5 Years ago: Bernie Madoff Ponzi scheme that cost investors over $17 billion

It was one of the most destructive frauds in history—a major financier, highly trusted, who helped launch the NASDAQ stock market, promised huge returns to thousands of people. By the end, he controlled over $65 billion in investors’ cash. But one day, it all came crashing down for Bernie Madoff when all of his showmanship and fast talking couldn’t save him. With people calling for $7 billion of their money in withdrawals and Madoff only having $200 to $300 million, his scheme quickly collapsed. In December 2008, he was arrested; convicted in 2009, he now serves his 150-year sentence in a North Carolina federal prison.

People have asked how such a scandal could happen today, but in reality, Madoff’s fraud isn’t new. He simply adapted the Ponzi scheme to the 21st century. Made famous by Charles Ponzi, it works by promising potential investors financial returns far beyond what banks and traditional stocks offer. In Ponzi’s case, he promised 50% returns on investments in just 90 days; unfortunately, for a Ponzi scheme to work, there must always be money flowing in to cover what was promised. He was, as the saying goes, “robbing Peter to pay Paul”; all returns to clients were only on paper, and the investing strategies were vague and undefined.

Madoff faced the same problem. He counted on people wanting to make even more money, hoping they wouldn’t request payouts; he also counted on not being scrutinized, due to his reputation as a major financial player and as someone who advised the Securities and Exchange Commission on trading securities. But clues to Madoff’s fraud had surfaced again and again; in 1999, a financial analyst named Harry Markopolos told the SEC that he believed it was impossible to achieve the returns Madoff said his firm delivered. According to Markopolos, five minutes of calculations told him that the numbers did not add up; however, both the Boston and New York SEC offices ignored him.

In December 2008 everything changed for Madoff when the major flaw in the Ponzi scheme showed up to the tune of seven billion dollars. Too many clients had decided to remove their money at one time, and he didn’t have $7 billion in cash to pay them. He did promise his employees that $173 million in bonuses would be paid early though, leaving his sons to wonder how bonuses could be paid when they couldn’t make payments to clients. Admitting to his sons that it was a giant Ponzi scheme, Madoff was arrested on December 10, 2008.

Federal authorities seized over $170 million in personal assets from him; a federal trustee charged with liquidating Madoff’s businesses has recovered about $10 billion, but was recently denied the authority to sue banks involved with Madoff. Altogether, investors lost over $17 billion in Madoff’s Ponzi scheme, leaving his name tied to fraud and greed forever.

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