The Madoff Investment Scandal
By Tarnbir Singh, Jonathan Mason,
David Yong, Jennifer Nguyen, and
Lucy Pham
About Bernard Madoff
• Born in Queens, NY
• His father was a stockbroker
• Received his BA in Political Science from
Holstra University
• Briefly attended Brooklyn Law School, but did
not receive a degree.
• Shortly after, founded his company: Bernard L.
Madoff Investment Securities LLC in 1960.
About Bernard L. Madoff Investment
Securities LLC
• In order 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 its quotes
• At one point, Madoff Securities was the
largest buying-and-selling "market maker" at
the NASDAQ.
Background
• Federal investigators believe the fraud in the
investment management division and advisory
division may have begun in the 1970s.
• By 2000, Madoff Securities, one of the top
traders of US securities, held approximately
$300 million in assets.
Ponzi Scheme
• Hallmarks of a Ponzi scheme:
- Abnormally high returns
- Abnormally consistent returns
- Sometimes begins as a legitimate investment
vehicle
Ponzi Scheme Cont.
• What ends a Ponzi scheme:
- Government intervention
- Promoter leaves with all the money
- Stream of new investors slows
- External economic factors cause investors to
withdraw their funds
Strategy Cont.
• Methods Madoff used:
- Madoff's Ponzi differed from others in that his
was based on a real brokerage organization
- Madoff never revealed much about his business,
and kept his financial statements secret
- By being so secretive, Madoff created an air of
mystery around his company and methods.
- People did not question Madoff, which is how
he got away with this scheme for so long.
- Split-strike conversion to cap the lose
What happened?
• 2008 (economic downturn): His scheme began
to unravel as the market began to dwindle.
• Investors wanted to withdraw their money.
• However, even with his new investors, Bernie
could not cover the amount needed to be
withdrawn
• December 2008: Bernie Madoff confessed to
his sons stating “it was one big lie” and he was
“finished”
Effect on International Community
• Forced the temporary closing of many charities
• Examples: Robert I. Lappin Charitable Foundation, the
Picower Foundation, and
• the JEHT Foundation
• Madoff’s Ponzi scheme also effected major banks
around the globe.
• Examples: HSBC Holdings PLC of Britain, Royal Bank of
Scotland Group PLC
• and Man Group PLC, Spain's Grupo Santander SA,
France's BNP Paribas and Japan's
• Nomura Holdings
Effect on Health Industry
• Also caused a large disruption in scientific and health communities.
• It even affected diabetes research and palliative care.
• Mortimer Zuckerman, a real-estate magnate, pledged to Memorial
Sloan-Kettering
• Cancer Center in 2006 an amount of $100 million.
• 10% of this amount was invested in Madoff’s business.
• Led to a loss of $30 million; many patients affected.
• Carl Schapiro, the founder of Kay Windsor Inc., has been a generous
donor to healthcare causes for many years.
• Donated to hospitals affiliated with Harvard.
• Lost $100 million in their foundations endowment.
• Also made a personal loss of $400 million due to Madoffs scam.
SEC Controls: Encouraging Greater
Cooperation from Insiders
• New incentives to give tips on illegal activity.
• Recruiting new staff with specialized
experience- bringing in staff to the SEC with
wide skill sets to expand its knowledge and
improve its ability to assess illegal operations.
• Ex. Barry Minkow.
SEC Controls: Enhancing Safeguards for
Investors’ Assets
• Surprise exams: random checks to ensure
compliance with regulations.
• Audit enhancements- broker dealer that
maintains custody of customers assets will
now have to go through a new compliance
examination that includes an audit of the
controls in place to protect customers
investments.
Aftermath
• Bernie Madoff was sentenced to jail for 150 years
in addition to his age.
• Criminal charges against five directors will
proceed against Swiss wealth manager Aurelia
Finance, which lost an alleged $800 million of
client money. The directors' assets have been
frozen.
• Elie Wiesel, holocaust survivor and nobel
laureate, lost his life savings and his charity lost
$15.2 million as a result of this scandal.
Aftermath
• One of the founders of Access International
Advisors LLC was found dead in his company
office on Madison Avenue in New York
City. Although no suicide note was found at
the scene, his brother in France received a
note shortly after his death in which he
expressed remorse and a feeling of
responsibility.
Aftermath
• On February 10, 2009, highly-decorated
British soldier William Foxton, OBE,65, shot
himself in a park in Southampton, England,
having lost all of his family's savings. He had
invested in the Herald USA Fund and Herald
Luxembourg Fund, feeder funds for Madoff
from Bank Medici in Austria.