Bernie Madoff Pulled Off the Largest Ponzi Scheme in History Using One Legal Loophole

Toni Koraza

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Bernard L. Madoff is dead.

The man who ran and operated the largest Ponzi scheme in history died of natural causes at the age of 82. His story is a Greek tragedy.

Madoff ran one of the largest financial institutions on Wall Street, pioneering the electronic trading systems. He robbed thousands of high-end individuals and created the biggest financial house of cards the world has ever seen. Steven Spielberg, Kevin Bacon, Sandy Koufax, and Elie Wiesel were just some of his affluent victims.

Then, the winds of the financial crisis of 2008 blew away every card in the stack and brought thousands of millionaires to their knees, even wrecking a few billionaires.

Bernard Madoff defrauded 37,000 people in 125 countries by the time of his arrest, amassing a personal fortune of $843 million.

The wave of suicides following Madoff’s arrest

Imagine, being a wealthy New York family one day, and then waking up with no assets and money.

The generational wealth your family carefully built is now gone, evaporated beyond any return. One man is to blame. You’re broke and probably bankrupt, and it’s just the time for Christmas.

FBI arrested Bernard Madoff on December 11, after his two sons alerted the authorities. Some victims lost everything they had. And Madoff’s family alongside individual investors attempted suicide. Some successfully passed away, others woke up unintentionally, and the rest died of a rapidly progressive illness. It was almost like a higher force struck them all down.

“Now you know how you have destroyed the lives of your sons by your life of deceit. Fuck you,” wrote Mark Madoff in his suicide letter after the 1st attempt. He didn’t leave a note the second time around. Andrew Madoff died four years later of cancer, and Ruth Madoff survived her diazepam overdose.

French banker Rene-Thierry Magon de la Villehuchet took a handful of sleeping pills after losing the $1.4 billion investment he had with Madoff’s company. Paramedics found him on the floor of his Manhattan office 2 weeks after Madoff’s arrest. Army major William Foxton was another one of Madoff’s victims. He shot himself in the head when he realized his life savings disappeared in the Ponzi scheme. Another victim was found at the bottom of his swimming pool shortly after Madoff’s trial was concluded.

Bernard L. Madoff was sentenced to 150 years in prison, and ordered to pay 170 billion in restitution (roughly the net worth of Elon Musk in 2021).

Madoff had a net worth of negative $17 billion at the time of his death, according to Celebrity Net Worth. His victims barely received any compensation in the first years following the trial. However, the Madoff Recovery Initiative, lead by Irving Picard, eventually managed to recover almost $15 billion from the original scam.

Madoff claimed he singlehandedly organized the largest Ponzi scheme in history, even defrauding his family and company’s top executives.

Who was Bernie Madoff — the man behind the largest fraud in modern history?

Everything the SEC did prior to 2006 was a waste of time. It never entered the SEC’s mind that it was a Ponzi scheme,” Madoff said in one of his interviews. The investigators only had to call a few numbers, and they “would’ve seen it.”

Nobody could be bothered to check.

Bernard Madoff was marinated in all sorts of financial indecency from an early age. His parents ran Gibraltar Securities until SEC closed the company over failed assessments and trading misconduct.

Young Bernie took on a lifeguard job as a teenager and saved up to $5,000 (equivalent to $45,000) that he later used to start his trading company, Bernard L. Madoff Investment Securities. Madoff originally traded penny stocks but soon became a third-option market maker. He secured a first investment of $50,000 with his father-in-law and entered the world of exclusive finance.

“The $740 million average daily volume of trades executed electronically by the Madoff firm off the exchange equals 9% of the New York exchange’s. Mr. Madoff’s firm can execute trades so quickly and cheaply that it actually pays other brokerage firms a penny a share to execute their customers’ orders, profiting from the spread between bid and asked prices that most stocks trade for.” — Randall Smith, Wall Street Journal.

Bernard Madoff was a pioneer of electronic trading

His original business was all about buying and selling stocks to provide liquidity on the market (aka market maker). Madoff also invested heavily in stocks and generated outstanding yearly returns, matching S&P’s annualized returns of 16% between 1982 and 1992.

“I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding.” — Bernard Madoff

The company used innovative technology to sort trading quotes, creating a market system that eventually became NASDAQ, one of the largest electronic stock markets on the planet.

Apple, Amazon, Tesla, and Microsoft are just some of the companies you can buy and sell exclusively on NASDAQ today. Following the massive success of automated quotations, Madoff was offered a non-executive chair at NASDAQ in 1990, which he gladly accepted.

Madoff’s Ponzi scheme was not exactly a $65 billion scam

The SEC first investigated Avellino & Bienes, one of Madoff’s feeder funds, in 1992.

The Commission closed the case without any further investigation into Bernie Madoff’s business. Investigators ignored the evidence of significant returns Madoff’s company consistently made using basic trading strategies, which pointed at legitimate fraud at scale.

Harry Markopolos, a fraud investigator, tried to alert the SEC about Madoff’s irregular statements, but the SEC decided to turn another blind eye.

“I gift wrapped and delivered the largest Ponzi scheme in history to the SEC,” Markopolos told a House subcommittee, “and somehow, they couldn’t be bothered to conduct a thorough and proper investigation because they were too busy on matters of higher priority.”

The Ponzi scheme continued churning out impossible returns year over year.

Madoff was a wizard of lies. He’d reassure his investors, saying how “the owner’s name was on the door.” He’d promised to take full responsibility for the client’s business. The company would boast about annual returns of 12%, which were outstanding, but still modest enough to keep the operation flying under the radar.

Today’s hedge funds promise returns in the 7%–10% ballpark, often falling short of average returns that come from investing in the S&P 500.

Bernard Madoff didn’t do anything spectacular. He used a classic legal loophole to run his business. Madoff’s company wasn’t obliged to apply with a financial custodian or any outside organization that could actually audit his books. For decades, Madoff would simply deposit the money into his business account at JP Morgan Chase and withdraw the amount his clients asked for in redemptions. For those who are not savvy with financial jargon, redemption is when investors request back initial investment sooner than originally agreed.

When poop hit the fan in 2008, investors asked to redeem $7 billion from Madoff’s company. If that didn’t happen, Madoff could still be out there, operating his business.

Bernie Madoff effectively stole $20 billion in principal funds by the time of his arrest, writing down assets and accumulated profits for up to $65 billion. Headlines use $65 billion as a reference point because it was the money investors believed they had in their accounts at the time the scheme came crashing down.

The active trustee initiative recovered almost 75% of the original investments over the past 12 years.

Madoff made zero investments in the last 12 years of running his business

“Your Honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme.” — Bernard Madoff

Bernard Madoff was cold, agreeable, and somewhat remorseful for his actions. He pleaded guilty on all counts and apologized to his victims, saying, “I’m sorry, I know that doesn’t help you.” Madoff claimed he didn’t buy a single stock for over a decade and that the whole scheme originated in 1992. However, many believe that his fraud is as old as the company itself.

Madoff also claimed he was the only man in charge of the Ponzi scheme, trying to relieve his family and colleagues of any accountability. Bizarrely enough, five people were charged under various counts of fraud, but nobody directly knew about Madoff’s swindle.

Madoff's wife and two sons suffered a fate worthy of Greek tragedies. Both sons died, while Ruth Madoff barely survived her suicide attempt. She confessed to not missing her husband and said she was glad “the villain” was behind bars. She now lives in Connecticut, far away from the public eye.

The largest Ponzi scheme in history operated through a system of feeder funds and made possible with a simple legal loophole. No authority was around to check on Madoff’s business. The scheme lasted for decades, possibly going back to the 1960s.

Madoff started a chocolate business later in prison, where he bought the whole supply of chocolate bars and sold them back to prisoners for a profit. He was well-respected and didn’t mind spending time behind bars, according to his lawyer. Inmates often asked for financial advice and legal help.

The impossible thief was 82 when he died of natural causes in Federal Medical Center, in Butner, North Carolina. He served only 10 out of a 150-year sentence and didn’t pay the $170 billion in restorations (obviously).

Many of Madoff’s victims say his death is too good for him.

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Curious Fellow | Founder at Mad Company, and MadX.Digital | Writes about Current Events, Lifestyle, and Money |

Miami, FL
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