Business

Swindler from Wall Street

Published: 16. 7. 2021
Author: Silvia Mária Petrovitsová
Photo: Photo ČTK/AP/Louis Lanzano a/and Shutterstock.com
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People who trust various schemes with a high and quick return on an investment often run into fraudsters. The world of financial fraud and all kinds of illegal operations is very diverse. From political corruption, through artificially overvalued stocks, insider trading, falsification of financial statements, bank failures to pyramid schemes.

Bernie Madoff, the mastermind of the largest financial fraud in the history of the United States, was one of the most respected financiers on Wall Street for decades. He died in prison in April 2021, where he was serving a total sentence of 150 years.

From zero to the top

Bernard Lawrence "Bernie" Madoff was born on 29th April 1938 in New York. The life story of this accountant's son in law started in the 1960s. After studying political science at Hofster University, he started a business with five thousand dollars capital in a single office, where he had just a desk and a chair, and only later did he buy a computer. Gradually, over the years, he became a recognized financier and a key player in the US stock market. In the early 1990s, he became chairman of the NASDAQ, one of the major stock markets in the United States. As media interest grew, so did his fame and recognition.

Billions in losses

His fraudulent investment firm for the rich, Madoff Investment Securities, operated on the principle of pyramid schemes, where investors entrust their finances to the fund under the promise of high returns. It was one of the largest Ponzi schemes in history. Madoff lured his investors, half of whom were speculative funds, banks and wealthy individuals, with yields of 10-15%. He paid proceeds to some of them, but he did so from the deposits of new investors. If a fund doesn’t invest deposits, it can pay the proceeds to those who entered the scheme earlier, only from the capital of those who entered the system later. However, this system only works as long as there are new investors. Clients who don’t manage to leave in time will lose their money. Madoff's scheme ended with the financial crisis, when he was to pay out seven billion dollars, which he didn’t have. The list of victims was long and included many major European banks. The total loss to investors was $ 18 billion. In Madoff's case, JP Morgan was negligent, which, although aware of the suspicious transactions, did not act.

The infamous end

Financier Bernard L. Madoff' was reported by his sons Andrew and Mark after he admitted that his company had been insolvent for years and that his entire business was a big fat lie. His insolvency climbed to $ 50 billion. He allegedly planned to report himself, knowing that it could not work indefinitely. But first he wanted to give the last $ 200-300 million to some employees, relatives and friends. On 29th June, 2009, the court sentenced the financier to 150 years in prison for embezzlement, although Madoff regretted his actions. He died in prison on 14th April 2021.

Ponzi scheme

Italian emigrant Carlo Ponzi worked at Zarossi Bank in Montreal, whose clients were mostly Italian immigrants. At that time, the bank offered 6% interest on deposits, which was a lot at the time. It paid this interest from newly opened accounts. It was this system that inspired Ponzi to create infamous scheme. He wanted to make money on speculation with international postal coupons. However, he soon discovered that this business was profitable only on a theoretical level. Well, he didn't give up. He persuaded several friends to invest smaller sums in the project, promising to double their deposit within three months. As he kept his promise, he gradually gained more investors with the prospect of a certain profit. The Ponzi scheme still works today. It can be found in a wide range of financial tools such as stocks, real estate, insurance and the like. Ponzi schemes are common among high-risk investment companies known as HYIP- High-yield investment programme, when investing via the Internet and through electronic currencies such as Bitcoin or Altcoin.

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