This is the second part of the Madoff's case. So, if everyone is buying into the Madoff hype, how did the authorities discover his scheme, which Madoff admitted that it started during the early 1990s? In May 2000, or approximately 10 years after Madoff allegedly began the scheme, Harry Markopolos, a financial analyst and portfolio manager at Rampart Investment Management first made the real concerns about Madoff's operation. He tried replicating the investment strategy that Madoff is advertising to clients using financial options, but can’t seem to have the returns that Madoff is promising. For him, as a seasoned trader and a portfolio manager, Madoff must doing something illegal with his trading practices. Markopolos alerted the Securities and Exchange Commision (or SEC) about his suspicions, but was easily ignored given the strong reputation of Madoff.
The Ponzi scheme that Madoff has been operating for approximately 18 years at that time began to crumble in December 2008, during the Subprime Mortgage Crisis. When the general market downturn accelerated, investors asked for the withdrawal of funds around USD7 billion from the firm. To pay off those investors, Madoff needed new money from other investors, but failed to do so because of the overall market downturn. Madoff’s efforts failed and that’s the time he admitted to his sons Mark and Andrew that the asset management arm of the firm was in fact a Ponzi scheme. His sons reported him then to the authorities. Madoff eventually plead guilty as he did not have enough money to payback his investors. At the sentencing, Madoff apologized to his victims, saying, “I have left a legacy of shame, as some of my victims have pointed out, to my family and my grandchildren. This is something I will live in for the rest of my life. I'm sorry. ... I know that doesn't help you.”
Clearly, Madoff is the one to blame for creating an almost USD65 billion worth of Ponzi scheme. However, the public (us, even I for example) is curious how was he able to deceive so many experienced investors and continue with the Ponzi scheme for almost two decades, twenty long years. For example, the U.S. SEC was unable to detect or even find some red flags of the possible fraud that Madoff is conducting. One possible reason is that some SEC investigators were also investors in Wall Street, therefore, they lack the objectivity that possibly clouded the investigation or potential inquiries. And of course, the highly respected position of Madoff itself, possibly hindered some suspicions.
Many of Madoff’s clients were also screened for the potential misconduct of being blinded by high returns. Jeffry and Barbara Picower were also investigated and being accused of misleading the public, because their foundation, Jeffry and Barbara Picower Foundation was a beneficiary of Madoff’s, and they are also receiving returns that were implausibly high. For example, they have experienced an annual return from 120% to 950% during the periods 1996 to 1999, which could have raised suspicion given their status as sophisticated investors. However, this case was settled, and Madoff insists that the Picowers be treated as mere clients and not accomplices. After Madoff was sentenced to 150-year imprisonment, his brother Peter Madoff was given a 10-year sentence for falsifying records and obstruction of justice. His son, Mark, was unable to handle all the social pressure and shame, and committed suicide in December 2010.
Due to the negative consequences of the largest Ponzi Scheme that Madoff has created, investors are advised to be more skeptical, and be suspicious of unsolicited offers. It is important to understand how the investment works; and verify, or even double verify the investment strategy through government and fund managers if possible. Another way to avoid such schemes is to have a more diversified investment portfolio which to avoid putting all the investments in one basket. On the government’s part, a more regular audit might be needed to be implemented by enforcers to ensure that the regulations are being followed. The case of Bernie Madoff Ponzi Scheme now stands as one of the most, if not the most famous Ponzi scheme in history, which highlights the ethical issue of white-collar criminal.
That's the end of my Madoff case's blog. Hope you learned something from it.
