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Summary of accounting fraud - madoff investment scandal

The Madoff investment scandal is the Ponzi scheme that former NASDAQ chairman Bernard Madoff confessed to in 2008. Bernard Madoff was a successful American businessman, former non-executive chairman and one of the NASDAQ stock exchange founders but he was at last pled guilty as he is committing a big scandal. He was sentenced to 150 years in prison with restitution of $170 billion. Prosecutors estimated the size of the fraud to be $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients. Madoff started his firm in 1960 as a penny stock trader with $5,000 (about $35,000 in 2008 dollars), earned from working as a lifeguard and sprinkler installer. His fledgling business began to grow with the assistance of his father-in-law, accountant Saul Alpern, who referred a circle of friends and their families. Federal investigators believe the fraud in the investment management division and advisory division may have begun in the 1970s. However, Madoff himself stated his fraudulent activities began in the 1990s. In the 1980s, Madoff's market-maker division traded up to 5% of the total volume made on the New York Stock Exchange. Madoff was "the first prominent practitioner" who paid a broker to execute a customer's order through his brokerage, called a "legal kickback", which gave Madoff the reputation of being the largest dealer in NYSE-listed stocks in the U.S., trading about 15% of transaction volume. By 2000, Madoff Securities, one of the top traders of US securities, held approximately $300 million in assets. In March 2009, Madoff admitted that since the mid- 1990's he stopped trading and his returns had been fabricated. Madoff's sales pitch, an investment strategy consisted of purchasing blue-chip stocks and taking options contracts on them, sometimes called a split-strike conversion or a collar. Rather than offer high returns to all comers, Madoff offered modest but steady returns to an exclusive clientele. The investment method was marketed as "too complicated for outsiders to understand". He was secretive about the firm's business, and kept his financial statements closely guarded. He made his reputation and his millions by delivering solid returns of 1 or 2 percent a month to his investors' month in and month out from the day he launched his investment advisory business as an adjunct to his brokerage firm. Wealthy investors and hedge fund operators marveled as Madoff worked his "magic" in bull markets and bear markets alike, regardless of the gyrations on the stock market. However, there were also those who realized that such consistent returns could not be achieved through legal means. US officials now allege that Madoff was engaged in a Ponzi scheme by using new revenues from investors to meet payments due to existing investors, as no one really knows how long Madoff was doing this. There were ample signs that Madoff's operation was fraudulent. Madoff was a "master marketer", and his fund was considered exclusive, giving the appearance of a "velvet rope", so that is why he refused to meet up with his investors. Some Madoff investors were wary of removing their money from his fund, in case they could not get back in later. One New York real estate investor said she "literally begged" Madoff to take her money, and he refused. Madoff's annual returuns were "unusually consistent", around 10%, and were a key factor in perpetuating the fraud. Whereas ponzi schemes typically pay returns of 20% or higher, and collapse quickly. An unnamed investor remarked, “The returns were just amazing and we trusted this guy for decades and if you wanted to take money out, you always got your check in a few days. That's why we were all so stunned.” The Swiss bank, Union Bancaire Privée, explained that because of Madoff's huge volume as a broker-dealer, the bank believed he had a perceived edge on the market because his trades were timed well, suggesting they believed he was front running. The Madoff family gained unusual access to Washington's lawmakers and regulators through the industry's top trade group. The Madoff family has long-standing, high-level ties to the Securities Industry and Financial Markets Association (SIFMA), the primary securities industry organization. Finally, the scheme collapsed after clients requested some $7 billion in redemptions as it is because of the down-plunge of economy and Madoff doesn't has money to pay back as there are currently no new investors.

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