Madoff's 'Titanic Crime'

Bernie Madoff, one of the greatest con-men of all time was sentenced to 150 years imprisonment back in 2009 for a crime that went unseen for decades. So how did he manage to fool so many people for so long?

The so called 'lion' of wall street, swindled billions of dollars from investors, with offers that were certainly to good to be true. This should no doubt be the biggest lesson that everyone should take away from the Madoff scandal. With steady annual returns, no matter what the state of market, people believed this was the safe option to take with their money and so began investing largely, worldwide. It is this kind of performance that should have raised flags from the first time the market took a bad turn. How was Bernie still making delivering high returns despite the market taking a turn for the worse? Stock investing is no doubt a risky investment, returns have fluctuated wildly in past decades but it is possible to beat the market for some time although eventually the winning streak will stop at some point. So how is it that Bernie managed to beat the market year, after year?

Madoff's high annual returns and ultra safe investment filed in the face of the "Eat Well, Sleep Well" principle of investing, in reference to risk and reward. If you want to gain high returns for your investment (Eat Well), you must take on high risks that will prevent you from sleeping well. Alternatively, if you invest in risk-free investments (Sleep Well),  you will receive considerably smaller returns, hence not eating well.

Madoff claimed to implement the split strike conversion strategy that involved investing in a basket of 40-50 stocks from the S&P 100. He then promised to "opportunistically time" his purchases and would occasionally roll the money into Treasury Notes. Also claiming to use option contracts, it limited his potential losses caused by unpredictable stock price movements. He fooled investors by sending out fake statements created by the firm showing how he kept to his promise of delivering the gains. Investors were content, those who wanted to withdraw their money did so with no problem, as their were simply paid with someone else's investment. Ironically, they were the only ones that received the imaginary gains.

        'Everyone wants something for nothing, you just give them nothing for something'

When Harry Markopolos tried to out Madoff as a fraud almost a decade before his conviction, SEC didn't listen to him. Why? Simply because they thought it was too big to be a scam, and simply brushed the case off their shoulders without investigating any further! With SEC failing to do their due diligence into the case, who now would be powerful enough to stop Madoff? It took the credit crunch years later to bring him to his knees. Investors demanded money, and fast. With so little money coming in, Bernie simply could not afford the pay-outs being demanded. For the first time, his ponzi scheme was publicised worldwide. Finally, some justice!
There are several lessons that we should take away from this case:
- If something looks too good to be true, it probably is!
- Never put your eggs in one basket and ensure you get a second opinion on any investment!
- Don't rely on collective due diligence, reputations aren't always everything, independent verification is needed!