How the Madoff Investment Scandal was uncovered

Until recently Bernard Madoff was a successful American businessman, former non-executive chairman and one of the NASDAQ stock exchange founders. He is truly one of the living examples of the so called American Dream. He started his company with only $5,000 that he earned from working as a lifeguard and sprinkler installer and eventually became one of the biggest players on the stock exchange market. But that was only one side of his life. On March 12, 2009, Madoff pled guilty to an 11-count criminal complaint and admitted that he defrauded thousands of investors and that he was responsible for building up the largest investor fraud ever committed by a single person. The losses of his clients were almost $65 billion and now Madoff faces a lifelong sentence and up to $170 billion in restitution. The scheme he built is the so called Ponzi scheme. Named after Charles Ponzi, who was the first man that created an investment pyramid where the profits of the earlier investors and Ponzis’ personal wealth were covered by the new investments.

 

The whole case was uncovered on December 10, 2008 by one of Madoffs’ sons. Madoff informed his sons that he decided to pay several million dollars in bonuses two months earlier than scheduled and they demanded to know how he is going to pay bonuses if he couldn't afford to pay investors. After that he admitted that the asset management arm of his firm was a Ponzi scheme. One of the sons reported him to federal authorities and Bernard Madoff was arrested on December 11. On March 12, 2009 he pled guilty to 11 felonies, including securities fraud, wire fraud, mail fraud, money laundering, perjury and making false filings with the SEC. The maximum sentence for his crimes will be 150 years in prison, plus mandatory restitution of up to twice the gross gain or loss from his crimes. Still Madoff insists that he was solely responsible for the Ponzi scheme and did not reach a plea bargain with the government, because he is most probably covering any of his accomplices. He confessed that he begun his scheme in the early 1990s. Despite the fact that the investments gave no profit he continued to satisfy the expectations of high returns promised to his clients. He actually managed to fool 4,800 clients. None of this money was ever invested, it was simply deposited into his business account at Chase Manhattan Bank. The "profits" were explained by his own unique "split-strike conversion strategy", but in reality Madoff created false trading activities masked by foreign transfers and false SEC filings. Madoff claimed that his firm had "liabilities of approximately US$50 billion", federal prosecutors calculated that the size of the fraud was $64.8 billion. First concerns about Madoff's business surfaced in the early 1999, when financial analyst-whistleblower Harry Markopolos informed the SEC that he suspected the gains Madoff claimed to deliver to be legally and mathematically impossible to achieve, but it actually took Bernard Madoff confession to uncover this giant scheme.

 

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