Bernard Lawrence "Bernie" Madoff was an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of an estimated $65 billion over the course of at least 17 years.
He was also a pioneer in electronic trading and chairman of the Nasdaq stock exchange in the early 1990s.
Madoff died in a prison hospital at age 82 on April 14, 2021, while serving a 150-year sentence for money laundering, securities fraud, and several other felonies.
Key Takeaways
- Bernie Madoff was a money manager responsible for one of the largest financial frauds in modern history.
- Bernie Madoff's Ponzi scheme, which ran for decades, defrauded thousands of investors out of tens of billions of dollars.
- Investors put their trust in Madoff because he created a front of respectability, his returns were high but not outlandish, and he claimed to use a legitimate strategy.
- In 2009 Madoff was sentenced to 150 years in prison.
:max_bytes(150000):strip_icc()/bernard-madoff.asp_final-9393eeb8ad1645788dcc0aa2ffaebc01.png "Bernie Madoff: Who He Was and How His Ponzi Scheme Worked (1)")
Early Life and Education
Madoff was born in Brooklyn, New York, on April 29, 1938, to Ralph and Sylvia Madoff. His father worked as a plumber before entering the financial industry with his wife. They founded Gibraltar Securities, which 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 college, Bernie married his high-school sweetheart, Ruth (née Alpern), with whom he later founded Bernard L. Madoff Investment Securities LLC in 1960.
At first, he traded penny stocks with $5,000 he earned installing sprinklers and working as a lifeguard.
Notable Accomplishments
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 Fishman, Madoff said, "We were a small firm, we weren't a member of the New York Stock Exchange. It was very obvious."
According to Madoff, he began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he told Fishman, giving the example of a client who wanted to sell eight bonds; a bigger firm would disdain that kind of order, but 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 down, entertaining 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—controversially, he paid for much of it—and by the late 1980s, Madoff was making in the vicinity of $100 million a year.
Madoff would become chair of the Nasdaq exchange in 1990, and also served in that role in 1991 and 1993.
Scandal, Scheme, and Crime
At some point, Madoff attracted investors by claiming to generate large, steady returns through an investing strategy called split-strike conversion, a legitimate trading strategy.
What Madoff was really doing was depositing client funds into a single bank account that he used to pay existing clients who wanted to cash out. He funded the redemptions by attracting new investors and their capital. This is the classic Ponzi scheme model: Take in a constant stream of new money while paying enough back to maintain the appearance of outsized gains.
Inevitably, the fraud unraveled when the market turned sharply lower in late 2008 and too many clients sought to withdraw their money.
On Dec. 10, 2008, he confessed his wrongdoing to his sons—who worked at his firm. The following day, they turned him over to the authorities. Bernie remained adamant that his sons and his wife were not aware of his scheme.
The fund's last statements indicated it had $64.8 billion in client assets.
The Players
It is not certain when Madoff's Ponzi scheme began. He testified in court that it started in the early 1990s but his account manager, Frank DiPascali, who had been working at the firm since 1975, said 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 lifestyle and my family's lifestyle. I didn't need to do this for that," he told Fishman, adding, "I don't know why."
The legitimate wings of the business were extremely lucrative, and 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 said, without 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 time, but 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 greedy, everybody wanted to go on, and I just went along with it," Madoff told Fishman. He indicated that these investors, at least, must 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.
The Scheme
When clients sought to redeem their investments, Madoff funded the payouts with new capital, which he continued to attract through a reputation for unbelievable returns and by grooming his victims. Madoff cultivated an image of exclusivity, often initially turning clients away.
This model allowed roughly half of Madoff's investors to cash out at a profit. These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money.
Madoff created a front of respectability and generosity, impressing investors with his activities on behalf of charities. In fact, many nonprofits were among his victims. About 10% of the money he swindled came from nonprofit organizations, according 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 strategy, also known as a split-strike conversion. A collar is a way of minimizing risk, protecting underlying shares by purchasing an out-of-the-money put option.
- His returns were high (10 to 20% per annum) and consistent, but not outlandish. As the Wall Street Journal reported in a now-famous interview with Madoff, from 1992:
"[Madoff] insists the returns were really nothing special, given 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."
The Investigation
The SEC had been investigating Madoff and his securities firm off and on since 1992—a fact that frustrated many after he was finally prosecuted since it was felt that much of the damage could have been prevented if the initial investigations had been rigorous enough.
Financial analyst Harry Markopolos was one of the earliest whistleblowers. In 1999, he calculated in the space of an afternoon that Madoff had to be lying. He filed his first SEC complaint against Madoff in May 2000, but the regulator ignored him.
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 case, there 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."
Many felt that Madoff's worst damage could have been prevented if the SEC had been more rigorous in its initial investigations.
It was not until 2005—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 list, the SEC drafted letters to two of the firms listed but didn't send them, and that was that.
"The lie was simply too large to fit into the agency's limited imagination," writes Diana Henriques, author 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 2008, Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6% despite a 39% decline in the S&P 500 during that period. As the selling continued, Madoff could no longer fulfill the cascade of client redemption requests.
So, on Dec. 10, according to the account he gave Fishman, Madoff confessed to his sons Mark and Andy, who worked at their father's firm. "The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said, 'You gotta turn your father in,' they went, did that, and then I never saw them again." Bernie Madoff was arrested on Dec. 11, 2008.
Madoff insisted he acted alone, though 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. 5, 2020, Madoff'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.
Madoff, prisoner No. 61727-054, remained at the Butner Federal Correctional Institution in North Carolina until he died in the prison hospital on April 14, 2021.
The Aftermath
The paper trail of victims' claims displays the complexity and sheer size of Madoff's betrayal of investors. His final account statements, which include millions of pages of fake trades and shady accounting, show that the firm had $47 billion in "profit."
While Madoff pleaded guilty in 2009 and was sentenced to spend the rest of his life in prison, thousands of investors lost their life savings, and multiple tales detail the harrowing sense of loss victims endured.
As of late September 2022, about $4 billion was returned to some 40,000 of his victims via the U.S. Department of Justice's Madoff Victim Fund.
Depictions of Bernie Madoff in Popular 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 2017, Madoff 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.
Who Was Bernie Madoff?
Bernie Madoff was an American financier who orchestrated the largest Ponzi scheme in history, collecting about $65 billion that he had no intention of investing.
Bernie promised investors high returns in exchange for their investments but their money was not invested. Madoff deposited it into a bank account, which he freely used to fund his lavish lifestyle. Withdrawals were funded out of new deposits, keeping the fraud going for decades.
During the 2008 recession, Madoff could no longer meet the redemption requests. His sons turned him in to the authorities.
Madoff was convicted of fraud, money laundering, and other related crimes, for which he was sentenced to 150 years in federal prison. He died in prison on April 14, 2021, at the age of 82.
How Much Money Did Bernie Madoff Return?
Madoff's assets, including real estate, yachts, and jewelry, were seized and sold by the Feds to reimburse his victims. As of September 2022, only about $4 billion had been returned to 40,000 victims.
How Did Madoff Get Caught?
Although several people alerted the SEC and other authorities of Bernie Madoff's scheme, it wasn't until he confessed to his sons that he was caught. In 2008, when Bernie could no longer accommodate investors' redemption requests, he admitted his wrongdoings to his sons, Mark and Andrew, who turned their father over to authorities.
The Bottom Line
In 2009, at age 71, Madoff pleaded guilty to 11 federal felony counts, including securities fraud, wire fraud, mail fraud, perjury, and money laundering.
His Ponzi scheme became a potent symbol of the culture of greed and dishonesty that, to critics, pervaded Wall Street in the run-up to the financial crisis. Madoff, the subject of numerous articles, books, movies, and biopic miniseries, was sentenced to 150 years in prison and ordered to forfeit $170 billion in assets, but no other prominent Wall Street figures faced legal ramifications in the wake of the crisis.
In April 2021, Madoff died in a federal correctional facility at age 82.
