Stealing $65 Billion: The Bernie Madoff Story

Robarisky Virges

MGMT E-2000

5/8/19

Stealing $65 Billion: The Bernie Madoff Story

        Since he was indicted when I was a young high school student at the time, I had always wondered who Bernie Madoff was and how exactly did he construct a scheme that would net him $65 billion dollars? For this final paper, it was a combination of genuine curiosity, a desire to learn about what drove him, and the intrigue of learning about the dark side of finance. No, I’m not planning on embezzling money, committing corporate fraud, or utilizing the wonderful tools and lessons I’ve learned this semester to use the system against itself. As cool as it would be to live a Gordon Gekko-eque life, it’s pretty interesting learning about what drives these scandals and the people involved at the core of it all. Through a long career littered with shrewd business savvy, Madoff earned himself a reputation as one of the most well-respected investment brokers in the world. Yet, a long history of corporate corruption earns him the reputation as one of the most hated men in the US.

        Bernie Madoff came from very modest beginnings in Queens, New York during the 1940s and 1950s. His father worked as a plumber and mother as a homemaker. After struggling to make ends meet for several years, the Madoffs managed to achieve their goal of working in finance. The Madoffs had a business called Gibraltar Securities and ironically the business ran into some troubles, the company failed to report filings and eventually was forced to close. While the family struggled through financial troubles, Bernie earned a degree in political science from Hofstra University. After a brief stint at Brooklyn Law School and eventually dropping out, with $5,000 earned as a lifeguard and part-time work installing sprinkler, Madoff starts Bernard L. Madoff Investment Securities LLC in 1960 shortly after his wedding to his wife, Ruth Madoff (Berman).  

        It doesn’t take long for Madoff Investment Securities to generate a buzz among investors.

The firm looked good from the outside, it had a reputation as a solid “market maker” which describes a brokerage house that is always prepared to buy and sell securities in order to provide liquidity to the markets. In a nutshell, they buy when people sell and sell when people buy, to keep the cogs turning. They don’t buy because a stock goes up, they buy when people sell. Initially, Madoff earns legitimate profits trading through penny stocks. Madoff would make money by pocketing the difference in the spread between the offering and the selling price (Berman).

By the 1980s, Bernie Madoff is living large with three homes and a yacht in the Bahamas. Bernie Madoff’s success earns him powerful and well-connected friends on Wall Street. At this point Bernie Madoff has a very strong grip on his firm, while it was a legitimate business it was tightly controlled by him and his family. He had his sons as traders, his wife Ruth was involved in the business but he also had a full staff. Madoff being both highly intelligent with a shrewd business sense he decides to go moderate where he’s going to give returns to his investors in the 10-17% range. That range of year in and year out profit seemed beneficial for Madoff and his investors. The investors get a quick return on a percentage rate Madoff can work with.

But, behind the scenes, Madoff was a master at covering his tracks, but despite the precautions he eventually realizes that some of his investors and clients have asked for about 7 billion dollars that he has to cash out and give back to them, unfortunately this time around he just can’t catch up as the money just isn’t there. A turning point comes in December of 2008 when Madoff confesses to some of his employees that he’s struggling to free up funds. He also tells his two sons Mark and Andrew Madoff that he’s been involved in a Ponzi scheme, the ironic part about it is they decide to notify the FBI about it and that was how the FBI was able to discover Madoff’s Ponzi Scheme. As CEO of Madoff Investment Securities and the former chairman of the NASDAQ, he openly admits to both his sons that he’s been running a multi-billion dollar Ponzi scheme. In the same month, Madoff is then arrested by the FBI for securities fraud. The following March of 2009, Bernie Madoff apologized for engineering one of the largest fraud scams in American history and pleads guilty to all 11 felony counts against him including false findings with the SEC, money laundering, fraud, and perjury. Madoff was then sentenced to 150 years in prison (Berman).