Bernard Madoff: How the scandal worked:The story of exactly how Bernard Madoff kept a $50bn (£34bn) fraud silent for what could prove to be decades may never be fully known.
Bernard Madoff: How the scandal worked
The story of exactly how Bernard Madoff kept a $50bn (£34bn) fraud silent for what could prove to be decades may never be fully known.
By James Quinn, Wall Street Correspondent
Last Updated: 3:43PM GMT 19 Jan 2009
But what is known is how he built up a core following of loyal investors who were all so willing to benefit from the promises of 10-12pc annual returns that they chose to ask few, if any, questions about how he was investing their wealth.
One of the most interesting aspects of the Madoff case is that although some clamoured to invest with him, many more did not even know of his existence until his arrest.
This was because seven smaller so-called "feeder funds" channelled funds into the main fund, meaning a great number of investors were completely unaware that their money was being managed by Mr Madoff. Jeffrey Katzenberg, head of the Dreamworks film studio, for example, whose charitable foundation lost an undisclosed amount, said he had never heard of the Madoff name until after the fraud was discovered.
Based on the confessions Mr Madoff allegedly made to his sons and to an FBI agent prior to his arrest on December 11, the accused fraudster was, at least since 2005, when the current fraud charge dates back to, operating what is known as a "Ponzi scheme" – named after American-Italian fraudster Charles Ponzi – where someone takes money from new investors to pay off earlier investors, essentially recycling the cash.
Such a scheme can only continue to operate as long as there are new investors willing to invest. In Mr Madoff's case, he, like so many others, became a victim of the global financial crisis and, as the money he had invested began to produce poorer returns, and as there were fewer newer investors, so the returns to existing investors diminished.
When that happened, earlier this year, investors began to want to redeem their funds. One of the selling points of Mr Madoff's funds was that investors could always withdraw their principal investment whenever they wanted to – an unusual facet for such a large investment fund.
But as a number of European investors began to withdraw en masse in the second-half of 2008, Mr Madoff got into trouble – so much trouble that as recently as October he is understood to have told at least one major US investor in his fund that he was going to cut off the European investors and re-focus on the US.
These would appear to have been the words of a desperate man who knew he needed to replace the money being withdrawn or risk being found out. Just ten days before he confessed, Mr Madoff even asked long-term friend and mentor Carl Shapiro, the textiles magnate, to invest an extra $250m, promising it would be repaid shortly with interest. But that turned out not to be the case.
Knowing the game was up, and with less than $200m in the bank, Mr Madoff confessed – but not before writing out a series of cheques worth a total of $137m to close family and friends, which were found stashed in his desk drawer shortly after his arrest.