The Madoff Hustle - how did he pull it off?

"Everyone wants something for nothing, you just give them nothing for something..."

You hear about scams and think “I’ll never be stupid enough to fall for that!” but the number of people who are looking for something in return for nothing is crazy. I believe this was the belief people who trusted their savings with Bernie Madoff had.

Madoff is responsible for one of the largest financial cons in U.S. history. What was surprising was that he was one of the last people on Wall Street people would expect to be arrested. He was the chairman of NASDAQ market at a certain point as well so it was clear that he had the trust from a lot of people. The number of people affected by the scandal was countless and it is hard to estimate how much money he actually stole.

Madoff was clever with his scheming - people parted with their money because he was exclusive. He would meet potential clients and tell them that he wanted them to be  comfortable with him before they invested their money. He came across as a nice and honest man. He did not promise investors a high return, but a steady one instead. He was basically telling his clients that they would receive a certain return each month at a very low risk.

The scheme collapsed because it became too big for him to handle. During the credit crunch, clients started to contact him asking for their money back. Madoff tried to reassure them that everything was fine and that the returns were still steady - some people were given this assurance a week before he came out as a fraud.

How did he fool people for so long? The answer is simple - he provided statements that looked so legit that even accountants such as Richard Friedman believed them. People received these each month so they had no reason to believe that there was anything wrong.

Did he do this on his own? Personally, I do not think he could have pulled off such a huge scam on his own. His wife Ruth, was the bookkeeper...surely she knew that he was keeping the money to himself? And what about his brother Peter who ran the office on a day to day basis or his niece Shana, who was the compliance officer of the company and was in the office for the majority of the time? Both his sons - Andrew and Mark who were in charge of the trading section - must have suspected something. At some point, they must have realised that the company was not doing any trading at all...their job title was basically pointless!

Harry Markopolos discovered that Madoff was running a massive Ponzi scheme. He informed the U.S. Securities and Exchange Commission (SEC) numerous times in 2000, 2001 & 2005 about this but was ignored by them...surely they should have investigated the situation then and saved a number of potential investors?! The scheme has left widows with penniless and retired men have had to go back to working in part time jobs just so that they can make ends meet. The video focuses on Willard Foxton - his father William, was an ex-army Major and had survived a number of things but shot himself in the head after losing his life savings of £35bn. This is just one example of how the scandal has affected families.

In the end, Madoff confessed everything to both his sons and it was them who turned him in. On the second anniversary of Bernie Madoff's arrest, Mark was found dead - he had committed suicide by hanging himself.

How did a middle class boy from Queens turn to one of the world's biggest fraudsters and leave so many people penniless? 

Madoff's investment sounded appealing but should people have really put all their money into one investment. Consider Harry Markowitz's theory - he suggested that people can reduce their risk through diversification. Instead of investing in a single firm, they should have a portfolio of investments. If the Madoff victims had not been so optimistic and eager for easy money, they should have looked more into the market and invested in a variety of different firms instead of putting all of their life savings into the hands of Madoff. Sure, there are plenty of opportunity costs involved in investing in a variety of companies such as losing out on potential returns, but I believe it is better to remain safe rather than sorry with certain scenarios - specially those involving retired people's life savings.

What do you think? Let me know in the comments below.

Until next time!