Bernard L. Madoff, now a commonplace name and memory on Wall Street, to investors, and to business school students studying finance and ethics, was denied a compassionate release from prison. Madoff died in June 2021. This is a retelling of one of the largest, if not the largest, reported Ponzi schemes in recent history. Note: A “Ponzi scheme” is defined as “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors” (Chen, 2021, April 14).

Bernard L. Madoff Investment Securities LLC was founded in the 1960s as a small investment firm on Wall Street. At age 22 and with $5,000 in savings from summer jobs, Madoff launched the firm that in the 1980s would rank with some of the most prestigious and powerful firms on Wall Street. Madoff began as a single stock trader before starting a family-operated business that included his brother, nephew, niece, and his two sons. Each held a position that was quite valuable within the company.

Madoff had also created “an investment-advisory business that managed money for high-net-

worth individuals, hedge funds and other institutions.” He made profitable and consistent returns by repaying early investors from the money received from new investors. Instead of running an actual hedge fund, Madoff held this investment operation inside his firm on the 17th floor of the building, in a secure area that only two dozen staff members were permitted to enter. Because of the prestige and power that Madoff possessed, no employee dared question the security and confidentiality of the “hedge fund” floor. The $65 billion investment fund was later discovered to be fraudulent, shattering the lives of thousands of individuals, institutions, organizations, and stakeholders worldwide.

Bernard Madoff’s charisma and amiable personality were important traits that helped him gain power in the financial community and become one of the largest players on Wall Street. He became a notable authoritative figure by securing important roles on boards and commissions, helping him bypass securities regulations. One of the roles included serving as the chairman of the board of directors of the NASDAQ stock exchange during the early 1990s. Madoff was knowledgeable and smart enough to understand that the more involved he became with regulators, the more “you could shape regulations.” He used his reputation as a respected trader and perceived “honest” businessman to take advantage of investors and manipulate them fraudulently. Investors were hoodwinked into believing that it was a privilege to take part in Madoff’s elite investments, since Madoff never accepted many clients and used exclusively selective recruiting in order to keep this part of his business a secret.

Madoff was even able to keep his employees quiet, telling them not to speak to the media regarding any of the business activities. While several understood something was not right, they ignored their suspicions because of Madoff’s perceived clean record and aura: “He appeared to believe in family, loyalty, and honesty. . . . Never in your wildest imagination would you think he was a fraudster” (Creswell and Thomas, 2009, as cited in Perri, 2013, 11).

Madoff has been described as a person who is “typically [like] people with psychopathic personalities [who] don’t fear getting caught. . . . They tend to be very narcissistic with a strong sense of entitlement” (Treanor, 2011). This led many analysts of criminal behavior to observe similar traits between Madoff and serial killers like Ted Bundy. Analysts discovered several factors motivating Madoff toward a Ponzi scheme: “A desire to accumulate vast wealth, a need to dominate others, and a need to prove that he was smarter than everyone else” (Creswell and Thomas, 2020). Whatever the motivating factors were, Madoff’s behavior was still criminal and affected a large pool of stakeholders.

Despite the unrealistic returns and questionable nature of Madoff’s business operations, investors continued to invest money. In 2000, a whistle-blower from a competing firm—Harry Markopolos, CFE, CFA—discovered Madoff’s Ponzi scheme. Markopolos and his small team developed and presented an eight-page document that provided evidence and red flags of the fraud to the Boston regional office of the Securities and Exchange Commission (SEC) in May 2000.

Markopolos used what he referred to as the “Mosaic Method” to find Madoff’s irregularities. The first red flag was when Madoff claimed he was making money when the Standard & Poor’s Index was in decline, which is mathematically impossible.

To make matters even worse, Madoff Securities was earning “undisclosed commission” instead of using the standard hedge fund fee (1 percent of the total plus 20 percent of the profits). Markopolos also found out that Madoff “was applying for huge loans from European banks (seemingly unnecessary if Madoff’s returns were as high as he said)” (Hayes and Khartit, 2020).

Despite the SEC’s lack of response, Markopolos resubmitted the documents again in 2001, 2005, 2007, and 2008. His findings were not taken seriously: “My team and I tried our best to get the Securities and Exchange Commission to investigate and shut down the Madoff Ponzi scheme with repeated and credible warnings.” Because Madoff was well respected and powerful on Wall Street, few suspected his fraudulent actions. The status and wealth that Madoff had created gave him the means to manipulate the SEC and regulators alike....

Questions for Discussion

1. What did Madoff do that was illegal and unethical?

2. Identify some of the main reasons that Madoff was able to start and sustain such an enormous Ponzi scheme for as long as he did.

3. Who were/are the major stakeholders involved and affected by Madoff’s scheme and scandal?

4. Did Madoff have accomplices in starting and sustaining his scheme, or was he able to do it alone? Explain.

5. How was he caught?

6. What lessons can be learned from the Madoff scandal?