In 1960, Bernard L. Madoff started a modest penny stock investment firm named “Bernard L. Madoff Investment Securities” in New York City. Madoff's firm made itself unique by using a new computer system to propagate quotes before the NASDAQ existed and this innovation made his firm very successful. Up to now Bernie Madoff was the epitome of successful stockbroking in America. However, Madoff quickly fell victim to the seduction of what his reputation could bring. By using his newfound financial success and sparkling reputation Madoff quickly began to dabble in front running, ponzi scheming, and ultimately complete fraud by forging return statements. Today, Madoff is known as the largest financial criminal in history after accruing 64.8 billion dollars from his clients by fraud.
It's not clear exactly when Madoff started his illegitimate practice. Madoff himself claims he began committing fraud in the early 90s, however federal investigators believe it may have began as early as the 70s. It's been suggested that much of Madoff's financial success prior to his ponzi scheme may have been achieved by an illegal practice called “front running”. Front running is where a stockbroker pushes a security on his clients when it's in position to make a jump in value. This spike in investors will push the value further so the stockbroker also invests in the security to reap the benefit. This is a type of market manipulation using the insider information naturally given to a stockbroker which makes it often difficult to detect. Although this is a common suspicion it has never been proven as the SEC investigated Madoff's firm several times in his earlier years and never found proof of fraud.
At some point between the 1970s and 2000, Bernie Madoff's "Wealth Management and Advisement" Division stopped operating as a legitimate hedge fund firm and started operating as a sort of Ponzi scheme. Madoff targeted an exclusive group of Jewish businessmen (himself being Jewish) and interested them in a modest, but very consistent, “investment strategy”. He marketed the strategy as “too complicated for outsiders to understand” in order to further promote his reputation without divulging too much information. Madoff then took their investments and, instead of putting them into securities, kept the money in company accounts which he slowly siphoned from. He then would send his clients fraudulent return statements in which he showed a successful return of around 10% on securities that didn't exist.
While this sounds like a clever scam it wouldn't work for too long if the client wanted to withdrawl their money. Madoff would be expected to return the money invested and the amount reported in fake returns. Ponzi schemes traditionally avoid this issue by taking money from new investors and giving it to old investors however Madoff was able to minimize the risk and frequency of withdrawls altogether in several ways. The biggest contributor was the exclusivity of his firm. Madoff...