Bernard Lawrence Madoff ran the largest Ponzi scheme in history, with his firm having two basic units: a stock brokerage and an asset management business.
Madoff founded a penny stock brokerage in 1960, which grew into Bernard L. Madoff Investment Securities. He tried to keep his asset management business low profile and exclusive, but his brother Peter Madoff and daughter Shana Madoff worked for him.
Madoff’s sons told authorities that their father had confessed to them that his wealth management business was a massive Ponzi scheme. The following day, Madoff was arrested and charged with securities fraud.
The Madoff investment scandal defrauded thousands of investors of billions of dollars. Madoff was sentenced to 150 years in prison, the maximum sentence allowed, and died in 2021 from chronic kidney disease.
Madoff attended the University of Alabama, Hofstra University, and Brooklyn Law School, before founding Bernard L. Madoff Investment Securities LLC.
Bernard Madoff founded Bernard L. Madoff Investment Securities LLC in 1960 with $5,000 and a loan of $50,000 from his father-in-law, accountant Saul Alpern. The firm became the largest market maker at the NASDAQ and the sixth-largest market maker in S&P 500 stocks.
Madoff was the first prominent practitioner of payment for order flow, and he argued that these payments did not alter the price that the customer received.
Members of the Madoff family have served as leaders in the securities industry. Bernard Madoff was a founding board member of the International Securities Clearing Corporation.
In 1992, the SEC began investigating Madoff after two people complained to them about investments they made with Avellino & Bienes, the successor to Madoff’s father-in-law’s accounting practice. In 2004, a lawyer in the SEC’s Office of Compliance Inspections and Examinations recommended further questioning, but was told to stop.
Madoff said that the SEC’s inspector general had never asked the right questions, and that they had acted like “Lt. Columbo”.
After Madoff’s arrest, the SEC was criticized for its lack of financial expertise and lack of due diligence, and its inspector general found that six investigations of Madoff had been botched.
Due to concerns of improper conduct by Inspector General Kotz, Inspector General David C. Williams was brought in to conduct an independent outside review. The Williams Report questioned Kotz’s work on the Madoff investigation.
Harry Markopolos informed the SEC that he believed Madoff’s numbers were fraudulent, but was ignored by the SEC’s Boston and New York offices. He has since co-authored a book with Gaytri D. Kachroo titled No One Would Listen.
Although Madoff’s wealth management business grew into a multibillion-dollar operation, none of the major derivatives firms traded with him, and several high-ranking executives at those firms suspected his operations and claims were not legitimate.
The Federal Bureau of Investigation report and federal prosecutors’ complaint say that during the first week of December 2008, Madoff confided to a senior employee that he was struggling to meet $7 billion in redemptions. He told his brother Peter about the fraud on December 9.
Madoff told his sons he was going to pay out $173 million in bonuses two months early, but then told them his investment fund was “just one big lie” and “basically, a giant Ponzi scheme”.
Madoff’s sons reported their father to federal authorities, and he was arrested and charged with securities fraud. He posted $10 million bail and remained under 24-hour monitoring and house arrest in his Upper East Side penthouse apartment until his guilty plea.
Madoff’s lawyer filed an appeal, but the court denied it. He then hand-delivered a pre-sentencing letter to the judge requesting a sentence of 12 years.
Ruth Madoff agreed to forfeit $85 million to the SEC and a trustee, and to stop withdrawing $15 million from company-related accounts.
Mechanics of the fraud
According to an SEC indictment, office workers created false trading reports based on the returns that Madoff ordered for each customer. They used a computer program specially designed to backdate trades and manipulate account statements.
DiPascali and his team watched the closing price of the S&P 100 and created bogus “baskets” of stocks based on the best-performing stocks. They slipped up and dated trades as taking place on weekends and federal holidays.
Madoff admonished his investors to keep quiet about their relationship with him because if his trading activity became known, investors would question whether he could trade on the scale he claimed without the market reacting to his activity.
Madoff admitted during his March 2009 guilty plea that he used client money to pay for requests, rather than investing it and generating steady returns.
Madoff maintained that his fraud began in the early 1990s, but prosecutors believed that it was underway as early as the 1980s.
Madoff targeted wealthy American Jewish communities, using his in-group status to obtain investments from Jewish individuals and institutions. Some Jewish charitable organizations were forced to close.
Size of loss to investors
David Sheehan, chief counsel to trustee Picard, stated that about half of Madoff’s investors were “net winners”.
The size of the fraud was stated as $65 billion early in the investigation, but the actual net fraud was estimated to be between $10 and $17 billion. Jeffry Picower was the largest beneficiary of the fraud, and his estate settled the claims against it for $7.2 billion.
Plea, sentencing, and prison life
Madoff pleaded guilty to 11 federal felonies in 2009, including securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, theft from an employee benefit plan, and making false filings with the SEC.
Madoff’s accounting front man and auditor, David G. Friehling, pleaded guilty to securities fraud, investment adviser fraud, making false filings to the SEC, and obstructing the Internal Revenue Service, and was sentenced to one year of home detention and one year of supervised release.
Madoff stated he began his Ponzi scheme in 1991 and paid his clients out of his personal business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC filings, but realized his scam would eventually be exposed.
On June 29, 2009, Madoff was sentenced to 150 years in prison. His lawyers requested a sentence of 12 years.
Judge Chin did not receive any mitigating factor letters from friends or family testifying to Madoff’s good deeds, and said that Madoff had not been forthcoming about his crimes.
Ruth did not attend court but issued a statement, saying that she felt betrayed and confused. Her husband Bernie committed a horrible fraud.
Madoff’s attorney asked the judge to place Madoff in the Federal Correctional Institution, Otisville, but the judge only recommended that Madoff be sent to a facility in the Northeast United States. Madoff experienced his first prison yard fight on October 13, 2009.
Madoff was moved to Duke University Medical Center in Durham, North Carolina, and was treated for several facial injuries. He later signed an affidavit indicating that he had not been assaulted.
After an inmate slapped Madoff, it was reported that Madoff befriended Carmine Persico, boss of the Colombo crime family.
Madoff’s lawyer filed for compassionate release from prison on the claim that he had chronic kidney failure and less than 18 months to live.
Madoff died of natural causes at the age of 82 in 2021 of hypertension, atherosclerotic cardiovascular disease and chronic kidney disease. He was cremated.
Madoff met Ruth Alpern while attending Far Rockaway High School. The two eventually married, and had two sons, Mark and Andrew, who both worked in the trading section alongside their paternal cousin Charles Weiner.
Several family members worked for Madoff, including his younger brother Peter, who was senior managing director and chief compliance officer. Peter’s daughter Shana Madoff was the firm’s compliance attorney.
Both sons used outside investment firms to run their own private philanthropic foundations, and Andrew Madoff returned to work after being diagnosed with mantle cell lymphoma. Peter Madoff remained the target of a tax fraud investigation by federal prosecutors.
Bernard Madoff lived in Roslyn, New York, a ranch house through the 1970s, an ocean-front residence in Montauk, New York, a 8,700-square-foot house in Palm Beach, Florida, and a 55-foot (17 m) sportfishing yacht named Bull. He was worth up to $126 million.
Ruth Madoff claimed she and her husband had attempted suicide after their fraud was exposed, and David Kugel pleaded guilty to helping them create a phony paper trail.
Philanthropy and other activities
Madoff was a prominent philanthropist who served on boards of nonprofit institutions, including the Chais Family Foundation, the Robert I. Lappin Charitable Foundation, the Picower Foundation, and the JEHT Foundation. He donated approximately $6 million to lymphoma research after his son Andrew was diagnosed with the disease.
Madoff undertook charity work for the Gift of Life Bone Marrow Foundation and made philanthropic gifts through the Madoff Family Foundation, a $19 million private foundation.
In the media
In season 7 of Curb Your Enthusiasm, George Costanza loses all the money he made from an app called iToilet by investing with Madoff. Imagining Madoff was a 2010 play that generated controversy when Elie Wiesel threatened legal action. A documentary, Chasing Madoff, was released in 2011, and Woody Allen’s 2013 film Blue Jasmine was inspired by the Madoff scandal. The Wizard of Lies, a film based on the best-selling book by Diana B. Henriques, was released on May 20, 2017, and Madoff, a miniseries by ABC, aired on February 3 and 4, 2016. Elin Hilderbrand’s novel Silver Girl, Cristina Alger’s novel The Darlings, James Grippando’s thriller Need You Now, Elinor Lipman’s novel The View from Penthouse B, Randy Susan Meyers’s novel The Widow of Wall Street, Emily St. John Mandel’s novel The Glass Hotel are among the many novels that feature Madoff-like characters.
Here is the new Netflix documentary about this influential investor of the 80s, 90s and 2000’s – eventually arrested when the FBI investigated his lucrative investment arm of his financial empire which didn’t offer investment, merely returns on new clients investment.