It has been 15 years since Bernie Madoff was arrested by the FBI for perpetrating the single largest Ponzi Scheme fraud in United States history. By some estimates, he swindled over $60 billion!
Before we get to “how,” let’s review exactly what a Ponzi Scheme is. Named after Charles Ponzi, the first man to pull off this con, A Ponzi Scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors, with the fraudster pocketing the rest of the money for himself.
And Madoff discovered a way to take this crime to a whole new level. He took in money from unsuspecting investors and never invested it! He would send these clients confirmations and statements showing that the money was invested . . . and, remarkably, his investments always went up! He was universally considered a savant and a genius, and the money poured in.
At the end of each month he would scan all the stocks on each of the three main exchanges – the New York Stock exchange, the American Stock Exchange and the NASDAQ Stock Exchange - to determine which companies performed the best that month. Then he would print up “dummy” statements showing that he had purchased those specific investments for his clients just prior to the price climbing. And, of course, this made him look like he had some kind of magical crystal ball!
Imagine the experience of seeing nothing but “winners” every month in your portfolio! That’s what he was delivering! Of course, it was smoke and mirrors because not one of his clients actually owned any investments. Bernie was taking all the money and depositing it into his own personal account to fund his lavish lifestyle and to pay huge bonuses to his employees who were in on the con with him.
But, what if clients needed to withdraw $40,000 to pay for their daughter’s wedding? No problem! Bernie would simply cut a check from his personal account and mail it to the client. I mean, when you’re sitting on millions of dollars, sending $40,000 to a client to help pay for a wedding is a small price to pay.
And you’re not going to believe which technological advancement allowed him to perpetrate this deception. It was actually the introduction of the laser printer that gave him the tool he needed!
You see, prior to the laser printer, we had dot-matrix printers that produced basic letters and numbers. But the quality was very poor. The laser printer, on the other hand, allowed Madoff to print his fraudulent monthly account statements that looked as real as any statement you might receive from Merrill Lynch or J.P Morgan!
So, when these fictional statements were received by clients, they certainly looked legit! And it was the perception that Madoff, the former chairman of the NASDAQ Exchange, was an honest businessman that not only gave his clients comfort . . . they told their friends about him! And the number of referrals he received because he kept hitting “homeruns” was staggering! And it wasn’t just wealthy investors . . . he was also introduced to and subsequently managed money for some of the largest charities, churches and foundations in the country.
So, the fallout when he was arrested in December of 2008 was monumental. If you remember 2008, the stock market tanked that year. So, Bernie’s exercise of trolling only for stocks that had gone up in value stopped working . . . . because NOTHING was going up in value. So, clients started to see dreaded losses in their accounts and some of them started demanding their money back. In fact, in the Fall of 2008 he received redemption notices from clients that totaled $7 billion! And he did not have the liquidity to pay these clients back.
So, the excuses started, and the authorities were notified . . . which lead to the FBI showing up one day at his New York City office and taking him away in handcuffs. On March 12, 2009, Madoff pleaded guilty to 11 federal felonies, including securities fraud, wire fraud, mail fraud, money laundering, making false statements, perjury, theft from an employee benefit plan, and making false filings with the SEC.
In his plea allocution, Madoff stated he began his Ponzi scheme in 1991. He admitted he had never made any legitimate investments with his clients' money during this time. Instead, he said, he simply deposited the money into his personal business account at Chase Manhattan Bank.
Madoff was sentenced to 150 years in prison and eventually passed away at age 83 in a Federal Medical Center in North Carolina in April of 2021.
So . . . How do you protect yourself from this kind of thing happening to you? For this scam to work, Madoff instructed his clients to make checks payable to his company, not to an investment custodian. When you give us a check to deposit into your account, the check is never made payable to “Dunlap & Associates.” Instead, we instruct you to make checks payable to National Financial Services - the firm that Commonwealth Financial Network (our brokerage partner) has contracted with to hold client assets. They are, in fact, our custodial firm. They provide you with your statements and your portfolio’s insurance protection through SIPC (Securities Investor Protection Corporation). This is the layer of security that we provide you so that things like a Ponzi Scheme will not happen to you.
But, to be fair, because my clients trust me, if I were to tell them to make checks payable to “Dunlap & Associates” I suspect they would . . . and that would be a significant violation on my part that could jeopardize the safety of your investments, and I can assure you it is something we will NEVER do!
Criminals and scammers will always be out there. And, honestly, no financial advisor earns positive returns EVERY year for his or her clients! And, if someone tries to tell you otherwise, they’re full of it and you should act with great caution! Honestly, if something sounds too good to be true, it probably is . . . especially in the investment world.
So, be careful who you trust, especially as it pertains to your money. And, as always, if you ever have any questions or concerns, let us know. We are all here to help.