Why Did Madoff Defraud Investors?

Bernard Madoff is certainly not your typical crook. Until recently, he was a highly respected figure in the financial industry. In 1960, he used $5,000 in his own savings to found an investment company, Bernard L. Madoff Investment Securities LLC. He ran this company for almost half a century. For many years, Madoff also served as the Chairman of NASDAQ.

Why Did Madoff Do It?

By 2008, Madoff and his wife were worth just under $1 billion. What would make a wealthy, successful, and respected gentleman put everything at risk and engage in fraud? Clearly, Madoff didn’t become a criminal to make a quick buck. He had enough wealth to never worry about money for the rest of his life. Nor was he an obsessive thief, trying to steal money he didn’t need. Instead, Madoff’s story is about a person too proud to admit his own weaknesses. Decades ago, he promised his investors to generate good performance through stock picking and market timing. He was honest and he believed in his own skills. Unfortunately, in this world virtually everyone thinks of themselves as great investors. The sad reality is that virtually no one is truly great; the vast majority of people who made money from stock trading were just lucky, buying in at the right time before major bubbles and selling at a profit. Soon after he started his firm, he realized he was losing investor money. Most of us “common people” would simply suffer the losses and give up after we’ve lost our investments. But Madoff was different. For him, failure was not an option. Instead of admitting defeat, Madoff created an elaborate fraud scheme – a Ponzi scheme. Existing investors were told that the fund was doing great. If anyone wanted to withdraw the profits, they were welcome to do it. In fact, the money to pay out the “profits” were taken from new investors; he was taking money from the new and repaying back to existing clients that wanted to pull out. As more investors heard about his success and joined the club, there was always fresh money to give out to previous investors. By 2008, the fraud expanded to unbelievable proportions. The accountants are still unsure about the exact amount, but it seems that Madoff lost about $60 billion and never told anyone. It is hard to understand the magnitude of this number. This is roughly equivalent to every family in America losing $6000 overnight – except that the money was never there to begin with. The $60 billion only existed in Madoff’s fraudulent investor statements, and was never real. The fraud will cost Madoff up to 150 years in prison.

The Aftermath of Madoff’s Scandal

Unfortunately, it will also cost a lot of pain to thousands of families, as many of them relied on the money to pay for retirement. Many lessons will be learned from this disaster, but perhaps the main lesson for us, average Americans is: don’t be greedy and look for a quick buck in the stock markets. If an investment sounds too good to be true, it is.

By 2008, Madoff and his wife were worth just under $1 billion. What would make a wealthy, successful, and respected gentleman put everything at risk and engage in fraud? Clearly, Madoff didn’t become a criminal to make a quick buck. He had enough wealth to never worry about money for the rest of his life. Nor was he an obsessive thief, trying to steal money he didn’t need. Instead, Madoff’s story is about a person too proud to admit his own weaknesses. Decades ago, he promised his investors to generate good performance through stock picking and market timing. He was honest and he believed in his own skills. Unfortunately, in this world virtually everyone thinks of themselves as great investors. The sad reality is that virtually no one is truly great; the vast majority of people who made money from stock trading were just lucky, buying in at the right time before major bubbles and selling at a profit. And Mr. Madoff was not lucky for too long either. Soon after he started his firm, he realized he was losing investor money. Most of us “common people” would simply suffer the losses and give up after we’ve lost our investments. But Madoff was different. For him, failure was not an option. Instead of admitting defeat, Madoff created an elaborate fraud scheme – a Ponzi scheme. Existing investors were told that the fund was doing great. If anyone wanted to withdraw the profits, they were welcome to do it. In fact, the money to pay out the “profits” were taken from new investors; he was taking money from the new and repaying back to existing clients that wanted to pull out. As more investors heard about his success and joined the club, there was always fresh money to give out to previous investors. By 2008, the fraud expanded to unbelievable proportions. The accountants are still unsure about the exact amount, but it seems that Madoff lost about $60 billion and never told anyone. It is hard to understand the magnitude of this number. This is roughly equivalent to every family in America losing $6000 overnight – except that the money was never there to begin with. The $60 billion only existed in Madoff’s fraudulent investor statements, and was never real. The fraud will cost Madoff up to 150 years in prison. Unfortunately, it will also cost a lot of pain to thousands of families, as many of them relied on the money to pay for retirement.

Many lessons will be learned from this disaster, but perhaps the main lesson for us, average Americans is: don’t be greedy and look for a quick buck in the stock markets. If an investment sounds too good to be true, it is. But that doesn’t mean people shouldn’t invest. It just makes the pros and cons debate between investing in something safe like a CD account versus stocksmore relevant.

The information in this article is accurate at the time of publication. Click here for the latest news regarding investment fraud.