BERNIE MADOFF

Bernie Madoff

Bernie Madoff

Introduction

Bernard Madoff was born on 29 April 1938 in Queens, New York, the son of a plumber who became a stockbroker. He graduated from Hofstra College in 1960 and briefly attended Brooklyn Law School before founding Bernard L. Madoff Investment Securities LLC in New York, a penny-stock trading firm, which he capitalized with $5,000 of his own savings. The firm began attracting clients through referrals from Madoff's father-inlaw, then took off in the 1970s, after regulatory changes allowed smaller-market makers like Madoff's to trade more expensive stocks. Madoff lured away orders from the New York Stock Exchange by paying clients a few pennies for every share they agreed to trade through him.

This strategy, though legal and common among penny-stock traders, was frowned upon at the larger exchanges for its resemblance to a kickback. Madoff's firm claimed still more trading market share in the 1980s and 1990s by pioneering electronic trading systems that became precursors to the NASDAQ electronic market. Simultaneously, Madoff Securities discreetly operated as an investment adviser, accepting client assets on an invitation-only basis. It delivered steady investment returns in all markets, typically about 10 percent annually, a success Madoff attributed to his skill in trading futures and options to even out any losses on stock investments. Madoff recruited many of his clients among the affluent circles of Long Island and Palm Beach, Florida, where he had homes. His reputation as a powerful trader, for unsurpassed investment gains, and the air of exclusivity helped rake in billions in assets from hedge funds, endowments, and well-heeled individuals (Lipman, 2002).

Suspicions Grow

The returns stupefied Madoff's competitors. One, Boston's Rampart Investment Management Co., tasked its derivatives expert, Harry Markopoulos, with cracking Madoff's code, but Markopoulos found it impossible. He met with the Securities and Exchange Commission (SEC) in 2001 to air suspicions about Madoff's investments, up with a twenty-one-page analysis asserting, “Madoff Securities is the world's largest Ponzi scheme.” The same month of Markopoulos's SEC meeting, two trade publications published articles suggesting Madoff could achieve his returns only by “front-running,” or fraudulently trading ahead of the orders that his market-making business processed.

The allegations were difficult to prove because Madoff ran his investments with minimal oversight. He did not have to register with the SEC for regular inspections. Similar investment houses typically contracted with outside broker-dealers to process their trades, exposing their holdings to new sets of eyes, but Madoff's processing arm handled his investment trades. Madoff even routinely denied his own investors access to his investment records. Far from seeming suspicious to the SEC, Madoff in fact was held in high esteem. For decades he had cultivated close ties with regulators and had served for years in a regulatory role as chairman of the board of directors of the National Association of Securities Dealers, a self-regulatory industry organization. Arthur Levitt, the SEC chairman from 1993 to early 2001, acknowledged in a New York Times interview that even he occasionally consulted Madoff for advice about how the market ...