Madoff was born in 1938, schooled in Far Rockaway High School and joined HoEstra University for a bachelor’s degree but never graduated. Madoff build himself a good reputation that made him to be respected and thus he was able to trick investors in putting their money in his Ponzi scheme. Madoff was a legend in the financial industry because of his reputation, he was admired by many people, venerated by some and thus no one dared to criticize him without risking their careers (Gregoriou, and Lhabitant, 2009. His vast influence and popularity in both the financial sector and other sectors in the US made many people to trust and fear criticizing him. Through his business, he operated the largest Ponzi scheme which caught up with him in 2008 and it was estimated that it he had ripped investors of billions for about forty years. The man had a good reputation on Wall Street and thus attracted a wide following for the reason that he delivered consistently high returns with very low volatility over a long period and claimed to use a split-strike conversion strategy to obtain these low-risk returns. This essay looks at the personal profile of Maddoff, the crime he committed and how he devastated many people’s finances during the recession of 2008
Bernard Madoff commenced his career as an investment broker in 1960, where he bought and sold over-the-counter stocks not listed on the New York Stock Exchange by using legal means. His basic knowledge in finance helped him to defraud investors because he disguised himself as having a good business which had high returns if people invested their money in it. “In 2008, the world learned about Bernard Madoff’s unprecedented fraud, a Ponzi scheme that spanned decades and defrauded customers of approximately twenty billion US dollars” (Salameh, 2014). Madoff defrauded investors of billions for the reason that the investors were made to believe that they were going to make huge profits. There was only a decade’s long scam in which the returns of early clients were paid by the contributions of those who came later and convinced investors that they were investing in fund that promised high returns. This made many investors to trust him because of the low risks that were involved in his business which was discovered to be a scheme later on. From the early 1960’s, Madoff’s business expanded through word of mouth to a world class investment opportunity which attracted investors who put billions into the business. Investors were so blinded by high returns from the business that no one questioned the strategy that was used by Madoff in buying stocks and trading options on these stocks, his way of limiting the potential loss and the legitimacy of the profits that were gotten from the business. The legitimacy of his profits and the strategies that he employed in mitigating the risks that came with the investment were not questioned for more that forty years that his business was in operation. “Madoff simply kept the money his customers entrusted to him for their investment advisory accounts and was stealing it unless they were lucky enough to ask for it back on time” (Lewis, 2013). When requested, he returned it not for the reason that he was remorseful, but because he was fearful of the authorities that were concerned. He felt that the whole scheme could go down if he was reported to the authorities by the investors because it was illegitimate.
Bernad madoff committed many crimes for many years because of the nature of his business and the tricks he used on investors. Madoff set himself up as the operator of an exclusive club to which only the lucky few were invited to profit from his genius. The continuous profits that he alleged that his business generated attracted many investors who never bothered to question the strategies used by the business to operate and make profits throughout the year despite of the ups and downs that as a result of market forces. Madoff claimed to be implementing a split strike conversion strategy in which investors could profit from their investments because he claimed that his business made profits throughout the year regardless of market forces. Madoff had full control of the business and thus he had the power to convince more investors to invest billions in the scheme thus sustaining it. He used charisma and other skills to lie and defraud investors of billions of dollars that were invested in the scheme which was a business that was nonexistent. He lied to the investors and his clients and thus made them to believe that they were investing in something special by creating a system which promised high returns in the short term and was nothing but the Ponzi scheme. He turned down potential investors and targeted the investors with more money to invest in his business so as to generate huge profits. Wealthy individuals invested their money in the scheme which aided the business to continue running without experiencing some financial constraints. The existence of auditors in the scheme was an additional element in the production of trust in Madoff and his investment firm, however, there was little actual control performed by these auditors (Stolowy, Messner, Jeanjean, and Richard Baker, 2014). Most of the Investors that were tricked into the scheme were comforted by signatures, labels, and “big names,” thereby allowing Madoff to continue with his fraudulent scheme.
During the recession of 2008, Madoff devastated the finances of many investors who had entrusted him because of his reputation in the society. Repercussions from the Madoff scandal spread throughout the securities industry thus making asset managers to face numerous inquiries from clients and regulators concerning the safety of investments and custody of funds. The clients were curious to know if their investments were safe and the safest ways to invest their money and thus ended up looking for consultancy services. After the Madoff Ponzi scheme came to light, FINRA undertook two separate reviews of member firms on the topics of custody of assets for investments with joint broker-dealers and broker-dealers that served as feeders to asset managers (Madoff’s Ponzi scheme, 2009). This was meant to ensure that no investors fall prey to fraudsters who wanted to benefit from their hard earned fortunes through dubious schemes.
The Madoff collapse remains as an expensive lesson in due diligence to many people who were tricked in the scheme and the general observing public. Many of the investors who were tricked into the scheme thought the business will generate huge profits and they did not raise eyebrows because Madoff too respectable to be scrutinized. Others gained confidence from personal relationships with the manager or word of mouth endorsement received from friends. This shows that the reputation and track record of a person cannot be solely relied upon as justification of its worthiness for investment no matter how impressive the business idea may look.
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Lewis, L. (2013). The Confidence Game: Of Others and of Bernard Madoff. Society, 50(3), 283-292.
Salameh, A. (2014). The Securities Investor Protection Corporation and Madoff Fraud Litigation: Implications for Financial Institutions.Journal of Taxation & Regulation of Financial Institutions, 27(6), 45-52.
Stolowy, H., Messner, M., Jeanjean, T., & Richard Baker, C. (2014). The Construction of a Trustworthy Investment Opportunity: Insights from the Madoff Fraud. Contemporary Accounting Research, 31(2), 354-397.
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