The Madoff Affair

12May09

[Notes from a Frontline video on the Madoff affair.]

FRONTLINE correspondent Martin Smith unearths the details of the world’s first global Ponzi scheme — a deception that lasted longer, reached wider and cut deeper than any other business scandal in history — in The Madoff Affair.

Dec 11, 2008: Madoff was arrested for stock fraud. The largest stock fraud in history. There were lots of questions: how did he pull it off? who helped him? when did it all begin?

It all started in 1960, when Madoff has just graduated and got married. He then started a career as a market maker on Wall Street. He slowly built it up – kind of like a whole sale firm: paying a penny a share – sold lots of trading volume. Paid order flow. However, Madoff also had a side business: investment advisor — operated completely under the radar. Arrangement: promising people big amounts 18%, smaller 17-16-15% Never asked how it was possible to give back the money. Possibly something with arbitrage. With time, the side firm was getting too many clients – to operate an unregistered firm.

1992: trouble. An investigation by the SEC. Shut down in November because they didn’t have a license. At first the SEC were worried that the money wouldn’t be there. That’s when the investigations started, still without having Madoff purposely in view.

Madoff was repeatedly investigated by the SEC, but it found nothing amiss. Madoff remained a pillar of the financial world until the markets came crashing down in late 2008. “The fact is, he easily could have gone through his life without this being found out,” says Madoff investor Burt Ross. “The only reason that this ended was because, at one given point in time, the economy did so badly that people wanted — needed — to get money out of Madoff’s investments.”

It almost seem like a play of fate. Madoff being uncovered by the exact financial crisis he was playing his cards in undercover. Such a long time playing the scheme, building on the slices of a bigger and bigger pie. An amazing reality that was only found out by chance, so to say.

**Ponzi Scheme: you always have to attract new investment and you have to make sure that you don’t have a sudden outflow. The key is stability.

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