THE CON: With his stellar reputation and cozy relationship with regulators, Bernard Madoff had an excellent cover. He also had a steady stream of cash from hedge funds, individual investors and foundations eager to reap double-digit returns. Then the market crashed, exposing his $65 billion Ponzi scheme.
THE DAMAGE: The $65 billion scam bankrupted thousands of individual investors. Several charities folded and countless lives and fortunes were ruined.
THE OUTCOME: Six months after his arrest, Madoff - who pleaded guilty - received the maximum sentence of 150 years in prison. To date, $1.25 billion has recovered from his assets and 8,800 individuals have filed claims for restitution.
When FBI agents came to ask him a few questions about his investment advisory business, Bernard L. Madoff didn’t mince words: “It’s all just one big lie.” After running an international Ponzi scheme for decades, Madoff knew the game was up. A day earlier, he told his sons, Mark and Andrew, that he was “finished,” that he had “absolutely nothing.” After the confession, Madoff’s sons turned him in to the authorities.
Shock waves rippled across the globe – down Wall Street and beyond, through golf courses and country clubs in New York and Florida. From investors who entrusted their fortunes with Madoff, to the thousands of individuals and institutions with money in one of the numerous hedge funds that fueled his operation, Madoff cut a long and deep path of betrayal. His victims ranged from the world’s largest banks to small charities, and included Hall of Fame pitcher Sandy Koufax and the foundations of both Steven Spielberg and Elie Wiesel. At the time of his arrest, Madoff managed about $17 billion in assets. At 71, he might have expected to run the scheme until his death; but too many investors, nervous about the declining markets, wanted to withdraw their funds. Madoff found himself $7 billion short.
Beyond the scope of the Ponzi scheme – estimated first at $50 billion but thought to be closer to $65 billion – there was his reputation.
Bernard L. Madoff Securities was one of the top three market-makers in Nasdaq stocks; his two sons, and brother, Peter Madoff, ran the company from the 19th floor of a lipstick-shaped building in Midtown Manhattan. A lower profile, and illegal, operation took place on the 17th floor. About a dozen employees handled Madoff’s investment advisory business, which was unconnected to Madoff Securities and shrouded in secrecy. He insisted that the feeder funds keep his role as investment advisor out of any printed materials. Madoff’s individual clients, who considered themselves lucky to have the chance to invest with him, understood that discretion was expected. And, though Madoff had thousands of clients, and managed billions in assets, he didn’t register with the Securities and Exchange Commission until 2006.
He ended up flying a massive blimp under the radar, but Madoff started off small. In 1960, he went to work in the over-the-counter market where he built a client base by offering a penny or two for every share traded – a legal practice that allowed his firm to pocket the difference between the offering and selling price. By the 1980s, he had started offering another service; recruiting clients from amongst his friends and associates in New York City, Madoff became an investment advisor.
The two accountants who worked for Madoff in this early period, Frank Avellino and Michael Bienes, were content not to ask questions. In a 2009 interview with FRONTLINE, Bienes summed up attitude shared by many of Madoff’s investors. Asked how he thought Madoff could offer a 20% rate of return, Bienes said, “I don’t know. I don’t want to know. I know you can split an atom. I don’t know how you do it.”
In 1987, Madoff opened a new office in Ft. Lauderdale, Florida, where he found new clients on golf courses and at country clubs. Wealthy individuals who saw how friends invested with Madoff enjoyed significant returns wanted in on the action. Before long, Madoff had more than 3,000 clients. Still he declined to register with the SEC - in spite of the fact that an investment advisor with more than 15 clients is required by law to register. In 1992, he had his first of several harmless encounters with the agency. Alerted that Madoff might be running a Ponzi scheme, the SEC investigated and found that he had $441 million in assets invested. They shut the operation down but were apparently unconcerned about wrongdoing; Madoff managed to produce the $441 million and, as a former chairman of Nasdaq, seemed to have an untouchable air.
In fact, the SEC ignored multiple warnings about Madoff’s unregistered business. But Madoff’s consistently high performance didn’t go unnoticed in the securities industry; when an executive in Boston sat down to figure out the secret of Madoff’s success, he discovered the fraud. Starting with his first memo in 2000, up until his fifth and final report itemizing the red flags in Madoff’s operation, Harry Markopolous was ignored by the SEC. Markopolous’ warnings didn’t go entirely unnoticed; a 2001 article in Barron’s explored Madoff’s quiet management of $6 billion and his unusual policy of not charging money-management fees, while demanding a code of silence. Asked how he produced compound average annual returns of 15% for 10 years running, Madoff kept his mouth shut. “It’s a proprietary strategy,’ he said. “I can’t go into it in great detail.”
In hindsight, the red flags that Markopolous listed seem impossible to miss. Madoff managed billions in assets but used a tiny auditing firm – located in a strip mall outside of New York City with just three employees. The statements that recorded trades and sales were printed and sent to clients several days after the trades were said to have occurred; they were never offered electronically.
Markopolous failed in his efforts to get the SEC to act in part because of Madoff’s cozy relationship with regulators. Arthur Levitt Jr., who was SEC chairman from 1993 to early 2001, admitted that he sought advice from Madoff about how the market functioned. Levitt denied that Madoff had influence over the agency, and claimed to be unaware of the fact that Madoff ran an investment management business.
Likewise, none of Madoff’s feeder funds bothered to investigate his operation. Fairfield Greenwich Group had $3 billion invested with Madoff but never once asked for verification or visited the 17th floor of the “Lipstick Building.”
The SEC finally looked into Madoff’s business in 2006, but cleared him of any wrongdoing. After the housing bubble burst, the markets tanked. By November 2008, they were down 40%. Unable to produce the $8 billion his clients wanted back, Madoff made his confession to his sons and effectively turned himself in.
In June 2009, Madoff was sentenced to 150 years in prison for eleven counts of fraud, money laundering, perjury and theft. The whole story of his Ponzi scheme, including when it began and the total amount lost, has yet to be told. About $1.25 billion has been recovered by liquidating Madoff's assets and 8,800 individuals have filed claims for restitution.