Posted by Madoff: The Monster of Wall Street is a documentary released on Netflix on January 2023. It comes out in a particular historical period, while the world is living in a global financial crisis, and the attention towards the big financial scandals in history is relevant: movies like Margin Call have become pretty popular in those years, and reasonably the true story of Bernie Madoff and his Ponzi Scheme (the technical expression that indicates his fraud) catch the interest of many people. This article will tell the true story of Madoff and his investment scandal. We will also explain what a Ponzi scheme is.
You can watch the official trailer for Madoff: The Monster of Wall Street here on Youtube.
Bernie Madoff: the true story of his life
Bernie Madoff was an American financier active in the stock market for five decades: he founded his first investment company, Madoff Investment Securities LLC, in 1960, when he was 22, and he operated as a broker and investor until his arrest in 2008.
Although today he’s famous as a fraudster and the mastermind of the largest Ponzi scheme in history, during the years of his activity, he was a well-respected personality in the American financial world. He was one of the first to use IT to automatize trading, and his technology became the basis for the birth of NASDAQ. He also served as a NASDAQ director for three years.
His brokerage company was very successful, and under his own admission, he didn’t really need any fraud to maintain the wealthy lifestyle he and his family used to have. Apparently, he started frauding his investors without a real reason, almost by chance, without being fully aware. “I just allowed myself to be talked into something and that’s my fault; I thought I could extricate myself after a period of time. I thought it would be a very short period of time, but I just couldn’t,” he declared in an interview. “I don’t know why,” he said.
It’s also not sure when the fraud started. According to his testimony at the trial, he started it in 1990, but people working with him admitted that the scam was up already in the 70s. He has been investigated many times over the years, but nobody ever found proof of his fraud. Everything eventually collapsed in the 2008 financial crisis, when many investors requested to withdraw their investments: Madoff’s company simply didn’t have the capital and gains reported and promised for decades. Bernie Madoff confessed his fraud to his sons on December 10, 2008. He was arrested the morning after.
One of the most fascinating parts of the true story of Bernie Madoff was how his fraud worked. Let’s simply understand the mechanism of his scam and what a Ponzi scheme is.
Madoff’s fraud: what is a Ponzi scheme?
In general, a Ponzi scheme is a type of investment fraud where a structure, person, or company attracts investors, promising high profits that don’t match reality, hiding the origin of any profit under secret activities. Investors come, flooding the investment with new money, especially in the markets’ profitable periods. When an old investor withdraws his investment, claiming his profit, the Ponzi scheme typically pays out using the money coming from the new investors. Obviously, suppose a large portion of investors withdraw their capital at the exact moment (as usually happens during a financial crisis), claiming the promised gains: in that case, the author of the Ponzi scheme won’t be able to cover the withdrawals, and usually they file for bankruptcy.
Bernie Madoff attracted many investors because of his reputation in the financial world. Becoming Madoff’s client was considered a privilege. Madoff Securities LLC reported a stable profit every year, which appealed to many investors: the annual returns were never outstanding, maintaining an average 10% yearly profit to investors, which isn’t considered abnormal (that helped keep the fraud covered). However, even in years when the American stock markets were considerably down, Madoff’s investments were reportedly returning positive profits.
The money coming from Madoff’s client was just never invested: Bernie Madoff was only transferring all capital to one of his accounts. The profits reported every quarter were false, built on purpose by pretending to pick the best stocks in the market and trade stock options wisely. Year after year, Madoff’s clients believed their investments were growing increasingly, and whenever one wanted to sell, Madoff just paid them out with the money in his account.
In November 2008, the total nominal value in the accounts of all Madoff’s clients was theoretically 64 billion dollars. Due to an acceleration of the market decline, several withdrawals were requested, for a total of about 7 billion dollars. Madoff’s account, in fact, was almost empty: already in 2005, investors claimed withdrawals larger than the capital he had, forcing him to acquire new money quickly. He manages to collect about 300 million dollars since then, but they were already gone because of more withdrawals.
Madoff collected about 200 million dollars more in the days before his arrest from investors like Carl J. Shapiro and Martin Rosenman. Knowing that he was finished, he used that money to pay out the accounts of relatives and favored investors. Then, on December 10, 2008, he asked his sons Mark and Andrew (who worked in his company, unaware of the scam) to pay out the bonuses forecasted for the upcoming two months. His sons questioned the decision, asking how the company could pay the bonuses if it could not respect the withdrawal requests of its investors. At that point, Madoff confessed everything. Mark and Andrew Madoff immediately contacted the lawyers, who connected them with the federal prosecutors and the SEC, the agency that oversees securities exchanges. Bernie Madoff was arrested the morning after.
Madoff pleaded guilty to all charges at the trial, not even asking for special treatment. On June 29, 2009, he was sentenced to 150 years in prison. Bernie Madoff died in jail on April 14, 2021, aged 82.
Bernie Madoff was represented in many movies and TV shows over the years: Woody Allen admitted he drew inspiration from him for his Blue Jasmine, and Robert DeNiro interpreted him in the 2017 HBO film The Wizard of Lies. Netflix’s Madoff: The Monster of Wall Street represents a new milestone in the media coverage of Bernie Madoff true story.
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