Betrayal the Life and Lies of Bernie Madoff

Betrayal The Life and Lies Of Bernie Madoff

By Andrew Kirtzman

2/26/2011

Made famous by its namesake, a young ambitious Italian immigrant utilized an unusual investment tactic in 1920 that was revisited once again starting in the 1960's by another ambitious investor of Jewish decent. While in both cases the strategy offered its potential investors unbelievable returns it had devastating results after specific triggers sent both brokers into a downward spiral. Both men were known for their presence and ability to pacify any and all that confronted them, including regulators, relative to their would be investments; however it would be this same cunning that would prove to be their ultimate undoing.

The investment strategy made famous by its namesake is called a Ponzi scheme and in terms of its unknowing investors the only person that profits from it is the broker who perpetrates the scam. Ponzi the Italian immigrant initiated it by baiting investors with promises of returns of fifty percent. The initial scam involved postal coupons issued by governments to be used for international shipping and the ability to play exchange rates. After discovering the red tape required to cash in on the possible investment Ponzi used the philosophy or idea to bait investors, also known as marks, into his scam. The scam relies on the principle that early investors are paid returns by those who enter in to the scheme later. One inherent trait of the Ponzi is that it is doomed to fail from the beginning because payment in, at some point during its life, will not be able to keep up with the payment out, leaving the broker and many others penniless. This failure is typically triggered by an event initiated by an outside investigator that creates a run on the fund or investment making it impossible to pay out or settle with its investors. Ponzi's undoing came in the form of an article written by Clarence Barron, financial analyst for the Boston Post, who indicated the astronomical amount of postal coupons that would have to be in circulation to facilitate the reported fifty percent investment potential. After indictment Ponzi found himself serving multiple Federal and State prisons sentences totaling about ten years.

Fast forward to December 11, 2008, the world financial markets, already suffering from market declines, reel from the news that renowned investment advisor and one time Chairman and founder of the NASDAQ, Bernie Madoff, has operated the largest Ponzi scheme in history and has caused loses to the extreme of sixty five billion dollars. Madoff was ultimately sentenced to one hundred and fifty years for securities fraud after a guilty plea. What was it that brought him to this point? Betrayal The Life And Lies Of Bernie Madoff written by Andrew Kirtzman, an award winning journalist, deals with the topic of how he, Madoff, deceived thousand of well intended investors and his ultimate demise, going from riches to rags and from penthouse to prison cell overnight. The overall question here is how was he able to thwart off investigators from the SEC, Security Exchange Commission, not to mention investors and still be able to perpetrate the mind boggling scheme for the better part of fifty years.

Madoff marries Ruth Alpern after graduating from Hofstra in 1960 and goes to work in his father- in-laws accounting firm. He went on to become a market maker building a legitimate business in the stock market on wholesale stocks. Madoff had a side business, however, as an investment advisor brining in Frank Avellino and Michael Bienes, partners in the remains of Madoffs father -in-laws accounting firm, as a feeder organization. Madoff offered 20% or better investment guarantee to the partners indicating they could pocket a few percentage points while issuing promissory notes to their clients with set rates of return. Madoff advises Avellino and Bienes that potential investors could receive returns of between fifteen to twenty percent based on the amount invested. Madoff explained this off as arbitrage, buy low sell high at the right time; to the feeders however the strategy later evolved into the split strike conversion, comparable to Ponzi's postal coupon. The black box of the investment world, it was, as Madoff stated, a set of complex algorithms that made arbitrage more efficient and offered high returns even when the market was in a decline. It, as did Ponzi's scheme, offer the allure of easy fast money that no one would turn down.

Madoff did not relish the spotlight and facilitated his investment strategies through feeders or other organizations that fed into the high return fund. Soon the partnership of Avellino and Bienes was brining in close to ten million dollars a year just in profit simply for passing on customers' investments in to the Madoff fund. In 1987 Avellino and Bienes in an effort to expand their business open an office in Fort Lauderdale, Florida looking for yet another well to draw from. Madoff and his feeders seemed to favor the Jewish community and it was here in Lauderdale that Jewish retirees where beginning to settle. By 1990 the partners had amassed a clientele of well over three thousand which for even licensed investors would be too many as mandated by SEC regulation.

In 1992 when questioned about their high rate of returns by an investment advisor from Seattle, Washington, while conducting due diligence, the two partners were unable to provide clear answers relative to the high performance of fund. An investigation ensued, launched by the SEC based on the concerns that the feeder partners, Avilleno and Bienes, where running a Ponzi scheme. With close ties to the SEC himself Madoff recommends an attorney that had run the SEC office in the past, Ira Sorken noting that the feeder group had four hundred and forty million dollars invested with Madoff. The SEC, finally running out of patients shut the feeder down with the explanation provided to investors that the partners were not licensed and that they had too many investors. All investments at this time were handed over to Madoffs firm. With all trails leading to Madoff, current chairman of NASDAQ, all suspicions of a Ponzi scheme where relieved and further investigations halted having come close to stopping the scheme dead in its tracks before it reached the later extremes.

In the mid-nineties Madoff moves on to even larger pools of revenue noting once again that the objective of the Ponzi scheme is to have larger deposits than what is being withdrawn and at the same time avoiding a run or sudden outflow. During this time of growth noting the economic environment of the time, Madoff brings into his investment