Bernie Madoff, financier behind largest Ponzi scheme in history, dies in prison

Bernie Madoff, the man convicted of operating the world’s biggest Ponzi scheme in financial history, had died in prison while serving a 150 year sentence.

Madoff had schemed billions of dollars from countless investors over a number of years. But in 2008 it came to an end after Madoff allegedly confessed his crimes to his two sons who promptly turned him into the authorities.

But first, what’s a Ponzi scheme?

A Ponzi scheme works in a similar way to a pyramid scheme in that it constantly needs to find new recruits to sustain itself. Without new members (or existing members constantly funding the scheme) it eventually stalls or collapses entirely.

With a pyramid scheme, incoming members are urged to recruit new members, creating a pyramid structure. This isn’t necessarily a pre-requisite for a Ponzi scheme, but both share the common flaw that they use the contributions of new members to pay out to existing members, thus creating a model that is unsustainable and unable to reward all of its members. Like a pyramid scheme, most members usually lose out while existing members (or even just its founder) profit greatly.

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Ponzi schemes often operate in the financial investment sector. They often promise investors a return on their money, often under the guise of some type of service, such as stock trading. However such services are in reality non-existent, or do not provide enough capital to keep the scheme from relying on members, existing or new, paying into it. And when that money is paid in, it eventually gets paid back out to other members, or to the creator of the scheme itself. The phrase “robbing Peter to pay Paul” is often used to illustrate the fundamental principle of a Ponzi scheme.

Bernie Madoffs Ponzi scheme…

Madoff is often dubbed the “father of the Ponzi scheme” since his is considered the largest Ponzi in financial history, worth around $69 billion. Madoff used a number of tricks no doubt learned from a long career in the financial industry to help him obscure his scheme from authorities, allowing him to operate for so long.

He promised investors a 10-20% return on their investments each year; high, but not too high as to attract attention from the SEC or raise suspicions from potential investors. It is unclear when exactly his Ponzi “officially” started, but even minimal estimations claim it was operating for well over a decade.

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Madoff obfuscated his illegal activities using a variety of complex financial operations and trickery, but was ultimately able to persuade many to join because of his reputation in the industry. He was already a successful multi-millionaire, Chairman of the Nasdaq in the 1990s and a pioneer in the electronic trading industry. And while the scheme he operated was very complex, it still boiled down to the same fatal flaw that appears in any Ponzi scheme – he was paying out existing members using the money invested by newer members.

Madoff’s scheme nearly collapsed in the 2000s after many investors asked to “cash out”, and a few years later in 2008 Madoff confessed his crimes to his two sons, who sought legal advice and then turned him in to the authorities. Madoff was arrested in December 2008 and convicted of securities fraud, wire fraud, mail fraud, perjury, and money laundering, among other crimes.

He was sentenced to 150 years to prison.

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He left behind a path of destruction. Countless investors had lost their money, some even spending their life savings. Authorities seized billions of dollars from Madoff in money and assets, most of which is being used to pay back people who were out of pocket because of Madoff. Investors who did profit with Madoff have also been made to pay back money to those who were not so lucky.

Perhaps what separated Madoff from others convicted of similar crimes – other than the scale of his operation – was the fact that Madoff was already so wealthy, mostly from legitimate ventures. Many seen Madoff as the epitome of “Wall Street greed“.

And Madoff’s death largely brings a close to one of the most devastating financial crimes in history. Madoff was 82 at the time of his death.