The story begins in 1960, a young man started a business as a penny stock trader with $5.000, and this man is Bernard Madoff. Madoff business began to grow with the help of his father-in-law and some close friends and family members. In order for his firm to compete with other firms that were members of the New York Stock Exchange, his firm began using advance computer information technology to disseminate its quotes, which developed the NASDAQ. Madoff’s company became the largest buying and selling market maker the NASDAQ. He served as the Chairman of the Board of Directors for the National Association of Securities Dealer (NASD) as well as on the Board of Governors. Forty-Eight years ago did Madoff know that he was going to run the biggest Ponzi scheme in U.S. history which will destroy thousands of lives financial? In 1992, Wall Street Journal described him: “one of the masters of the off-exchange “third market” and the bane of the New York Stock Exchange.” In the 1980’s, Madoff was the first prominent practitioner who paid a broker to execute a customer’s order through his brokerage, which was called a legal kickback, which gave Madoff the reputation of being the greatest dealer in NYSE. Several people have questioned the ethics of these payments made to Madoff. Madoff argued that these payments did not alter the price that the customer received; he viewed these payments as a normal business practice. Madoff Securities was one of the top traders of securities in the USA by 2000; his holding was estimated to be approximated $300 million in assets. Madoff firm was as phony as a three dollar bill.
Madoff’s sales pitch was investment strategy consisting of purchasing blue-chip and then taking options contracts on them, which is sometimes called a split strike conversion or a collar. Rather than offer high returns to all investors, Madoff offered modest but steady returns to an exclusive clientele. His clients were called the “County Club Member,” only the prominent people could invest with Madoff Securities, because it was too complicated for outsiders to understand. He had the investor’s so convince that he would invest their money in shares of common stocks, options, and other securities and would, at their request, return profit and principal. This gave his firm the appearance of a velvet rope organization. Some investors were wary of removing their money from the Madoff fund, for the fear they could not get back in later. His annual returns were consistent around 10%, and were a key factor in perpetuating the fraud. With the Ponzi schemes the pay return on investment were typically around 20% or higher. One of Madoff investors stated, “The returns were amazing and we trusted this guy. If you wanted to take money out, you always receive your check in a few days.” But these investors never knew he was robbing Peter to pay Paul. He solicited billions of dollars under false pretenses and failed to invest investor’s funds as promised. Instead he deposited investors’ funds in a bank account at Chase Manhattan Bank. In order to conceal the fraud Madoff had to move funds from Chase Manhattan accounts to his business account. This man managed to conceal this crime for 48 years, investigated twice by the SEC in 1999 & 2000 for concerns that the firm was hiding its customer’s orders from other traders and no one knew he was stealing money.
There were some many red flags that could prevented this crime; for instance, Financial analyst and whistleblower Harry Markopols complained to the SEC they should investigated Madoff because it was impossible to legally make the profits Madoff claimed using the investment strategies that he claimed to use. Typically, hedge funds hold their portfolio at a securities firm acting as the funds prime-broker, which allows an outside investigator to verify their holdings. Madoff’s firm was its own broker-dealer and allegedly processed all of its traders. Madoff unethical