Investopedia / Matthew Collins

Bernard Lawrence "Bernie" Madoff was an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, possibly longer.

He was also a pioneer in electronic trading and chair of the Nasdaq in the early 1990s. He died in prison at age 82 on April 14, 2021, while serving a 150-year sentence for money laundering, securities fraud, and several other felonies.

Bernie Madoff was born in Brooklyn, New York, on April 29, 1938, to Ralph and Sylvia Madoff. His father worked as a plumber before entering the financial industry with his wife.34 They founded Gibraltar Securities, which was ultimately forced to close by the SEC.5

Bernie earned a bachelor's degree in political science from Hofstra University in 1960 and briefly attended law school at Brooklyn Law School. While in college, Bernie married his high-school sweetheart, Ruth (née Alpern), with whom he later founded Bernard L. Madoff Investment Securities LLC in 1960.67

At first, he traded penny stocks with $5,000 he earned installing sprinklers and working as a lifeguard.8 He soon persuaded family friends and others to invest with him. When the "Kennedy Slide" flash crash lopped 20% off the market in 1962, Madoff's bets soured and his father-in-law had to bail him out.

Notable Accomplishments

Madoff had a chip on his shoulder and felt that he was not part of the Wall Street in-crowd. In an interview with journalist Steve Fishman, Madoff advised, "We were a small firm, we weren't a member of the New York Stock Exchange. It was very obvious."9

According to Madoff, he began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he told Fishman, giving the example of a client who wanted to sell eight bonds; a bigger firm would disdain that kind of order, but Madoff's would complete it.10

Success finally came when he and his brother Peter began to build electronic trading capabilities—"artificial intelligence" in Madoff's words—that attracted massive order flow and boosted the business by providing insights into market activity. "I had all these major banks coming down, entertaining me," Madoff told Fishman. "It was a head trip."11

He and four other Wall Street mainstays processed half of the New York Stock Exchange's order flow—controversially, he paid for much of it—and by the late 1980s, Madoff was making in the vicinity of $100 million a year.

Madoff would become chair of the Nasdaq in 1990, and also served in 1991 and 1993.6

At some point, Madoff attracted investors by claiming to generate large, steady returns through an investing strategy called split-strike conversion, a legitimate trading strategy. However, Madoff deposited client funds into a single bank account that he used to pay existing clients who wanted to cash out.

He funded redemptions by attracting new investors and their capital but was unable to maintain the fraud when the market turned sharply lower in late 2008.

On Dec. 10, 2008, he confessed his wrongdoing to his sons—who worked at his firm. The following day, they turned him over to the authorities.12 Bernie remained adamant that his sons were not aware of his scheme.

The fund's last statements indicated it had $64.8 billion in client assets.4

It is not certain when Madoff's Ponzi scheme began. He testified in court that it started in the early 1990s, but his account manager, Frank DiPascali, who had been working at the firm since 1975, said the fraud had been occurring "for as long as I remember."1314

Even less clear is why Madoff carried out the scheme at all. "I had more than enough money to support any of my lifestyle and my family's lifestyle. I didn't need to do this for that," he told Fishman, adding, "I don't know why." The legitimate wings of the business were extremely lucrative, and Madoff could have earned the Wall Street elites' respect solely as a market maker and electronic trading pioneer.15

Madoff repeatedly suggested to Fishman that he was not entirely to blame for the fraud. "I just allowed myself to be talked into something and that's my fault," he said, without making it clear who talked him into it. "I thought I could extricate myself after a period of time. I thought it would be a very short period of time, but I just couldn't."16

The so-called Big Four—Carl Shapiro, Jeffry Picower, Stanley Chais, and Norm Levy—have attracted attention for their long and profitable involvement with Bernard L. Madoff Investment Securities LLC.17 Madoff's relationships with these men go back to the 1960s and 1970s, and his scheme netted them hundreds of millions of dollars each.18

"Everybody was greedy, everybody wanted to go on and I just went along with it," Madoff told Fishman. He indicated that the Big Four and others (several feeder funds pumped client funds to him, some all but outsourcing their management of clients' assets) must have suspected the returns he produced or at least should have. "How can you be making 15 or 18% when everyone is making less money?" Madoff said.19

Madoff's apparently ultra-high returns persuaded clients to look the other way. In fact, he simply deposited their funds in an account at Chase Manhattan Bank—which merged to become JPMorgan Chase & Co. in 2000—and let them sit. The bank, according to one estimate, may have made as much as $435 million in after-tax profit from those deposits.20

When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust. Madoff also cultivated an image of exclusivity, often initially turning clients away. This model allowed roughly half of Madoff's investors to cash out at a profit. These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money.

Madoff created a front of respectability and generosity, wooing investors through his charitable work. He also defrauded a number of nonprofits, and some had their funds nearly wiped out, including the Elie Wiesel Foundation for Peace and the global women's charity Hadassah.2122 He used his friendship with J. Ezra Merkin, an officer at Manhattan's Fifth Avenue Synagogue, to approach congregants. By various accounts, Madoff swindled $2.4 billion from its members.2324

Madoff's plausibility to investors was based on several factors:

• His principal, public portfolio appeared to stick to safe investments in blue-chip stocks.

• He claimed to be using a collar strategy, also known as a split-strike conversion. A collar is a way of minimizing risk, whereby the underlying shares are protected by the purchase of an out-of-the-money put option.

• His returns were high (10 to 20% per annum), consistent, and not outlandish. As the Wall Street Journal reported in a now-famous interview with Madoff, from 1992:

"[Madoff] insists the returns were really nothing special, given that the Standard & Poor's 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992. 'I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding,' he says."25

The SEC had been investigating Madoff and his securities firm off and on since 1992—a fact that frustrated many after he was finally prosecuted since it was felt that the biggest damage could have been prevented if the initial investigations had been rigorous enough.26

Financial analyst Harry Markopolos was one of the earliest whistleblowers. In 1999, he calculated in the space of an afternoon that Madoff had to be lying. He filed his first SEC complaint against Madoff in May 2000, but the regulator ignored him.27

In a scathing 2005 letter to the Securities and Exchange Commission (SEC), Markopolos wrote, "Madoff Securities is the world's largest Ponzi Scheme. In this case, there is no SEC reward payment due to the whistle-blower so basically I'm turning this case in because it's the right thing to do."28

Many felt that Madoff's worst damage could have been prevented if the SEC had been more rigorous in its initial investigations.

Using what he called "Mosaic Theory," Markopolos noted several irregularities.29 Madoff's firm claimed to be making money even when the S&P was falling, which made no mathematical sense, based on what Madoff claimed he was investing in.30 The biggest red flag of all, in Markopolos's words, was that Madoff Securities was earning "undisclosed commissions" instead of the standard hedge fund fee (1% of the total plus 20% of the profits).31

The bottom line, concluded by Markopolos, was that "the investors that pony up the money don't know that BM [Bernie Madoff] is managing their money."31 Markopolos also learned Madoff was applying for huge loans from European banks (seemingly unnecessary if Madoff's returns were as high as he said).32

It was not until 2005—shortly after Madoff nearly went belly-up due to a wave of redemptions—that the regulator asked Madoff for documentation on his trading accounts. He made up a six-page list, the SEC drafted letters to two of the firms listed but didn't send them, and that was that. "The lie was simply too large to fit into the agency's limited imagination," writes Diana Henriques, author of the book "The Wizard of Lies: Bernie Madoff and the Death of Trust*,"* which documents the episode.

The SEC was excoriated in 2008 following the revelation of Madoff's fraud and their slow response to act on it.33

In November 2008, Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6% during the same period when the S&P 500 dropped 39%.34 As the selling continued, Madoff became unable to keep up with a cascade of client redemption requests.

So, on Dec. 10, according to the account he gave Fishman, Madoff confessed to his sons Mark and Andy, who worked at their father's firm. "The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said, 'You gotta turn your father in,' they went, did that, and then I never saw them again." Bernie Madoff was arrested on Dec. 11, 2008.35

Investopedia / Matthew Collins

Bernard Lawrence "Bernie" Madoff was an American financier who executed the largest Ponzi scheme in history, defrauding thousands of investors out of tens of billions of dollars over the course of at least 17 years, possibly longer.

He was also a pioneer in electronic trading and chair of the Nasdaq in the early 1990s. He died in prison at age 82 on April 14, 2021, while serving a 150-year sentence for money laundering, securities fraud, and several other felonies.

Bernie Madoff was born in Brooklyn, New York, on April 29, 1938, to Ralph and Sylvia Madoff. His father worked as a plumber before entering the financial industry with his wife.34 They founded Gibraltar Securities, which was ultimately forced to close by the SEC.5

Bernie earned a bachelor's degree in political science from Hofstra University in 1960 and briefly attended law school at Brooklyn Law School. While in college, Bernie married his high-school sweetheart, Ruth (née Alpern), with whom he later founded Bernard L. Madoff Investment Securities LLC in 1960.67

At first, he traded penny stocks with $5,000 he earned installing sprinklers and working as a lifeguard.8 He soon persuaded family friends and others to invest with him. When the "Kennedy Slide" flash crash lopped 20% off the market in 1962, Madoff's bets soured and his father-in-law had to bail him out.

Notable Accomplishments

Madoff had a chip on his shoulder and felt that he was not part of the Wall Street in-crowd. In an interview with journalist Steve Fishman, Madoff advised, "We were a small firm, we weren't a member of the New York Stock Exchange. It was very obvious."9

According to Madoff, he began to make a name for himself as a scrappy market maker. "I was perfectly happy to take the crumbs," he told Fishman, giving the example of a client who wanted to sell eight bonds; a bigger firm would disdain that kind of order, but Madoff's would complete it.10

Success finally came when he and his brother Peter began to build electronic trading capabilities—"artificial intelligence" in Madoff's words—that attracted massive order flow and boosted the business by providing insights into market activity. "I had all these major banks coming down, entertaining me," Madoff told Fishman. "It was a head trip."11

He and four other Wall Street mainstays processed half of the New York Stock Exchange's order flow—controversially, he paid for much of it—and by the late 1980s, Madoff was making in the vicinity of $100 million a year.

Madoff would become chair of the Nasdaq in 1990, and also served in 1991 and 1993.6

At some point, Madoff attracted investors by claiming to generate large, steady returns through an investing strategy called split-strike conversion, a legitimate trading strategy. However, Madoff deposited client funds into a single bank account that he used to pay existing clients who wanted to cash out.

He funded redemptions by attracting new investors and their capital but was unable to maintain the fraud when the market turned sharply lower in late 2008.

On Dec. 10, 2008, he confessed his wrongdoing to his sons—who worked at his firm. The following day, they turned him over to the authorities.12 Bernie remained adamant that his sons were not aware of his scheme.

The fund's last statements indicated it had $64.8 billion in client assets.4

It is not certain when Madoff's Ponzi scheme began. He testified in court that it started in the early 1990s, but his account manager, Frank DiPascali, who had been working at the firm since 1975, said the fraud had been occurring "for as long as I remember."1314

Even less clear is why Madoff carried out the scheme at all. "I had more than enough money to support any of my lifestyle and my family's lifestyle. I didn't need to do this for that," he told Fishman, adding, "I don't know why." The legitimate wings of the business were extremely lucrative, and Madoff could have earned the Wall Street elites' respect solely as a market maker and electronic trading pioneer.15

Madoff repeatedly suggested to Fishman that he was not entirely to blame for the fraud. "I just allowed myself to be talked into something and that's my fault," he said, without making it clear who talked him into it. "I thought I could extricate myself after a period of time. I thought it would be a very short period of time, but I just couldn't."16

The so-called Big Four—Carl Shapiro, Jeffry Picower, Stanley Chais, and Norm Levy—have attracted attention for their long and profitable involvement with Bernard L. Madoff Investment Securities LLC.17 Madoff's relationships with these men go back to the 1960s and 1970s, and his scheme netted them hundreds of millions of dollars each.18

"Everybody was greedy, everybody wanted to go on and I just went along with it," Madoff told Fishman. He indicated that the Big Four and others (several feeder funds pumped client funds to him, some all but outsourcing their management of clients' assets) must have suspected the returns he produced or at least should have. "How can you be making 15 or 18% when everyone is making less money?" Madoff said.19

Madoff's apparently ultra-high returns persuaded clients to look the other way. In fact, he simply deposited their funds in an account at Chase Manhattan Bank—which merged to become JPMorgan Chase & Co. in 2000—and let them sit. The bank, according to one estimate, may have made as much as $435 million in after-tax profit from those deposits.20

When clients wished to redeem their investments, Madoff funded the payouts with new capital, which he attracted through a reputation for unbelievable returns and grooming his victims by earning their trust. Madoff also cultivated an image of exclusivity, often initially turning clients away. This model allowed roughly half of Madoff's investors to cash out at a profit. These investors have been required to pay into a victims' fund to compensate defrauded investors who lost money.

Madoff created a front of respectability and generosity, wooing investors through his charitable work. He also defrauded a number of nonprofits, and some had their funds nearly wiped out, including the Elie Wiesel Foundation for Peace and the global women's charity Hadassah.2122 He used his friendship with J. Ezra Merkin, an officer at Manhattan's Fifth Avenue Synagogue, to approach congregants. By various accounts, Madoff swindled $2.4 billion from its members.2324

Madoff's plausibility to investors was based on several factors:

• His principal, public portfolio appeared to stick to safe investments in blue-chip stocks.

• He claimed to be using a collar strategy, also known as a split-strike conversion. A collar is a way of minimizing risk, whereby the underlying shares are protected by the purchase of an out-of-the-money put option.

• His returns were high (10 to 20% per annum), consistent, and not outlandish. As the Wall Street Journal reported in a now-famous interview with Madoff, from 1992:

"[Madoff] insists the returns were really nothing special, given that the Standard & Poor's 500-stock index generated an average annual return of 16.3% between November 1982 and November 1992. 'I would be surprised if anybody thought that matching the S&P over 10 years was anything outstanding,' he says."25

The SEC had been investigating Madoff and his securities firm off and on since 1992—a fact that frustrated many after he was finally prosecuted since it was felt that the biggest damage could have been prevented if the initial investigations had been rigorous enough.26

Financial analyst Harry Markopolos was one of the earliest whistleblowers. In 1999, he calculated in the space of an afternoon that Madoff had to be lying. He filed his first SEC complaint against Madoff in May 2000, but the regulator ignored him.27

In a scathing 2005 letter to the Securities and Exchange Commission (SEC), Markopolos wrote, "Madoff Securities is the world's largest Ponzi Scheme. In this case, there is no SEC reward payment due to the whistle-blower so basically I'm turning this case in because it's the right thing to do."28

Many felt that Madoff's worst damage could have been prevented if the SEC had been more rigorous in its initial investigations.

Using what he called "Mosaic Theory," Markopolos noted several irregularities.29 Madoff's firm claimed to be making money even when the S&P was falling, which made no mathematical sense, based on what Madoff claimed he was investing in.30 The biggest red flag of all, in Markopolos's words, was that Madoff Securities was earning "undisclosed commissions" instead of the standard hedge fund fee (1% of the total plus 20% of the profits).31

The bottom line, concluded by Markopolos, was that "the investors that pony up the money don't know that BM [Bernie Madoff] is managing their money."31 Markopolos also learned Madoff was applying for huge loans from European banks (seemingly unnecessary if Madoff's returns were as high as he said).32

It was not until 2005—shortly after Madoff nearly went belly-up due to a wave of redemptions—that the regulator asked Madoff for documentation on his trading accounts. He made up a six-page list, the SEC drafted letters to two of the firms listed but didn't send them, and that was that. "The lie was simply too large to fit into the agency's limited imagination," writes Diana Henriques, author of the book "The Wizard of Lies: Bernie Madoff and the Death of Trust*,"* which documents the episode.

The SEC was excoriated in 2008 following the revelation of Madoff's fraud and their slow response to act on it.33

In November 2008, Bernard L. Madoff Investment Securities LLC reported year-to-date returns of 5.6% during the same period when the S&P 500 dropped 39%.34 As the selling continued, Madoff became unable to keep up with a cascade of client redemption requests.

So, on Dec. 10, according to the account he gave Fishman, Madoff confessed to his sons Mark and Andy, who worked at their father's firm. "The afternoon I told them all, they immediately left, they went to a lawyer, the lawyer said, 'You gotta turn your father in,' they went, did that, and then I never saw them again." Bernie Madoff was arrested on Dec. 11, 2008.35