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Bernie Madoff’s Ponzi Scheme: Reliable Returns from a Trustworthy Financial Adviser
By Denis Collins
Denis Collins is a Professor of Management in the School of Business at Edgewood
College in Madison, Wisconsin.
I. Introduction
A. Case Synopsis:
This case study is a chronology of the largest Ponzi scheme in history. Bernie Madoff
began his brokerage firm in 1960 and grew it into one of the largest on Wall Street. While doing
so, he began investing money as a favor to family and friends, though he was not licensed to do
so. Over a period of fifty years, these side investments became an investment fund that
mushroomed into a $50 billion Ponzi scheme. Bernie pled guilty without a trial on March 12,
2009, and was sentenced to 150 years in prison. Thousands of wealthy clients, philanthropic
organizations, and middle-class people whose pension funds found their way into Bernie’s
investment fund lost their life savings.
B. Case Objectives:
To critically evaluate the evolution of the largest Ponzi scheme in history
To understand how small illegal activities can evolve into larger ones that are difficult
to disengage from
To assess how sophisticated investors can be fooled by investment opportunities and
fail to perform due diligence
To understand why the SEC failed to appropriately investigate complaints that Bernie
Madoff operated a Ponzi scheme
To analyze the impact of one person’s crime on the life of victims and family
members
II. Classroom Management
A. Outline for a 1-hour class
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Introduce the case by having students respond to the “What Would You Do?”
dilemma [10 minutes]
Students summarize the main facts of the case. [10 minutes]
Students meet in small groups to reach consensus on answers to the four
analytical opinion-based questions at the end of the case. [5-10 minutes]
Facilitate discussion among student groups case question answers. [20 minutes]
Update latest newspaper reports about the case [5 minutes]
Summary and lessons learned [5 minutes]
B. Questions
1. Should Mark Madoff have granted his father’s request for a one week delay before
notifying government authorities about his crime?
This is a fascinating issue because of major value conflicts – loyalty to father,
Have students use the “Critical Thinking Decision-Making Process Table” (Exhibit 5.11
in Chapter 5) copied below to inform their ethical intuitions.
Then ask them what if they caught their father doing something immoral or of
questionable ethics [i.e., adulterous affair, out of control gambling, drunken driving, taking too
Exhibit 5.11 Critical Thinking Decision-Making Process Table
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Step 1: Write the decision options in the appropriate column below.
Step 2: Apply the seven “Applying Ethical Theories to Decision Making” questions to the
Step 3: Insert the ethical strength and weakness revealed by each of the seven ethical questions in
Step 4: Review the option strengths and insert in the options column what “value” supports the
Step 5: Given the strengths and weaknesses, choose a decision option, explain why that option
1) Who are all the people affected by the action?
2) What option benefits me the most?
3) What option does my social group support?
4) What option is legal?
5) What option is the greatest good for the greatest number of people affected?
6) What option is based on truthfulness and respect/integrity toward each stakeholder?
7) What option would a virtuous person do?
Option and its
underlying Value
Option Strengths Based on
Application of Ethical Theories
Option Weaknesses Based on
Application of Ethical Theories
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I’m not practicing truthfulness
It’s legal
Victims will incur no additional
losses
I’m practicing truthfulness
Option Weaknesses
In terms of facilitating the discussion there are two methods I have found most useful.
a) Students complete critical thinking chart.
b) Take a quick tally by asking students how many would grant Bernie the extra week
(Option 1) and how many would immediately turn Bernie into government authorities.
2. Describe the chronological evolution of Bernie Madoff’s Ponzi scheme.
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April 29, 1938 Bernie born in New York City
1950s Bernie’s father works mostly off-the-books as a plumber, caught by the IRS, and
must pay $13,000 in back taxes ($101,000 in 2009 dollars)
Late 1950s Gibraltar Securities registered in Bernie’s mother’s name, his father works there
1963 Bernie’s mother investigated by SEC, loses her license, and banned from securities
industry; Bernie’s father keeps trading/investing
1968 Saul Alpern employs Michael Bienes as accountant; he recruits for Bernie
1970 Bernie hires his brother Peter; he helps computerize operations
1971 NASDAQ founded and computerizes prices; Bernie among first 5 brokers to join
1971 Saul Alpern retires and gives business to Avellino and Bienes
1976 Bernie computerizes Cincinnati Stock Exchange
1983 Bernie opens branch in London
1986 Bernie among 100 highest paid people on Wall Street
October 19, 1987 Bernie stays open on “Black Monday,” honored by SEC for doing so
1988 Bernie moves business to prestigious Lipstick Building on Third Avenue
1990/1991 Jerome O’Hara and George Perez hired to develop computer programs and
maintain “House 05” and “House 17” servers
1992 Avellino & Bienes investigated by SEC; the unlicensed investment advisers had
3,200 clients investing $441 million; fined $350,000 and banned from industry
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December 3, 2008 Bernie informs DiPascali investment fund is insolvent
December 9, 2008 Bernie informs Mark he wants to pay $173 million in employee bonuses now
December 9, 2008 Bernie informs his brother Peter about the Ponzi scheme
December 10, 2008 Ruth withdraws $10 million from Cohmad Securities account
December 10, 2008 Bernie informs Mark and Andrew about the Ponzi scheme
3. Why did sophisticated investors trust Bernie Madoff with their funds? Why didn’t
they perform appropriate due diligence?
Bernie sold blue-chip stocks
He had a long successful track record
He pursued a conservative investment strategy –
oSecond, he bought and sold option contracts as a hedge to limit losses during
sudden market downturns.
He was at the forefront of the computerization of stock trading.
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Served on SEC advisory committees, held a four-year elected term on the NASD
He was quiet yet charismatic and did not boast about his financial success.
Elderly clients treated Bernie as a son, peers treated him like a brother, and younger
clients treated him like a friendly uncle.
4. Why didn’t the SEC, which received several complaints about Bernie Madoff,
uncover the fraud?
A list of factors played into their decision-making:
The SEC annually receives more than 10,000 complaints against brokers. The understaffed
The SEC had difficulty understanding the complexity of Bernie’s operations. Bernie lied to
They gave Bernie the benefit of the doubt because he had an impressive track record with
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Bernie never requested the presence of a lawyer when speaking with SEC agents, signaling
When questioned about his consistently high returns, Bernie explained he had a personal
Markopolos unsuccessfully competed against Bernie, thus leaving himself vulnerable to the
SEC managers and Markopolos had an adversarial relationship.
The SEC believed Markopolos was primarily motivated by a desire for the whistleblowing
A frustrated Markopolos contacted Taxpayers Against Fraud about getting the Wall Street
Journal to investigate his findings. The Wall Street Journal editors rated the topic a low priority
5. Do you believe Mark and Andrew Madoff didn’t know about their father’s Ponzi
scheme prior to their December 10, 2008 discussion at Bernie Madoff’s apartment?
Why?
oMark and Andrew did know:
oMark and Andrew did not know:
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6. Should sophisticated investors who withdrew millions from their Madoff accounts
forfeit the undeserved gains to people who lost the millions of dollars they invested?
Irving Picard filed lawsuits against the beneficiaries of Bernie’s investment fund, enough to
collect $50 billion if he won them all.
Picard’s general philosophy was that people who invested with Bernie should only get what
they put in. If they withdrew more than they deposited, the difference should be given to
victims who put in money and got nothing out.
C. Update Information and Relevant Websites
This case concludes in December 2010. Conduct a Google search for more recent
information about the Madoff Ponzi scheme. In particular, search:
Frontline’s “The Madoff Affair”
Frontline, funded by the Public Broadcasting System (PBS), created an excellent video
about Bernie Madoff’s Ponzi scheme. It can be viewed at
http://www.pbs.org/wgbh/pages/frontline/madoff/
The website contains links to a wide range of resources about the Ponzi scheme. The
resources are listed at: http://www.pbs.org/wgbh/pages/frontline/madoff/etc/links.html#6
Newspapers
New York Times:
http://topics.nytimes.com/top/reference/timestopics/people/m/bernard_l_madoff/index.ht
ml?scp=1-spot&sq=Bernie%20Madoff&st=cse
Wall Street Journal: http://online.wsj.com/public/page/bernard-madoff.html
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Books
Erin Arvedlund, Too Good To Be True: The Rise and Fall of Bernie Madoff (New York:
Penguin, 2009)
James Bandler and Nicholas Varchaver, “How Bernie Did It,” Fortune, April 30, 2009
Andrew Kirtzman, Betrayal: The Life and Lies of Bernie Madoff (New York:
HarperCollins, 2009)
Brian Ross, The Madoff Chronicles: Inside the Secret World of Bernie and Ruth (New
York: Hyperion, 2009)
Note: Irene Henriques, the New York Times reporter, is writing a book about Bernie
Madoff.
Madoff-Related Indictments
All government documents on the case, including court hearings, available at
http://www.justice.gov/usao/nys/madoff.html
United States of America v. Bernard F. Madoff available at
http://www.justice.gov/usao/nys/madoff/20090310criminalinfo.pdf
United States of America v. Frank DiPascali, Jr. available at
http://www.justice.gov/usao/nys/madoff/20090811dipascaliinformationsigned.pdf
United States of America v. Daniel Bonventre, Annette Bongiorno, Joann Crupi, a/k/a
“Jodi,” Jerome O’Hara, and George Perez available at
http://www.justice.gov/usao/nys/madoff/20101118s2supersedingindictment.pdf
Securities and Exchange Commission v. Jerome O’Hara and George Perez available at
http://www.sec.gov/litigation/litreleases/2009/lr21292.htm
Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities
LLL available at
http://www.slideshare.net/breakingnews/lawsuit-against-ruth-madoff-irving-picard
Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme, Report
of Investigation, United States Securities and Exchange Commission, Office of Inspector
General available at http://www.sec.gov/news/studies/2009/oig-509-exec-summary.pdf
Commonwealth of Massachusetts Office of the Secretary of the Commonwealth
Securities Division, Cohmad Securities Corporation, Administrative Complaint available
at http://www.sec.state.ma.us/sct/sctcohmad/cohmad_complaint.pdf
Matthew Greenberg, Walter Greenberg, Doris Greenberg, and the Estate of Leon
Greenberg v. Friehling & Horowitz, KPMG UK, KPMG International, JP Morgan Chase
& Co., The Bank of New York Mellon, Paul Konigsberg, Annette Bongiorno, Frank
DiPascali, Andrew Madoff, Mark Madoff, Peter Madoff, and John Does 1 through 30
available at http://www.oakbridgeins.com/clients/blog/madofflawsuits/greenberg.pdf
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Testimony of Harry Markopolos Before the U.S. House of Representatives Committee on
Financial Services, p. 7, available at
http://ncc.gmu.edu/events/09_MOT-markopols/markopolos_020409.pdf
D. Concluding Question: What did you learn from this case?
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