Bernard Madoff: How I Swindled $50 Billion

Wall Street money manager Bernard Madoff, now behind bars and facing a lifetime in prison for the largest investment fraud in U.S. history, has given a detailed version of how he defrauded thousands of investors out of $50 billion over the course of nearly 20 years without anyone noticing.

The story, surprisingly simple given the magnitude and duration of the theft, is the first time Madoff, or anyone, has laid out how the massive Ponzi scheme centered on Bernard L. Madoff Securities LLC unfolded. As a result, Madoff, a former pillar of the Wall Street community and NASDAQ chairman, has become a despised symbol, the poster child for the out-of-control corporate greed and deception that has come to symbolize the nation’s catastrophic economic collapse.

‘I Am Deeply Sorry and Ashamed’

Madoff said he started taking investor dollars and, instead of buying securities putting the money into a Chase Manhattan bank account, in 1990. He said the recession gripping the U.S. at the time “posed a problem for investments in the securities markets.”

“I never invested those funds in the securities, as I had promised,” Madoff admitted in court.

He nonetheless charged clients 4-cents per “transaction” as a commission, even though he never made a legitimate purchase for any client.

When clients wanted to be paid profits from their “investments,” Madoff would simply withdraw the funds from the account to pay them. All the while, Madoff knew that one day, his entire scheme would catch up to him and he would be exposed as a fraud.

“As the years went by, I realized that my arrest and this day would inevitably come,” Madoff told the judge in pleading guilty on March 12, 2009. “I am here today to accept responsibility for my crimes … and explain the means by which I carried out and concealed my fraud.”

Investment Strategy Was Smoke and Mirrors

To convince investors to part with their hard-earned cash and to justify the alleged profits he was earning on their behalf, Madoff created an investment strategy he dubbed “spit strike conversion strategy.” Through the strategy, Madoff promised to invest in a basket of common stocks selected from the 100 largest publicly traded companies in terms of market capitalization.

He further claimed that he would hedge client investments in the common stocks and limit potential losses by buying and selling option contracts related to the stocks. This scheme went on for years undetected, Madoff said.

When the Securities and Exchange Commission started nosing around Madoff’s firm in 2006, he lied under oath and claimed that he had been investing client funds in keeping with his “split strike conversion strategy.” He filed false trading confirmations, SEC filings, and fictitious client account statements to cover his tracks. Clients had no way of knowing it was all smoke and mirrors and it took another 13 years for the SEC to finally unravel his web of lies and financial deceit.

New Steps Taken to Conceal Fraud

In more recent years, Madoff began wiring money between the United States and the United Kingdom to make it look like he was buying securities for his clients. As part of this cover up, Madoff had money transferred from the U.S. bank account of his investment advisory business to the London bank of Madoff Securities International Ltd, the U.K. corporation affiliated with his New York-based operation. Once again, the entire operation was a fraud designed to hide the fact that Madoff was ripping off and lying to thousands of investors who trusted him with their lives savings, charitable funds, and other monies.

Other Businesses Were ‘Legitimate’ and ‘Profitable’

Madoff told the court that while his securities trading firm was an absolute fraud, other businesses he owned and were managed by his two sons and brother were not involved in the scam. These “legitimate” and “profitable” endeavors included proprietary trading and market making operations which were not involved in any way with his fraudulent investing firm, Madoff said.

Madoff did not strike a plea bargain with federal prosecutors, agreed to plead guilty all 11 felony counts filed against him, and accept a likely prison term of up to 150 years in part because he refused to admit to conspiracy. Doing so would have forced Madoff, who claims he acted alone, to implicate his sons, brother, wife, and possibly others in the scam. His assertion in court that the entities operated by his loved ones were not part of his investment swindling seems unbelievable, but also a calculated effort to protect his family.

A Sad Chapter in Wall Street History is Closed

With the guilty pleas leading to a long prison term and the detailed account of how he ripped off so many people for so much money, the sad, tragic life of Bernard Madoff and his unprecedented impact on Wall Street is coming to an end.

The man who had so much going for him chose instead to lead a life of lies and deception which bankrupted thousands of people who trusted him to help them retire early, send their kids to college, fund charities, and pay for other honorable endeavors. Bernard Madoff will deservedly go down in history as one of the most notorious swindlers in U.S. history.

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