Through his business started in 1960, Bernard L. Madoff Investment Securities LLC hedge fund, he operated the largest Ponzi scheme that has ever been uncovered. In 2008, that scheme finally caught up with him. Depending on the source, the scheme has been estimated to be ripping investors off for approximately 40 years. Madoff convinced investors that they were investing in fund that promised high returns with low risk involved. In the end, Madoff had dug himself too big of a hole and couldn’t climb his way out.
In 2008, financial crisis struck the US which had investors becoming more conservative. Madoff could no longer support his Ponzi scheme. In order for his scheme to continue to function, the system needs a continuous flow of new investors to support the previous investors and provide them with “gains”.
“Redemption requests for $7 billion, by investors looking to pull back from turbulent stockmarkets, forced Mr Madoff to admit that his coffers were empty—bearing out Warren Buffett's adage that only when the tide goes out is it clear who was swimming naked.” (The Economist 2008)
Madoff allegedly cheated about 8,000 investors in his scheme of somewhere between $15 billion and $65 billion. The exact figure varies with the source. He operated over a span of 40 years, paying off those who sought to cash out with funds secured from new clients, and he sent regular statements to investors detailing their holdings and their illusory high level of profits. (Geis 2013)
There were many red flags whom which Harry Markopolos made obvious to the SEC. Although, the red flags were true and apparently obvious the SEC continued to ignore Harry’s claims for several years. Some of the red flags Markopolos identifies include; Split-Strike Conversion, Market Timing, Cheaper to Borrow, Giving Up Profits, Secrecy and Performance Line Had a 45-Degree Angle. These red flags should have been enough for the attention of the SEC to investigate Bernie Madoff’s wealth management business.
Largest Accounting Fraud in history.
1.) How was the fraud perpetrated?
The scale of the investment Ponzi scheme perpetrated by Bernie Madoff is hard to pinpoint with any accuracy. There are likely many investors who will never come forward about their losses for a sloe of reasons. We are left to estimate the total losses, but $65 billion was the total showing on investor statements at the time the fraud was stopped. However, this number includes the fake “gains” that had accumulated on the money. The $18 billion number is tagged as actual cash input into the Bernie Madoff Ponzi scheme by investors, and in the end the true total loss. (Coenen 2010)
2.) Ponzi Scheme
-A “Ponzi Scheme” is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new...