What Is The Bernie Madoff Scandal
The Bernie Madoff Scandal is considered to be the largest financial and accounting fraud in American history. The details of the scandal itself are so complicated and unbelievable that it appears to be a work of non-fiction. Many have tried to gather enough evidence to make sense of what happened, but there was never enough evidence to prove when the fraud began. Madoff himself said that the scheme began in the late 1980s or early 1990s, but then again we cannot be certain of when it really started. Many lives have been effected by this scandal and cause some significant changes to be made to the Securities and Exchange Commission (SEC).
Before discussing his scheme, some facts about Madoff should be known. Without these facts, it would be …show more content…
hard to understand how successful and legitimate he appeared. Why so many trusted him with their money. Barnard L. Madoff was born on April 29, 1938 in Queens, New York. He attended the University of Alabama and graduated from Hofstra University with a Bachelor of Arts in political science. Madoff then started his firm, the Bernard L. Madoff Investment Securities LLC in 1960 with just $5,000 he earned from a summer job as a lifeguard. The firm started as a penny stock trader, which are stocks from companies that are too small to be listed on the national exchange. As the firm grew, it started to quote bid and ask prices, also known as a market maker. Because of this, the firm started to use new computer technology for these quotes, a program which became the National Association of Securities Dealers Automated Quotations or the NASDAQ stock exchange. The firm then functioned as a third-market provider, allowing investor to trade directly, instead of through an exchange. At one point, the firm became one of the top market makers at the New York Stock Exchange (NYSE) . Even when the fraud was discovered in 2008, his firm was still the largest market maker on Wall Street.
However, this part of his firm was not the focus of the fraud. Instead the fraud occurred in the firm’s advisory and investment management division. Before the scheme was revealed, Madoff and his firm appeared to be a reputable business. The Securities and Exchange Commission (SEC) appointed him to panels and congress invited him to testify on several occasions. At one point he was even the chairman of the NASDAQ stock exchange. Because of these reasons, people respected Bernie and most thought he was an honest businessman. When he was finally arrested on December of 2008, the scheme he ran was estimated to be worth a massive $65 billion. Many were stunned and simply did not believe that he could have done such a thing.
Madoff ran a type of scam called a Ponzi scheme. It was a fraudulent investment operation where the operator would pay the returns to its investors by using money from new investors, rather than from actual profit earned. The technique was named after Charles Ponzi who became infamous for using it in 1920. Since Ponzi schemes often assures high returns, such as one percent per month in the Bernie Madoff case, investors would often leave their money with the operator for long periods. Thus allowing the operator to keep the money and show them fraudulent returns. In cases where the investment is withdrawn, the operator will use funds gained from new investors to pay the original investors. Which is essentially stealing money from the new investors to pay the original ones. If Ponzi schemes are not caught by the appropriate regulators or authorities, they will eventually fall apart when the operator can no longer gain enough new investors to pay the original ones. The operator could also disappear, taking what was remaining of the investment money. In Madoff’s case, the 2008 financial crisis caused panic among investors, instigating them to withdraw their investments from Madoff. Approximately $7 billion in total. Of which he would not have enough money to pay the investors their pledged amounts all at the same time.
On December 9, 2008, as the scheme began to fall apart, Madoff informs his sons that the firm will pay out approximately $200 million in bonuses. As his sons were unaware of his fraud, they asked how the firm could pay bonuses, when they could not even pay back their investors. Madoff then admits to them that the investment division of his firm was just a huge Ponzi scheme and he could no longer manage it. His sons then reported him to the authorities.
Two days later, on December 11, 2008, the Federal Bureau of Investigations (FBI) arrested Madoff on a criminal charge of securities fraud. Madoff was released on the same day after a $10 million bail and placed on house arrest in his apartment. At this time he received multiple death threats from his enraged investors, causing the FBI to provide additional security. His firm was ordered to freeze all activities to prevent further fraud from occurring. He eventually pleads guiltily to 11 federal charges, ranging from mail fraud, securities fraud, to money laundering, false statements, and perjury. He was then sentenced to the maximum of 150 years in prison and ordered to pay $7.2 billion in restitution. He is now serving his sentence at the Butner Federal Correctional Institution in North Carolina.
The aftermath of the fraud was enormous. Many lives were ruined. Some invested their entire savings with Madoff. Others had plans to retire from the returns. Even his own son, Mark, committed suicide. His close friends and family stated that it was most likely due to the fact that he was accused of crimes related to his father and threaten with multiple lawsuits. Although, Bernie Madoff was the focus of the Ponzi scheme, soon after his arrest, several others have been arrested for crimes related to it. Most of them because they committed fraud related to this scheme and was likely aware of the crimes Madoff has committed.
As Madoff was investigated, it was revealed how Madoff was able to pull off his scheme so well for such a long period of time.
His fraud has been discovered as soon as 1999 by Harry Markopolos who looked at Madoff’s numbers and realized it was a fraud. He even reversed engineered it and reported it to the SEC. As the SEC took no action, Markopolos sent even more detailed reports in 2001 and again in 2005. There are several reasons for this. Due to his social status, Madoff had multiple connections with lawmakers and regulators. He spent more than $400,000 to influence the federal government and his niece even married an SEC official. Many speculated these connections help him go undetected. Madoff also kept information related to the scam a secret and hid it well. For example, few employees work in this particular division and all the data related is stored on a single IBM AS/400 server from the 1980s. Though, the primary reason Madoff was able to avoid detection was the SEC itself. The SEC claims it lacked funding and experience staff to verify the claims against Madoff. When Madoff was aware of these claims against him, he stated that he was astonished that the SEC did not verify these claim. In addition, he was able to get so many investors because instead of asking clients to invest in his fund like one would expect, he simply did nothing. As a result, it appeared that he did so well that he did not need their money, causing them to want to invest …show more content…
more.
Subsequently, countless of those affected by it blame the SEC for not protecting them and ensuring that their money is safe.
They argued that it was the purpose of the SEC. The SEC was heavily criticized, even at congressional hearings. The SEC improved in many ways after the scandal. Eight SEC employees have been disciplined over the failures. Since 2008, several changes have been made to the SEC. including new leadership to ensure that it focuses on cases that are important, as well as initiatives to encourage cooperation with information. The have also started recruiting staff with better or specialized
experience.
In conclusion, the Bernie Madoff Scandal is so massive in size it is barely believable. Many lives were ruined by the scandal. They lost most if not all of their savings. Madoff himself appear to be a respectable and honest businessman due to his appearances, allowing investors to trust him, when barely any of it was real. The most significant issue exposed by the scandal is the issue of the SEC’s incompetence. Multiple reports of Madoffs fraud were reported to them for years. No actions were ever taken because of those reports. Although Madoff will almost certainly remain in prison for the rest of his life, it will not fix the lives he ruined and the money he lost. Nevertheless, there is still a silver lining in all of it. Changes were made to the SEC attempt to prevent something similar to this from reoccurring. We cannot be certain if these changes will be enough to prevent fraud from occurring again. We can only hope that it does. As people and technology develop further, new types of scams maybe invented in the future.
Before discussing his scheme, some facts about Madoff should be known. Without these facts, it would be …show more content…
hard to understand how successful and legitimate he appeared. Why so many trusted him with their money. Barnard L. Madoff was born on April 29, 1938 in Queens, New York. He attended the University of Alabama and graduated from Hofstra University with a Bachelor of Arts in political science. Madoff then started his firm, the Bernard L. Madoff Investment Securities LLC in 1960 with just $5,000 he earned from a summer job as a lifeguard. The firm started as a penny stock trader, which are stocks from companies that are too small to be listed on the national exchange. As the firm grew, it started to quote bid and ask prices, also known as a market maker. Because of this, the firm started to use new computer technology for these quotes, a program which became the National Association of Securities Dealers Automated Quotations or the NASDAQ stock exchange. The firm then functioned as a third-market provider, allowing investor to trade directly, instead of through an exchange. At one point, the firm became one of the top market makers at the New York Stock Exchange (NYSE) . Even when the fraud was discovered in 2008, his firm was still the largest market maker on Wall Street.
However, this part of his firm was not the focus of the fraud. Instead the fraud occurred in the firm’s advisory and investment management division. Before the scheme was revealed, Madoff and his firm appeared to be a reputable business. The Securities and Exchange Commission (SEC) appointed him to panels and congress invited him to testify on several occasions. At one point he was even the chairman of the NASDAQ stock exchange. Because of these reasons, people respected Bernie and most thought he was an honest businessman. When he was finally arrested on December of 2008, the scheme he ran was estimated to be worth a massive $65 billion. Many were stunned and simply did not believe that he could have done such a thing.
Madoff ran a type of scam called a Ponzi scheme. It was a fraudulent investment operation where the operator would pay the returns to its investors by using money from new investors, rather than from actual profit earned. The technique was named after Charles Ponzi who became infamous for using it in 1920. Since Ponzi schemes often assures high returns, such as one percent per month in the Bernie Madoff case, investors would often leave their money with the operator for long periods. Thus allowing the operator to keep the money and show them fraudulent returns. In cases where the investment is withdrawn, the operator will use funds gained from new investors to pay the original investors. Which is essentially stealing money from the new investors to pay the original ones. If Ponzi schemes are not caught by the appropriate regulators or authorities, they will eventually fall apart when the operator can no longer gain enough new investors to pay the original ones. The operator could also disappear, taking what was remaining of the investment money. In Madoff’s case, the 2008 financial crisis caused panic among investors, instigating them to withdraw their investments from Madoff. Approximately $7 billion in total. Of which he would not have enough money to pay the investors their pledged amounts all at the same time.
On December 9, 2008, as the scheme began to fall apart, Madoff informs his sons that the firm will pay out approximately $200 million in bonuses. As his sons were unaware of his fraud, they asked how the firm could pay bonuses, when they could not even pay back their investors. Madoff then admits to them that the investment division of his firm was just a huge Ponzi scheme and he could no longer manage it. His sons then reported him to the authorities.
Two days later, on December 11, 2008, the Federal Bureau of Investigations (FBI) arrested Madoff on a criminal charge of securities fraud. Madoff was released on the same day after a $10 million bail and placed on house arrest in his apartment. At this time he received multiple death threats from his enraged investors, causing the FBI to provide additional security. His firm was ordered to freeze all activities to prevent further fraud from occurring. He eventually pleads guiltily to 11 federal charges, ranging from mail fraud, securities fraud, to money laundering, false statements, and perjury. He was then sentenced to the maximum of 150 years in prison and ordered to pay $7.2 billion in restitution. He is now serving his sentence at the Butner Federal Correctional Institution in North Carolina.
The aftermath of the fraud was enormous. Many lives were ruined. Some invested their entire savings with Madoff. Others had plans to retire from the returns. Even his own son, Mark, committed suicide. His close friends and family stated that it was most likely due to the fact that he was accused of crimes related to his father and threaten with multiple lawsuits. Although, Bernie Madoff was the focus of the Ponzi scheme, soon after his arrest, several others have been arrested for crimes related to it. Most of them because they committed fraud related to this scheme and was likely aware of the crimes Madoff has committed.
As Madoff was investigated, it was revealed how Madoff was able to pull off his scheme so well for such a long period of time.
His fraud has been discovered as soon as 1999 by Harry Markopolos who looked at Madoff’s numbers and realized it was a fraud. He even reversed engineered it and reported it to the SEC. As the SEC took no action, Markopolos sent even more detailed reports in 2001 and again in 2005. There are several reasons for this. Due to his social status, Madoff had multiple connections with lawmakers and regulators. He spent more than $400,000 to influence the federal government and his niece even married an SEC official. Many speculated these connections help him go undetected. Madoff also kept information related to the scam a secret and hid it well. For example, few employees work in this particular division and all the data related is stored on a single IBM AS/400 server from the 1980s. Though, the primary reason Madoff was able to avoid detection was the SEC itself. The SEC claims it lacked funding and experience staff to verify the claims against Madoff. When Madoff was aware of these claims against him, he stated that he was astonished that the SEC did not verify these claim. In addition, he was able to get so many investors because instead of asking clients to invest in his fund like one would expect, he simply did nothing. As a result, it appeared that he did so well that he did not need their money, causing them to want to invest …show more content…
more.
Subsequently, countless of those affected by it blame the SEC for not protecting them and ensuring that their money is safe.
They argued that it was the purpose of the SEC. The SEC was heavily criticized, even at congressional hearings. The SEC improved in many ways after the scandal. Eight SEC employees have been disciplined over the failures. Since 2008, several changes have been made to the SEC. including new leadership to ensure that it focuses on cases that are important, as well as initiatives to encourage cooperation with information. The have also started recruiting staff with better or specialized
experience.
In conclusion, the Bernie Madoff Scandal is so massive in size it is barely believable. Many lives were ruined by the scandal. They lost most if not all of their savings. Madoff himself appear to be a respectable and honest businessman due to his appearances, allowing investors to trust him, when barely any of it was real. The most significant issue exposed by the scandal is the issue of the SEC’s incompetence. Multiple reports of Madoffs fraud were reported to them for years. No actions were ever taken because of those reports. Although Madoff will almost certainly remain in prison for the rest of his life, it will not fix the lives he ruined and the money he lost. Nevertheless, there is still a silver lining in all of it. Changes were made to the SEC attempt to prevent something similar to this from reoccurring. We cannot be certain if these changes will be enough to prevent fraud from occurring again. We can only hope that it does. As people and technology develop further, new types of scams maybe invented in the future.