Turning a blind eye: how Bernie Madoff ripped off billions and got away with it

The most infamous Wall Street fraud since Charles Ponzi died this week – here’s how it all worked for one-time chairman NASDAQ … until it didn’t

The Bernie Madoff promised stellar returns to his A-list clients and instead defrauded them of more than $19 billion in history’s largest Ponzi scheme. Picture: Bloomberg

Bernard Madoff, the convicted fraudster, died this week in prison at the age of 82.

What set Madoff apart from other perpetrators of financial frauds was that he didn’t make extravagant promises of pie-in-the-sky returns to try to lure in the unsuspecting. His tactics were almost exactly the opposite. Madoff made a reputation of providing unerring positive returns, year in and year out, regardless of the fluctuations of the stockmarket.

He would take on investors on the condition they didn’t ask any questions.

What Madoff shared with the rogue’s gallery of swindlers going back to the original Charles Ponzi was that his returns were too good to be true.

Madoff’s fame among hedge funds for his ability to provide steady returns attracted both the very rich and famous, including Hollywood stars and owners of major league sports teams, as well as the merely well-off who entrusted their wealth to him.

A court-appointed trustee has managed to recover more than $US13bn of the $US17.5bn investors had entrusted to Madoff. At the time of his arrest in December 2008, their account statements showed holdings totalling $US60bn.

Madoff’s scheme unravelled when the stockmarket plunged in the wake of the GFC. Until then, he could simply falsify his investors’ statements with bogus trades that showed their accounts steadily rising in value.

That Madoff could get away with his scheme for so long was a testament to the credulity of his investors. He had burnished his reputation as a pillar of the investment world, including serving as the non-executive chairman of the Nasdaq stockmarket. Madoff also ran a major stockmarket-making operation apart from the investment management business.

And by delivering steady, double-digit returns, elite so-called feeder funds would place millions in Madoff’s supposed portfolios. These funds of funds existed to do supposed due diligence and direct clients’ money to the best managers — for a fat tab layered on top of the hedge funds’ own fees that would typically total 2 per cent of 20 per cent returns.

Madoff could command those princely payments because he supposedly generated results that increased his clients’ accounts in a steady, upward-sloping line.

Those who doubted Madoff’s results said they couldn’t duplicate them using his trades. He would scoff at anyone who would question the strategy’s viability. He confessed after his arrest that there were no trades, just fictitious numbers.

As with all Ponzi schemes, as long as the money kept coming in, the fraud could continue.

Among the doubters was fraud investigator Harry Markopolos, who also found it impossible to copy Madoff’s purportedly profitable strategy. He eventually tried to become a whistleblower, alerting the Securities and Exchange Commission about what he was convinced was a fraudulent operation run by Madoff.

In November 2005, more than three full years before Madoff’s scheme collapsed, Markopolos made a submission to the SEC entitled “The World’s Largest Hedge Fund Is a Fraud.” In it, he described alerting the commission’s Boston office about the scheme beginning in 1999. The picture that emerged of the regulators was one of a combination of bureaucratic indifference and incompetence after the scheme imploded.

But the fraud continued even after Barron’sraised doubts about Madoff’s inexplicably consistent high returns. Eventually, lives were destroyed by his actions, including one of his sons who committed suicide two years after his father’s arrest.

Among clients was the Wilpon family, the former owner of the New York Mets baseball team, who had used Madoff’s funds as a virtual bank account for the team’s expenses.

Others who entrusted their relatively modest nest eggs to Madoff found themselves broke in retirement, at least until some of his money was clawed back for his victims.

Madoff was able to attract billions in investors’ money after a career that started from modest circumstances. Born in the New York City borough of Queens, he become one of the pioneers of the Nasdaq, the first electronic exchange, and later became its chairman. Madoff and his brother, Peter, built a major market-making business, buying and selling stocks for institutional investors.  On a separate floor of their Midtown Manhattan office, Bernie also ran the secretive money-management business, which never actually made any trades but churned out phony customer statements.

The scandal was featured in a range of books and television features including the The Wizard of Lies based on a book by Diana Henriques, in 2017 with Robert DeNiro as Madoff.

After he was arrested, Madoff pleaded guilty in 2009 and was sentenced to 150 years in federal prison. In 2020, he sought compassionate release because of his terminal kidney failure and the risk from the coronavirus pandemic. He was admitted to a comfort care unit of the federal prison in Butner, North Carolina, instead, where he died.

Barron’s