A Case Study of a Con Man: Bernie Madoff and the Timeless Lessons of History's Biggest Ponzi Scheme

on december ii, 2008, fbi agents in manhattan arrested bernard l. madoff, the founder and sole proprietor of bernard l. madoff Investment Securities, a 48-year-old wholesale securities trading firm with a nearly pristine regulatory history.

The day before, Mark and Andrew Madoff, both senior executives at their father's firm, told federal law enforcement agencies that Madoff had just confessed to them that he was running a Ponzi scheme that owed investors more than $50 billion. The FBI agents had no evidence beyond the sons' hearsay report of the confession, but when they asked Madoff in the foyer of his penthouse apartment whether there was "some innocent explanation" for his shocking admission, he said, "There is no innocent explanation." (Except where otherwise attributed, citations for all details about the Madoff case are provided in my book The Wizard of Lies: Bernie Madoff and the Death of Trust [2011]).

Madoff was processed and booked at the federal courthouse in Manhattan and released on bail. In March 2009, after months of negotiations, he pleaded guilty to various securities and tax law violations and was sentenced to 150 years in federal prison. He is serving his sentence at the federal correctional institution in Butner, North Carolina.

The Madoff scam was the largest documented Ponzi scheme in history, and the first truly global one. It claimed victims from Palm Beach to the Persian Gulf, from Canada to Brazil, from a teachers' pension plan in South Korea to a Catholic girls' school in St. Croix. Even Madoff's own breathtaking description of the scale of his fraud turned out to be an underestimate; his Ponzi scheme actually erased almost $65 billion in paper wealth supposedly held in investor accounts. He took almost $18 billion in cash from later investors and doled it out as fake profits to earlier investors. Either amount puts the Madoff fraud in the record books; until his arrest, the largest alleged Ponzi scheme in the United States involved liabilities of just under $4 billion.

What made his crime all the more mysterious was the fact that Bernie Madoff had been a legitimately successful Wall Street entrepreneur for decades. His trading firm handled orders from several major mutual fund complexes and most major Wall Street firms. Madoff was an early force in the so-called "third market," where New York Stock Exchange stocks traded after hours. He was commended for his firm's performance during the chaos of the market crash on Monday, October 19, 1987, when countless Nasdaq firms saw their systems break down under unprecedented volume and volatility. He testified at several of the congressional hearings held after Black Monday, seated alongside the president of the New York Stock Exchange and the chairman of the Securities and Exchange Commission (SEC). He had served several terms as the non-executive chairman of the Nasdaq market and had become a respected industry statesman. And for decades, his legitimate trading firm had maintained an almost spotless regulatory record. His arrest in December 2008 was the first blot on his resume.

The scandal sent a shock wave through regulatory circles in Washington, where it would soon emerge that the Securities and Exchange Commission had received credible evidence raising questions about Madoff as early as 1999 but had failed to conduct an adequate investigation of those reports.

Madoff's arrest also hit a nerve on both Wall Street and Main Street. While he was not a household name in the elite ranks of investment bankers, he was well known in the backstage world of Wall Street's trading infrastructure and rulemaking apparatus. He had served on advisory panels at the SEC and chaired numerous industry association committees. He could credibly claim to be one of the pioneering over-the-counter stock dealers who helped launch the Nasdaq market in the 1970s. The clients of his private investment management operation included a host of sophisticated Wall Street executives, real estate magnates, Hollywood celebrities, wealthy jetsetting families in Europe and Latin America, and a multitude of...