The biggest fraud in American history The Madoff Scandal By Group 1: Mei Ying (presenter), Fatin, Boon Xuan http://www.pptbackgroundstemplates.com/popular_backgrounds_page1.html

Assigned reading Lewis, Michael and Einhorn, David (2009). The end of the financial world as we know it. New York Times, January 3,2009. (http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html ?_r=1...) More details about the story of Bernard Madoff (http://en.wikipedia.org/wiki/Bernard_Madoff)

Investigation report contents What happened? Ponzi Scheme Timeline of events: Bernard Madoff’s early life and career start-up Madoff’s fame Fraud exposed Aftermath of the fraud Conclusion

What happened?

What happened? Bernard “Bernie” Madoff, aged 71 (at time of arrest). A renowned (now notorious) stockbroker & financial advisor in Wall Street. Founded Bernard L. Madoff Investment Securities LLC Cheated ~$65 billion from investors in a Ponzi scheme. One of the largest fraud ever executed worldwide. https://azjewishpost.com/2016/growing-up-madoff-raising-a-family-with-a-notorious-name/

Ponzi Scheme

How the investment is supposed to go Investor requests to buy shares from company X Stockbroker helps client purchase the shares Investor (client) Investment firm Company X Company X earns money. Investor sells shares via investment firm, gaining the profit from company X Investor earns money when company X earns money!

How a Ponzi scheme works Named after Charles Ponzi, an Italian swindler. Investor requests to buy shares from company Y ($1000 deposited) Investor requests to buy shares from company X ($1000 deposited) “The Schemer” Madoff & his investment firm Investor 1 Investor 2 The $1000 is kept in an account and not invested The $2000 is kept in an account and not invested Investor requests withdrawal of money and profit ($2000 paid to investor 1)

How a Ponzi scheme works Named after Charles Ponzi, an Italian swindler. Use later investors’ money to pay earlier investors. “Stealing from Peter to pay Paul” tactic. No real investment is involved. More investors must be recruited to support the scheme. Destined to collapse when there is not enough investors. Investor requests to buy shares from company X ($1000 deposited) Investor requests withdrawal of money and profit ($2000 paid to investor 2) Investor 4 “The Schemer” Madoff & his investment firm Investor 2 The $0 is kept in an account and not invested The $2000 is kept in an account and not invested Investor 3 Investor requests to buy shares from company Z ($1000 deposited)

Timeline of events

Madoff’s early life and career-start up Sylvia Munter Ralph Madoff Bernard L. Madoff Investment Securities LLC created!! (1960s) Works here too Sondra Weiner Bernard Madoff Peter Madoff Earned money from being a lifeguard and installing sprinklers + loan from father-in-law $ $ https://clipartfest.com/categories/view/06ced9d19687f27afcae4408cb01f4b951a151e/school-clipart-transparent-background.html https://img.clipartfest.com/e676bf92b248a2f18e761b2e113559a2_download-this-image-as-university-clipart-transparent-background_600-361.png Attended Far Rockaway High School – Met wife Ruth Alpern here Graduated from Hofstra University https://en.wikipedia.org/wiki/Bernard_Madoff

Madoff’s Fame Bernard L. Madoff Investment Securities help develop NASDAQ (2nd largest stock exchange in the world). Madoff Investment Securities was one of the highest performing market maker in Wall Street. http://egov.eletsonline.com/wp-content/uploads/2012/02/nasdaq.jpg

Madoff’s Fame Bernard Madoff’s positions (financial): Chairman of NASDAQ, National Association of Securities Dealers (NASD) & Securities Industry and Financial Markets Association (SIFMA) trading committee. Founding board member of International Securities Clearing Corporation. Bernard Madoff’s positions (non-financial) Founder of Madoff Family Foundation. Chairman of Sy syms School of Business, Yeshiva University. Board of New York City Center. Executive council of UJA Foundation of New York Wall Street division.

Fraud Exposed- Harry Markopolos Harry Markopolos had been trying to bust Bernard Madoff’s scheme for 9 years to no avail Came across Madoff’s scheme when working for Rampart Investment Management. Analyzed Madoff’s investment performance but numbers did not add up  knew that Madoff must be lying about his investment scheme. Tried to persuade the Securities and Exchange Commission (SEC) that Madoff was a fraud they ignored him. Created 17-page report detailing evidence of the fraud to SEC SEC investigated for a while before dismissing Markopolos’ claim. http://www.fraud-magazine.com/article.aspx?id=313 http://www.quickmeme.com/meme/3u9143

Fraud Exposed- Statistical considerations Fairfield Sentry - “the investor” who invested through Madoff’s scheme. S&P 100 - Stock market index that tracks performance of the top 100 companies in the U.S. Madoff supposedly invested in at least 1/3 of the stocks in S&P 100. Therefore we expect Fairfield Sentry’s returns to correlate closely with the S&P 100 index. This is however not the case Fairfield Sentry returns seems to be independent of S&P 100 for many years. Fairfield Sentry returns S&P 100 Index Does not make sense Source: Rhee, 2009.

Fraud Exposed- Statistical considerations Why is Fairfield Sentry gaining profit when the market is losing money??? Argument: Maybe Madoff was so talented that he predicted which stocks will outperform the index and only invested in those stocks. Counter-argument: The probability of doing this for years is extremely extremely low. Fairfield Sentry returns S&P 100 Index Does not make sense Source: Rhee, 2009. http://1.bp.blogspot.com/-zIxJpvb98SI/Ulbw3onPQNI/AAAAAAAABVM/PmuFPLygZ-4/s1600/Untitled.png Any person with some background in statistics should have noticed this inconsistency in data

Fraud Exposed- Madoff’s confession 2008 stock market crash lead to waves of people demanding withdrawal of their investment funds. Recall: Ponzi Scheme destined to collapse when there is not enough investors. Madoff’s scheme had more withdrawals than investors  not enough money to pay everyone. Madoff knew he can’t take the rest of the money and run. He decided to confess to his sons about the Ponzi scheme his sons informed the authorities. Madoff claimed to have started the Ponzi scheme in the 1990s but no one knew for sure. http://members.bonnerandpartners.com/wp-content/uploads/2014/06/title-final-300x268.png

Aftermath of the fraud

Aftermath Madoff’s reputation Madoff’s family SEC’s reputation Sentenced to 150 years in jail. Treated like a Mafia boss in prison. Madoff’s son, Mark, committed suicide. Madoff’s other son, Andrew, died of lymphoma. Peter, Madoff’s brother, sentenced to 10 years in jail. People lost faith in the SEC. SEC deemed as ‘incompetent’ and ‘needs fixing’. Sparked discussions about the need to educate SEC staff and lawyers about finance, economics and statistics. http://www.flashesandflames.com/wp-content/uploads/2015/06/NYMadoff-226x300.jpg https://images.template.net/wp-content/uploads/2016/05/19092713/Sad-Emoji-Face-on-Google-Android.jpg http://www.clipartkid.com/images/32/wrench-clipart-wrench-clipart-D9tgsU-clipart.gif http://crushzion.k0nsl.org/wp-content/uploads/2012/01/1069_bernie_madoff.jpg http://www.freakingnews.com/funny-pictures/madoff-pictures-03.asp

Conclusion The world largest Ponzi scheme was executed by Bernard “Bernie” Madoff and went undetected for 14 years. There were attempts to expose Madoff’s scheme by Harry Markopolos but were unsuccessful. Had the SEC staff and lawyers been well trained in finance, economics and statistics, the inconsistent data in Madoff’s ‘investments’ would have been detected and the fraud exposed earlier.

References http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html? _r=1... http://en.wikipedia.org/wiki/Bernard_Madoff http://scholarship.law.ufl.edu/cgi/viewcontent.cgi?article=1500&cont ext=facultypub http://www.fraud-magazine.com/article.aspx?id=313