Madoff’s $50 Billion Ponzi Scheme

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Bernard MadoffIf you haven’t read the news lately, you should because one of the biggest scams of all time was uncovered in what could see the term Ponzi scheme renamed the Madoff scheme. Bernard L. Madoff was once the head of the Nasdaq (yes, the head of the Nasdaq) and started his own investment firm, Bernard L. Madoff Investment Securities. Over the course of decades, Madoff took investor’s money, lived the high life, and soon lost it all when investors started pulling out their money when the market went south this year. In classic Ponzi scheme fashion, once the money starts leaving, the scheme is discovered.

Some of the individual ensnared include J. Ezra Merkin, chaiman of GMAC; Fred Wilpon, principal owner of the New York Mets (miss the playoffs badly two years in a row and discover your money’s been lost due to fraud? That’s a rough run…); and Norman Braman, former owner of the Philadelphia Eagles. In total, it’s an estimated $50 billion in losses and some people don’t even know they’ve lost money because various funds invested with Madoff. For example, Merkin founded several hedge funds and one, Ascot Partners, had all of its $1.8 billion invested with Madoff.

Until his recent foray into Ponzi, Madoff was a well-respected member of the investment community. He was credited as being a pioneer in market-making, which is the act of being the middle man between buyers and sellers of stocks. It was that work that led him to become the chairman of the Nasdaq, bringing in a tremendous amount of business. However in the 1990s, he used that success to launch the asset management firm that, sometime in 2005, would turn into the largest Ponzi scheme ever.

Despite his gains, a growing number of investors began asking Madoff for their money back. In the first week of December, according to the SEC suit, Madoff told a senior executive that there had been requests from clients for $7 billion in redemptions. On Wednesday, Madoff met with his two sons to tell them the advisory business was a fraud — “a giant Ponzi scheme,” he reportedly told them — and was nearly bankrupt. The sons reportedly contacted their lawyer, who then alerted federal authorities to the fraud. Before being caught, Madoff was working on a scheme to dole out his funds’ remaining $300 million to the firm’s employees and his family members.

It’s an absolutely stunning story. How are you supposed to protect against that?

(Photo: AP)

{ 11 comments, please add your thoughts now! }

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11 Responses to “Madoff’s $50 Billion Ponzi Scheme”

  1. Cap says:

    This entire episode just out right blew my mind away. Not just the amount involved, but the stature of the person in question. Sigh.

  2. Dave says:

    I find this absolutely amazing. The fact that he was able to get away with it for so long just baffles the mind – I read that he never showed anyone the books and he had some small town firm do the audits on them (which I’m sure he paid off).

    I also find it crazy that he had so many high profile clients – do people just get dumb when they become rich? I can’t imagine giving that much money to someone I didn’t trust.

    I also wonder if this is going to get some government agency to start checking on all the mutual funds out there and uncover more of these things…

    • jim says:

      @Dave: I think they did trust him, I mean he was once the chairman of the Nasdaq and, until this incident, very well respected. I think he should write a book and then use the proceeds to repay the people he stole from. I’d really like to read what went on in his mind… the guy pioneered market-making, he couldn’t have been doing that poorly in the money department.

  3. Eric N. says:

    I’m glad I am no one near that mess. I feel bad for all the unknowing people though.

  4. Boogie says:

    “How are you supposed to protect against that?”

    Simple. Have an independent auditors. SEC should employ numerous CPAs (preferably honest) who can evaluate and who would have a full access to financial statements of hedge funds/capital management firms whenever they want.
    The whole 50-billion dollar Madoff scheme (as you might have read) was “presumably” under the audit of an almost fictional 1-person CPA firm somewhere in NJ.
    It looks like folks over at SEC should be invited Congress soon.

  5. Brad says:

    Many of the “victims” were driven by pure greed, in which the drive for higher returns negated the years of reports of this guy’s questionable returns.

    It is very important to question unrealistic gains and promises of consistantly high returns. The funds investing were financial firms and financial professionals. No one paid attention to the people calling this company’s returns unrealistic?

    It is also an important reminder to know where your funds are invested and to not invest in one basket alone.

  6. Ed says:

    I think Brad hit’s the nail on the hit here. Consistanly high gains is not normal in a market. I know someone personally who had lots of money with one of Madoff’s investors. During the past year my friend didn’t lose any money but had gains… you have to wonder why you’re making all this money while you’re in the midst of that.
    Another bad habit is keeping all of a portfolio with one firm, like my friend did. If something happens to it, you lose everything.

    • jim says:

      Another thing this issue highlights is how much research an individual needs to do when picking mutual fund investments. You could have the bad luck of owning several mutual funds that all invested a bit in Madoff’s funds and end up with a high percentage than you’d like. The one thing all this economic turmoil has taught us is that we need to read more about what we’ve invested in because no one else will.

  7. xmen says:

    Putting all the scholarly thoughts aside and the “should haves” to rest. The simple fact is this man and many others like him are criminals of the worst kind and these kinds of people are becoming the norm. Our society has developed into one that has allowed immorality and dishonesty among those in the highest places. This includes politicians, priests, sports figures, and business leaders to name a few. The punishments that are handed out to these villains are in no way equal to the crimes they commit. Especially when some of those who are equally dishonest and evil in their own way are handing out the punishments. The answer to these problems and the punishment required is a simple one that dates back to the beginning of mans existence. If Mr. Madoff’s fellow villains could see him hanging lifeless and naked from the gallows, I guarantee you we would see a paradigm shift in the realm of honesty and morality among this countries villains. Those who are brave and honest should be recognized, rewarded and showered with our gratitude. Unfortunate? Yes, but very necessary to combat the steep decline this country is falling into. Honesty and treating fellow humans with love and respect cannot be taught to those who do not possess these traits. It is a disease with only one cure.

  8. E says:

    AMEN! to XMEN. Thats exactly what I’ve been thinking since all the latest headllines read: Fraud, liars, cheats etc. I’m glad there are others out there that are concerned with the heightened level of immorality we’re facing everyday. Its very sad.

  9. Spanky Davis says:

    greed. rich people wanted more and more.

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