Andrew Ulloa - Crimes of the Century: Bernie Madoff

In the fall of 2008, at the zenith of the American financial crisis, multiple Wall Street firms posted losses reaching into the hundreds of millions. These losses represented the beginning of an unprecedented disaster.

In December of 2008, CNN estimated that Bernard L. Madoff Investment Securities LLC was responsible for $50 billion.

Widely touted as the biggest Ponzi scheme in history, Bernard Bernie Madoff lured wealthy investors with promises of high returns only to siphon away funds to finance his own lavish lifestyle. He would then replenish his coffers by recruiting more unsuspecting clients.

After decades of deception, the question remains: How did Madoff get away with it for so long?

Bernie Madoff had planned the perfect crime o r so he thought.

Initially, Madoff needed wealthy clients to fund his scheme. To him, the pivotal factor was access. He knew that affluent investors crave two things: exclusivity and consistent returns. If he could provide these, doors would be permanently open to him.

To achieve exclusivity, Madoff started travelling in elite circles. He enhanced his image by serving on the boards of various New York charities. In a profile of Madoff victims, Vanity Fair investigated how Madoff leveraged his charitable contributions to become a member of the Palm Beach Country Club, a predominantly Jewish club where he acquired many of his clients. One anonymous source would later make the most damning of comparisons, claiming What Hitler didnt finish, [Madoff] did!

To signal his success to the world, Madoff purchased the typical trappings of the well-to-do. He became the proud owner of a luxury yacht and a French chateau. Many people wanted to be in business with such an accomplished financier. Knowing this, Madoff delivered his masterstroke. He began turning down investors, creating the illusion that only a select few were worthy of investing with Madoff.

The next step was consistency. Without fail, Madoff always delivered annual returns of 10% to his clients. This was no easy feat. Nor was it realistic. According to the indictment , Madoff manufactured false trading reports that artificially inflated investors gains on paper. To ensure that no client would stumble upon the truth, he enacted rules prohibiting clients from withdrawing funds for designated amounts of time. They had to trust Madoff for the long haul. This was the trade-off for being welcomed into his inner circle.

Madoffs obsession with access extended beyond recruiting clients. The Wall Street Journal documented Madoffs entre into the world of regulatory agencies. Madoff kept close ties with the leading securities industry organization, Securities Industry and Financial Markets Association (SIFMA), where his brother Peter served on the board of directors. Additionally, Madoff held close relationships with employees of the Securities and Exchange Commission (SEC). His nephew was a SEC lawyer and Madoff considered past SEC Chairpersons and Commissioners to be friends. It seemed that he had friends everywhere .

What is fascinating about Madoff is the ability he had to manipulate so many smart, wealthy, connected people. Even days before Madoffs arrest, there were those still clamoring to invest with him. Madoff had crafted a sustainable self-perpetuating scheme.

Yet, the one factor Madoff could not anticipate was the subprime mortgage crisis and the resulting housing market crash. The economy was shaken, and investors wanted to be as liquid as possible. In the fall of 2008, they began requesting cash withdrawals from Madoff. This was the end of the line. There was no way Madoff could redeem over $7 billion in requests. According to Bloomberg News , Madoff only had $200 million left to disperse. With his options limited, he confessed to his family and surrendered to authorities on December 11, 2008.

BBC News reported that on March 12, 2009, Bernie Madoff pled guilty to 11 federal felonies, including securities fraud and money laundering. On June 29 of that year he was sentenced to the maximum of 150 years in federal prison.

According to the website Madofftrustee.com , investigators continue to work on recouping the funds owed to victims, but have so far managed to retain only $2.7 billion out of a potential $20 billion owed.

Madoff maintains that he was the sole actor in the Ponzi scheme.

Madoffs guilt was never in question. What intrigued prosecutors most was who else knew about the scheme and to what extent. Is it really possible that Madoff, a nondescript man by most accounts, was wholly and entirely responsible for the greatest and most complex Ponzi Scheme the world had ever seen?

Attention shifted to Madoffs sons, Mark and Andrew, both of whom held high positions in the firm. Both maintained they knew nothing of the scheme until Bernie confessed to them days before his arrest. Yet prosecutors pursued them, along with their uncle Peter, for tax fraud.

On December 11, 2010, exactly two years after his fathers arrest, Mark Madoff committed suicide. Bernies wife, Ruth, confessed to CBS News that she and Bernie had also contemplated suicide the night before Bernie surrendered. Ruth is not a suspect at this time, though investigations of Peter and Andrew are ongoing.

According to NBC News , David Friehling, Madoffs accountant, and Frank DiPascali, Madoffs right hand man, who have both been charged with multiple counts of fraud, are expected to cooperate with authorities in exchange for reduced sentences.

With investigations pending, it seems unlikely that Madoff truly acted alone. Friehling and DiPascali are but minor players. Authorities suspect another central figure exists but have failed to yield evidence that confirms their suspicions.

The Madoff saga ignited a media firestorm during the height of the financial crisis. Bernie Madoff became the poster child for Wall Street excess at a time when the public was seeking to put a face on the rampant economic criminal activity that had crippled the nation.

In addition to the timing, what really gave the story legs was the tabloid nature of the scandal. Vanity Fair cited many wealthy investors, including celebrities and public figures, as Madoff victims. Names such as Steven Spielberg and Fred Wilpon, the owner of the New York Mets, appeared in the headlines. Story after story emerged of people losing their life savings. It seemed that every day a new victim would step forward.

Another media focal point was the clear ineptitude of the SEC. How had the regulatory agency not detected a scandal of such large proportions brewing right under its nose?

The consensus was that the SEC was either incompetent or corrupt. The Washington Post reported that several regulatory agencies had diverted investigations away from Madoff toward negligent subprime mortgage lenders and traders.

Madoff himself claimed that SEC was simply bad at its job. The New York Daily News quoted Madoff as saying he was astonished.If investigators had checked with the Depository Trust Company[the Ponzi scheme] would have been easy for them to see.

There were other early warning signs that the SEC chose to ignore. Independent investigator Harry Markopolis published a book, No One Would Listen , outlining the extent of Madoffs corruption and how no one heeded his calls for an investigation in 1999. Further, several prominent Wall Street firms refused to do business with Madoff because they did not trust him or his accounting practices.