Bernard Madoff has probably made history by operating the biggest ponzi scheme in the world. Before we look at his case, let us revisit what a ponzi scam is.
A ponzi is a fake investment scheme that promises investors x% returns. The actual investment does not generate returns anywhere near that which is promised. Instead, money from new investors are used to fund the payments to earlier investors.
The whole ponzi can continue to operate until either it gets too big or investors start to do mass redemptions.
The typical ponzi scheme that operates on the internet start by taking in hundreds or even thousands of dollars from each investor. Usually, they grow to a couple of million dollars in size before the scammers decide to call it a day and run off with the money.
Now, back to the Madoff case.
Bernard L. Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a securities broker dealer that ranks among the top 1% in US.
He also runs a separate investment advisory business for certain private clients. There are between 11-25 clients with a total of approximately $17.1 billion of assets under management. This is the area where the ponzi took place.
A few days ago, Madoff admited to a couple of senior employees that this advisory business was a big fraud. He had personally lost close to $50 billion and the business had been insolvent for years. What he had been doing was to use money from new investors to fund payments to old investors.
Recent requests from clients for redemptions of $7 billion meant that the game was over. You can read the sworn statement of Theodore Cacioppi, a special FBI agent who spoke to Bernard Madoff, below.