by Amber Maccione
In 1939, Edwin Sutherland defined white-collar crime as crime that is committed by someone who is respected and holds a high social status during his career life (Price & Norris 2009). Later on,
the FBI defined it as illegal acts which are characterized by deceit, concealment, or violation of trust and which are not dependent upon the application or threat of force or violence. Individuals and organizations commit these acts to obtain money, property, or services, to avoid the payment or loss of money or to secure personal or business advantage (Price & Norris 2009).
Among the crimes of white-collar persons are the Ponzi schemes, which are security fraud schemes that take people’s money promising to invest it with guarantee of a large return, but instead using it to pay off existing clients. Eventually, when there are no more new investors, the money dries up as existing investors pull money out. The scheme comes into the light, usually with the culprit is long gone (Smith). Carlo Ponzi is the man that the Ponzi scheme is named after. He was an Italian immigrant “who defrauded countless investors of millions of dollars in his Ponzi scheme (Price & Norris 2009). Although most Ponzi schemes are done on small scales, one man did it on a massive scale (Smith) and was able to deceive people for 16 years: Bernard Madoff (Admin 2014).
Who Was He?
Bernard L. Madoff started off as a lifeguard and entrepreneur who installed sprinkler systems (Bernard Madoff.biography). After dropping out of law school, he took his $5000 saved from his jobs and started his own investment firm called Bernard L. Madoff Investment Securities, LLC (Bernard Madoff.biography) in 1959 (Bandler & Varchaver 2009). In order to begin the broker-dealer firm, he had to fill out an application with SEC (Securities and Exchange Commission) (Bandler & Varchaver 2009). At first, it was his wife and him with his father-in-law giving advice. Eventually, he was able to add more family including his brother and his two sons (Bernard Madoff.biography). By the 1980s, he “handled up to 57 percent of the trading on the New York Stock Exchange” (Bernard Madoff.biography).
At first, Madoff specialized in over-the-counter stocks – stocks with small-companies that didn’t trade on the exchange. He was a wholesaler. He bought and sold these small stocks to brokers all by phone. He was not into the technology that kept up to date prices. Therefore, he was able to write up his own quotes making him successful in the “under the counter” market (Bandler & Varchaver 2009). Ironically, he became respect as the “pioneer in electronic trading” (Bandler & Varchaver 2009). In 1971, Madoff helped launch National Association of Securities Dealers Automated Quotations (NASDAQ), a primitive computer system that listed bids and offers in order to create quotes for trading (Bandler & Varchaver 2009 & Bernard Madoff.biography). He also served as the president of the board of directors for NASDAQ (Bernard Madoff.biography).
What is a Ponzi Scheme?
The Beginning of Ponzi
A few years before launching NASDAQ, in the 1960s, Bernard began accepting investors beginning his journey into his Ponzi scheme (Bandler & Varchaver 2009). He conned his investors into using his “investing strategy” that he based off of the split-strike conversion approach, which eventually became known as fraudulent (Bandler & Varchaver 2009). Basically, he promised that their money would in the long run pay out a high dividend (Bandlet & Varchaver 2009).
Bernie (as everyone called him) had two and a half floors of business. Floor 19 was where trading happened, floor 18 was where his software programmers worked, and half of floor 17 was where his fraud took place (Bandler & Varchaver 2009). Madoff hired a young man named Frank DiPascali to run his 17th floor. Also hired were paper pushers and clerks to keep account of his lavish scheme. There was also a locked room where Bernard’s dated IBM computer server was stored along with piles of trading statements (Bandler & Varchaver 2009). The AS/400 system that was used showed thousands of “trades” that had never really been made (Bandler & Varchaver 2009). The illegal business on floor 17 was kept secret from those on floors 18 and 19. Although employees knew Bernard Madoff had business on that floor, they didn’t know the details (Bandler & Varchaver 2009).
During the 16 years that Madoff defrauded his investors, there were those that voiced that he was involved in fraud. From June 1992 to the day Madoff confessed, SEC was alerted six times. Also, two articles were written and published in reputable publications questioning the consistent returns (United States Securities and Exchange Commission Office of Inspector General). SEC would start an investigation, but never conducted one thoroughly. Madoff was always there to refute their suspicions. Ever when SEC knew things were not adding up, they still did not investigate further; they just accepted his lies for truth. (Bandler & Varchaver 2009 & Liberto 2009). After Madoff confessed and a thorough investigation happened, a 450-page report was written up detailing everything that the previous investigations had failed to do (Liberto 2009).
Bernard was able to stay off the radar for such a long time for a few reasons. He was smart when it came to how he set up people’s portfolios. He would make sure they were set up to match the returns of the S&P 500 (Smith). By doing this, he didn’t have to pay too much to existing clients (Smith). Another factor was that his business was word of mouth. It was private, only a very elite group, which he kept close (Bandler & Varchaver 2009 & Smith). He did not make accessible account information even to the client who it belonged to (The Madoff Affair: Con of the Century 2008). He always kept all his paperwork up to date and consistent (Smith).
The Take Down
Although Bernie was very precise on how he ran things and kept things secret, he knew it was only a matter of time before he got caught (Liberto 2009). With all the times that SEC came in to investigate, he was surprised at how easy it was to evade them and get them to close up the investigation with his lies (Liberto 2009). With the market starting to decline in 2008, investors began to request large withdraws. Madoff of course did not have the funds to support this (Bandler & Varchaver 2009). He hadn’t really traded the money. He had laundered it through his bank accounts in London and New York (Bandler & Varchaver 2009). As he tried to keep up buy borrowing money, he realized it was impossible to keep up (Smith). Therefore, realizing he was over his head, he confessed to his sons his Ponzi scheme on December 10, 2008 (Smith & Bandler & Varchaver 2009). His sons called the lawyer and then turned their father into federal authorities (Bandler & Varchaver 2009).
In the authorities’ hands, Bernard L. Madoff confessed to his Ponzi scheme. He stated that it was his idea and he acted alone. None of his family, friends, business associates, or employees had anything to do with the scheme (Bandler & Varchaver 2009). Even though he stated no one else was involved, there was a very in-depth investigation conducted. Everyone was interviewed. Guards were posted on the 17th floor to ensure nothing was taken. All office workers were under “office arrest” as they were questioned by FBI agents (Bandler & Varchaver 2009). As the investigations went on, employees began to be arrested (Smith). His accountant, David Frienling, was charged with criminal fraud because he was the one signing off on the fake documents (Bandler & Varchaver 2009). Frank DiPascali was also arrested and charged. He spilled the beans in order to get a lighter sentence (Bandler & Varchaver 2009). He verified that none of Madoff’s family was involved, but some investors knew what was going on because they would ask for things to be fudged if they expected large gains from other investments. They didn’t want to have to pay larger taxes; therefore, DiPascali would write up false documents stating loss so the tax bill would be not as high. He stated that investors knew their returns were falsified (Bandler & Varchaver 2009). JPMorgan also was investigated by authorities since that was Bernard’s bank. During the investigation, they did not cooperate. Therefore, they had to negotiate a $2 billon dollar settlement because of allegations of misconduct as Madoff’s primary bank (Cohn 2013).
Bernard L. Madoff pled guilty to 11 counts of felony crimes: securities fraud, investment advisor fraud, mail fraud, wire fraud, money laundering, false statements, perjury, and false filing with U.S. Securities & Exchange Commission (Bernard Madoff.biography). He admitted that he had lost near $50 billion dollars of his investors’ money. Although further investigations are showing that $170 billon had be moved over the 16 years and a firm statement showed a total of $65 billion dollars (Bernard Madoff.biography). On June, 29, 2009, Bernie was sentenced to 150 years in prison, the maximum sentence (Bernard Madoff.biography). Judge Denny Chin gave Madoff the maximum because of the length of damage he had done. He was put into a medium security federal prison in North Carolina (Liberto 2009).
Interview with Barbara Walters
The Interview, Lack of Remorse, & The Damage
In a prison interview two years after his sentence, Bernard Madoff gives a sense of false humility and seems to think everything he stole could be recovered with a profit. He states that the whole Ponzi scheme was his idea and the guilt falls solely on him. But in the next sentence, he puts the blame on his investors saying that they pressured him into it with their high expectations of large returns. Then he would brag on how he pulled the blinds over his partners’ eyes. He passed harsh judgment on those that had questioned his work. Lastly, he stated that SEC could recover $50 billon. That covered the $20 billion he took from his clients and an extra $30 billion after paying his clients back. He ended with saying that this made him the “greatest money manager in modern history (Admin 2014).
This belief that his scheme did not really do any damage because it could all be found and given back was ludicrous. He had caused extensive damage. Since his business collapsed, that meant there was no money left. Family, former employees and victims were left to pick up the pieces. The family name was tarnished and they were caught up in legal litigations as different parties tried to regain their assets. Former employees were left with a tarnished resume as they tried to find new work and explain that they had no idea of the fraud that was right under their noses. The victims were left with devastation as they realized their savings were gone (Bandler & Varchaver 2009). Some of those victims lost everything because of Madoff’s scheme. In the end, three people committed suicide. One of which was Madoff’s oldest son Mark who hung himself on the second anniversary of his father’s arrest (Admin 2014).
And We Ask Why
There are two reasons why Bernard Madoff may have committed his Ponzi scheme. The first is that his parents were involved with securities and got into trouble with it. One of his childhood friends stated that since Madoff was a young child, he knew he wanted to go into business (Bandler & Varchaver 2009). The second reason was that Bernie was defrauded by a man named Jack Dick. In the 1960s, Madoff had invested $85,000 to one of Dick’s fraudulent businesses. He lost it all when Dick was apprehended and imprisoned for embezzlement (Bandler & Varchaver 2009). It seems that Madoff had examples of fraud. Maybe after seeing what others did and failed at, he thought he could do it and succeed.
Because of Bernard’s elaborate Ponzi scheme and SEC’s poor response to red flags, there has been a change in leadership within the SEC as well as revised regulations when it comes to investigating fraud (Moyer 2008). SEC had proven to be irresponsible in investigating claims of financial fraud. If they had done a thorough investigation, including investigating Madoff himself, the Ponzi scheme may have not gone on for as long has it had and they might have been able to salvage some of the funds that were stolen. Usually when someone or a company is under investigation it is done quietly and behind the scenes. As they collect information, they interview the little people within the company making deals with them so that they can catch the mastermind behind the scheme. Once they have a solid case, the mastermind is arrested, charged, and tried (Bandler & Varchaver 2009). This did not happen the two times that SEC tried to investigate the claims that Bernard Madoff was running a Ponzi scheme. Each time, Bernie would take control of the investigation telling SEC lies to hide what he was really doing. SEC would accept what he said and close the investigation (Bandler & Varchaver 2009).
Bernard L. Madoff was a man of high respect and held a high position in society during his career, yet he chose to use his position to defraud the people who trusted him and respected him. White-collar crime is common and there are many Ponzi schemes that go on behind closed doors or corporations. The SEC is the government organization responsible for investigating financial crimes such as Ponzi schemes. With Madoff, they failed. Since then, SEC has been changed to better its ability in investigating such crimes after the wake that Madoff made with his elaborate Ponzi scheme that ruined many people’s lives.
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