1

QUESTION ; Who is Bernie Madoff?

ANSWER ; Bernard Lawrence Madoff  born April 29, 1938 is an American former market maker, investment advisor, financier, fraudster, and convicted felon.

Bernard "Bernie" Madoff, former Chairman of the NASDAQ stock exchange, started his own penny stock investment advisory firm in 1960 with $5000. In 2008, he was charged and pleaded guilty to defrauding investors in the amount of over $50 billion, running the largest Ponzi scheme on record over at least two .

He did bilk investors out of so much mony

Bernard Madoff was so successful at separating people from their money—investors lost about $18 billion of the $65 billion they entrusted to him—in part because the story he told them, at first blush, didn’t seem too good to be true.

The perpetrator of what is considered the largest swindle in history didn’t tell prospective marks that he could make them rich overnight. Many of them were charities or wealthy individuals who were unlikely to be swayed by such a pitch. Instead he promised them relatively modest returns—in line with those of the stock market—that carried almost no risk of loss.

As with any Ponzi scheme, Madoff’s created the appearance of returns by paying income to early investors out of capital committed by later ones. As more investors are lured into a Ponzi scheme, still more must be recruited to pay them. When too many new investors are needed to pay existing ones, the money runs out and the fraud is discovered—or, as in Madoff’s case, adverse market movements lead to demands for redemptions that can’t be met, giving the game away.

After his scam was uncovered in late 2008 and Madoff was sentenced to 150 years in prison, authorities set about recouping his victims’ money. Rick Antle, the William S. Beinecke Professor of Accounting at Yale SOM and a member of the team engaged in the recovery effort, noted in a conversation with Yale Insights that restitution for victims of any Ponzi scheme comes from two sources: the assets of the perpetrator and the apparent profits of early participants.

“You have to follow the money,” he said, including into “the hands of people who took out more money than they put in.” Even though it’s “emotionally wrenching,” Antle said, “you have to claw that back and redistribute it to people who actually lost money.”
  
Finding investors’ capital and dividing it up in an equitable way is especially difficult because a Ponzi scheme “shuffles money around among a lot of people,” he pointed out, “taking one person’s money and giving that to someone else.” Even though the person committing the fraud “takes a relatively small percentage of the take,” he or she is “making a huge mess” in the process.

Such confusion is a common element in Ponzi schemes as the orchestrator tries to keep the fraud going and hide what is occurring. It was true of the fraud committed nearly a century ago by Charles Ponzi, an Italian immigrant in Boston who cheated investors out of $20 million by convincing them that they could make a bundle by buying an obscure type of postal order whose value differed from country to country and redeeming it for a profit in the United States.

Ponzi schemes existed long before they bore Charles Ponzi’s name. In fact, he got his idea after working at a Montreal bank whose founder had bilked depositors. Indeed, the Bible refers to endeavors that bear the hallmarks of Ponzi schemes, Antle noted. It may be no coincidence that they are also called “rob Peter to pay Paul” frauds.

Among the more notorious examples of the last century or so, William “520 Percent” Miller of Brooklyn promised to pay 10% weekly interest (apparently not compounded) in a banking scam in 1899. Another fake banker, Dona Branca, duped poor Portuguese savers in the 1970s and 1980s with the promise of 10% monthly interest—more modest but just as illusory.
  
In an operation similar to Madoff’s in its method and its high-tone victims, but much smaller, the San Diego commodity trading firm J. David & Co. ripped off investors for $80 million in the 1980s. In 2005, Syed Sibtul Hassan Shah, a science teacher in Pakistan, attracted nearly $900 million from investors with tales of a stock-trading system that he had picked up in Dubai. Two years later, an estimated one million Chinese were taken in by a ploy involving ant farms used to produce an alleged aphrodisiac.

Common sense might have alerted victims of schemes with such outlandish promises that something was amiss. For more subtle ones, like Madoff’s, a greater understanding of the relationship between risk and reward is required.

“The underlying tenet of the efficient-markets hypothesis…is you can’t get a higher expected return without taking risk,” Antle said. When presented with the opportunity Madoff offered, “you could say, ‘Oh, my God, I found the holy grail,’ or if you really take this efficient-markets hypothesis to heart and take as your working hypothesis that you can’t get rewarded without taking some risk, you become very suspicious of this…. It’s too good to be true.”

Who Did Madoff Defraud?

Madoff enjoyed an exemplary reputation in the financial community. His investors came from all walks of life and trusted him implicitly with their fund's management. Some of Madoff's more illustrious investors included a charitable organization funded by Steven Spielberg, actor Kevin Bacon and the owners of the New York Mets. Large banks and pension funds such as Spanish bank Banco Santander; HSBC; Royal Bank of Scotland; and Korea Teachers Pension were scammed by Madoff as well. Some of Madoff's individual investors ended up on the street, living out of cars and RVs.

The Wall Street Journal developed a list of all Madoff's victims.

What Happened to Madoff and the Money?

Madoff pleaded guilty to charges of securities fraud, among others, and was sentenced to 150 years in a maximum-security prison. The courts are still sorting through Madoff's financial records in the wake of his arrest and indictment, trying to decide restitution and distribution to his investors with the money they can find. Still in prison, Madoff maintains that the big banks defrauded in his scheme were complicit.

The element of fraud were present in this scandal ;

Investment scandal

Main article: Madoff investment scandal

In 1999, financial analyst Harry Markopolos had informed the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. According to Markopolos, it took him four minutes to conclude that Madoff's numbers did not add up, and another minute to suspect they were likely fraudulent.

After four hours of failed attempts to replicate Madoff's numbers, Markopolos believed he had mathematically proved Madoff was a fraud.^[76] He was ignored by the SEC's Boston office in 2000 and 2001, as well as by Meaghan Cheung at the SEC's New York office in 2005 and 2007 when he presented further evidence. He has since co-authored a book with Gaytri Kachroo (the leader of his legal team) titled . The book details the frustrating efforts he and his legal team made over a ten-year period to alert the government, the industry, and the press about Madoff's fraud.

Although Madoff's wealth management business ultimately grew into a multibillion-dollar operation, none of the major derivatives firms traded with him because they did not believe his numbers were real. None of the major Wall Street firms invested with him, and several high-ranking executives at those firms suspected his operations and claims were not legitimate.

Mechanics of the fraud

According to the SEC indictment against Annette Bongiorno and Joann Crupi, two back office workers who worked for Madoff, they created false trading reports based on the returns that Madoff ordered for each customer.

Affinity fraud

Madoff targeted wealthy American Jewish communities, using his in-group status to obtain investments from Jewish individuals and institutions. Affected Jewish charitable organizations considered victims of this affinity fraud include Hadassah, the Women's Zionist Organization of America, the Elie Wiesel Foundation and Steven Spielberg's Wunderkinder Foundation.

Size of loss to investors

David Sheehan, chief counsel to trustee Picard, stated on September 27, 2009, that about $36 billion was invested into the scam, returning $18 billion to investors, with $18 billion missing. About half of Madoff's investors were "net winners," earning more than their investment. The withdrawal amounts in the final six years were subject to "clawback" (return of money) lawsuits.