Name - Digamber A Patil

Roll No - 18-F-313
Subject - Management of Banks and Financial services
Course - Master in financial Management (M.F.M)
Topic - The Madoff Investment Scandal

Faculty - Prof. Sandesh Kirkire

The Madoff Investment scandal (2008)
The Madoff investment scandal was a major case of stock and securities fraud discovered
in late 2008. In December of that year, Bernard Madoff, the former NASDAQ
Chairman and founder of the Wall Street firm Bernard L. Madoff Investment Securities
LLC, admitted that the wealth management arm of his business was an elaborate Ponzi
scheme.
Bernard Lawrence "Bernie" Madoff (born April 29, 1938) is an American former
stockbroker, investment advisor, financier, and admitted fraudster. He is the former non-
executive chairman of the NASDAQ stock market, and the confessed operator of the
largest Ponzi scheme in world history, and the largest financial fraud in U.S. History.
Prosecutors estimated the size of the fraud to be $64.8 billion, based on the amounts in
the accounts of Madoff's 4,800 clients as of November 30, 2008.

Madoff started his firm in 1960 as a penny stock trader with $5,000, earned from
working as a lifeguard and sprinkler installer. His fledgling business began to grow with the
assistance of his father-in-law, accountant Saul Alpern, who referred a circle of friends and
their families. Initially, the firm made markets (quoted bid and ask prices) via the National
Quotation Bureau's Pink Sheets. To compete with firms that were members of the New
York Stock Exchange trading on the stock exchange's floor, his firm began using innovative
computer information technology to disseminate quotes. After a trial run, the technology
that the firm helped develop became the NASDAQ. At one point, Madoff Securities was the
largest buying-and-selling "market maker" at the NASDAQ

Who Is Bernie Madoff?

Bernard Lawrence "Bernie" Madoff is an American financier who executed the largest
Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars
over the course of at least 17 years, and possibly longer. He was also a pioneer in electronic
trading and chairman of the Nasdaq in the early 1990s
• Bernie Madoff was a money manager responsible for one of the largest financial
frauds to date.

• Bernie Madoff's Ponzi scheme, which likely ran for decades, defrauded thousands of
investors out of tens of billions of dollars.

• In 2009 Madoff was sentenced to 150 years in prison and forced to forfeit $170
billion.

• As of December 2018, the Madoff Victims Fund had distributed more than $2.7 billion to 37,011
victimized investors in the U.S. and around the world.

Why the scam Happened?

Federal investigators believe the fraud in the investment management division and
advisory division may have begun in the 1970s. However, Madoff himself stated his
fraudulent activities began in the 1990s

In 1999, financial analyst Harry Markopoulos had informed the SEC that he believed it was
legally and mathematically impossible to achieve the gains Madoff claimed to deliver.
According to Markopoulos, it took him four minutes to conclude that Madoff's numbers did
not add up, and another minute to suspect they were likely fraudulent. After four hours of
failed attempts to replicate Madoff's numbers, Markopolos believed he had mathematically
proved Madoff was a fraud. He was ignored by the SEC's Boston office in 2000 and 2001, as
well as by Meaghan Cheung at the SEC's New York office in 2005 and 2007 when he
presented further evidence.

Although Madoff's wealth management business ultimately grew into a multibillion-dollar

operation, none of the major derivatives firms traded with him because they did not believe
his numbers were real. None of the major Wall Street firms invested with him, and several
high-ranking executives at those firms suspected his operations and claims were not
legitimate. Others contended it was inconceivable that the growing volume of Madoff's
accounts could be competently and legitimately serviced by his documented
accounting/auditing firm, a three-person firm with only one active accountant

For years, Madoff had simply deposited investors' money in his business account at
JPMorgan Chase and withdrew money from that account when they requested
redemptions. He had scraped together just enough money to make a redemption payment
on November 19. However, despite getting cash infusions from several longtime investors,
by the week after Thanksgiving it was apparent that there was not enough money to even
begin to meet the remaining requests. His Chase account had over $5.5 billion in mid- 2008,
but by late November was down to $234 million—not even a fraction of the outstanding
redemptions.

Sales methods
Rather than offer high returns to all comers, Madoff offered modest but steady returns to
an exclusive clientele. The investment method was marketed as "too complicated for
outsiders to understand". He was secretive about the firm's business, and kept his financial
statements closely guarded

A scheme that targets members of a particular religious or ethnic community is a type of

affinity fraud, and a Newsweek article identified Madoff's scheme as "an affinity Ponzi".

Madoff was a "master marketer”, and his fund was considered exclusive, giving the
appearance of a "velvet rope". He generally refused to meet directly with investors, which

gave him an "Oz" aura and increased the allure of the investment. Some Madoff investors
were wary of removing their money from his fund, in case they could not get back in later.

Madoff's annual returns were "unusually consistent”, around 10%, and were a key factor in
perpetuating the fraud. Ponzi schemes typically pay returns of 20% or higher, and collapse
quickly. One Madoff fund, which described its "strategy" as focusing on shares in the
Standard & Poor's 100-stock index, reported a 10.5% annual return during the previous 17
years. Even at the end of November 2008, amid a general market collapse, the same fund
reported that it was up 5.6%, while the same year-to-date total return on the S&P 500-
stock index had been negative 38%.An unnamed investor remarked, "The returns were just
amazing and we trusted this guy for decades — if you wanted to take money out, you
always got your check in a few days. That's why we were all so stunned."
Recovery of funds
• It estimated that Madoff customers lost $17.5 billion in a decades-long fraud that
ended 2008.

• As of March 23, 2018, the Securities Investor Protection Act (SIPA) Trustee has
recovered recover approximately $12.874 billion, representing more than 73
percent of the estimated $17.5 billion in principal loss of customers who filed
claims.

• A separate $4 billion fund set up by the U.S. Department of Justice will also
compensate Madoff victims
Regulatory Changes Post Madoff

The Securities and Exchange Commission Post-Madoff Reforms

In December 2008, Bernard L. Madoff admitted to perpetrating a massive Ponzi scheme.

Shortly thereafter, the SEC began taking decisive and comprehensive steps to reduce the
chances that such frauds would occur or be undetected in the future. Today, the agency is
continuing to reform and improve the way it operates. Among other things, the SEC has
been:

● Revitalizing the Enforcement Division

● revamping the handling of complaints and tips

● Encouraging greater cooperation by 'insiders'

● Enhancing safeguards for investors' assets

● Improving risk assessment capabilities

Reference-
https://www.investopedia.com/terms/b/bernard-madoff.asp#:~:text=Bernie
%20Madoff's%20Ponzi%20scheme%2C%20which,to%20use%20a%20legitimate
%20strategy.

https://en.wikipedia.org/wiki/Madoff_investment_scandal