It is in times of crisis when pyramid schemes become relevant. This is due to the fact that credibility to usual financial instruments decreases, but investors are trying to do everything not to lose the remaining funds. It should be noted that virtually no one is insured from being one of the members of the financial pyramid. The most striking example is the financial pyramid “Madoff Fund” which was founded by a well-known swindler Bernard Madoff.
Bernard «Bernie» Lawrence Madoff comes from New York. There in 1938 a boy was born in a Jewish family, the future of whom would be equally terrible and great.
However, as a child, Bernard was little different from his peers: he finished a prestigious school Far Rockaway without distinction, then studied at Hofstra College and received a bachelor’s degree in politics. Like Charles Ponzi initiated his Ponzi scheme with only a few hundred dollars in his pocket, similarly Bernard Madoff started from scratch.
While studying in college, he worked part time as a laborer managing to save about $ 5,000. It was enough for Bernard to start his own company Madoff Investment Securities, where he then employed some of his relatives.
Bernard participated in creating Nasdaq, the US stock market, buying and selling securities for the benefit of investors. His company Investment Securities was one of the largest bidders at Nasdaq. By the beginning of 1990s, Madoff was the chairman of the board of directors of Nasdaq. Over time, Madoff Investment Securities was recognized as the most reliable investment fund in America and around the world. It is worth noting that for all time of its existence it brought high profits – about 12-13% per annum.
Creating the broker-dealer business and trading securities continued for more than 40 years. Madoff Investment Securities sold stocks, bonds and other securities beneficially for themselves and for clients. Experts estimated Madoff’s business incomes worth $ 67 million in 2006. Net trading in 2006 brought $ 72.5 million, and expenses of the company amounted to only $ 30 million.
At the same time in the skyscraper where there was residence of Madoff Investment Securities, this trickster managed to organize “two businesses” – one legitimate – which was a broker-dealer company, and the second – fraudulent – a hedge fund, which was not limited by regulation, unavailable for a large number of people.
The first business was controlled by SEC (the Securities and Exchange Commission). All – brokerage books, statements, cash flows, transactions – were subject to supervision. Not less than once every 2 years there came auditors with inspections. In short, it’s just perfect.
But one floor below other employees were working tirelessly in the offices. Unlike their “colleagues” – brokers – they did not wear suits, but casual clothes, so as not to be conspicuous, not to stand out in the crowd. Entrance to the 17th floor (it was there where the hedge fund was situated) was classified as secret and represented a small inconspicuous door to the left of the elevator.
Brokers demonstrated activity of Madoff’s empire, and a few workers of the 17th floor made capital for him. Most broker-dealers were not allowed to attend the 17th floor. What did they deal with on this mysterious 17th floor?
Madoff had the following principles of work: a private investor opened a brokerage account. But in fact, this is not a real one, because it was not connected with the brokerage business. Madoff got access to the client’s funds, but didn’t put them into the hedge fund, and spent most of them on his needs, giving old investors the money of new ones. This is the scheme of the traditional “pyramid“.
Intermediate funds, friends and family were among other sources of investment for Madoff. They received a certain percentage of the transaction, attracting other investors. By the way it was on the respectable 18th floor where agitation of possible investors took place. And then their funds were diverted to the floor below.
According to the legend, on December 10, 2008 in a frank conversation with his sons Madoff confessed that his entire business was based on lies, and they, without second thought, reported to the authorities. On December 11 Madoff was arrested, on December 16, all his accounts were frozen. During the investigation it was found out Bernard Madoff did not invest for the past 13 years.
According to more truthful version the cause of the pyramid collapse was a global financial crisis. When the first wave was over, some large investors decided to take back investment and property worth $ 7 billion. It was clear that Madoff did not have such funds. In March 2009, Madoff pleaded guilty according to all 11 charge counts, namely perjury, fraud, money laundering and others. On June 29, 2009 the District Court in Manhattan, Bernard Madoff was sentenced to 150 years in prison. According to some sources, Madoff’s company squandered $ 50 billion.
The consequences of the financial pyramid collapse were terrible. Major banks, financial and investment corporations, insurance companies and charitable organizations across Europe and the world suffered from it. Among them there was «Fairfield Sentry Ltd», «Kingate Global Fund Ltd», the Spanish banking group «Banco Santander», «Royal Bank of Scotland» and many others.