madoff final

7/29/2019 Madoff Final

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Bernard Lawrence "Bernie" Madoff; (born April 29, 1938) is an

American former financier and convicted felon.

He served as a non-executive chairman of the NASDAQ stock

exchange

He pled guilty to an 11-count criminal complaint, admitting todefrauding thousands of investors of billions of dollars.

He was convicted of operating a Ponzi scheme that has beencalled the largest investor fraud ever committed by a single person

Federal prosecutors estimated client losses, which includedfabricated gains, of almost $65 billion.


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Other estimates of the fraud are $14-21 billion.

On June 29, 2009, he was sentenced to 150 years inprison, the maximum sentence allowed

The firm was one of the top market maker businesses onWall Street, which bypassed "specialist" firms, by directlyexecuting orders over the counter from retail brokers.

Madoff was a prominent philanthropist, who served onboards of nonprofit institutions many of whichentrusted his firm with their endowments.


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Ponzi scheme is a scam investment designed to separateinvestors from their money.

A Ponzi scheme promises investors a large return on theirinvestment.

Unlike a valid investment strategy, the way a Ponzi schemepays its investors is by recruiting new investors.

It is poorly documented

The scheme is designed to convince the public to place theirmoney into a fraudulent investment.

Once the scam artist feels that enough money has beencollected, he disappears - taking all the money with him.


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The investors give money to the Firm

The Firm gives back money to the investors with returns

Firm

Investors


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This way the firm makes its first set of customers These customers spread the word to other potential investors


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These new investors invest in the firm and receive returns


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Newer set of customers are made The investors again refer a newer set of investors

This is how the funds of the firm increase


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Madoff gathered money from local establishments like country clubsand charity events.

Investors would be present at these gatherings and they wouldquestion Madoff for advice, as he was already a well-known

investor who was able to make seemingly magic returns.

These investors would entrust him with his savings, which onlyfueled the principal that Madoff needed to make his Ponzi schemecontinue to work.

The complete events of the Company can be broken down into 2 mainPhases,

Phase I (1960-1992)

Phase II (1992-2008)


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1960 Madoff started career in his father's accounting firm in NY as a

market maker and as an investment advisor

It was completely off the radar, that it wasn't registered

He basically started small, with a handful of closely known people,promising a return of around 14-20%.

Brought In two accountants from his father-in-laws firm, FrankAvellino & Michael Bienes

They handled the funding part, taking small percentage of the totalfunds


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1992

SEC (Securities and Exchange Commission ) Launched an investigation

after a complaint from an Investment advisor, suspecting a Ponzi

scheme

Above 3000 clients were being served

By November 1992, SEC ordered shutting doing the Co.

Avellino and Bienes paid back all the investors moneyEnd of Phase I


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1992

Madoff took over the company in public

Avellino & Bienes themselves invested their personal money with Madoff

Mid 90s

By now Madoff had Bigger players in his scheme, Private banks had startedto pool in money

The family of the investors did the marketing

It had started being marketed to the wealthiest and famous people allaround the world


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It seemed like Madoff had everything set in his favor until 2006 rolled around.

The amount of principal that was being introduced to Madoff's Ponzi schemewasn't enough to cover the returns previous investors were promised.

Investors were moving to withdraw their funds from Madoff's care, caused partsof Madoff's scheme to collapse.

How did it collapse?? In 2007 after the Housing bubble burst, most of the companies in the market

allowed its investors to withdraw money or were simply shut down

By December of the same year, there were more requests of withdrawals inthe firm than deposits

The firm was unable to pay the customers and the scheme came to light


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The Victims of the Fraud

The known list of victims are prominent billionaires--

Steven Spielberg, famous Hollywood Director

Carl Shapiro, a clothing magnate who may have lost $545m

Thousands of wealthy retirees; and a cluster of mostly Jewish charities,some of which face closure.

Dozens of supposedly sophisticated financial firms including banks suchas Santander and HSBC


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He claimed to be employing an investment strategy known as split-strikeconversion.

This is a fairly common approach that entails buying and selling differentsorts of options to reduce volatility.

Aksia, an advisory firm, concluded that the S&P 100 options market that MrMadoff claimed to trade was far too small to handle a portfolio of his size.

Stock holdings were liquidated every quarter, presumably to avoid reportingbig positions.

For a godfather of electronic trading, Mr Madoff ran the business where

clients were denied online access to their accounts.

Even more worryingly, he cleared his own trades, with no externalcustodian.

A computer program specially designed to backdate trades and manipulate

account statements.


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After many years of returns in the range of12% to 15%, in recent times says Madoffinvestor Burt Ross

"The only reason that this ended wasbecause, at one given point in time, the

economy did so badly that people wanted -- needed -- to get money out of Madoff'sinvestments."
http://www.pbs.org/wgbh/pages/frontline/madoff/investors/http://www.pbs.org/wgbh/pages/frontline/madoff/investors/http://www.pbs.org/wgbh/pages/frontline/madoff/investors/http://www.pbs.org/wgbh/pages/frontline/madoff/investors/


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The company being Unregistered although serving thousands ofcustomers

There was always a steady rate of return even if the market goes upor down

The statements sent to customers was always given in printed form

and were never available online. Statements were set to customers 3-

5 days AFTER a deal in the market was made.

If customers complained on any of the above issues, the firm would

threaten to return back the money


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The 3rd party Due Diligence (Auditor) officer had his office in Bermuda, a

place not known for having such offices

Whistle Blowers Like Harry Markopolos published these facts in 2001 but

SEC did not act accordingly

Following are SECs responsibilities which should have been checked:

SEC should have checked if the firm was registered or not

Should have proactively taken the initiative to check on the firm of itsfunds

Even after the warnings from whistleblowers, the SEC should have swiftlyacted on the situation


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Gautam Agrawal 18Hitesh Agrawal 19Giftson Jeyakumar 24Sahil Kasat 26

Deepesh Kothari 27Hitesh Makkhijani 29Pratik Shah 33

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