Bernie Madoff has become known to many people as the man that perpetrated by far the largest scam in the history. His reputation of a successful investor, financial genius, and a chairman of NASDAQ took a turn for the worst when his so called split strike conversion strategy turned out to be nothing but a huge ponzi scheme affecting thousands of investors from around the globe.
Although many financial advisors questioned his strategy and argued that it is virtually impossible to achieve, he managed to hide his scheme for many years. Why did Madoff got away with his fraud scheme for so many years? This is not a million dollar question as many would argue. The answer comes down to trust and greed. Investors trusted him because he had strong financial expertise and experience, he contributed substantial donations to various charities and foundations, investors were referred to him by friends and family, and he actively served on the board of directors of several high-profile companies. Greed was the other source of keeping Madoff away from getting his successful scam revealed. Investors were getting steady returns on their investments not annually, not quarterly but on a monthly basis. These returns were too good to be true but most of the investors were so happy with the profits they got from Madoff that they did not bother to further investigate and get a better understanding of his strategies.

In essence, the way Madoff orchestrated his fraud scheme was by promising investors fixed returns on their investment at a relatively low risk. To gain trust in current and prospective clients, he told investors that he has using a specific strategy called “split-strike conversion” in which he would select and buy a basket of 35-50 common stocks from the S&P 100 “that would closely mimic the price movements of the S&P100 and he would opportunistically time those purchases, and would be "out of the market” intermittently.” He further claimed that he would hedge the proceeds of investments in the basket of stocks and sell options to secure investments of any sudden changes in the stock prices. In reality though, what Madoff did was using the funds from new investors to pay off returns to early investors as opposed to keeping his promise and invest the funds in stocks, options, and other market securities.
The search of investors was not hard at all. Madoff started small by attracting investors from his own community and later as his business became credible and a great source of generating high profits the flow of funds was coming primarily from referrals made by his current clients.
Among the people who participated, supported, become a victim of, observed, and tipped the regulators of the $36 billion Ponzi scheme that Madoff was so successfully hiding for years were:

Jeffry Picower -was a close friend and one of the earliest investors in Madoff’s hedge fund. Picower has allegedly withdrawn more than $7.2 billion from his investments in Bernie’s investment fund.

Peter Madoff- is Bernie’s younger brother who was in charge with the legitimate business that Madoff was running on the nineteenth floor. Peter has also helped Bernie to develop an electronic system which allowed Bernie to far exceed its competitors buy trading stocks cheaper and faster.

Frank DiPascali - is one of Madoff’s key employee and former chief executive officer who was become aware of the Ponzi scheme in the early stage and continued to cooperate with Bernie with raising more investment capital.

Walter Noel- is the founder and chairman of Fairfield Greenwich Group which is one of the biggest feeder funds to Madoff. The company has placed over $7 billion of investors capital in the fraud hedge fund.

Frank Avellino and Michael Bienes -are the two accountants who helped Madoff to raise money for his business in the early 1960s and although they were sanctioned by SEC for running a fund raiser without proper registration they continued to funnel money in the so called hedge fund that Madoff was handling.

Harry Markopolos - a portfolio manager who first questioned Madoff’s investing methods and later on became the man known to blow the whistle on the ponzi scheme that Madoff was orchestrating. Markopolos has sent several letters to SEC warning them that Madoff’s business was not legitimate.

When it comes to identifying the possible motives that pushed Bernie into committing the largest investment fraud in the United States, money certainly was the biggest motivator along with pressure and power to control. Many people believe that at the beginning Madoff did have true intentions to create a large investment fund and turning it into a successful money maker but during the course of time his unrealistic promises for high returns caught up with him. He felt pressured and continued to raise more capital perhaps rationalizing that he would soon able to catch up and be able to pay its investors real returns on their investment. As the time passed by Bernie found himself in a situation in which all he had left was to continue attracting more investors’ capital to be able to pay off returns to its early investors. He was aware that his scheme will eventually come to an end but he was too afraid to stop, in part because of the public shame, fear to go to jail, and perhaps loosing the very comfortable and luxurious life he was living.
The most important control that could potentially have prevented the fraud from occurring is performing due diligence. Yes, Madoff was able to deceive so many innocent people but if these people did their homework and asked for financial advice, perhaps they would not have lost their funds. Better yet, those who have financial background could have done quick check on the securities they “owned” with Madoff and verify if they matched with the information released on the stock markets.
Other two important controls that were absent and could have deterred the ponzi scheme are monitoring hedge funds and verifying tips and complaints from credible sources. The presence of formal policies for monitoring hedge funds could have been a good control for deterring Madoff’s scheme. For instance the chairman of SEC, Mary Schapiro has suggested several recommendations for deterring investment schemes. Some of them are:
-Creating formal guidance and training the SEC staff to review and evaluate complaints about ponzi schemes or any other investment fraud;
-Requesting that all complaints should be reviewed by at least two trained professionals;
-Training personnel to use any available resource and ask for assistance from SEC units that have higher expertise.
-Establishing a formal protocol for monitoring and utilizing information from news articles, industry analysis for potential violations of the law.

If SEC had implemented these controls earlier and paid close attention to the several warnings they received from Markopolos and other financial analysts, Madoff’s fraud could have been revealed and many investors could have saved their money. SEC however failed. It failed because most of its staff was inexperienced, lacked proper training, and it had delayed the several ongoing examinations on Madoff’s hedge fund. SEC also failed due to poor communication among different units in the organization which allowed Madoff to continue growing his scheme. Another major mistake attributed to SEC is their lack of diligence in verifying Bernie’s trading activities. Should SEC had performed in-depth investigation and contacted third party to validate the transactions that Madoff claimed was doing, SEC would have discovered that Madoff did not execute any transactions at all. In summary, SEC had numerous chances to uncover the huge scheme but it did not do so, in part because of the inexperienced and narrowly focused personnel, inadequate time to check on all complaints, and the intimidation and persuasiveness on Bernie’s behalf.

The red flags of illegal activity were evident during the whole time but many people chose to ignore them because it was Bernie - a trusted man. For example, after becoming a member of Bernie’s team, clients were asked to remain silent about the fund. They were instructed, personally by Bernie to not discuss any information with outsiders because he feared that someone could possibly reveal his genius strategy and begin using it. He was also warning its clients that if they would tell anyone that they are investing with him he would return their money and banned them from the club. In addition, Bernie did not give too many details about his strategy which added to the vagueness of what exactly he was doing to generate high return on invested capital. Another huge red flag was the unusual high returns year after year despite stock market downturns. Investors did not have online access to their accounts and relied upon mailed statements only.
The split strike conversion did make sense to some financial analysts, especially to Harry Markopolos. For instance, the options that Madoff was supposed to purchase should have been more than what was available on the option market. Assuming that he was actually buying these options no one actually recalls seeing or hearing of Madoff or any of his representatives buying huge bulks of options.
A red flag was also an upward slope of the performance line of Madoff’s investment returns which was practically impossible unless the strategies used in generating these returns were illegal. In general, when legitimate investment returns are plotted on a graph the slope will go up and down depending on the behavior of the securities traded.
The most obvious red flag that everyone but Markopolos disregarded was the cost of running the business and keeping up with the high returns of around 12% annually that Madoff was guaranteeing to its clients. It is virtually impossible to make any profit off the transactions Bernie supposedly did.

In December of 2008, Bernie Madoff admitted to committing the biggest investment scam the consequences of which led to massive reforms in SEC. As mentioned earlier, the chairman of SEC had implemented several guidelines which will help protecting investors’ interest and hopefully help the agency’s personnel investigate, prevent, deter, and resolve fraud allegations. Unfortunately, a little has been done for the thousands of innocent investors who knowingly or unknowingly had become victims of Madoff. The total amount of investments put into Bernie’s ponzi scam is approximately $36 billion, and Mr. Irvin Pickard is the trustee, appointed by the court to recover the money. Picard is expected to recover around $7-8 billion which roughly 50 cents on the dollar. Another serious issue that is currently under debate is the money that earlier investors were receiving in a form of returns. Most of those early investors were withdrawing more money than they actually invested.

In conclusion, Bernie Madoff, a man that many people chose to believe in because on his reputation of an ethical person, has become the person responsible for the biggest investment fraud in the history of United States. People respected him so much that they gave their money and followed his rules with no questions asked. Today, however, Bernie is remembered as the person who betrayed his own community without any remorse. Why would he do such thing? What pushed him into committing such crime? What did he do with the money? All these questions were left for open discussion and interpretation because