Bernie Madoff: Who He Was and How His Ponzi Scheme Worked

Bernard Lawrence "Bernie" Madoff orchestrated the largest Ponzi scheme in historydefrauding thousands of investors of an estimated $65 billion. A once-respected financier and former chairman of the Nasdaq stock exchangeMadoff manipulated the promise of steadyhigh returns to maintain his fraudulent operations for over 17 years. Despite his pioneering roles in electronic tradinghis legacy is forever marred by the scandal that led to his 150-year prison sentence for securities fraudmoney launderingand other felonies. Madoff passed away in prison on April 142021at the age of 82.

Bernie Madoff's Early Life and Education

Madoff was born in QueensNew Yorkon April 291938to Ralph and Sylvia Madoff. His father worked as a plumber before entering the financial industry with his wife. They founded Gibraltar Securitieswhich was ultimately forced to close by the SEC.

Bernie earned a bachelor's degree in political science from Hofstra University in 1960 and briefly attended law school at Brooklyn Law School. While in collegeBernie married his high-school sweetheartRuth (née Alpern)with whom he later founded Bernard L. Madoff Investment Securities LLC in 1960.

At firsthe traded penny stocks with $5,000 he earned instal ling sprinklers and working as a lifeguard.

Bernie Madoff's Rise in the Financial World

Madoff appeared to have a chip on his shoulder and felt that he was not part of the Wall Street in-crowd. In an interview with journalist Steve FishmanMadoff said"We were a small firmwe weren't a member of the New York Stock Exchange. It was very obvious."

According to Madoffhe began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he told Fishmangiving the example of a client who wanted to sell eight bonds; a bigger firm would disdain that kind of orderbut Madoff's would complete it.

Success finally came when he and his brother Peter began to build electronic trading capabilities—"artificial intelligence" in Madoff's words—that attracted massive order flow and boosted the business by providing insights into market activity. "I had all these major banks coming downentertaining me," Madoff told Fishman. "It was a head trip."

He and four other Wall Street mainstays processed half of the New York Stock Exchange's order flow—controversiallyhe paid for much of it—and by the late 1980sMadoff was making in the vicinity of $100 million a year.

Madoff would become chair of the Nasdaq exchange in 1990and also served in that role in 1991 and 1993.

Bernie Madoff's Ponzi Scheme: Scandal and Impact

Madoff attracted investors by claiming to generate steady returns through a strategy known as split-strike conversiona legitimate trading approach that lent credibility to his operation. In realityregulators later determined that client funds were not invested as representedand account activity was misreported to sustain investor confidence.

The scheme collapsed in late 2008 amid market turmoil and increased redemption requests. On Dec. 102008Madoff confessed his wrongdoing to his sonswho reported him to authorities the following day. Madoff maintained that his family members were unaware of the fraud. The fund’s final account statements indicated approximately $64.8 billion in purported client assets.

Key Figures in Bernie Madoff's Ponzi Scheme

It is not certain when Madoff's Ponzi scheme began. He testified in court that it started in the early 1990s but his account managerFrank DiPascaliwho had been working at the firm since 1975said the fraud had been occurring "for as long as I remember."

Even less clear is why Madoff carried out the scheme at all. "I had more than enough money to support any of my life and my family's life. I didn't need to do this for that," he told Fishmanadding"I don't know why." The legitimate wings of the business were extremely lucrativeand Madoff could have earned the Wall Street elites' respect solely as a market maker and electronic trading pioneer.

Madoff repeatedly suggested to Fishman that he was not entirely to blame for the fraud. "I just allowed myself to be talked into something and that's my fault," he saidwithout making it clear who talked him into it. "I thought I could extricate myself after a period of time. I thought it would be a very short period of timebut I just couldn't."

Madoff put some of the blame on his clients. Several wealthy individuals and a number of fund managers funneled vast amounts of money into Madoff's firm. Some were "feeder funds" that essentially handed over their clients' entire assets to Madoff to manage.

"Everybody was greedyeverybody wanted to go onand I just went along with it," Madoff told Fishman. He indicated that these investorsat leastmust have had their suspicions about the returns he claimed to be producing. "How can you be making 15 or 18% when everyone is making less money?" Madoff said.

Key Characteristics of Madoff’s Fraud

Madoff’s fraud worked by giving false information about investments and using money from new investors to pay those who wanted to withdrawinstead of making real profits through trading. The scheme lasted because there was little transparency and investors trusted himbut it collapsed when more people tried to take out their money and there were no real assets to cover the requests.

Madoff created a front of respectability and generosityimpressing investors with his activities on behalf of charities. In factmany nonprofits were among his victims. About 10% of the money he swindled came from nonprofit organizationsaccording to the New York State Attorney General's Office.

Madoff's plausibility to investors was based on several factors:

• His principal public portfolio appeared to stick to safe investments in blue-chip stocks.
• He claimed to be using a collar strategyalso known as a split-strike conversion. A collar is a way of minimizing riskprotecting underlying shares by purchasing an out-of-the-money put option.
• His returns were high (10 to 20% per annum) and consistentbut not outlandish. As the Wall Street Journal reported in a now-famous interview with Madofffrom 1992:

"[Madoff] insists the returns were really nothing specialgiven that the Standard & Poor's 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992. 'I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding,' he says."

Investigating Bernie Madoff: How His Fraud Was Uncovered

The SEC intermittently investigated Madoff starting in 1992. Many believe more rigorous probes could have prevented much of the damage.

Financial analyst Harry Markopolos was a whistleblower. In one afternoon in 1999he figured out that Madoff was lying and filed an SEC complaint in May 2000but they ignored it.

In a scathing 2005 letter to the Securities and Exchange Commission (SEC)Markopolos wrote"Madoff Securities is the world's largest Ponzi Scheme. In this casethere is no SEC reward payment due to the whistle-blower so basically I'm turning this case in because it's the right thing to do."

It was not until 2006—shortly after Madoff's firm nearly went belly-up due to a wave of redemptions—that the regulator asked Madoff for documentation on his trading accounts. He made up a six-page listthe SEC drafted letters to two of the firms listed but didn't send themand that was that.

"The lie was simply too large to fit into the agency's limited imagination," writes Diana Henriquesauthor of the book "The Wizard of Lies: Bernie Madoff and the Death of Trust," which documents the episode.

The SEC was excoriated in 2008 following the revelation of Madoff's fraud and their slow response to act on it. Eight employees faced disciplinary action but none were fired.

The Punishment

In November 2008Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6% despite a 38% decline in the S&P 500 during that period. As the selling continuedMadoff could no longer fulfill the cascade of client redemption requests.

Soon Dec. 10according to the account he gave FishmanMadoff confessed to his sons Mark and Andywho worked at their father's firm. "The afternoon I told them allthey immediately leftthey went to a lawyerthe lawyer said'You gotta turn your father in,' they wentdid thatand then I never saw them again." Bernie Madoff was arrested on Dec. 112008.

Madoff insisted he acted alonethough several of his colleagues were sent to prison. His elder son Mark Madoff committed suicide exactly two years after his father's fraud was exposed. Andy Madoff died of cancer at age 48 in 2014.

The Sentence

Madoff was sentenced to 150 years in prison and ordered to forfeit $170 billion in 2009. His three homes and four boats were auctioned off by the U.S. Marshals.

On Feb. 52020Madoff's lawyers requested that Madoff be released early from prison claiming that he was suffering from a terminal kidney disease that would kill him within 18 months.

Madoffprisoner No. 61727-054remained at the Butner Federal Correctional Institution in North Carolina until he died in the prison hospital on April 142021.

Aftermath of Bernie Madoff's Ponzi Scheme

The paper trail of victims' claims highlights the complexity and size of Madoff's betrayal. Final account statements with fake trades and shady accounting show $47 billion in "profit."

While Madoff pleaded guilty in 2009 and was sentenced to spend the rest of his life in prisonthousands of investors lost their life savingsand multiple tales detail the harrowing sense of loss victims endured.

In December 2024about $4.3 billion was returned to some 40,930 of his victims via the U.S. Department of Justice's Madoff Victim Fund.

Bernie Madoff's Legacy in Media and Pop Culture

Bernie Madoff has been depicted as a villain in the media and pop culture. In a 2009 episode of HBO's Curb Your Enthusiasm, Jason Alexander (who played George on Seinfeld) is swindled by Madoff and loses all of his money. Madoff or similar knock-offs appeared in Woody Allen's film Blue Jasmin, and in Elinor Lipman's novel, The View from Penthouse B.

In 2017Madoff was played by Robert DeNiro in the HBO film The Wizard of Lies. Several documentaries and books have recounted Madoff's fraud and his fall.

The Bottom Line

In 2009at age 71Madoff pleaded guilty to 11 federal felony countsincluding securities fraudwire fraudmail fraudperjuryand money laundering.

His Ponzi scheme became a potent symbol of the culture of greed and dishonesty thatto criticspervaded Wall Street in the run-up to the financial crisis. Madoffthe subject of numerous articlesbooksmoviesand biopic miniserieswas sentenced to 150 years in prison and ordered to forfeit $170 billion in assetsbut no other prominent Wall Street figures faced legal ramifications in the wake of the crisis.

In April 2021Madoff died in a federal correctional facility at age 82.