Greek bank

Date: 2008-2009
Published July 12th, 2017
Ron Rimkus, CFA, and Desi Allevato

Prominent investor Bernie Madoff duped a long list of wealthy and famous clients by operating a sophisticated Ponzi scheme. As client redemptions piled up during the market turmoil of 2008, Madoff was unable to fulfill redemption requests and his $50 billion fraud was exposed. Perhaps the most remarkable thing about this scandal is how long he deceived his investors. Madoff’s Ponzi scheme apparently went on for more than 40 years. By selling his product as a hedge fund in a brokerage wrapper, he created the plausibility of consistent returns and limited any oversight of his wrongdoing.


Background Events

  • 1960: 22-year-old Bernard (Bernie) Lawrence Madoff opens his trading operation, Bernard L. Madoff Investment Securities LLC (BLMIS).
  • 1960s–1970s: BLMIS  becomes known for making “third-market” OTC trades that use innovative computer technology and bypass the NYSE trading floor to make markets. Some BLMIS technology is used in the creation of NASDAQ. The firm also opens a private investment portfolio division, where Madoff manages money for his investors (whose trades are processed through his firm).
  • 1989: Becoming one of the largest independent trading operations in the securities industry, by 1989, BLMIS is handling approximately 5% of the trading volume on the NYSE.
  • 1990: Madoff is appointed the nonexecutive chairman of  NASDAQ. Through the 1990s, the firm’s private investment accounts continue to grow and report consistent growth with positive returns. Investors include hedge funds, large charitable foundations, individuals, and pension plans.
  • 1992: The US SEC investigates a Madoff Securities feeder fund, run by Frank Avellino and Michael Bienes, for selling unregistered securities. Avellino and Bienes agree to shut down the fund, but Madoff is revealed as the fund’s mystery manager, and his fame as an investment manager becomes even more widespread. As his fame increases, Madoff is asked to reveal his “strategy,” which is generally described as a “split-strike conversion” that uses options contracts on blue chip stock purchases to protect the portfolio’s downside potential. Multiple industry peers suspect something is awry with Madoff; they believe he may be front-running trades in his market-making unit.

Central Events

  • 1999: Harry Markopolos, CFA, a portfolio manager at an options trading company in Boston, is asked by his boss, Fred Casey, to design an investment product that can duplicate Madoff’s success. Markopolos concludes from four hours of analysis that Madoff cannot be earning the returns he claims without some sort of fraud.
  • 2000: Markopolos files a complaint with the Boston office of the SEC, but the SEC does not act on the complaint.
  • 2001: Markopolos sends another report to the SEC and offers to go undercover to attempt to acquire evidence that Madoff is committing fraud. The SEC does not act on this report.
  • 2002: Markopolos meets with European investors in Madoff’s fund who provide information convincing him that Madoff is actually operating a Ponzi scheme. During the next three years, Markopolos continues independently to investigate Madoff’s operations.
  • 7 November 2005: Markopolos sends another report to the SEC suggesting BLMIS is a Ponzi scheme. The SEC investigates and does not find any evidence of fraud.
  • 2008: BLMIS has grown into the sixth-largest market maker on Wall Street, but the developing financial crisis leads investors in Madoff’s fund to request redemptions faster than Madoff can bring in additional funds.
  • 9–10 December 2008: Madoff tells his brother and two sons that his business is a Ponzi scheme and that he is unable to fulfill his clients’ requests. His sons report this disclosure to the authorities.
  • 11 December 2008: Madoff is arrested and charged with securities fraud.


  • January 2009: Madoff’s customers begin filing claims against BLMIS.
  • 5 February 2009: A list of 13,567 Madoff customer accounts is released.
  • 12 March 2009: Madoff pleads guilty to 11 US federal felonies and states that he is the only individual responsible for the fraud. He is later sentenced to 150 years in prison.

Investment Principles

Principle #1

If something seems too good to be true, it probably is.

Principle #2

Fraud usually hides behind the screen of legitimacy; don't let praise and reputation take the place of due diligence.

Principle #3

The merits of an investment are not the same as its popularity.

Principle #4

Fraud can go undetected for many, many years.

Principle #5

Clarity about the business model is a prerequisite to good investing (i.e., the return characteristics that accompany any investment strategy must be understood).

Principle #6

Investors have a duty to be mindful of their own pride and the disastrous mistakes to which it can lead.

Principle #7

The knowledge one can obtain even through the best due diligence efforts is limited. So, investors need to diversify and manage risk.

Principle #8

Separate management of financial assets from the physical custody of those assets is a measure to protect against fraud.

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Arvelund, Erin E. 2001. “Don’t Ask, Don’t Tell: Bernie Madoff Attracts Skeptics in 2001.” Barron’s (7 May):

Carozza, Dick. 2009. “Chasing Madoff.” Fraud Magazine. May/June 2009:

DuBois, Alice, Gregory Roth, Jay Davies, Kelly Couturier, and Joshua Brustein. 2009. “A Timeline of the Madoff Fraud.” New York Times (29 June):

“The Madoff Case: A Timeline.” 2009. Wall Street Journal (12 March):

Madoff Client List. 3 February 2009 (court document published by the Wall Street Journal):

The Madoff Recovery Initiative:

Markopolos, Harry. 2009. FDCH Congressional Testimony: Madoff Ponzi Scheme and Regulatory Failures (4 February):

Smith, Randall. 1992. “Wall Street Mystery Features a Big Board Rival.” Wall Street Journal (16 December):

United States District Court, Southern District of New York. 2009. United States of America v. Bernard L. Madoff. (12 March):

US SEC. 2008. “SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme.” SEC Press Release (11 December):

US SEC. 2008. Complaint against Madoff (11 December):

Frontline. 12 May 2009. “The Madoff Affair”


Additional Reading

Arvelund, Erin. 2009. Too Good to Be True: The Rise and Fall of Bernie Madoff. New York: Portfolio.

Bernard, Carole, and Phelim Boyle. 2009. “Mr. Madoff’s Amazing Returns: An Analysis of the Split-Strike Conversion Strategy.” Journal of Derivatives, vol. 17, no.1 (Fall): 62–76.

Fishman, Steve. 2011. “The Madoff Tapes.” New York (27 February):

Markopolos, Harry. 2011. No One Would Listen: A True Financial Thriller. Hoboken, NJ: John Wiley & Sons.

US SEC. 2009. “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, Public Version.” (31 August):