Bernard Madoff was born in 1938 in Queens, New York, US. He graduated from Far Rockaway High School and completed his graduation in political science from Hofstra University. He is married to his high school sweetheart Ruth Madoff, and has two sons, Mark and Andrew.
In 1960, he founded the Wall Street firm Bernard L. Madoff Investment Securities LLC and was its chairman until December 11, 2008. He was active in the National Association of Securities Dealers (NASD), a self-regulatory organization for the U.S. securities industry. His firm was one of the five most active firms in the development of the NASDAQ, and he served as its chairman of the board of directors, and on its board of governors. Madoff was also a prominent philanthropist who served on the boards of non-profit institutions, many of which entrusted his firm with their endowments.
He brought several relatives into his business such as his younger brother, Peter (Senior Managing Director and Chief Compliance Officer) and Peter Madooff's daughter, Shana, took a job with the company as compliance attorney. The Madoff nephew, Charles Weiner and both of Madoff sons which are Mark and Andrew also joined his firm after finishing their education and worked in the trading section of the business. Andrew Madoff was invested his own money in his fund, but Mark had not done so for about eight years.
TIMELINE OF MADOFF CASE
In 1960 Bernard Madoff founded Bernard L.Madoff Investment Securities LLC with $ 5000. His firm is a small trading firm and was one of the largest independent trading operations in the securities industries. During 1989, his company become trading business skyrockets and market marker because handled more than 5% of the trading volume on the New York Stock Exchange. In 1990, Madoff becomes Chairman of NASDAQ. In 1992, Federal investigators questioned whether Madoff was connected to a Ponzi scheme and the result is there's been no evidence of fraud.
In 2005, a private fraud investigator from Boston, Harry Markopolos sent a report and mention that "highly likely" that Madoff is involeved in largest Ponzi scheme. The investigator had been tried to investigate Madoff since 1999. But, after investigation, SEC decided that Bernard Madoff is free from fraud. After, 3 year, which is 11 December 2008, Madoof is legalized involved in Ponzi scheme about almost 30 years for running a multibillion dollar Ponzi scheme. One day before, he disclosed the fraud to his brother and his son. Madoff had operated the 'Ponzi Scheme' since the 1980s.
A ponzi scheme is schemes that has high returns on investments and are promised to clients who are then paid off by money put up by new investors. Madoff was supposed to invest clients' money in the securities market and he deposited the entire amount into a Chase Manhattan account bank. The amounts of the fraud allegedly achieve to US$50 billion and it was the biggest financial fraud in US history and affecting the large number of investor.
According to the industry experts, both investors and regulators neglected some important facts and enabled Madoff to carry on the fraud for the long time since 1980. This fraud happened is significantly affected businesses around the world and some companies have been forced to close as consequence. On March 2009, Madoff is pleaded guilty to 11 criminal charges, including securities fraud, mail fraud, and wire fraud, money laundering and making a false filling with the SEC. And at the end, Bernard Madoff was sentences to 150 years in prison, the maximum for his crimes.
HOW PONZI SCHEME WORKS?
A Ponzi scheme is such investment that involves payment from people and it alleged return to existing investors from funds that contributed by having a new investors. This Ponzi scheme organizer seeks new investors by promise that they can give a lot of returns with little or no risk. In many Ponzi scheme, usually the fraudsters more focus on attracting new money to make payment in the earlier stage investors and to use for personal reason.
Ponzi scheme actually is named of Charles Ponzi who is deceived thousands of New England residents into postage stamps back in the 1920s. Ponzi made advantage for using differences between US and foreign currencies that used to buy and sell international mail coupon. Then, Ponzi told the investors that they can provide 40-50% of returns in just 90 days.
There are some 'red flags of Ponzi scheme. First, high investment returns with little or no risk. In business world, it doesn't make sense that such investment doesn't have a risk. To substance, there might have risk that involved an investment. Second, overly consistent returns that consist doubt because investments sometime go up and sometime may go down over time. Third, unregistered investments like Ponzi scheme is typically involved investments that not registered under the SEC or with any state regulators.
Fourth, unlicensed sellers also like Ponzi scheme that not registered and involved unlicensed individuals. Federal and state securities require that the investment must be registered and licensed. Fifth, there are secretive and complex strategies of investment. We should avoid an investment that are not give a full information and not understandable about the investment. Sixth, issues with paperwork that ignores excuses regarding the problem which we can't review the information in writing but also cannot review at the prospectus and disclosure of statement. Lastly, difficulty receiving payment cast doubt for such investment.
Bernard Madoff uses this Ponzi scheme to get more money. Madoff made his way to richer areas to get more money in cash by attracting richer clients. Madoff's new business dealt with the National Quotation Bureau. Madoff use computer technology to beat competition on New York Stock Exchange. This technology became the foundation of the modern NASDAQ Stock Exchange. At first, Madoff invested the whole money in stocks. But he not satisfied with the stock because he doesn't get more money that he wanted.
After that he chose rich Country Clubs to find richer investor. Then, to gain trust from the richer investor, he became part of the club's close community and befriended with them. His clients fell for his charisma and charm and they handed over large sum of money. Madoff's promise of 10% profit every year. This is beginning the hedge fund of Madoff. He pay his promise by gave his clients 10% back on their investment without fail.
This was incredibly attractive, and impressive, given the instability of the stock market. Madoff achieved the consistency by using the collar method. But this method didn't add up. Then, Madoff hedge fund shrouded in secrecy. Madoff use classic tricks that to be able to continue making the payments year after year Madoff require further income from alternative sources that would cover his expenses.
The further incomes were come from another investor. The cash come from another investor that could be used to make payments to the first investor. In this scheme, the cash from each new investor is used to pay back the older investor. 100% of everyone's money is being used to pay everyone's yearly 10% returns. Each investor's 10% gain is another investor's 10% loss. All the money slowly burnt up. This is name of Ponzi scheme.
OTHER SIMILAR SCHEMES WITH PONZI SCHEME
There are similar schemes like Ponzi scheme. There are pyramid scheme, buble scheme and Robbing Peter to pay Paul. A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. However, several characteristics distinguish these schemes from Ponzi schemes. There are in Ponzi scheme, the schemer acts as a "hub" for the victims, interacting with all of them directly but in a pyramid scheme, those who recruit additional participants benefit directly. A Ponzi scheme claims to rely on some esoteric investment approach and often attracts well-to-do investors while pyramid schemes explicitly claim that new money will be the source of payout for the initial investments.
A bubble is similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant, but it is not the same as a Ponzi scheme. It is because a bubble involves ever-rising prices in an open market where prices rise because buyers bid more prices are rising. Bubbles are often said to be based on the "greater fool" theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme, there is no person misrepresenting the intrinsic value investors typically know they are in a bubble.
Another scheme called "Robbing Peter to pay Paul". When debts are due and the money to pay them is lacking, whether because of bad luck or deliberate theft, debtors often make their payments by borrowing or stealing from other investors they have. It does not follow that this is a Ponzi scheme, because from the basic facts set out there is no indication that the lenders were promised unrealistically high rates of return via claims of unusual financial investments. Nor is there any indication that the borrower is progressively increasing the amount of borrowing to cover payments to initial investors.
THE EVENTS THAT LED TO THE DISCLOSURE OF THE FRAUD
When in the economic crisis, many organizations cannot survive because of the increase in cost of operation. So they need to withdraw all their investment in order to support their cost. In economic crisis, there is:
Increase in inflation.
In the economic crisis, the major factor of the economic downturn is mortgage crisis. The house's price increase rapidly and got to the peak where price became too high. House is a necessity in people's life. So they need to spend more money to get their necessity. So the investors need to spend more money to cover the increase in their cost of living because of inflation. So, the people who have investment in any organization will drawback all their money including the interest. So it became a problem to Bernard Madoff when huge number of his investor want to drawback of their money and Madoff does not have money to pay them since he has use up the principal part to pay return to all investor like been explain before. So, inflation is one of events that led to disclosure of Bernard Madoff's fraud.
Increase in unemployment
When economic in a crisis, many organizations which cannot survive will be bankrupt. As mention before, inflation will increase when the economic is downturn so the cost of operation will go up rapidly and the company may not have enough funds to cover all expenses. And it will lead to increase in unemployment in US. So when they are unemployed, they need to drawback any investments that have been made in the any securities in order to cover up all their expenses. So unemployment also is the one major factor of disclosure of Bernard Madoff's fraud.
WHY REGULATORY AGENCIES DO NOT DETECT ANY FRAUD AFTER ALMOST 30 YEARS OF SCHEME?
The reason why Bernard Madoff did not been caught after almost 30 years fraud is because of Bernard Madoff allegedly has been gained many accesses of government agencies such as Securities and Exchange Commission (SEC) and Securities Industry and Financial Markets Association (SIFMA). Bernard Madoff and his wife also contributed almost $240,000 from 2005 until 2008 to the activities done by Democratic Senatorial Campaign Committee.
In addition, Madoff gained access to Washington's Lawmaker and have high tied to the SIFMA. What is SIFMA? Securities Industry and Financial Markets Association (SIFMA) is an association which represents all securities firm, banks and asset management companies. Bernard Madoff is one of Board of Director in Securities Industry Association which merged with Bond Market Association to form SIFMA. Besides that, Bernard Madoff's brother holds a position in Board of Director in SIFMA for two terms. Within 2000 and 2008, Bernard Madoff's brother also have sponsor $66,000 of the SIFMA activities. It shows that Bernard Madoff have some power in knowing the internal information in SIFMA. In addition, Bernard Madoff's niece is an Executive Committee SIFMA's Compliance & Legal Division.
There also many criticism of SEC regulatory as a federal agency that enforce the organization to follow the law in investigating Bernard Madoff's case of fraud. Securities Exchanged Committees (SEC) never detect any fraud despite there are numerous red flags of Bernard Madoff's scheme. There is something wrong with the SEC organizations since their investigator looks like did not want to reveal any fraud of Bernard Madoff when they never asked the right question through investigation with Bernard Madoff. They have been interviewed Bernard Madoff but still cannot reveal the fraud done by Madoff.
BERNARD MADOFF'S TRICK TO AVOID FROM BEEN INVESTIGATED BY REGULATORY AGENCIES.
From the case, we can see that regulatory system is not the only cause why the regulatory agencies cannot detect any fraud almost 30 years of fraud done by Bernard Madoff. It is because Madoff have his own initiative in avoiding from being investigated.
The first trick done by Bernard Madoff is choosing small and unknown audit firm in auditing his business. At that time, there is no regulatory that present to register any audit firm towards law. So Madoff can hide his fraud cleanly over 30 years because there is no independent in auditing his business since he was using his crony.
Besides that, he was avoiding from the investor that have too many questions. Bernard Madoff's clients mostly are rich investor. He choose rich country club in order to find richer investor. He became part of the club community in order to gain their trust.
Bernard Madoff also good in keep his secret when he does his illegal operation from 17th Floor of his Lipstik's Building and only a dozen of employees were involved. In order to keep his secret about using the other investors' money to pay the return, the floor was isolated from the rest of the company. Bernard Madoff also producing statement for client using an old IBM computer which is does not link to the rest of company network. Besides that, the client statement were printed on paper only in order to avoid leave a digital footprint.
ANALYZE THE IMPACT OF THE FRAUD ON THE US ECONOMY AND THE WORLD ECONOMY
On February 4, 2009, the U.S. Bankruptcy Court in Manhattan released a 162-page client list with at least 13,500 different accounts invest in Bernard Madoff. The investors are not just individual investor but also from organization such as charitable organization, pension funds, hedge funds, and others. Bernard Madoff accepts billions of dollars and he said that his trading and hedging strategy will produce gains in all market conditions, though securities regulators.
Actually, it is just a lie because he never traded any share for client account but he just deposits it in his account of Chase Manhattan Bank. Normally most of individual investors are lost their life saving. For example, is on June 11, 2009 where William Foxton, 65, killed himself because of shame losing his family saving through Ponzi scheme. Besides that, most of organizations also have problem. They have to close their organization because of this problem. This is because some of organization invests most of their cash with Bernard Madoff in order to get more money. For example, December 23, 2008, the owner of Access International Advisers was found dead in an apparent suicide. This is because he invests $1.4 billion of its client's money with Bernard Madoff. Because of that, number of unemployment will increase and affect the US economy.
In addition, because of this case, investor will be more careful before they invest or afraid to invest. So, it will decrease capital for development. It's will give big impact to all company and also to US economy. Development and technology for the company will become slow. Investor from outside also will feel afraid to invest to US. Then, because of short in capital, company and US cannot proceed with their plan development and also have to delay certain project that already begins.
One of Bernard Madoff client is Yeshiva University. It is a private Jewish university in New York City. Their estimate losses are $14.5 million. This loss is just actual amount invested and not including falsified profits. This is affecting the university operation. Bernard Madoff is also treasurer of Yeshiva University and chairman of that university's business school. He has endowed large donation using the money from the Ponzi scheme. So, after this case, university trying to erase traces of Bernard Madoff from their website but can't. They want to do so because it will affect their good name which, as Jewish university traditionally it's provides the framework for consideration of ethical issue as part of the student's education. When the university is support by giant Ponzi scheme, people would have negative perception to the university. This is because they will think that kind of taught (Ponzi scheme) is taught at that university. People would have bad perception on US education system. It will affect education in US and also the economy.
DISCUSS THE MEASURES PLACE TO AVOID SUCH FRAUD REOCCURRING
In order to avoid such fraud like giant Ponzi scheme reoccurring, many things can be done by the regulatory agencies. It was to take attention to red flags. It is such important warning that can remind before little fraud become larger. We have to look the economic condition because it was one of the pressures and cause the fraud to rise. We also have o pay attention if the performance of the company is unrealistic. Besides that, we also have to pay attention if there is collusion between employees and third party. In the case of Bernard Madoff, he himself said that the SEC Chairman Mary Schapiro was a "dear friend" to him and he knew former chairman "very well". So, there is possibility of collusion between them. This is should be avoided. Not just that, we also have to pay attention to management override of control. In this case, just Bernard Madoff kept the financial statement for the firm under lock and key and was hide the true things about the firm's investment advisory business when discussing with other employees.
Next, we must improve the existing Securities Industry Regulations. This is needed because if the regulation is used for a long period, someone have already expert about that and can know how to avoid from it in creative way and it will contribute to fraud.
Then, we can have segregation of duties. It's not just good for internal but also needed fot external. It's to avoid of lack of controlled. When there is segregation of duties, frauds can be detected more quickly because can detect it faster that is happened within organization. This is important before it is become worst. So, it's a good way to detected and minimize.
Lastly, very employees have responsibility to detect fraud. So, we need to take into consideration if there is whistleblower complained about the company. This is because, as he person inside the company, they know what actually happened. In the case of Bernard Madoff, Harry Markopolos complained to the SEC's Boston office in May 1999, telling that it was impossible to legally make profits with investment strategies that he claimed is used. Besides that, outside analysts also raised about the same things. We should reward and protect the whistleblower in order to make sure they keep going to give the information. Not just that, we should give attention and take action to whatever they complain and not just leave it.
FIGURE 1
Based on figure 1, bank is the largest number of investor in Bernard Madoff. Logically, many people will affect especially client of the bank. As we know, client of the bank including individual and organization. So, even they are not directly invested with Bernard Madoff, they will be affected.
Then it followed by charity. Many of their funds are from many donors. So, if the fund is gone, they cannot run their program smoothly. It's also hard in order to find other donor during economic crisis.
Other investors that involve are hedge fund 17%, firm 14%, individual insurer 7%, and education 6%. As whole, individual investor is just small portion of investor list. Means that most of them are organization and will affect all individual in that organization even just one organization involve. It makes the number of person affected because of Bernard Madoff actually many.
CONCLUSION
As a conclusion, we cannot simply blame on Madoff alone because of other officer also involve in this conspiracy especially his relative that involve in upper management, SEC members and SIFMA. The most important part is the existing investors that already received high interest through Madoff's scheme also need to blame. They need to investigate why they can get higher return with low risk and should report back to the regulatory agencies for investigation. Many of the investor neglects the red flags warning because of high return in their investment.
SEC should also be the one who are going to be blame because despite numerous red flags they do not ask right question and looks like do not want to reveal any fraud by Bernard Madoff. May be they also have some interest in the Madoff's scheme.
