The Real Wolf Of Wall Street

Ponzi schemes, almost everyone knows them. But from where did the name originate?

In the 1920s, Charles Ponzi promised investors a 50% return after a couple of months for what he claimed was an investment in international mail coupons.

Ponzi Schemes use the funds from new investors to pay the returns on investment for earlier investors.

Someone called Bernie Madoff used this principle to become a multi-billionaire. Here is how he tricked the entire world, including banks and institutions on Wall Street.

Youth

In 1938, the biggest scammer of all time was born Queens, New York to an immigrant family. He graduated from Hofstra University with a bachelor's of Arts in Political Science.

Shortly after he had graduated, he founded Bernard L. Madoff Investment Securities.

Career

The company used payment for order flow. This is just a fancy way of saying that you connect a buyer and a seller of stock and take a commission off the trade.

Payment for order flow is legal in the U.S. but illegal in Canada.

Anyways, Bernie Madoff became one of the largest market makers, someone who connects a buyer and sellers on the Nasdaq stock exchange. Bernie Madoff even got a seat on the board of the Nasdaq.

Bernie Madoff made sure to bribe politicians. In total, he contributed around $240.000 to federal candidates, parties, and committees.

Madoff was investigated multiple times by the SEC but always got himself out of trouble. Madoff said his Ponzi scheme could have been exposed in 2003 but always got away with it because the investigators never asked the right questions.

I was astonished. They never even looked at my stock records. If investigators had checked with The Depository Trust Company, it would’ve been easy for them to see. If you’re looking at a Ponzi scheme, it’s the first thing you do. Feierstein Mitch, author of Planet Ponzi.

The Big Ponzi Scheme

In 1999, Harry Markopolos, a financial analyst told the SEC that he believed it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver.

Markopolos spend 4 hours trying to replicate Madoff’s numbers but he failed. He had just proven that Madoff was a fraud with the help of mathematics.

He warned the SEC in 2000 and 2001 but was ignored. In 2005 and 2007 he presented even more evidence but was again ignored. Imagine how much money could have been saved if the SEC listened to him.

Even though Madoff’s Ponzi scheme turned into a multi-billion dollar operation, none of the major Wall Street firms invested with him because they thought his number was not legitimate.

The Central Bank of Ireland failed to spot Madoff’s scheme when Madoff gave them all the necessary information to declare him a fraud. How incompetent is everybody?

The End

In the month of December 2008, some cracks started to appear in his master plan. In the first week of December, he was struggling to pay the fake returns to investors.

For years, Madoff deposited investors’ money in his business account at JPMorgan Chase and withdrew money whenever investors requested their promised returns.

He was barely able to make the redemption payment on November 19th.

Despite cash infusions from longtime investors, he realized that there wasn’t even enough money to begin paying off investors.

His Chase account had around $5.5 billion in mid-2008, but by late November was down to $234 million. Imagine having $5 billion in your bank account!

Borrowing money wasn’t an option either since all of the big banks had stopped lending him money. He was done.

According to the sons, Bernie Madoff said he would pay out $173 million in bonuses on December 9th, the same day that he ran out of money to pay off investors.

His brother who was also working for him asked how he could pay $173 million in bonuses when he could barely pay off investors.

Bernie Madoff then told his wife, brother, and sons that it was just one big lie and basically an enormous Ponzi scheme.

On December 11, Madoff was arrested for securities fraud.

Madoff paid a $10 million bail in December 2008 and was monitored 24/7 in his Upper East Side penthouse apartment until March 12th when the judge revoked his bail.

On June 26, 2009, the judge ordered forfeiture of $170 million in Madoff’s assets and a prison sentence of 150 years.

On April 14, 2021, Bernie Madoff died of natural causes at the age of 82.

Final Thoughts

The day the news came out about the scheme, the entire world was in shock. He was so trustworthy but in reality, it was all one big lie. I wonder how so many people could have fallen for the Ponzi scheme.