Bernie Madoff may have run the most successful Ponzi scheme ever devised by a private citizen, but does he deserve to be remembered as history’s greatest scam artist? Estimates of the scope of the scheme range from $10 billion to $17 billion. Some early accounting tallied closer to $50 billion, but that number included non-existent profits from years of false trading.
Bernie Madoff died aged 82 a lonely prisoner’s death. Convicted for 11 federal crimes in 2008 and sentenced to 150 years in jail, this was to be his inevitable demise. So how did Madoff evade scrutiny and capture for decades while convincing investors/victims that he was a Wall Street trading genius capable of delivering fabulous returns during all market conditions?
One might assume that a successful scam artist will be a smooth-talking salesman who reels the suckers in with his polished delivery. But Bernie Madoff was not an overly charismatic man. He was shy and awkward and spoke with a noticeable stutter. He was a poor communicator and many were moved through sympathy to finish the sentences that Madoff could not.
To meet with Bernie Madoff was sold as the glittery opportunity of a lifetime. He rebuffed investors, told many they did not have sufficient funds for his firm, ran late to appointments, and that made more appealing. People demanded Madoff take their money. He was the definitive anti-salesman. He played hard to get, rebuffed advances, and the tactic worked to the tune of billions of dollars.
Why Do People Fall For Scam-Artists?
All public-facing scams are designed to capitalise on the greed of the gullible. We have all received emails from Nigerian princes who have millions that need to be smuggled out of their homeland. Our new friend needs access to our bank account and a tiny upfront payment so the funds may be cleared. The naïve recipient says ‘screw it, I want to be a millionaire too’, and pays the tiny fee before dreaming of seaside mansions and bright yellow Lamborghinis.
What follows is a torturous and long-winded journey that results in the loss of a family home. The duped individual feels compelled to keep paying his purported Nigerian benefactor greater and greater sums to unlock the millions. Duty and excise fees, bribes for banking officials, detergent to wash dye from the banknotes, cash wiring charges, the demands are never-ending. To stop paying him would be to lose hope of securing the loot, and to tell others of the folly would be embarrassing, so a house is quietly mortgaged, and more and more money is sent. Once the mark has been wrung completely dry, the emails stop coming, and a life is ruined.
A well-constructed Ponzi scheme plays to the same underlying motivations of human greed. A financial wizard is capable of consistently beating standard market returns. He runs a private investment club with strictly limited access. So instead of investing with a renowned and well-regulated firm, dreams of fabulous wealth entices the victim to punt on the dubious genius. And the returns flow. So long as the Ponzi master is attracting new investors, he will pay out market-beating rates of return.
The Madoff investors were mostly wealthy residents of New York and Palm Beach. They sent the speculative portion of their portfolio to Madoff and true to his word, the promised dividends were forthcoming. The net widened in later years as Madoff employed agents across the globe to procure new funds. Madoff also managed funds for many charities. These were great clients as they were less likely to suddenly demand the return of their principal investment.
The actual scam portion of Bernie Madoff’s enterprise was largely unsophisticated. Between 1960 and 1990 he did trade the markets using apparently cutting-edge software. But this activity slowed and by the late 1980s, his firm was a complete façade. He ran a small ‘trading room’ that made no trades. Receipts were forged and posted to investors to suggest activity, but these were also often sloppy. Many did not contain enough digits, and any investment insider could see within minutes that Madoff was not running a legitimate investment firm. Rumours circulated Wall Street that Madoff was somehow front-running the market, but these were never fully investigated.
The whistle was blown on Madoff quite early in his game, notably by Edward Thorp in 1991 and Harry Markopolos in 2001. Markopolos wrote a detailed 17-page memo entitled ‘The World’s Largest Hedge Fund is a Fraud’. His explosive report was ignored by mainstream media companies. In 2003 the SEC’s Office of Compliance Inspections and Examinations sent Eric Swanson to investigate the Madoff organisation. He met and fell in love with Madoff’s niece, and that ended his line of inquiry.
Madoff’s longevity is therefore a testament more to lax law-enforcement than extraordinary scam-artistry. There were no aggrieved parties as long as the money kept flowing, so the SEC and other investigations failed to get off the ground. Madoff had a reputation as a private man who somehow beat the market every year. He made wealthy people more money. So what if he batted at 99% during all market conditions? Where was the crime?
The Ponzi scheme almost unravelled in 2005, but finally fell apart in the crash of 2008. Redemption requests could not be met and Madoff admitted defeat. Roughly $14 billion was recovered and settled. This process involved seizing funds from early investors and returning them to later participants. The only real losses are what Madoff was able to spend. His personal assets were declared at $826 million at the time of his arrest. Property, artwork, jewellery, and investments were all liquidated and returned to victims.
So what to make of Bernie Madoff and his long-running Ponzi scheme? He used market knowledge, forged a reputation, attracted billions in investments, dutifully paid his dividends when they were due, shaved a decent slice off for himself, collected expensive watches and sets of cufflinks, and fooled a great deal of people for decades. He achieved this by cultivating an aura of inaccessibility. Most of his clients were referred via word of mouth. He did not actively promote his fund. He developed a reputation as a financial genius and then played hard to get.
There are undoubtedly lessons to be learned from the man who took his Ponzi scheme to dizzying heights.
Jackson Byrne – Business Editor