The Game’s Up: Bernie Madoff, who made off with billions, has died

May 1, 2021

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3 min read

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What's going on here?

Serving a 150-year sentence, Bernie Madoff, responsible for the largest Ponzi Scheme in history, has died aged 82.

What does this mean?

Bernie Madoff, a prominent Wall St. figure and former Chairman of the Nasdaq Stock Exchange, was largely considered an investment guru. Madoff’s story, however, lends credence to the term “too good to be true”, as after the 2008 Financial Crash, it became apparent that Madoff’s investment strategy was just that.

As a result, $17.5bn in investor savings was lost, which ultimately led to his 150-year sentence, deaths, insolvencies and a significant change in investment due diligence.

Madoff wasn’t simply ripping off the elite; his victims include Steven Spielberg and Kevin Bacon, but also charitable organisations, such as the Wiesel Foundation and the global women’s charity, Hadassah.

Having been described as “extraordinarily evil” by the sentencing judge, Madoff’s death left behind a broken family, swathes of victims, and a fractured financial landscape.

What's the big picture effect?

Madoff’s criminal strategy was callous and simple: he would amass such a subscriber following that he’d have an investment pot large enough to pay out any sum of money, to any investor, upon any request. In doing so, he could promise investors steady double-digit returns of up to 20%, year on year, irrespective of market conditions. Madoff claimed his investment model was utilising a complex “split-strike conversion” strategy.

In reality, when one investor requested a withdrawal of their investment, Madoff would simply dispense another investor’s deposit with the added investment growth for good measure. Madoff funded redemptions by luring new investors and their money. No investment had occurred, no financial growth was occurring.

By its nature, this scheme could, and did, operate smoothly until many investors asked for withdrawals of their investment at the same time. This was an eventuality but by no means an inevitability, that was triggered by the 2008 Financial Crisis.

Madoff’s Ponzi scheme became an avatar for the perceived money-grabbing and dishonesty that was bred within Wall Street in the lead-up to the financial crash.

The Securities and Exchange Commission (SEC) had been investigating Madoff since the turn of the millennium. A prominent whistle-blower in the story was Harry Markopolos, who posited using data that Madoff’s supposed split-strike conversion model couldn’t possibly yield such consistent returns. Unfortunately for Madoff’s investors, the SEC’s investigation was lacklustre: “The lie was simply too large to fit into the agency’s limited imagination”, says Diana Henriques, author of “The Wizard of Lies: Bernie Madoff and the Death of Trust”.

Strikingly, the paper trail of victims’ claims suggests that Madoff’s Ponzi ran over five decades. Victims of the Ponzi scheme have been largely compensated by court action, which sued those who made a net gain. Of the $17.4bn lost, $13.3bn has been returned. A Madoff Victim Fund was also set up by the Federal Government in 2013, which by 2017 had raised $4bn. $2.2bn of that sum was collected as part of a civil forfeiture recovery programme from the estate of one of Madoff’s investors. The remaining $1.7bn was obtained as part of a deferred prosecution agreement with JPMorgan Chase Bank. Thousands of claims for the funds came from indirect investors: people who had invested in companies which in turn had invested in Madoff. Many indirect victims would not be compensated. In November 2018, it was calculated that over 37,000 victims had been paid over 50% of their losses, with thousands of more victims anticipated.

Report written by Matt Bryan

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