Bernie Madoff, dead at 82, still firmly holds a Ponzi scheme record

Bernie Madoff, the orchestrator of the largest Ponzi scheme in history, died today (April 14) at age 82 in North Carolina, at the Federal Medical Center in Butner, a prison for inmates with severe medical conditions. Madoff had been suffering from chronic kidney failure.

His victims may resist dancing on Madoff’s grave, but there will likely be few tears shed for the once highly regarded Manhattan-based financier and Nasdaq chairman who defrauded his clients to the tune of $65 billion through the classic Ponzi con: using money from new investors in a fictional investment to pay “returns” to former investors in the same fabricated vehicle—in this case, a mysterious, lucrative investment fund. The fallout from his scheme led directly to deaths by suicide and stress, and stole the life savings of thousands of people.

Madoff made other Ponzi schemes look minuscule by comparison

Ponzi schemes are, in fact, not as uncommon as you might imagine if the Madoff story is the last one that caught your attention around the time of his arrest in 2008. Every year, dozens of people in the US alone are charged with the crime. But nothing about the Madoff scandal even remotely resembles the still-devastating, but smaller Ponzi crimes that came before or after Madoff set up office in Manhattan’s famous Lipstick building.

First, there is that $65 billion figure, with investors’ principal losses pegged at $17.3 billion. The next largest Ponzi scheme on record was conducted by Texas-born financier Allen Stanford and involved $7 billion in losses. But only four of the biggest schemes in history, according to Ponzitracker.com, even cross the billion-dollar mark.

According to Jordan Maglich, a lawyer in Tampa who runs Ponzitracker, over the past five to 10 years, most Ponzi cases have led to total losses averaging $15 million to $20 million, while the median amount would be even lower. Madoff is an extreme outlier, he says. So too was his prison sentence: 150 years.

“You’re hard-pressed to find a financial fraud as egregious or massive as Madoff’s,” he says. It makes the size of the “vast amount of other Ponzi schemes I’m aware of and that I’ve tracked almost seem like a rounding error,” says Maglich, an attorney for Buchanan Ingersoll & Rooney, PC.

Madoff’s scam had 37,000 victims

The masterminds behind a common Ponzi scheme might dupe dozens or hundreds of people, he says. Madoff’s victims numbered up to 37,000 people. His list of clients included members of the Wilpon family, who previously owned the New York Mets; Elie Wiesel, the Holocaust survivor and late Nobel laureate; and a host of retirees, philanthropic groups, and hedge funds.

Other Ponzi schemes may last a few years or even a decade before its unwitting victims discover that there is no grocery-diverting business, no liquor licenses being sold, or screenplay rights gaining value. Usually, all it takes is one suspicious or cash-strapped investor to request a large withdrawal for the entire house of cards to collapse.

But here, too, Madoff was an outlier. His scam survived for nearly three decades because he was “[b]uttressed by elaborate account statements and a deep reservoir of trust from his investors and regulators,” as New York Times contributor Diana Henriques writes in an obituary. “Mr. Madoff steered his fraud scheme safely through a severe recession in the early 1990s, a global financial crisis in 1998 and the anxious aftermath of the terrorist attacks in September 2001,” she notes.

During the financial crisis of 2008, when hedge funds and other institutional investors started to pull from their Madoff holdings to return cash to their own clients, Madoff eventually ran out of money and wasn’t able to drum up new cash infusions.

What investors learned from the Madoff affair

The astonishing stories about the skeptics whose warnings had been ignored in those three decades have all been dissected and documented, including in Henriques’ book The Wizard of Lies: Bernie Madoff and the Death of Trust, which HBO turned into a movie starring Robert De Nero.

Such publicizing of the scam’s inner workings may be one of the silver linings of the Madoff affair: Average investors have become far more aware of red flags to watch for, says Maglich. Maybe it’s that independent financial modeling shows that the math behind a purported return doesn’t add up. Or one might do basic due diligence and request data and detailed evidence about a proposed investment, only to be blocked by red tape or other excuses. That is all the justification you need to decline, says Maglich, and save yourself from a crime he calls “financial homicide.”

The Madoff tale also taught other investors not to downplay the importance of diversification, which is “never a sexy thing,” Maglich observes. “But when the folks who invested all of their life savings in Madoff found out that the scheme collapsed, that was a very harsh lesson in diversification.”