The tale of fraudsters on Wall Street, or any other stock market across the globe, is usually led by a promise that is too good to be true. But, Bernie Madoff was different. “His camouflage was absolutely brilliant,” Diana B Henriques, the author of Wizard of Lies: Bernie Madoff and the Death of Trust, told CNBC in an interaction. “He never offered his investors something that was too good to be true. It was good enough to be true and good enough to be a trap,” she said. Madoff ran an investment advisory that duped people of $65 billion.
According to Bernie Madoff himself, he started his Ponzi scheme in the 1990s when he could not keep up with the returns he had promised investors. However, investigators who analysed the statements of his firm believe it was a decade ago that his scam started.
The Ponzi scheme
Bernie Madoff took money from investors and promised a handsome return. But instead of investing the amount in the stock market, it was ending up in a bank account and being paid out only to investors who were redeeming their positions. Bloomberg reported that clients of Madoff’s Bernard L Madoff Investment Securities LLC handed him $19 billion in principal, and he led them to believe that he had taken the amount up to $65 billion.
The scam was elaborate and backed up with fake statements to investors. He told investors that his strategy was a split-strike conversion. “Fraudsters always have good terminology,” said David Sheehan, Chief Counsel, Madoff Bankruptcy Trustee. “He was actually trading yesterday’s newspapers. In other words, they (Madoff Investment) take out The Wall Street Journal from a couple of days ago, look at what they could find in terms of yielding a profit and then backdate those trades into the customer statements. But in fact, none of that was actually happening,” he told CNBC.
Diversified client list
Madoff’s client lint was particularly striking. It included wealthy Hollywood stars to businessmen and even small individuals. Investigators said he had defrauded 37,000 people in 136 countries for four decades. His clients, according to Bloomberg, included Fred Wilpon, who once owned the New York Mets, Hollywood actor Kevin Bacon and his wife Kyra Sedgwick. Even Henry Kaufman, former chief economist at Salomon Brothers, was in the pool of investors who lost money. Although the client list must be shocking for many, the real blow was to his family who are believed to have known nothing of his shady business.
The scam came crippling down during the financial crisis of 2008 when investors started asking for more defaults and Bernie Madoff could not keep up with his lies. It was then he told his sons Andrew Madoff and Mark Madoff along with his wife about what had happened. The two sons who worked in the same building as their father, running the trading business of their firm, were the ones who informed the regulators of what their father had done.
Bernie Madoff managed to fool people for decades before his family ousted him. Bernie was one of the leading names of Wall Street who had played a key role in the digitalisation of the stock market. It was hard for people to believe that someone who had been the non-executive chairman of the NASDAQ could pull off such a stunt. According to a CIO report, till December 2020, nearly $3.2 billion have been returned to investors so far. Bernie Madoff died April 14 serving a 150-year prison sentence.