Bernard L. Madoff Investment
Securities was founded in the early
1960’s. In 2008, it was discovered to be the biggest Ponzi scheme in history. How he did it?
Madoff conducted a ponzi scheme. He lured investors in by promising large, consistent returns on their money. He would then pay returns to these investors with the money from new investors and keep whatever was left over for himself.
Usually, Ponzi schemes do not last very long because of a few reasons 1) The person running the scheme runs away with the money
2) Lack of new investors
3) Current investors begin to request returns in excess of what can actually be paid to them
Madoff Securities was audited by David Friehling of Friehling & Horowitz from 1991 to 2008.
Friehling & Horowitz was a small accounting firm located in a strip mall in
New City, NY. The firm consisted of three people: a secretary, an accountant and a partner in his 70’s living in Florida.
Friehling admitted that he failed to verify the assets of Madoff’s investment company or ensure that bank account records/chart listings for the purchase of securities were accurate.
Friehling received $186,000 each year from Madoff for his “auditing” services. Suspicion
Since 1999, multiple reports were filed with the SEC questioning
Madoff Securities. The SEC continually failed to find any wrong doing.
This could partially be due to the fact that Madoff was a respected member of the financial community.
MPI, a quantitative research firm, looked into Madoff and were unable to find a valid strategy to generate the amount of profit Madoff claimed to make.
A few clients suspected that Madoff was illegally trading but they did not think it would endanger their money.
Why he got caught?
In 2008, when the recession hit the United States, investors began demanding their money back. Madoff was paying returns quicker than he was bringing in new investors.
Clients were requesting returns totaling $7 billion when Madoff only had about $300 million.
On December 10, 2008, Madoff confessed his scheme to his sons,
Andy and Mark, who turned him into the authorities and resulted in his arrest the following day.
Madoff is said to have lost his investors $65 billion over the course of 20 years because that’s how much he had falsely reported to them. However, he had actually only lost about $20 billion.
Bernard Madoff pled guilty to 11 counts of fraud, perjury and money laundering and is currently serving150 years in prison.
His brother Peter, the senior managing director and chief compliance officer, was sentenced to 10 years in prison for one count of conspiracy to commit securities fraud and one count of falsifying records.
Thirteen people have been charged with criminal wrongdoing since the