Bernie Madoff Summarized

April 27, 2009 by  
Filed under Business News, Commentary

Fortune has an extensive piece on Bernard Madoff’s well-publicized $65 billion fraud. Entitled How Bernie Did It, they uncover various aspects of the plot to bilk investors out of billions. It’s worth the read, but I understand the time commitment of scanning an 11,000 word essay.  I’m summarizing the basics – in hopes you’ll never be caught in such a swindle.

According to the article…

Bernard Madoff was a family man. He married his high school sweetheart, Ruth, who by all accounts is gracious and lively. They had two sons who followed him into the family business. In 2006, Madoff’s nephew, Roger Madoff, died from leukemia complications. He donated millions to cancer research because of family ties.

In addition to his massive fraud, Bernard Madoff ran a legitimate investment business. The “real” business centered on market making. Madoff’s traders earned pennies on each trade – but made a lot of trades.  For a variety of reasons the market-making business ceased being profitable in the last few years, thus requiring a $250 million cash infusion from Madoff’s other “business”.

Bernard Madoff ran his $65 billion Ponzi scheme from the 17th floor in the Lipstick Building, New York. Investors received statements showing consistent double digit returns. Even last October, the fund was supposedly up +4.5%.  He used an IBM server that dated from the 1980s to process “transactions.” Emails were eventually banned at the unregulated firm, although not at the legitimate firm.

Bernard Madoff had a couple of close calls before finally confessing his crimes. In 1992, one of his feeder funds ran into some trouble with the SEC. He skirted the issue by producing $441 million at the SEC’s request. In 2006, he ran into another problem with the SEC. After instructing some business partners to shade the truth, then by personally lying to investigators, he averted disaster.

Bernard Madoff was the consummate con-man. From convincing investors to sign over their life savings to lying to Congress about his involvement in establishing the NASDAQ, Madoff could talk the millions out of the best of them. He added to the mystique by making his hedge fund a “private club.” Members could sign up only if they knew someone already inside.

It appears so far that Bernard Madoff’s family was not involved in the ruse. Both his sons and his business partner/brother Peter Madoff were supposedly not involved in the scheme. One person with intimate knowledge of the events, Frank DiPascali, was Bernie Madoff’s right-hand man. DiPascali is in talks with prosecutors right now and is reportedly willing to name names. Time will tell if the family gets tied to the scheme.

There was never $65 billion; investigators estimate Madoff collected $20 billion of original investments. The larger number was inflated during the scheme and was a figment of Madoff’s imagination – and unfortunately, his investors.

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