Bernard Madoff, popularly known as Bernie, took the art of fraud to new heights after he defrauded investors off money in excess of sixty five billion dollars. This single scheme is one of the biggest frauds in the American history (Lenzner, 2008).
Madoff was an investor and a business consultant when he created his fraudulent scheme. After his arrest, Madoff actually admitted to constructing the fraud in the 1990s. The Federal Bureau of Investigations traced the scheme to 1970s.
The Madoff Investment Securities
Bernard Madoff Investment Securities outdid other companies at the Wall Street by eliminating various barriers between the customers and the business. Transactions occurred without any bureaucratic procedures leading to a massive increase in the number of interested investors.
Madoff’s shady business deals never received any significant attention despite exhibiting unusual behaviour. The lapse by investigators facilitated Madoff’s survival throughout several investigations and endured incriminating claims by skilled financial experts (Henriques, 2009).
Indicators of fraud
Madoff’s cover blew after financial experts expressed doubts about his business’s profit claim.
Other companies in the same line of business to the Madoff Company avoided any transactions with it since they believed that the Company’s profile and scale of success did not reflect a possible legitimate investment.
Although Markopolos, the financial expert who first detected serious anomalies in Madoff’s scheme made furious attempts to warn regulatory authorities and the relevant government departments of the fraud of a colossal scale, no one thought that Madoff’s investments needed scrutiny.
Another indicator to the covered scheme was the fact that Madoff did not have an accounting department or company capable of dealing with the massive scale of his investments.
The first alarm taken seriously by federal police was when Madoff contradicted himself when talking to one of his sons. He claimed that he was in a financial crisis, and at the same time, wanted to reward his employees by paying them bonuses (Lenzner, 2008).
While Madoff concentrated at making attractive deals for his customers, his employees were always busy preparing fake documentation for various transactions. In addition, they used computers to avoid the risk of making contradictory documentation. This way, the scheme lasted for decades.
Madoff’s firm started in early 1960s when he accumulated enough finances from his plumbing job to invest. By the turn of the millennium, Madoff had made a fortune to the tune of a third of a billion dollars.
Surprisingly, by that time, Madoff had very few staff members, a characteristic that raised concerns of the legitimacy of his business enterprises.
In addition to having a phenomenally small number of employees for his immense investment, Madoff claimed that his profit margin, which was above 16 percent, was because of his sound financial planning.
He added that informed business manoeuvres in the preceding two decades facilitated his success his success (Henriques, 2009).
Madoff survived by restricting his preferred clients to charitable organisations, which the government did not require to make annual payments to the relevant authorities like other private business entities.
Virtual business and the deceitful profile
Madoff gained confidence from his clients by offering attractive returns, and the claims to have a lucrative business at the stock market. Madoff had actually not performed any transaction in the stock market in the last decade of his business scheme.
The criminal business dealing entangled him in a vicious cycle since he could not exit the business. The amount of funds required to pay his client’s counterfeit returns were beyond the actually available funds.
Madoff had to remain in business with the all the skill and camouflage he could master. To avoid suspicion, Madoff avoided the abnormally high returns for all clients, a characteristic synonymous with all known ponzi schemes.
He offered mild gains for some of his clients to simulate a genuine business environment and avoided scrutiny. In addition, he discouraged any intentions of a clear insight into his scheme by saying that ordinary people could not understand the complexity of his business (Lenzner, 2008).
Since the prominent players in the investments business avoided trading with Madoff’s company, he befriended certain wealthy Jews, and religious organisations to enter into business deals with him.
Madoff avoided any suspicions of being a possible fraudster by avoiding direct communication with investors. His emissaries were the people at the front desk.
One peculiarity with Madoff’s firm is that it never suffered any depression at any one time despite the fact that depression is a common characteristic of most businesses over time. Of interest, Madoff avoided withdrawal of investments by offering the best returns and stability.
This was uncommon in his line of business. The clients would not withdraw their investments in fear that they would unable to invest again in the same firm.
Madoff ensured a swift withdrawal of money for the few clients interested in this regard. The firm was able to support these few withdrawals for decades.
Madoff befriended the securities industry, always offered contribution to SIFMA, and had a close relationship with the government in Washington. This strategy ensured that his company was a trustable virtual goldmine (Henriques, 2009).
The fraud nature of Madoff’s company was primarily the fake documentation and the incorrect returns figure he would post. It is not viable or even feasible to post returns that the real profit could not support.
For years, the company took in investors’ money, as the principle amount, never invested it, and withdrawals were from the existing pool of principal deposits. This pool would deplete at a rate proportional to the size of investments depending on the withdrawal rate.
Owing to the attractive rates offered by the firm, the rate of investment was always greater than the rate of withdrawal.
However, due to spending and paying out of returns, the total real pool of existing money was growing progressively lesser than the documented value that most investors believed existed. Eventually, this pool would have completely depleted leaving investors with no money.
It could have taken so long for the pool to deplete that Madoff would have a guarantee of bankruptcy security in his lifetime. However, there was a possibility that the company could have gone bankrupt within twenty years.
Madoff created satellite firms that persuade customers to invest their money with his company. Most of the satellite firms were semiautonomous and partly owned by his long time employees or relatives. Some of the satellite firms were unaware of the fraud.
Madoff had been consistent over years unlike other fraud scheme, which normally last a few years before spiralling into financial crises (Press, 2009).
Successive investigations into Madoff’s business and the cordial relationship that existed between Madoff and SEC cast doubt on the ability of the regulatory body to deal with Madoff’s case.
Prior to the fraud scheme’s exposure, the Financial Industry Regulatory Authority (FINRA) posted a conclusion on the findings that a section of the fraudulent firm did not have any investors putting their money in it.
It was obvious that the firm was running a fraudulent scheme if it could operate without any clients. Investors never questioned the firm’s capabilities as long it posted good returns for their investments.
Downfall
Financial experts expressed the belief that no company dealing with securities could go for more than a decade without a significant number of marked downward market trends.
When the financial market started to exhibit signs of a downward trend in 2008, Madoff started to run out of funds, and was desperate for money from new clients.
He started borrowing using partly hidden techniques. It was an unusual phenomenon that a successful firm of Madoff firm’s scale would borrow money for any reason through unconventional methods (Lenzner, 2008).
The total value of the withdrawal claims from Madoff’s firm escalated exponentially to about seven billion dollars. Consequently, the firm could not pay the withdrawals promptly.
Desperately trying to keep the scheme under control, Madoff borrowed from some old friends, and eventually tried to trick a Wall Street financier to lend him money to tackle the imminent bankruptcy.
He did this by purporting to have a massive investment project that needed quick finances. Until his arrest, Madoff and a few of his trusted employees were aware of the fraudulent nature of the business.
His sons caused his final fall when they demanded for an explanation regarding his plan to pay staff bonuses instead of paying investor’s withdrawal first. Madoff could not adequately explain his unusual order of priorities to his sons.
Under pressure from his sons and the collapsing business empire, Madoff admitted that the whole company was a financial fraud.
The authorities arrested him and moved him to a security facility as he waited for his trial. In his testimony, Madoff admitted to running the fraudulent setup. However, he claimed that he did not involve anyone else in the fraudulent scheme.
This appeared to be a manoeuvre to protect his long time affiliates and relatives from the authorities. Investigators assessed that it is impossible for anyone to run a scheme such as that of Madoff without having any assistance with the paperwork and enquiries by the customers.
In addition, for the scheme to appear to run in tandem with the current market situation, someone must have monitored the situation continuously and reflected the dynamic nature of business in the scheme.
Conclusion
Bernard Madoff was sentenced to 139 years in prison for his fraudulent activities after the court dismissed his lawyer’s plea for a twelve-year sentence. The lawyer had requested for a shorter sentence on the grounds of Madoff’s age.
Considering that Madoff run a colossal fraudulent scheme for more than two decades, it is advisable that the government establishes a regulatory body to monitor firms dealing with large amounts of client’s liquid cash.
Evaluating the internal transactions of a company could help in ensuring that frauds do not emerge in future.
Frauds such as the one perpetrated by Madoff endured the test of time since the company kept its internal operations secret. For elimination of ponzi schemes, there must be a system to detect issuance of false statements and returns.
References
Henriques, D. (2009, June 29). Madoff Suits Add Details About Fraud. New York Times, p. B1.
Lenzner, R. (2008, December 12). Bernie Madoff’s $50 Billion Ponzi Scheme. Forbes , p. 5.
Press, A. (2009, July 29). Bernard Madoff describes details of fraud, attorney for victims says. The Times-Picayune , pp. 4-13.