Bernie Madoff created a Ponzi scheme which went unnoticed over 20 years and managed to secure $65bn of investment. How did this scheme work? Madoff set up an investment firm, which he would lure customers into entering, and promise a 10% return on their investment every year. He did not, however, invest this in stocks with a specially designed method which maximised profits like he claimed.
This was too risky.
Instead, he would repay investors with their own investment every year, but this meant that after 10 years, all of their money would be vanished. Madoff solved this problem by recruiting more and more investors, so that he could use new investor’s money to pay old investors their dividends. There was also the problem of investors wanting to pull out large sums of their money, which they were within their rights to do. Due to this, Madoff would restrict the people he allowed to invest determined by him accepting those who asked minimal questions and were likely not to ask for a lump withdrawal.
The exclusivity that this created led to the attraction of even more investors, all wanting to be part of an elite club. Celebrities such as Steven Spielberg, Kevin Bacon and Zsa Zsa Gabor had been sucked into this investment scandal and lost fortunes in doing so. Madoff managed to successfully continue this scandal for almost 20 years, and his downfall only came due to the credit crunch. In 2008, investors were demanding their money back as they were no longer in a financial situation where they could have these investments. But, by this time, their money was gone; it had been used to pay returns for themselves and other investors over the years.
One of the most significant fraud scandals Wall Street had ever seen had come to light. Madoff had ruined the lives of many;it wasn’t just those extremely wealthy that were affected. There were many cases of victims being forced to work rather than enjoy retirement, with over 9,000 people filing claims for losses. Madoff was ruthless, possessing a lack of moral principles; he had even comforted a widow for the sole purpose of securing her investment. Once authorities had uncovered the scandal, Madoff, at age 71,was charged with a 150-year prison sentence, ensuring that he will spend the rest of his life behind bars.