Infamous for the biggest scam in history, Bernie Madoff was a penny stock trader who grew to found the Nasdaq stock exchange gaining the trust of the richest.
Eventually, Bernie collaborated to found the Nasdaq stock exchange. Building Nasdaq was his most tremendous success, and he ultimately gained the trust of many of the wealthiest people in the world. Once they began trusting him with their money, it resulted in his grand Ponzi scheme,the Securities Investor Protection Corporation (SIPC) trustee estimated actual losses to investors of $18 billion.
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Scams aside, Madoff’s strategy can bring both an example of the importance of being careful about who to trust with your money, and as well as how you can benefit from a good reputation to grow a business. However, you should also be responsible for not committing a felony, and understand that it’s better to be honest than keeping a lie that can hurt yourself, those surrounding you and other people as well.
Bernie Madoff's origin: before things got ugly
Bernie Madoff was born on April 29, 1938, in Queens, New York.
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He was the son of Jewish immigrants who had fled Poland just before the outbreak of World War II. His father, Irving Madoff (1909-2002), worked as a salesman and made money through hard work and determination; his mother, Ruth (1911-2001), was a housewife who cared for her children and kept their home running smoothly while her husband was away working long hours at his job. Bernie had two brothers: Peter (1934) and Fred (1936).
The beginning of a great career (that later got rot)
In 1960, Madoff founded Bernard L. Madoff Investment Securities LLC as a broker-dealer for penny stock with $5,000 of his own money and a loan of $50,000 from his father-in-law.
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After his brother, Peter, joined the Madoff firm in 1970, he began to build a reputation for employing cutting-edge computer technology in the traditional stock trading business.
He was an early player in the electronic market that would eventually become the modern Nasdaq and was involved as an investor in several other computerized brokerage platforms.
Madoff's leadership in the market and his companies' willingness to challenge Wall Street traditions made him a trusted adviser as they tried to modernize the market.
His Nasdaq badge
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There’s no doubt that Bernie Madoff's most significant accomplishment was his involvement in building the Nasdaq stock exchange, founded in 1971 by the National Association of Securities Dealers (NASD), today it hosts thousands of companies and represents over half a trillion dollars in market capitalization.
This was a radical departure from traditional exchanges, where stocks are traded once per day at pre-set prices based on closing prices from earlier that day or week. This depended on whether it was an American or New York Stock Exchange.
Madoff’s involvement did not go unnoticed, since he became the Non-Executive Chairman of the Nasdaq Stock Market from 1990 to 1991. During his time as Chairman, he played a significant role in the growth and development of the Nasdaq market, which was then largely focused on technology and growth stocks. However, he resigned amid growing concerns about his business practices.
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After Nasdaq… before the scams?
In the 1990s, the industry of hedge funds and private companies were created and served as supposedly exclusive portals through which investors could benefit from Madoff's investing genius. These funds raised billions of dollars that he used to pay out promised winnings to his first clients and cover withdrawals when necessary.
By then, he was already an influential spokesperson who knew the tricks and ways of the stock market in detail, and his work with Nasdaq allowed him access to more capital than ever before, and this is where things got interesting.
In general terms, Bernie Madoff's investment strategy was to trade on margin (borrow money) and invest in securities such as stocks, bonds, and options. He also made some private loans using his clients' funds as collateral for these loans.
How people trusted him to manage their wealth
Bernie Madoff was a respected man in the financial world. He had built himself up over time, and people trusted him because of his excellent reputation with money. His great financial success gave people ease of mind, and they felt confident entrusting him with their own money.
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Madoff was well known for managing other people's money in a way that made them money without taking any risk on his part, he simply took a percentage of their profits as payment for his services.
How did it evolve into a Ponzi scheme?
This allowed him to generate large amounts of cash without having any actual capital or assets under management, something he would never have been able to do had he been operating any other kind of legitimate business model!
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The exact timeline of when Madoff's legitimate investment business turned into a Ponzi scheme is not entirely clear, although the Securities and Exchange Commission said that they ignored specific and credible evidence of problems going back to at least 1999, it was until December 2008 when the Ponzi scheme was revealed by the authorities.
How he scammed the wealthiest people in the world for so long
Bernie Madoff could get away with this scam for so long because he was a master of deception. He could convince people that he was trustworthy and honest, even though he wasn't.
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He also knew how to make himself seem like an important person in finance, which gave him credibility among his clients and investors. People trusted him because they thought he could help them make more money than they would have otherwise been able to do on their own, and they were right! He did help them make more money than they would have without his guidance.
A Ponzi scheme is an investment fraud that pays returns to its investors from their own money or the money paid by subsequent investors rather than from profit earned by the individual or organization running the business. The scheme involves an entity selling an asset to repay principal and interest at a higher price with future installments of new investment.
Unfortunately for these investors, though, it wasn't because of any actual investment strategy or intelligent financial decisions on their part, it was all just an elaborate scheme set up by Bernie Madoff himself.
In the aftermath
Bernie Madoff was caught when his sons reported their father to the FBI. He pleaded guilty and was sentenced to 150 years in prison for stealing $20 billion from investors over 20 years, making him one of the biggest financial fraudsters in history.
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On 2009, Madoff pleaded guilty to 11 federal felonies, including securities fraud, wire fraud, mail fraud, money laundering, perjury, theft from an employee benefit plan, and making false filings with the SEC. The plea was the response to a criminal complaint filed two days earlier, which stated that over the past 20 years, Madoff had defrauded his clients of almost $65 billion in the largest Ponzi scheme in history. Madoff insisted he was solely responsible for the fraud.
He was sentenced for 150 years in Federal Prision, he died on 2021, although it was reported he died of natural causes, according to a death certificate obtained by TMZ, the cause of his death was hypertension.
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Most people involved in Madoff's scheme were not charged because there wasn't enough evidence against them. However, some did go on trial, including Frank DiPascali Jr., who worked as an executive assistant for Madoff from 1987 until 2008. He retired due to health issues and died in 2013.
Conclusion
We can see from this story that Bernie Madoff is a very clever man who has been able to scam some of the wealthiest people in the world for decades. However, it wasn't just his intelligence that helped him get away with it for so long.
He also relied heavily on trust among his clients and an intricate web of lies that kept them from discovering what was happening behind closed doors at his company headquarters.
