Madoff Case Brief

Madoff Case Brief

Synopsis:

        From a young age, Bernie Madoff wanted to get out of the lower middle-class in which he was raised.  After he graduated from college, Madoff used funds saved from working during college to establish Bernard L. Madoff Investment Securities LLC.  Madoff found it difficult to compete with larger firms.  The rules of the New York Stock Exchange (NYSE) made it extremely difficult for small brokerage firms to compete with the cartel of large brokerage firms that effectively controlled Wall Street.  

Madoff sought to “democratize” the securities markets.  “Bernie was the king of democratization.  He was messianic about this.  He pushed to automate the securities trading system, listing buyers and sellers on a computer that anyone could access.”  With this drive to computerize the system of selling stocks, Madoff Securities was one of the first firms to utilize computers to expedite the process of trading securities.  Bernie Madoff is also credited as being one of the founders of the NASDAQ stock exchange.  Many current day investors pay lower transaction costs because of the pioneering work of Bernie Madoff.

Unfortunately, Madoff will not be remembered for his contributions to computerizing and modernizing the ways in which we sell and buy stocks.  He will be remembered for implementing one of the largest Ponzi schemes in the history of the United States.  Although the other areas of his firm made money, Madoff expanded the firm to include investment advisory services.  This investment advisory service is where Madoff ran his Ponzi scheme.  By late 2008, the total value of customer accounts managed by Madoff Securities reached $65 billion.  As the case states, “The key factor that accounted for the incredible growth in the amount of money entrusted to Madoff’s firm by investors worldwide was the impressive rates of return that the firm earned annually on the funds that it managed.”  To the outside world, the funds in which Madoff invested were pure gold and Madoff could do no wrong.  However, the reported returns and Madoff’s secretive investment strategy that produced them was fraudulent.

In a meeting with his two sons on December 10, 2008, Madoff confessed that the impressive returns earned for his clients on his firm’s investment advisory division over the previous years had been fraudulent.  His sons then reported this to the SEC.  The FBI arrested Madoff and charged him with securities fraud.  There has been a lot of criticism focused towards the SEC because of the poor way in which they handled previous interactions with Madoff Securities.  An “obscure financial analyst and mildly eccentric fraud investigator from Boston” named Harry Markopolos had repeatedly told the SEC that Madoff was operating a Ponzi scheme.  According to the case, “Among the most credible and impressive evidence Markopolos gave to the SEC were mathematical analyses and simulations allegedly proving that Madoff’s split-strike conversion investment strategy could not consistently produce the investment results that his firm reported.”  Also, the SEC was being criticized for not following through with other leads. A one man accounting firm named Friehling & Horowitz were providing audit services for the entirety of Madoff Securities.  An SEC official essentially said Friehling had “essentially sold his CPA license for more than 17 years while Madoff’s Ponzi scheme went undetected.”  Friehling is still free to this day because of his cooperation with the investigation.  He was convicted but his sentencing is constantly being pushed back.  Madoff was convicted and on June 29, 2009 was sentenced to 150 years in prison, effectively giving the elderly man a life sentence for his crimes.