How one man stole $64.8 Billion

In 2009, Bernie Madoff was sentenced to 150 years in prison for committing one of the biggest financial frauds in history. To be precise, he was guilty of running the biggest pyramid scheme ever. Let me start by explaining what a pyramid scheme is.

You convince your “friends” that you are starting a new business and ask them to provide you with capital and promise them very high returns. Let’s say 20 of your friends give you 5 lakh each. You’ve got 1 cr with you. You don’t do anything with it; you don’t invest it anywhere; you spend some of it on yourself, maybe buy a car. When the time comes to repay some investors, you use the money left to pay a few people. Let’s say after a year, 5 of those 20 people want their money back. Assuming you spent ten lakhs, you’re left with 90 lakhs at the end of the year. And now you owe 25 lakhs + interest. Let’s say you shell out 42 lakhs. That is, everyone gets their original 5 lakhs and 2 lakh as interest. That amounts to a 40% interest.

Investors are happy, and after some persuasion, some of them agree to keep their money invested with you (where else will they get an easy 40% return!). And in the process they tell their friends about your “business”, so now more people park their money with you. Your fund grows faster and faster. But the investors that came later on, their returns are lower compared to the original investors.

So now you can imagine a pyramid. There are only a few investors getting huge profits at the top. As we go down the pyramid, the number of investors increases, but their returns decrease. But this can’t go on forever. It needs a constant influx of money. If new investors don’t invest, your cash will start to decrease, and at some point, you won’t be able to pay your current investors, and your scheme fails. Now keep in mind this is an overly simplified explanation of a pyramid scheme, but hopefully, the overall idea is clear. Pyramid schemes are also known as Ponzi schemes (after the person who started this scheme).

Now, what if a former chairman of NASDAQ, the owner of a respectable Wall Street firm, a billionaire told his colleagues and friends that he is starting a new fund and promised investors huge returns. Who would say no to such a respectable person, who would doubt him? That man was Bernie Madoff. And investors poured in billions of dollars, and he ran a Ponzi scheme for 17 years. In 2008, when he could no longer sustain his now 64.8 billion-dollar scheme, he admitted to his two sons that he had been running a Ponzi scheme. His sons then approached lawyers who, in turn, contacted the feds. A year later, he was arrested, guilty on 11 accounts, and sentenced to 150 years in prison, the country’s maximum allowed. Out of the 19 billion worth of claims by investors ( now victims), 70% has been recovered. Madoff’s unprecedented scheme has left thousands of people homeless, and billions of dollars are still missing!