What Did Bernie Madoff Do To Build Ponzi Scheme? Simple Explanation

Thanks to Madoff: The Monster of Wall Street, Netflix is starting off 2023 by diving into one of the biggest financial scandals in modern history. For decades, Bernie Madoff was revered as one of the greatest financial minds and investors of his time. That illusion came crashing down in 2008 when Madoff’s sons told authorities their father had confessed the asset management unit of his company was one big Ponzi scheme.
Bernie Madoff’s actions financially ruined the lives of tens of thousands of people and caused untold damage. What did he do? Here is all about the crime that built the Ponzi Scheme. 

1. Who is Bernie Madoff?

Source: Pop Sugar

Bernie Madoff, a well-known Wall Street investment advisor, became world-famous for operating possibly the largest Ponzi scheme in history. When investigators for the FBI and the SEC finally uncovered the massive fraud in 2008, losses by Madoff’s investors were estimated at more than $50 billion over the course of nearly 20 years.
Madoff was effectively given a life sentence – 150 years – and his brother, Peter, who also worked for Bernard L. Madoff Investment Securities LLC, received a prison sentence of 10 years. Madoff was also ordered to pay nearly $200 billion in restitution, but that order from the court was essentially meaningless, as Madoff’s assets at that time couldn’t begin to cover the amount.

2. How does the Bernie Madoff Ponzi scheme work?

Source: IMDb

Ponzi schemes draw investors in by guaranteeing unusually high returns. The name originated with Charles Ponzi, a con artist who promised 50% returns on investments in only 90 days and ended up serving a 14-year prison sentence in 1920 due to his scheme. Ponzi schemes are run by a central operator, who uses the money from new, incoming investors to pay off the promised returns to older ones. This makes the operation seem profitable and legitimate, even though no actual profit is being made. Meanwhile, the person behind the scheme pockets the extra money or uses it to expand the operation.
To avoid having too many investors reclaim their "profits," Ponzi schemes encourage them to stay in the game and earn even more money. The "investing strategies" used are vague and/or secretive, which schemers claim is to protect their business. Then all they need to do is tell investors how much they are making periodically, without actually providing any real returns.
Ponzi schemes aren't usually very sustainable. The setup eventually falls apart after the operator takes the remaining investment money and runs, new investors become harder to find — meaning the flow of cash dies out — and too many current investors begin to pull out and request their returns. 

3. What Did Bernie Madoff Do To Build His Ponzi Scheme?

Source: New York Post

Madoff’s undertaking was a classic Ponzi scheme, where new investors’ money was simply funneled to fund payouts to existing investors, as well as bonuses to himself. Instead of investing the entrusted funds, investors’ money was simply deposited into an account at Chase Manhattan Bank (merged in 2000 to become JPMorgan Chase & Co.)*, where it would be retrieved to make reimbursements. 
Madoff attracted investors by promising them extraordinarily high returns on their investments. However, when investors handed over the money, Madoff just deposited it into his personal bank account at Chase Manhattan Bank. He paid “returns” to earlier investors using the money obtained from later investors. Clients’ trading statements, showing their alleged profits, were complete fabrications.
Related: Review Netflix MADOFF: The Monster of Wall Street Netflix

Source: New York Post

Things fell apart in 2008 when a large number of investors wanted to cash out their investments – to the tune of around $7 billion. Madoff didn’t have anywhere near enough money to cover the requested withdrawals. According to Madoff, at that time, he could only manage to come up with a couple of hundred million.
Madoff’s Ponzi scheme was when it began and how it managed to go undetected for so many years. It’s downright astonishing that Madoff managed to keep the scheme undiscovered for as long as he did. As far back as 1992, individuals had urged the Securities and Exchange Commission to investigate Madoff’s business practices, and the agency had done so on numerous occasions but had failed to detect the massive fraud. Madoff was widely distrusted by many Wall Street firms – several of which refused to do any trading with him. Nonetheless, Madoff was able to operate his massive Ponzi scheme without detection for at least a couple of decades.
MADOFF: The Monster of Wall Street is now streaming on Netflix. If you don’t see the docuseries right away, don’t worry. Refresh your Netflix app or browser and it should be there. Sometimes it just takes a minute for new episodes to be added.
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