The biggest fraud in

American history
The Madoff Scandal

By Group 1: Mei Ying (presenter), Fatin, Boon Xuan

Assigned reading
• Lewis, Michael and Einhorn, David (2009). The end of the financial
world as we know it. New York Times, January 3,2009.
(http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html
?_r=1...)

• More details about the story of Bernard Madoff

(http://en.wikipedia.org/wiki/Bernard_Madoff)
Investigation report contents
• What happened?
• Ponzi Scheme
• Timeline of events:
• Bernard Madoff’s early life and career start-up
• Madoff’s fame
• Fraud exposed
• Aftermath of the fraud
• Conclusion
What happened?
 What happened?
• Bernard “Bernie” Madoff, aged 71 (at time of
arrest).
• A renowned (now notorious) stockbroker & financial
advisor in Wall Street.
• Founded Bernard L. Madoff Investment Securities LLC
• Cheated ~$65 billion from investors in a Ponzi scheme.
• One of the largest fraud ever executed worldwide.
https://azjewishpost.com/2016/growing-up-madoff-raising-a-family-with-a-
notorious-name/
Ponzi Scheme
How the investment is supposed to go
Investor requests Stockbroker helps
to buy shares from client purchase the
company X shares

Investor (client) Investment firm Company X

Company X earns money.

Investor sells shares via investment
firm, gaining the profit from
company X
Investor earns money
when company X earns
money!
How a Ponzi scheme works
Named after Charles Ponzi, an Italian swindler.

Investor requests
Investor requests
to buy shares
to buy shares
from company Y
from company X
($1000 deposited)
($1000 deposited) “The Schemer”
Investor 1 Madoff & his investment Investor 2
firm

The $1000
$2000 is kept
in an account and
Investor requests not invested
withdrawal of
money and profit
($2000 paid to
investor 1)
How a Ponzi scheme works
Named after Charles Ponzi, an Italian swindler.

Investor requests
to buy shares
Investor requests
from company X
withdrawal of
($1000 deposited)
• Use
Investorlater
4 investors’ money to pay earlier investors.
money and profit
($2000 paid to
• “Stealing from PeterMadoff to“The
pay Paul”
Schemer” tactic.
investor 2)
& his investment Investor 2
• No real investment is involved. firm

• More investors must be Therecruited

The $0 is kept
$2000 in
is kept to support the scheme.
Investor 3
• DestinedInvestor
to requests
collapse
to buy shares
when there
inananaccount
account
not invested
and is not enough investors.
and

from company Z
($1000 deposited)
Timeline of events
 Madoff’s early life and career-start up
Sylvia Ralph
Munter Madoff

Bernard L. Madoff
Works here too
Investment Securities LLC
Sondra
Weiner Bernard
Madoff
Peter
Madoff
created!! (1960s)
Earned money from being a
$ lifeguard and installing sprinklers
+ loan from father-in-law
$

https://img.clipartfest.com/e676bf92b248a2f18e761b2e113559a2_download-
https://clipartfest.com/categories/view/06ced9d19687f27afcae440
this-image-as-university-clipart-transparent-background_600-361.png
8cb01f4b951a151e/school-clipart-transparent-background.html

Attended Far Rockaway High School – Graduated from Hofstra University

https://en.wikipedia.org/wiki/Bernard_Madoff Met wife Ruth Alpern here
Madoff’s Fame
1. Bernard L. Madoff Investment Securities help
develop NASDAQ (2nd largest stock exchange in
the world).

2. Madoff Investment Securities was one of the

highest performing market maker in Wall
Street.

http://egov.eletsonline.com/wp-content/uploads/2012/02/nasdaq.jpg
Madoff’s Fame
• Bernard Madoff’s positions (financial):
• Chairman of NASDAQ, National Association of Securities Dealers (NASD) &
Securities Industry and Financial Markets Association (SIFMA) trading
committee.
• Founding board member of International Securities Clearing Corporation.

• Bernard Madoff’s positions (non-financial)

• Founder of Madoff Family Foundation.
• Chairman of Sy syms School of Business, Yeshiva University.
• Board of New York City Center.
• Executive council of UJA Foundation of New York Wall Street division.
 Fraud Exposed- Harry Markopolos
Harry Markopolos had been trying to bust
Bernard Madoff’s scheme for 9 years to no avail

1. Came across Madoff’s scheme when working for Rampart

Investment Management.

2. Analyzed Madoff’s investment performance but numbers

http://www.fraud-magazine.com/article.aspx?id=313
did not add up  knew that Madoff must be lying about his
investment scheme.

3. Tried to persuade the Securities and Exchange Commission

(SEC) that Madoff was a fraud they ignored him.

4. Created 17-page report detailing evidence of the fraud to

SEC SEC investigated for a while before dismissing
Markopolos’ claim.
http://www.quickmeme.com/meme/3u9143
 Fraud Exposed- Statistical considerations
• Fairfield Sentry - “the investor” who invested
through Madoff’s scheme.

• S&P 100 - Stock market index that tracks

Fairfield Sentry returns performance of the top 100 companies in the
U.S.
S&P 100 Index
• Madoff supposedly invested in at least 1/3 of
Does not make sense the stocks in S&P 100.

• Therefore we expect Fairfield Sentry’s returns

to correlate closely with the S&P 100 index.

Source: Rhee, 2009. • This is however not the case Fairfield

Sentry returns seems to be independent of
S&P 100 for many years.
 Fraud Exposed- Statistical considerations
• Why is Fairfield Sentry gaining profit when
the market is losing money???

• Argument: Maybe Madoff was so talented

Fairfield Sentry returns that he predicted which stocks will
outperform the index and only invested in
S&P 100 Index those stocks.

Does not make sense • Counter-argument: The probability of doing

this for years is extremely extremely low.

http://1.bp.blogspot.com/-zIxJpvb98SI/Ulbw3onPQNI/AAAAAAAABVM/PmuFPLygZ-4/s1600/Untitled.png
Source: Rhee, 2009.
Any person with some background in statistics should have noticed this inconsistency in data
 Fraud Exposed- Madoff’s confession
• 2008 stock market crash lead to waves of people demanding withdrawal of
their investment funds.

Recall:
• Ponzi Scheme destined to collapse when there is not enough investors.

• Madoff’s scheme had more withdrawals than investors  not enough money http://members.bonnerandpartners.com/wp-
content/uploads/2014/06/title-final-300x268.png
to pay everyone.

• Madoff knew he can’t take the rest of the money and run.

• He decided to confess to his sons about the Ponzi scheme his sons informed
the authorities.

• Madoff claimed to have started the Ponzi scheme in the 1990s but no one
knew for sure.
Aftermath of the fraud
 Aftermath
Madoff’s reputation Madoff’s family SEC’s reputation

• Sentenced to 150 years in jail. • Madoff’s son, Mark, committed • People lost faith in the SEC.
• Treated like a Mafia boss in suicide.
prison. • SEC deemed as ‘incompetent’
• Madoff’s other son, Andrew, and ‘needs fixing’.
died of lymphoma.
• Sparked discussions about the
• Peter, Madoff’s brother, need to educate SEC staff and
sentenced to 10 years in jail. lawyers about finance,
economics and statistics.

http://www.flashesandflames.com/wp-content/uploads/2015/06/NYMadoff-226x300.jpg https://images.template.net/wp-content/uploads/2016/05/19092713/Sad-Emoji- http://www.clipartkid.com/images/32/wrench-clipart-

http://crushzion.k0nsl.org/wp-content/uploads/2012/01/1069_bernie_madoff.jpg
http://www.freakingnews.com/funny-pictures/madoff-pictures-03.asp Face-on-Google-Android.jpg wrench-clipart-D9tgsU-clipart.gif
Conclusion
• The world largest Ponzi scheme was executed by Bernard “Bernie”
Madoff and went undetected for 14 years.

• There were attempts to expose Madoff’s scheme by Harry

Markopolos but were unsuccessful.

• Had the SEC staff and lawyers been well trained in finance, economics
and statistics, the inconsistent data in Madoff’s ‘investments’ would
have been detected and the fraud exposed earlier.
References

• http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?
_r=1...
• http://en.wikipedia.org/wiki/Bernard_Madoff
• http://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1500&cont
ext=facultypub
• http://www.fraud-magazine.com/article.aspx?id=313