Bernard Madoff's Ponzi Scheme

Bernard Madoff Essay Bernard Madoff was a stockbroker who ran his multibillion-dollar firm as a grand-scale Ponzi scheme. A Ponzi scheme is defined as a way to lure investors in by guaranteeing unusually high returns. Ponzi schemes are run by a central operator, who uses the money from new, incoming investors to pay off promised returns to older ones. This makes the operation seem profitable and legitimate, even though no actual profit is being made. Meanwhile, the person behind the scheme pockets the extra money or uses it to expand the operation. Ponzi schemes are not usually very sustainable. The setup eventually falls apart when the operator takes the remaining investment money and runs, new investors become harder to find or too many current investors begin to pull out and request their returns. In researching Bernard Madoff, an interesting fact is he used $5,000 that he earned as a lifeguard and installer of sprinkler systems to open his investment company.

Madoff had connections, word-of-mouth recommendations and this was instrumental in his ability to gain new investor money. Basically, Madoff succeeded because he was an insider. Madoff’s intentions implied that he wanted to satisfy his clients’ expectations of high returns just like he had promised, even though it was during an economic recession. He insisted that he did not invest any of his clients’ money since the inception of his scheme. Rather, he merely deposited the money into his business account at Chase Manhattan Bank. He did admit to false trading activities that were disguised by foreign transfers and false SEC returns. Things began to crumble after clients requested $7 billion back in returns. Unfortunately for him, he only had $200 million left to give. In actuality he made off with about $20 billion, even though on paper he only cheated clients out of $65 billion, according to CNN