What did Bernie Madoff do?
In New York in 1938, in an upper-middle-class household of migrants from Eastern Europe, Madoff first established a stockbroking business with his brother, using the Money he saved from his job as a lifeguard and installing lawn sprinklers. This account would become an icon as he rose to the top of the charts.
Understanding Bernie Madoff
Although he claimed to earn large regular returns using an investment strategy known as a split-strike conversion, which is a basic trading strategy, Madoff simply transferred client funds into a single account to pay clients who desired to take cash. He financed redemptions by enticing new investors to invest their capital. However, he could not continue the fraud after the market fell sharply in the latter half of 2008. He confessed to his sons, who his company employed; however, he says, he did not know about the scheme on the 10th of December. Ten the 10th of December, 2008. They handed him over to authorities the next day. According to the last financial statements, it held $64.8 billion in assets from clients.
In 2009, aged 70, Madoff pleaded guilty to 11 federal felonies that included wire fraud, securities fraud, mail scam perjury, and Money laundering. The Ponzi scheme was a powerful emblem of the culture of dishonesty and greed that, according to some, was prevalent on Wall Street in the run-up to the financial crisis. Madoff received a sentence of 150 years of prison and was ordered to surrender $170 billion worth of assets, but none of the other notable Wall Street figures faced legal consequences due to the crisis.
A Short Biography of Bernie Madoff
Bernie Madoff was born in Queens, New York, on the 29th of April, 1938. He began to date his wife of a lifetime, Ruth (nee Alpern), during the year they were in their teens. While in prison, on the phone, Madoff told journalist Steve Fishman that his father, who owned a store selling sporting goods, was shut down because of shortages in steel in the Korean War: “You watch that happen, and you see your father, who you idolize, build a big business and then lose everything.” Fishman claims Madoff was Madoff wanted to get what he called “lasting success” his father had not, “whatever it took,” however, Madoff’s life had its downs and ups.
Madoff’s Early Days of Investing
The company he founded, Bernard L. Madoff Investment Securities LLC, in the year 1960, when he was 22. He initially was trading penny stocks using around $5,000 (about 41,000 dollars in the year 2017), which he had earned through installing sprinklers and as a lifeguard. Then, he convinced family members and other investors to invest in his company. After the “Kennedy Slide” lopped 20 percent from the stock market in 1962, Madoff’s investments deteriorated, and his father-in-law had to take over his financial obligations.
Madoff was a victim of ego on his shoulder and was constantly reminded that he was no longer part of the Wall Street in-crowd. “We were a small firm; we weren’t a member of the New York Stock Exchange,” Madoff told Fishman. “It was very obvious.” According to Madoff his own words, he was beginning to establish himself as a market maker who was scrappy. “I was perfectly happy to take the crumbs,” Madoff said to Fishman by citing the instance of a customer who wanted to buy eight bonds. An enterprise with more resources would reject this kind of deal; however Madoff’s approach would fulfill the task.
Success finally came when he and his brother Peter began to build electronic trading capabilities–“artificial intelligence” in Madoff’s words–that attracted massive order flow and boosted the business by providing insights into market activity. “I had all these major banks coming down, entertaining me,” Madoff stated to Fishman. “It was a head trip.”
He and four other Wall Street mainstays processed half of the New York Stock Exchange’s order flow–controversially, he paid for much of it–and by the late 1980s, Madoff was making in the vicinity of $100 million a year. Madoff was appointed chairman of Nasdaq in 1990 and was a member in 1991 and 1993.
Bernie Madoff’s Ponzi Scheme
It’s unclear exactly when the Ponzi scheme of Madoff began. The court hearings he appeared in revealed that it began in 1991; however, his account manager Frank DiPascali, who the firm had employed since 1975, claimed that the fraud was going on “for as long as I remember.”
The question isn’t as clear, however, the reason Madoff did the fraud in the first place. “I had more than enough Money to support any of my lifestyle and my family’s lifestyle. I didn’t need to do this for that,” Madoff said to Fishman, “I don’t know why.” The genuine branches of the business were very profitable, and Madoff might have earned the Wall Street elites’ respect just as an electronic trading pioneer.
Madoff often claimed to Fishman that he wasn’t completely responsible for the scam. “I just allowed myself to be talked into something, and that’s my fault,” Madoff claimed, not making it clear who enticed him into the fraud. “I thought I could extricate myself after some time. I thought it would be a very short period, but I just couldn’t.”
“The Big Four– Carl Shapiro, Jeffry Picower, Stanley Chais, and Norm Levy — have been a subject of attention due to their long-running and profitable relationship in Bernard L. Madoff Investment Securities LLC. Madoff’s associations with these four men began in late the 60s and 1970s, and his scheme earned the Big Four hundreds of millions of dollars per year.
“Everybody was greedy, everybody wanted to go on, and I just went along with it,” Madoff stated to Fishman. Madoff has said that his Big Four and others–several feeder funds that pumped clients’ funds into them and some even outsourced their handling of their client’s assets–must have been aware of the results the company generated or ought to have. “How can you make 15 or 18% when everyone makes less Money?” Madoff stated.
How Madoff got away with it for For a Long Time
Madoff’s seemingly high returns persuaded customers not to avoid looking. In actuality, he placed their Money into an account at the Chase Manhattan Bank –which was merged into JPMorgan Chase & Co. in 2000. He then left them there. According to the estimates of one source, it could have earned up to $483 million from these deposits and wasn’t likely to investigate.
When clients desired to redeem their investment, Madoff funded the payouts using new capital. Earned him a reputation for his incredible returns and grooming his clients by getting their confidence. Madoff created his image as sexy and exclusive by frequently first denying clients. This approach allowed about half of the investors in Madoff to make a profit on their investments. The investors were forced to contribute to an account for victims to pay back defrauded investors who could not pay.
Madoff established a facade of credibility and generosity and enticed investors through his charitable activities. He also committed fraud on several non-profit organizations. He had some of their funds nearly destroyed, such as The Elie Wiesel Foundation for Peace and the international women’s charitable organization Hadassah. He made use of his connection of J. Ezra Merkin, an officer of New York’s Fifth Avenue Synagogue, to solicit the congregation. According to various reports, Madoff swindled between $1 billion to 2 billion in cash from patrons.
Madoff’s legitimacy as a risk to the investors of his company was founded on a variety of reasons:
His main portfolio, the public sector, seemed to be a stickler for safe investments in blue-chip companies.
His returns were extremely high (10 up to 20 percent per year) but they were consistent and not outrageous. The Wall Street Journal reported in the now-famous interview with Madoff in the year 1992 “[Madoff] insists the returns were really nothing special, given that the Standard & Poor’s 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992. ‘I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding,’ he says.”
He claimed to have used the collar strategy, which is which is also known as a split strike conversion. Collars are a means to minimize risk, in which the shares that are being traded are secured by purchasing put options that are out of the Money.
The Securities and Exchange Commission Investigation
The SEC was conducting an investigation into Madoff and his company in various ways since 1999. A situation that irked many people after Madoff was finally brought to justice as it was believed that the greatest harm could have been avoided had the initial investigation been conducted with enough rigor.
Analyst in finance Harry Markopolos was one of the first whistle-blowers. He was in 1999 when he figured out within an afternoon that Madoff must have been lying. He made the first SEC complaints with the SEC against Madoff in 2000. However, the regulator did not take notice of his complaint.
In a defiant 2005 letter addressed to the Securities and Exchange Commission (SEC), Markopolos wrote, “Madoff Securities is the world’s largest Ponzi Scheme. In this case, there is no SEC reward payment due to the whistle-blower so basically I’m turning this case in because it’s the right thing to do.”
The Wall Street financier who was sentenced to 150 years in prison after being found guilty in what turned out to be referred to as the biggest and most tragic Ponzi scheme in the history of finance and died on Wednesday in the hospital of a prison within the US.
The scam, estimated at $65 billion, was a victim for every stratum of our society. From the most disadvantaged to the most powerful among victims includes film director Steven Spielberg, actor couple Kevin Bacon and Kyra Sedgwick and the broadcaster Larry King and baseball legend Sandy Koufax.