Back in 2008 on December the 11th one of the biggest scandals within Wall Street got shut down. Around 10 years ago Bernie Madoff a well-known investment manager and also the former chairman of NASDAQ conducted the largest Ponzi scheme known to date. Madoff’s Ponzi scheme was run by luring in investors by assuring them unusually high returns. The name Ponzi originated from a man named Charles Ponzi who guaranteed in 90 days people would get 50% returns on their investments (Yang, 2014).
The Ponzi scheme operated by Madoff using funds given by new investors to pay off the returns he assured to investors who were already involved. Although this particular system looked profitable there was no profit being made, but behind the scenes, Madoff pocketed the extra funds and used it to expand the scheme. Madoff informed his investors that they would most definitely be making large returns and were therefore persuaded not to pull out of their investments. The whole purpose of the Ponzi scheme not being revealed was to prevent from having too many investors trying to retrieve their ‘profits’, by constantly keeping them in the loop telling them that they can earn even more money (O’Donoghue, 2016). This specific tactic was used to help Madoff protect his business. As he was well respected amongst wall street, people trusted him. All he did was told his investors how much they were making every so often, without delivering any real returns. It is still so astonishing that many of the victims were smart and successful people and many celebrities. The most remarkable thing about this whole scandal is the longevity and how he got away with it for that long. Ponzi schemes are said not to last that long and eventually after a certain period of time it falls apart. There are a number of reasons such as if Madoff was to take all the investment funds that were left and run. Secondly, the difficulty of finding new investors for the scheme resulting in a major decrease of cash flow. Lastly, investors involved asking to retain their profits and pulling out (The Telegraph, 2017).
In Madoff’s case, investors started to ask for their money back due to the financial crisis booming. This is when everything started to deteriorate and unfold as there was not enough money to pay out and he was finally exposed. In 2008 Investors demanded $7 billion dollars back of their returns, but unluckily Madoff had hit a low point and only had around $300 million left to hand over (The Telegraph, 2017). Investors were backing out faster than Madoff was able to deposit more cash in. A few days before his arrest and him admitting to the fraud he finally told his brother and sons about the whole scheme and how it was a huge lie. His two sons were the ones who turned him into the authorities(Nytimes.com, 2009).
The SEC also known as the securities and exchange commissions is a federal government agency of which their responsibilities include protecting investors, upholding fair and systematic functioning of securities markets and enabling capital formation(Investopedia, n.d.). After a number of allegations and warnings put forward, the SEC failed to detect Madoff’s fraud and were left completely humiliated(Hilzenrath, 2011). Much of the blame for not unraveling this scheme any sooner was attached to the SEC.
Over the past few decades concerns regarding Madoff were raised repeatedly together with a letter sent to the SEC by Harry Markopolos in 1999 accusing Madoff of running a Ponzi scheme but they did not take any action(Appelbaum and Hilzenrath, 2008).
Markopolos only started to unravel what he thought Madoff may be doing during his time working at Rampart Investment Management when one of the supervisors wanted him to look into getting between 12 and 15% return a year like Madoff. While looking into his scheme he concluded that he was either running some sort of Ponzi scheme or something else. Finally, in May 2000 he unraveled his findings to the SEC and five years later ended up producing a 25 page documented report stressing 30 key warning signals related to Madoff getting upto no good (Valuewalk, 2016).
The SEC employees usually examined around 10% of investment advisors every three years but failed to examine Madoff even though he was the focus of a fraud yet to be proven.The weakness of the SEC is the way that they handled and approached this whole scandal. Madoff’s firm was investigated 8 or so times and there were no fraudulent activities uncovered (Williams, 2009).
In 2008, the SEC boss Mr. Cox pointed at a number of failures at his agency, so decided to launch an investigation to investigate further into his officials and Madoff. He criticised a number of his staff for a number of failed attempts. This included Mr. Eric Swanson who at one stage during the investigation was keeping an eye on Madoff’s firm and later married Madoff’s niece Shana (The Telegraph, 2017).