Bernard Madoff, the man behind the largest financial scam in the US history

Bernard MadoffPhoto by Red Carlisle

Bernard Lawrence “Bernie” Madoff, born April 29, 1938 – usually known as Bernard Madoff, is an American fraudster and a former stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered the largest financial fraud in US history.

Bernard Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008. The firm was one of the top market maker businesses on Wall Street, which bypassed “specialist” firms by directly executing orders over the counter from retail brokers. He employed at the firm his brother Peter, as senior managing director and chief compliance officer; Peter’s daughter Shana Madoff, as the firm’s rules and compliance officer and attorney; and his sons Andrew and Mark. Peter has since been sentenced to 10 years in prison and Mark committed suicide by hanging exactly two years after his father’s arrest.

“One Big Lie” worth $65 billion

On December 10, 2008, Bernard Madoff ‘s sons told authorities that their father had confessed to them that the asset management unit of his firm was a massive Ponzi scheme, and quoted him as describing it as “one big lie”. The following day, FBI agents arrested Bernard Madoff and charged him with one count of securities fraud. The US Securities and Exchange Commission (SEC) had previously conducted multiple investigations into Madoff’s business practices, but had not uncovered the massive fraud.

Bernard Madoff

Photo by US Department of Justice

On March 12, 2009, Madoff pleaded guilty to 11 federal felonies and admitted to turning his wealth management business into a massive Ponzi scheme. The Madoff investment scandal defrauded thousands of investors of billions of dollars. Madoff said he began the Ponzi scheme in the early 1990s. However, federal investigators believe the fraud began as early as the mid-1980s and may have begun as far back as the 1970s. Those charged with recovering the missing money believe the investment operation may never have been legitimate. The amount missing from client accounts, including fabricated gains, was almost $65 billion. The Securities Investor Protection Corporation (SIPC) trustee estimated actual losses to investors of $18 billion. On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum allowed.

Access to US Government

From 1991 to 2008, Bernie and Ruth Madoff contributed about $240,000 to federal candidates, parties and committees, including $25,000 a year from 2005 through 2008 to the Democratic Senatorial Campaign Committee. The Committee returned $100,000 of the Madoffs’ contributions to Irving Picard, the bankruptcy trustee who oversees all claims, and Senator Charles E. Schumer returned almost $30,000 received from Madoff and his relatives to the trustee. Senator Christopher J. Dodd donated $1,500 to the Elie Wiesel Foundation for Humanity, a Madoff victim.

Members of the Madoff family have served as leaders of the Securities Industry and Financial Markets Association (SIFMA), the primary securities industry organization. Bernard Madoff served on the board of directors of the Securities Industry Association, a precursor of SIFMA, and was chairman of its trading committee. He was a founding board member of the DTCC subsidiary in London, the International Securities Clearing Corporation.

Madoff’s brother Peter served two terms as a member of SIFMA’s Board of Directors. He and Andrew received awards from SIFMA in 2008 for “extraordinary leadership and service”. He resigned from the Board of Directors of SIFMA in December 2008, as news of the Ponzi scheme broke. From 2000-08, the Madoffs brothers donated $56,000 directly to SIFMA, and paid additional money as sponsors of industry meetings. Bernard Madoff’s niece Shana Madoff was a member of the Executive Committee of SIFMA’s Compliance & Legal Division, but resigned shortly after the arrest.

Madoff’s name first came up in a fraud investigation in 1992, when two people complained to the SEC about investments they made with a firm called Avellino & Bienes. Madoff returned the money to investors and the SEC closed the case. In 2004, Genevievette Walker-Lightfoot, a lawyer in the SEC’s Office of Compliance Inspections and Examinations (OCIE), informed her supervisor branch chief Mark Donohue that her review of Madoff found numerous inconsistencies, and recommended further questioning. However, she was told by Donohue and his boss Eric Swanson to stop work on the Madoff investigation, send them her work results, and instead investigate the mutual fund industry. Swanson, Assistant Director of the SEC’s OCIE, had met Shana Madoff in 2003 while investigating her uncle Bernie Madoff and his firm. The investigation was concluded in 2005. In 2006 Swanson left the SEC and became engaged to Shana Madoff, and in 2007 the two married. A spokesman for Swanson said he “did not participate in any inquiry of Bernard Madoff Securities or its affiliates while involved in a relationship” with Shana Madoff.

Mechanics of the Madoff scam

According to the SEC indictment against Annette Bongiorno and Joann Crupi, two back office workers who worked for Madoff, they created false trading reports based on the returns that Madoff ordered for each customer. For example, when Madoff determined a customer’s return, one of the back office workers would enter a false trade report with a previous date and then enter a false closing trade in the amount required to produce the required profit, according to the indictment. Prosecutors allege that Bongiorno used a computer program specially designed to back date trades and manipulate account statements. They quote her as writing to a manager in the early 1990s “I need the ability to give any settlement date I want.” In some cases, returns were allegedly determined before the account was even opened.

Madoff admitted during his March 2009 guilty plea that the essence of his scheme was to deposit client money into a Chase account, rather than invest it and generate steady returns as clients had believed. When clients wanted their money, “I used the money in the Chase Manhattan bank account that belonged to them or other clients to pay the requested funds,” he told the court.

Family name used for affinity fraud

Madoff used his family name to obtain investments from within the Jewish community. Affected Jewish charitable institutions considered victims of affinity fraud include Hadassah, the Women’s Zionist Organization of America, the Elie Wiesel Foundation and Steven Spielberg’s Wunderkinder Foundation. Jewish federations and hospitals lost millions of dollars, forcing some organizations to close. The Lappin Foundation, for instance, was forced to close temporarily because it had invested its funds with Madoff.

Prison life

Madoff’s attorney asked the judge to recommend that the Federal Bureau of Prisons place Madoff in the Federal Correctional Institution, Otisville, which is located 70 miles (110 km) from Manhattan. The judge, however, only recommended that Madoff be sent to a facility in the Northeast United States. Madoff was transferred to the Federal Correctional Institution Butner Medium near Butner, North Carolina, about 45 miles (72 km) northwest of Raleigh; he is Bureau of Prisons Register #61727-054. Jeff Gammage of the Philadelphia Inquirer said “Madoff’s heavy sentence likely determined his fate.”

Madoff’s projected release date is November 14, 2139. The release date, described as “academic” in Madoff’s case because he would have to live to the age of 201, reflects a reduction for good behavior.

On December 18, 2009, Madoff was moved to Duke University Medical Center in Durham, North Carolina, and was treated for several facial injuries. A former inmate later claimed that the injuries were received during an alleged altercation with another inmate.

Other news reports described Madoff’s injuries as more serious and including “facial fractures, broken ribs, and a collapsed lung”. The Federal Bureau of Prisons said Madoff signed an affidavit on December 24, 2009, which indicated that he had not been assaulted and that he had been admitted to the hospital for hypertension.

Impacts of Bernard Madoff scam

The systemic problems exposed in the Madoff prosecution have not improved remedies for fraud victims. Indeed, since the exposure, it has become far harder for a fraud victim to prevail. In 2009, the Supreme Court required a plaintiff to establish his claim before any disclosure is required by the defendant. Labels and conclusions” and “a formulaic recitation of the elements of a cause of action” will not suffice. Thus, correct statements about fraud will not be enough by themselves to support a lawsuit; plaintiffs are required to have some actual evidence in order to proceed.

List of investors into the Bernard Madoff scam

 

Photo by Red Carlisle 

 

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