Bernard Madoff's Ponzi Scheme

The $50 Billion Tragedy

Major acts of fraud in the early 21st century have proven that the ancient ponzi scheme model designed to feed off the greed of others is quite far from dead. Whether a dark recession clouds a nation's optimism or a booming economy elicits cheer, people are drawn to promises of high returns and quick riches.

The most shocking incident of fraud resulted from Bernard Madoff's Ponzi Scheme, which is now the largest individual act of fraud recorded in the history of the United States.

The Truth is Revealed
to the World

As the recession in 2008 took its toll on the United States' economy, various wealthy investors across the world became more interested in liquidating their assets. Many participants in Bernard Madoff's firm followed this suit and began to request the money that was owed to them.

Realizing that he was unable to face the challenge of proving his boasted profits, Madoff called together his employees and admitted the truth: There were no investments. "Profits" had simply been forwarded to old investors using the classic "rob Peter to pay Paul" system.

After his own employees were forced to report Madoff to the SEC, he realized that he had no choice but to come clean. Shock rang out around the globe soon after Madoff admitted the truth about his treacherous scam. Over $50 Billion had been recklessly circulated through the giant community money pot that was used to satisfy the old investors.

What's in a Name?

In this situation, apparently the name "Bernard Madoff" meant everything. As the former chairman of the NASDAQ Stock Exchange, Madoff had previously built up a solid reputation and developed many wealthy, powerful contacts. In addition to his revered status as a financial genius, Madoff was considered to be charming and influential.

Prestigious wealth managers were drawn to Madoff Securities' tremendous success. Many individuals were happy to throw their money at Madoff even though he refused to explain the exact nature of his investments. The reputation and "results" of the firm were enough to satisfy many of the inquisitive minds.

Once the vast majority of angry investors found out they had been duped, they began to realize the careless nature of their investment process. Many victims essentially admitted, "Everything looked excellent on the outside, and I guess I just became greedy." Bernie Madoff had carefully concealed the truth about his firm's "operations" from each of his investors and employees; therefore, most participants had essentially succumbed to blind faith when they decided to invest. As with most programs and companies using a ponzi scheme model, human greed was the primary catalyst.

Who was hurt by Madoff's scam?

Although several wealthy individuals only deposited relatively small amounts with Madoff's firm, some invested hundreds of millions of dollars. Many prosperous businessmen and celebrities, such as Steven Spielberg and Fred Wilpon, New York Mets owner, even publicly admitted they had lost a sizable chunk of their fortune to Madoff's deception.

Some victims may have lost only a small pinch of their net worth, but others lost everything. As the news of Madoff's scam quickly spread, new horror stories began to surface. Several individuals had even trusted their retirement with Madoff, and lost every penny they had diligently worked for within the past 30 - 40 years.

Bernard Madoff offered his clients a steady, high rate of return. The ROI was relatively constant, whether the market itself was up or down, giving his clients the impression that his investment structure was reliable and consistent. Unfortunately, this false appearance of reliability led many non-profit organizations to trust Madoff with their funds. Many family charities were severely scarred once the ponzi pool collapsed.

The Consequences

Bernie Madoff pled guilty to 11 felonies on March 12, 2008, and faces up to 150 years in prison. Regardless of the sentence, it is doubtful that Madoff will spend less than the rest of his life in prison. Recent reports indicate that the total sum of Madoff's money laundering exceeded $65 billion, which is significantly larger than the original estimate of $50 billion.

As a result of ponzi scheme related operations, only a small fraction of investors' money remains. Some reports suggest that less than $1 billion is left. It is rather unlikely that most investors will see even a small percentage of their money returned to them. The authorities can usually do very little to alleviate the damages suffered by victims once the money pot of a ponzi scheme runs dry.

The People want to know "WHY?"

This despicable, financial tragedy left many people asking- "WHY? Why did you do this to us, Madoff?"

Bernard Madoff had initiated his ponzi scheme activities in the early '90s, and he claims he did so during a period when "times were rough." With his intelligence and experience in the financial world, the possibility of Madoff being unaware of the consequences (i.e. the inevitability of collapse and destruction to investors) is slim to none.

Greed, the central theme of all ponzi schemes, prevailed on both sides of table- the operator and the investors. And as with most scenarios flooded with greedy emotions, severe injuries were dealt to those with their guard down.

If nothing else, hopefully the world's largest ponzi scheme will serve as reminder that greedy desires should never cloud good judgment or replace intelligent, responsible financial decisions. Otherwise, the price to pay can be devastating.